[Federal Register Volume 62, Number 4 (Tuesday, January 7, 1997)]
[Rules and Regulations]
[Pages 889-915]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-116]



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  Federal Register / Vol. 62, No. 4 / Tuesday, January 7, 1997 / Rules 
and Regulations  

[[Page 889]]



DEPARTMENT OF AGRICULTURE

Food and Consumer Service

7 CFR Parts 210 and 226

RIN 0584-AC42


Child and Adult Care Food Program; Improved Targeting of Day Care 
Home Reimbursements

AGENCY: Food and Consumer Service, USDA.

ACTION: Interim rule with request for comments.

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

SUMMARY: This interim rule amends the Child and Adult Care Food Program 
regulations governing reimbursement for meals served in family or group 
day care homes by incorporating provisions of the Personal 
Responsibility and Work Opportunity Reconciliation Act of 1996. 
Specifically, this rule establishes a two-tiered reimbursement rate 
structure for day care homes. Under this structure, the level of 
reimbursement for meals served to enrolled children will be determined 
by economic need based on: the location of the day care home; the 
income of the day care provider; or the income of individual children's 
households. In addition, this rule makes a minor amendment to the 
National School Lunch Program regulations to facilitate the provision 
of elementary school data on free and reduced price eligibility 
determinations to sponsors of family day care homes. These revisions 
are intended to target higher CACFP reimbursements to low-income 
providers and children.

DATES: Effective July 1, 1997, except for sections 210.9(b)(20), 
210.19(f), 226.6(f)(2) and 226.6(f)(9), which are effective March 10, 
1997. To be assured of consideration, comments must be postmarked on or 
before April 7, 1997, except for comments on the information collection 
which must be received by March 10, 1997.

ADDRESSES: Comments should be addressed to Mr. Robert M. Eadie, Chief, 
Policy and Program Development Branch, Child Nutrition Division, Food 
and Consumer Service, Department of Agriculture, 3101 Park Center 
Drive, Room 1007, Alexandria, Virginia 22302. Comments in response to 
this rule may be inspected at the above address during normal business 
hours, 8:30 a.m. to 5:00 p.m., Monday through Friday.

FOR FURTHER INFORMATION CONTACT: Robert M. Eadie or Edward Morawetz at 
the above address or by telephone at 703-305-2620.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

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

Regulatory Flexibility Act

    This rule has also been reviewed with regard to the requirements of 
the Regulatory Flexibility Act (5 U.S.C. 601-612). This rule is 
expected to have a significant impact on a substantial number of small 
entities. Specifically, it will impact day care homes classified as 
tier II day care homes. Additional discussion of this impact is 
contained in the Economic Impact Analysis following this rule.

Executive Order 12372

    The Child and Adult Care Food Program (CACFP) and the National 
School Lunch Program (NSLP) are listed in the Catalog of Federal 
Domestic Assistance under No. 10.559 and 10.555, respectively, and 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 published at 48 FR 
29114, June 24, 1983).

Paperwork Reduction Act

    Summary: In accordance with the Paperwork Reduction Act of 1995, 
this Notice announces the Food and Consumer Service's (FCS) intention 
to request Office of Management and Budget (OMB) review of the 
adjustments to be made to the information collections for the Child and 
Adult Care Food Program and the National School Lunch Program as a 
result of the interim rule, Child and Adult Care Food Program: Improved 
Targeting of Day Care Home Reimbursements.
    To be assured of consideration, comments on the information 
collection must be received by March 10, 1997.
    Comments on the information collection should be addressed to Mr. 
Robert M. Eadie, Chief, Policy and Program Development Branch, Child 
Nutrition Division, Food and Consumer Service, Department of 
Agriculture, 3101 Park Center Drive, Room 1007, Alexandria, Virginia 
22302.
    Comments are invited on the following areas: (a) Whether the 
proposed collection of information is necessary for the proper 
performance of the functions of the agency, including whether the 
information will have practical utility; (b) the accuracy of the 
agency's estimate of the burden of the proposed collection of 
information, including the validity of the methodology and assumptions 
used; (c) ways to enhance the quality, utility and clarity of the 
information to be collected; and (d) ways to minimize the burden of the 
collection of information on those who are to respond, including 
through the use of appropriate automated, electronic, mechanical, or 
other technological collection techniques or other forms of information 
technology.
    All responses to this Notice will be summarized and included in the 
request for OMB approval, and will become a matter of public record.
    Titles: 7 CFR Part 226, Child and Adult Care Food Program and 7 CFR 
Part 210, National School Lunch Program.
    OMB Numbers: 0584-0055 and 0584-0006.
    Type of request: Revision of existing collections.
    Abstract: The interim rule, Child and Adult Care Food Program: 
Improved Targeting of Day Care Home Reimbursements, is intended to 
implement the provision included in Public Law 104-193, the Personal 
Responsibility and Work Opportunity Reconciliation Act of 1996, that 
establishes a two-tiered reimbursement system for day care homes 
participating in the Child and Adult Care Food Program. Under this 
structure, the level

[[Page 890]]

of reimbursement for day care homes will be determined by economic need 
based on: (1) The location of the day care home; (2) the income of the 
day care home provider; or (3) the household income of each 
participating child.
    In accordance with the Paperwork Reduction Act of 1995, the 
Department is providing the public with the opportunity to comment on 
the information requirements of this interim rule as noted below:

----------------------------------------------------------------------------------------------------------------
                                                                                                        Annual  
                Section                       Annual No. of          Annual      Annual       Per       burden  
                                               respondents         frequency   responses   response     hours   
----------------------------------------------------------------------------------------------------------------
 7 CFR 210.9(b)(20) School food authorities provide State agencies with a listing of elementary schools with at 
                                              least 50% eligibility                                             
                                                                                                                
----------------------------------------------------------------------------------------------------------------
New...................................  4,969 school food                1          4,969      .50         2,485
                                         authorities.                                                           
----------------------------------------------------------------------------------------------------------------
  7 CFR 210.19(f) State agency collects and maintains a listing of all elementary schools participating in the  
                           National School Lunch Program with at least 50% eligibility                          
                                                                                                                
----------------------------------------------------------------------------------------------------------------
New...................................  54 State agencies........        1             54     2              108
----------------------------------------------------------------------------------------------------------------
  7 CFR 210.19(f) State agency provides Child and Adult Care Food Program State agencies with a listing of all  
       elementary schools participating in the National School Lunch Program with at least 50% eligibility      
                                                                                                                
----------------------------------------------------------------------------------------------------------------
New...................................  12 State agencies........        1             12      .50             6
----------------------------------------------------------------------------------------------------------------
     7 CFR 226.6(f)(9) State agencies administering CACFP provide listing of eligible schools to sponsoring     
                                                  organizations                                                 
                                                                                                                
----------------------------------------------------------------------------------------------------------------
New...................................  54 State agencies........       23          1,242     1            1,242
----------------------------------------------------------------------------------------------------------------
      7 CFR 226.6(f)(9) State agencies administering CACFP provide census data to sponsoring organizations      
                                                                                                                
----------------------------------------------------------------------------------------------------------------
New...................................  54 state agencies........        2.3          124     1              124
----------------------------------------------------------------------------------------------------------------
 7 CFR 226.6(f)(10) Sponsoring organizations submit tier I and tier II enrollment information to State agencies 
                                                                                                                
----------------------------------------------------------------------------------------------------------------
New...................................  1,240 sponsors...........        1          1,240     1            1,240
----------------------------------------------------------------------------------------------------------------
       7 CFR 226.15(e)(3) Sponsoring organizations maintain documentation used to classify homes as tier I      
                                                                                                                
----------------------------------------------------------------------------------------------------------------
New...................................  1240 sponsors............       40         49,600     1           49,600
----------------------------------------------------------------------------------------------------------------
    7 CFR 226.13(b) Sponsoring organizations collect and report meals by category to State agency each month    
                                                                                                                
----------------------------------------------------------------------------------------------------------------
New...................................  1,240 sponsors...........       12         14,880     2           29,760
----------------------------------------------------------------------------------------------------------------
        7 CFR 226.13(d)(1)-(3), 226.18(e) Tier I and Tier II homes submit monthly meal counts to sponsors       
                                                                                                                
----------------------------------------------------------------------------------------------------------------
New...................................  193,000 homes............       12      2,316,000     1.25     2,895,000
----------------------------------------------------------------------------------------------------------------
   7 CFR 226.13(d)(3)(i)-(iii) Sponsoring organizations establish reimbursement amounts for tier II homes with  
                                            income-eligible children                                            
                                                                                                                
----------------------------------------------------------------------------------------------------------------
New...................................  496 sponsors.............       78         38,688      .50        19,344
----------------------------------------------------------------------------------------------------------------
 7 CFR 226.15(e)(3) Sponsoring organizations, upon request, collect free and reduced applications from enrolled 
  children in Tier II that are not providers own at least once a year and maintain eligibility determination of 
                                               each enrolled child                                              
                                                                                                                
----------------------------------------------------------------------------------------------------------------
New...................................  496 sponsors.............       39         19,344      .50         9,672
----------------------------------------------------------------------------------------------------------------
  7 CFR 226.23(e)(1) Households of children enrolled in tier II day care homes complete free and reduced price  
                                                  applications                                                  
                                                                                                                
----------------------------------------------------------------------------------------------------------------
New...................................  166,752 households.......        1        166,752      .075       12,506
----------------------------------------------------------------------------------------------------------------
7 CFR 226.23(h)(6) Sponsoring organizations collect information to conduct verification of homes that qualify as
                                        tier I based on provider's income                                       
                                                                                                                
----------------------------------------------------------------------------------------------------------------
New...................................  1,240 sponsors...........       16         19,840     1           19,840
----------------------------------------------------------------------------------------------------------------
Total Proposed Burden Hours: 3,040,927.                                                                         

Executive Order 12778

    This interim 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

[[Page 891]]

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 its 
provisions, all applicable administrative procedures must be exhausted. 
In the Child and Adult Care Food Program: (1) Institution appeal 
procedures are set forth in 7 C.F.R. Sec. 226.6(k); and (2) disputes 
involving procurement by State agencies and institutions must follow 
administrative appeal procedures to the extent required by 7 CFR 226.22 
and 7 CFR 3015.
    This rule implements the amendments set forth under sections 708(e) 
(1) and (3) of the Personal Responsibility and Work Opportunity 
Reconciliation Act of 1996, Pub. L. 104-193 (the Act), which was 
enacted on August 22, 1996. The Act made several fundamental changes 
affecting the reimbursement provided for meals served in family or 
group day care homes under the Child and Adult Care Food Program. 
Section 708(k)(3) of Pub. L. 104-193 requires that interim regulations 
implementing these amendments be issued by January 1, 1997, and that 
final regulations be issued by July 1, 1997. For this reason, the 
Administrator of the Food and Consumer Service has determined, in 
accordance with 5 U.S.C. 553(b)(3)(B), that it is impracticable and 
contrary to the public interest to take prior public comment and that 
good cause therefore exists for publishing this rule without prior 
public notice and comment. Comments are being solicited until April 7, 
1997. A longer comment period is not practicable given the Act's 
requirement that final regulations be issued by July 1, 1997. All 
comments will be carefully considered prior to final rulemaking.

Background

    Under the Child Care Food Program (CCFP), as it was initially 
established and authorized in November 1975 by section 16 of the 
National School Lunch Act and Child Nutrition Act of 1966 Amendments of 
1975 (Pub. L. 94-105), application requirements, enrollee eligibility 
determinations, and reimbursement rates were the same for both family 
and group day care homes and centers. Specifically, individual 
eligibility determinations based on household size and income 
statements were required, and the meal reimbursement rates paid to 
centers and to sponsors on behalf of day care homes were based on each 
enrolled child's eligibility for free, reduced price, or paid meals. 
Eligibility for free and reduced price meals was based on income 
thresholds and procedures essentially the same as those used by the 
National School Lunch Program (and still in use by the National School 
Lunch Program). At this time, in both day care centers and day care 
homes, approximately 70 percent of enrolled children were eligible for 
free and reduced price meals; the remaining 30 percent were eligible 
for paid meals.
    Over the next several years, concern was raised that licensing, 
paperwork, and recordkeeeping requirements were creating barriers to 
day care home participation in the CCFP, and it became clear that there 
were major differences between the administrative capabilities and 
operating methods of day care home providers and child care center 
operators. Specifically, differences in size of facility, relationship 
with parents, and management sophistication suggested the need for 
simpler administrative procedures in day care homes. In 1978, these 
concerns were addressed in the Child Nutrition Amendments of 1978 (Pub. 
L. 95-627). This law eliminated individual free and reduced price 
eligibility determinations (i.e., means testing) in day care homes and 
established a single reimbursement rate for each type of meal served. 
This rate was slightly less than the rate paid for comparable meals 
served at the ``free'' rate in child care centers. These changes 
encouraged day care home provider participation in the Program by 
reducing their administrative paperwork burden.
    The Omnibus Budget Reconciliation Act of 1981 (Pub. L. 97-35) 
introduced a requirement to means test households of providers' own 
children by eliminating reimbursement for providers' own children if 
the providers' households had incomes greater than 185 percent of the 
Federal income poverty guidelines. Otherwise, the simplified procedures 
established by Public Law 95-627 were left intact. With the sole 
exception of means testing of providers' own children, day care homes 
have continued to receive reimbursement under the Program for meals 
served to all enrolled children, without application and regardless of 
income.
    Simpler administrative procedures for family and group day care 
homes led to significant growth in their program participation. This 
growth was especially evident among family day care homes serving 
middle and upper-income children. The Study of the Child Care Food 
Program (CCFP) conducted for FCS by Abt Associates, Inc., showed that 
by 1986 approximately 70 percent of children then receiving 
reimbursement for meals served in family day care homes would have 
qualified for ``paid'' meals prior to the changes to the law in 1978. 
(``Paid'' meals are for children from households with incomes over 185 
percent of poverty.) These percentages were exactly opposite from the 
percentages of income-eligible children participating in the program 
before the means test was eliminated. Led by growth in the family day 
care portion of the CCFP--renamed the Child and Adult Care Food Program 
(CACFP) in 1989--Program expenditures increased from $300 million in 
1983 to $1.44 billion by 1995.
    To illustrate the current difference between reimbursement in day 
care homes and centers, in 1996, for example, if a child eligible for 
paid meals and a child eligible for free meals both transferred from a 
center to a day care home, reimbursement provided for lunches for the 
paid child would change from $0.32 in the center to $1.54 in the day 
care home. The change for the child eligible for free meals would 
change from $1.94 in the center to $1.54 in the home. The rate 
difference for the ``free'' child is largely due to administrative 
costs, which are paid separately to sponsoring organizations of day 
care homes, while center administration is included in the 
reimbursement rate they receive.
    The goal of reducing overall Federal expenditures has prompted a 
review of many programs and led to a decision to improve the targeting 
of benefits to low-income children in the CACFP. To accomplish this 
targeting, the Personal Responsibility and Work Opportunity 
Reconciliation Act of 1996 establishes two ``tiers'' of day care homes 
and reimbursement rates. Under the law, tier I homes are those that are 
located in low-income areas or those in which the provider's household 
income is at or below 185 percent of the Federal income poverty 
guidelines. All meals served to enrolled children in tier I homes will 
continue to be reimbursed at essentially the same rates that they 
currently receive, adjusted for inflation. Tier II homes, in contrast, 
are those which do not meet the location or provider income criteria 
for a tier I home. The meals served in tier II homes are reimbursed at 
lower rates, unless the provider elects to have the sponsor collect 
free and reduced price applications from the households of children 
enrolled for day care in the home. In that case, the meals served to 
identified income-eligible children (i.e., children from households 
with incomes at or below 185 percent of the Federal income poverty 
guidelines) are reimbursed at the higher, tier I rates.

[[Page 892]]

    These and other related provisions of the law are discussed in 
greater detail in the preamble that follows.

Tier I Family or Group Day Care Homes

Definition

    Section 708(e)(1) of the Personal Responsibility and Work 
Opportunity Reconciliation Act of 1996 amended section 17(f)(3)(A) of 
the National School Lunch Act (NSLA) (42 U.S.C. Sec. 1766(f)(3)(A)) by 
defining a ``tier I family or group day care home'' as:

    [1] a family or group day care home that is located in a 
geographic area, as defined by the Secretary based on census data, 
in which at least 50 percent of the children residing in the area 
are members of households whose incomes meet the income eligibility 
guidelines for free or reduced price meals under section 9 [of the 
NSLA]; [2] a family or group day care home that is located in an 
area served by a school enrolling elementary students in which at 
least 50 percent of the total number of children enrolled are 
certified eligible to receive free or reduced price school meals 
under this Act [the NSLA] or the Child Nutrition Act of 1966 (42 
U.S.C. 1771 et seq.); or [3] a family or group day care home that is 
operated by a provider whose household meets the income eligibility 
guidelines for free or reduced price meals under section 9 [of the 
NSLA] and whose income is verified by the sponsoring organization of 
the home under regulations established by the Secretary.''

    Also, providers whose day care homes qualify as tier I day care 
homes on the basis of the provider's household income may demonstrate 
that they meet the criteria for free or reduced price meals by virtue 
of their receipt of food stamp, Food Distribution Program on Indian 
Reservation, or certain State programs for Temporary Assistance to 
Needy Families (formerly Aid to Families with Dependent Children) 
benefits.
    This rule amends section 226.2 of the CACFP regulations by adding a 
definition of ``tier I day care home.''

Provision of Data

    Except in cases in which a provider demonstrates its household 
income meets the free or reduced price eligibility standards, the Act 
requires that either elementary school eligibility data or census data 
must be utilized in order for a day care home to qualify as a tier I 
family or group day care home. Section 708(e)(3) of the Act further 
amended section 17(f)(3) of the NSLA to set forth requirements 
pertaining to the provision of this data to family or group day care 
home sponsoring organizations.

School Data

    Section 708(e)(3) of the Act added section 17(f)(3)(E)(ii) to the 
NSLA to require that each State agency that administers either the 
National School Lunch or School Breakfast Programs annually provide to 
approved family or group day care home sponsoring organizations a list 
of elementary schools in the State in which at least one-half of the 
enrolled children are certified to receive free or reduced price meals. 
That provision of the Act further stipulates that, when determining 
whether a day care home qualifies as a tier I day care home, the CACFP 
State agency and sponsors shall use the most current data available at 
the time of the determination. Finally, the Act directs State agencies 
which administer the school nutrition programs to collect on an annual 
basis the data necessary to comply with these requirements.
    The Department considers that aggregate school data on the 
percentage of enrolled children eligible for free and reduced price 
meals is a highly effective way of determining whether or not day care 
homes are located in low-income areas. To enable sponsors to obtain 
this information, this interim regulation amends the National School 
Lunch Program (NSLP) regulations to require school food authorities to 
provide the State agency administering the NSLP with a list of all 
elementary schools under their jurisdiction in which 50 percent or more 
of the enrolled children are determined eligible for free or reduced 
price meals as of the last operating day in October. Although the law 
refers to both the State agency which administers the NSLP and the 
State agency which administers the School Breakfast Program, in fact 
there are no States in which the NSLP and School Breakfast Program are 
operated by separate State agencies. Furthermore, in accordance with 
section 301 of the Healthy Meals for Healthy Americans Act of 1994 
(Pub. L. 103-448), we are planning to consolidate the regulations for 
the NSLP and School Breakfast Program in the near future in order to 
eliminate duplication and to streamline program requirements. 
Therefore, the Department has determined that it is unnecessary to 
amend 7 CFR Part 220, regulations for the School Breakfast Program, to 
include the provision of data requirements discussed above.
    The Department notes that this information is already collected and 
maintained at the local school food authority level. Section 210.8(c) 
requires school food authorities to report the total number of enrolled 
free, reduced price and paid children to the State agency on the 
October claim for reimbursement. To submit this data, the school food 
authority consolidates the enrollment data submitted by the individual 
schools under its jurisdiction. Moreover, school food authorities are 
required pursuant to section 210.9(a)(8) to analyze monthly meal counts 
submitted by their schools for accuracy. This is generally done by 
comparing the free, reduced price and paid meal counts to an attendance 
factor developed using the October enrollment data. Therefore, this new 
statutory requirement will not result in an additional information 
collection burden at the local level.
    Likewise, there should be little, if any, increase in reporting 
burden. While there is no Federal requirement for school food 
authorities to report the names of participating schools to the State 
agency, many States do collect this information. The Department also 
notes that some school food authorities are accustomed to providing 
individual school data for severe need reimbursement under the School 
Breakfast Program. In most instances, these will be the same low-income 
schools as those meeting the criteria for a tier I low-income area 
determination. For these reasons, the increase in reporting burden 
should not be large.
    The law directs the State agency administering the NSLP to provide 
this information directly to sponsors that request it. However, the 
Department is concerned that some sponsors, particularly smaller ones, 
may not know whom to contact in the State agency administering the NSLP 
to obtain this information. This would be especially true of sponsors 
operating in States in which an agency other than the State education 
agency administers the CACFP.
    Therefore, this interim regulation requires the NSLP State agency 
to provide the CACFP State agency with a list of elementary schools in 
which 50 percent or more of enrolled children have been determined 
eligible for free or reduced price meals in addition to requiring NSLP 
State agencies to provide the list to requesting sponsors. This will 
facilitate sponsors' access to local school data while minimizing 
confusion. The first list shall be submitted by school food authorities 
to the NSLP State agency no later than March 1, 1997, from the NSLP 
State agency to the CACFP State agency no later than March 15, 1997, 
and by the CACFP State agency to sponsoring organizations by April 1, 
1997. In subsequent years, this list must be provided by school food 
authorities no later than December 31, and from the

[[Page 893]]

NSLP State agency to the CACFP State agency no later than February 1 of 
each year. This schedule gives school food authorities 60 days after 
the end of October to report this data to the NSLP agency, and the 
February 1 deadline will provide that agency with one month in which to 
compile the list and forward it to the CACFP State agency, which would 
then make the information available to sponsors by February 15 each 
year.
Census Data
    Section 708(e)(3) of the Act amended section 17(f)(3)(E)(i) of the 
NSLA to require that the Secretary provide each State agency 
administering CACFP with appropriate census data showing the areas of 
the State in which at least 50 percent of the children are from 
households meeting the income standards for free or reduced price 
meals. Each CACFP State agency, in turn, must provide the data to day 
care home sponsoring organizations in the State.
    Section 708(e)(3) of the Act further provides that the sponsoring 
organization's determination that a day care home is located in an 
eligible low-income area be in effect for three years when such 
determination is based on school data. When census data are used, the 
determination remains in effect until such time as more recent census 
data are available. Regardless of the type of data used, section 
708(e)(3) of the Act further amended section 17(f)(3) of the NSLA to 
give the State agency the discretion to change the determination if it 
subsequently learns that the area in which a home is located no longer 
qualifies as an eligible area. Since we believe that in order to ensure 
program integrity all levels of program administration should have the 
responsibility to amend tier I determinations based upon the benefit of 
new information, this interim rule provides FCS and sponsors, as well 
as State agencies, with this authority. This expanded authority is 
being granted under the Department's general authority to issue 
regulations necessary for the administration of the Program.
    The Department has experience in the Summer Food Service Program 
with area eligibility determinations and the data available to document 
area eligibility. Based on this experience, the Department believes 
that census data should not be used when relevant, current information 
on free and reduced price eligibility in local elementary schools is 
available. Since census data are collected only once every ten years, 
and release of the data by the Bureau of the Census typically does not 
occur until several years after the data are collected, school data is 
far more current and will, in most cases, more accurately represent 
current economic conditions in a given area. However, we recognize that 
there may be certain circumstances which warrant the use of census data 
to establish a day care home's eligibility, even when current-year 
school data are available. Therefore, when providing the required 
census data, the Department will provide specific guidance as to the 
use of such data to all State agencies for making determinations in 
such situations.
    We also recognize that there may be situations in which census data 
and school data provide conflicting results of an area's eligibility. 
Our guidance accompanying the census data will outline very specific 
instances in which using census data, instead of current-year school 
data, is appropriate. Using this guidance, the Department expects State 
agencies to exercise their oversight to resolve conflicts between the 
data sources so as to ensure that decisions on classifying tier I homes 
are appropriate. Of primary concern to the Department is that 
sponsoring organizations use the data that is most reflective of the 
socio-economic status of a given area when classifying homes as tier I 
or tier II.
    Accordingly, this interim rule adds a new paragraph (b)(20) to 
section 210.9 to require school food authorities to provide their NSLP 
State agencies, by March 1, 1997, and by December 31 of each year 
thereafter, with a list of all elementary schools under their 
jurisdiction in which 50 percent or more of the enrolled children have 
been determined eligible for free or reduced price meals as of the last 
operating day of October. Furthermore, a new paragraph (f) is added to 
section 210.19 requiring the State agency administering the NSLP to 
provide by March 15, 1997, and by February 1 each year thereafter, to 
the State agency administering the CACFP, and to sponsoring 
organizations upon request, a list of all elementary schools 
participating in the NSLP in which at least 50 percent of enrolled 
children have been determined eligible for free or reduced price meals 
as of the last operating day of October. In addition, this rule amends 
section 226.6(f) by adding a new paragraph (9) to require that the 
CACFP State agency provide all approved day care home sponsoring 
organizations in the State the school and census data as described 
above. For school data, this would require coordination with the NSLP 
State agency. New section 226.6(f)(9) also requires that, when using 
school or census data, the most recent available data be used in making 
the determination of a home's eligibility as a tier I day care home; 
that determinations of a home's eligibility as a tier I home will be 
valid for one year if based on a provider's household income, three 
years if based on school data, or until more current data are available 
if based on census data; and that a sponsor, a State agency, or FCS may 
change the determination if information becomes available indicating 
that a home is no longer in a qualified area.

Making Tier I Day Care Home Determinations

    Section 708(e)(3) of the Act amended section 17(f)(3)(E) of the 
NSLA to require that school and census data ultimately be provided to 
sponsoring organizations. Sponsoring organizations, consequently, will 
be responsible for determining which day care homes are eligible as 
tier I day care homes. As discussed above, this will be accomplished 
applying the school or census data provided by the CACFP State agency, 
or by determining that the households of day care home providers not 
located in low-income areas are eligible for free or reduced price 
meals by use of a free and reduced price application.
    Since there is a significant financial benefit associated with the 
classification of a day care home as a tier I day care home, this rule 
requires State agencies to establish overclaims against sponsors which 
improperly classify a home as a tier I day care home. The Department 
recognizes that, because day care home classification is a new process, 
there are various circumstances which may result in the 
misclassification of a day care home as a tier I day care home as 
sponsors and State agencies begin these new procedures. Therefore, FCS 
will issue guidance, in advance of the implementation of the two-tiered 
reimbursement structure, to address circumstances under which a State 
agency may decide not to assess overclaims for tier I 
misclassifications.
    In addition, this rule requires that sponsoring organizations of 
day care homes include in their annual management plans a description 
of their system for making tier I day care home determinations. As is 
the case with all items included in the management plans, State 
agencies are required by section 226.6(f)(2) to review and approve the 
system. For the initial implementation period, sponsors are required to 
amend their plans to include this description by April 1, 1997. The 
Department recognizes that this requirement will impose an additional

[[Page 894]]

administrative burden on sponsors and State agencies during the 
transition period to the two-tiered structure. However, given the 
potential for significant financial liability for sponsors and State 
agencies resulting from incorrect determinations, it is extremely 
important to ensure that each sponsor's method for making tier I 
determinations is appropriate and achieves the most accurate 
determinations possible using the most current available data.
    Accordingly, this rule amends section 226.15 by redesignating 
paragraphs (f) through (j) as paragraphs (g) through (k), respectively, 
and by adding a new paragraph (f) to require sponsoring organizations 
to make tier I day care home determinations. New paragraph (f) also 
indicates, as discussed above and indicated in revised section 
226.6(f)(9), that determinations of a home's eligibility as a tier I 
day care home will be valid for one year if based on the provider's 
household income, three years if based on school data, or until more 
current data are available if based on census data. Additionally, as 
discussed above, a sponsor, State agency, or FCS may change a 
determination if information becomes available indicating that a home 
is no longer in a qualified area. In addition, section 226.14(a) is 
amended to require that State agencies establish overclaims against 
sponsoring organizations of day care homes when they misclassify day 
care homes as tier I day care homes unless the State agency determines, 
in accordance with FCS guidance, that the misclassification was 
inadvertent. Finally, section 226.6(f)(2) is amended to add the 
requirement that the annual management plan include a description of 
the sponsor's system for making tier I day care home determinations. 
For initial implementation, each sponsoring organization of day care 
homes shall amend its plan, subject to review and approval by the State 
agency, to include this information by April 1, 1997.

Reimbursement Factors for Tier I Homes

    Section 708(e)(1) of the Personal Responsibility and Work 
Opportunity Reconciliation Act amended section 17(f)(3)(A) of the NSLA 
to establish the reimbursement factors for meals served in tier I day 
care homes as the factors in effect on July 1, 1996, with adjustments 
made to the factors on July 1, 1997, and each July 1 thereafter. This 
section of the Act further amended section 17(f)(3)(A) of the NSLA to 
require that the factors be rounded to the nearest lower whole cent, 
instead of to the nearest quarter-cent increment as previously 
required. Subsequent adjustments must be based on the unrounded rate 
from the preceding school year. In addition, annual adjustments, which 
were previously based on changes in the Consumer Price Index for food 
away from home, must now be made based on the Consumer Price Index for 
food at home.
    Section 226.4(c) of the current regulations contains the base 
reimbursement rates for day care homes. These rates are adjusted 
annually on July 1 and announced in a notice in the Federal Register. 
Since the base reimbursement rates become out-of-date as soon as they 
are adjusted for inflation, including them in the regulation serves no 
useful purpose. Therefore, this rule will not include the base 
reimbursement rates established for tier I homes under Pub. L. 104-193. 
A notice announcing the reimbursement rates will continue to be 
published in the Federal Register each July 1, as provided for under 
section 226.4(g).
    Accordingly, this rule amends section 226.4(c) to remove the base 
reimbursement rates and to indicate that meals served in tier I day 
care homes will be reimbursed at the current rates for such homes. 
Also, section 226.4(g) is amended to incorporate the revised method of 
making annual adjustments to the rates of reimbursement. Additional 
discussion of reimbursement for meals served in day care homes may be 
found in the next section of this preamble.

Tier II Family or Group Day Care Homes

Definition

    Section 17(f)(3)(A)(iii) of the NSLA, as amended by section 
708(e)(1) of the Act, describes a ``tier II family or group day care 
home'' as a day care home that does not meet the criteria set forth for 
a tier I family or group day care home. Specifically, a tier II family 
or group day care home would not be located in an area that meets the 
50 percent free or reduced price eligibility criteria, based on 
elementary school or census data, nor would the day care home 
provider's household income be at or below 185 percent of the Federal 
income poverty guidelines.
    Accordingly, this rule amends section 226.2 to add a definition of 
``tier II day care home'' which defines such a home as one which does 
not meet the criteria for a tier I day care home.

Election by Providers

    In contrast to tier I day care homes, the law provides that meals 
served in tier II day care homes may be eligible for two levels of 
reimbursement--the tier I day care home rates for meals served to 
income-eligible children and tier II rates for meals provided to all 
other children. The Act further amended section 17(f)(3)(A)(iii) of the 
NSLA to give providers operating tier II homes three options with 
regard to how meals served in such homes are reimbursed.
    While the law does not specifically require sponsors to provide 
notification to tier II homes of their reimbursement options, section 
17(f)(3)(A)(iii)(II), as amended by the Act, clearly gives day care 
homes, not their sponsoring organizations, the authority to elect the 
reimbursement option. Therefore, this rule requires sponsors to provide 
such notification.
    Under the first option, a day care home provider may elect to have 
its sponsoring organization distribute income applications to the 
households of all children enrolled in the home. In that case, for all 
meals served to enrolled children who are determined to meet the 
criteria for free or reduced price meals, the home would receive the 
tier I reimbursement rates. Meals served to enrolled children who are 
not eligible for free or reduced price meals, or children from whose 
households completed income applications are not received, would be 
reimbursed at the tier II reimbursement rates.
    These free and reduced price eligibility determinations could be 
made in several ways. First, as with the current method, families may 
document their child's eligibility for tier I reimbursements by 
completing an application which shows that their household income is at 
or below 185 percent of poverty. The categorical eligibility options at 
current section 226.23(e), which are based on section 9(d)(2) of the 
NSLA would continue to be available to all households submitting 
applications. In addition, section 17(f)(3)(A)(iii)(III)(bb) of the 
NSLA, as amended by section 708(e)(1) of the Act, provides other 
categorical eligibility options for households applying for tier I meal 
reimbursements on behalf of children in tier II homes. Such households 
may demonstrate eligibility if the child or parent participates in, or 
is subsidized under, any ``federally or State supported child care or 
other benefit program with an income eligibility limit that does not 
exceed'' 185 percent of poverty. As quickly as possible, the Department 
will issue a list of Federal programs which meet this criterion, and 
then each State will be required to do the same for its own State-
funded programs. The Department wishes to emphasize that the process of 
providing these lists will be ongoing, and that both the

[[Page 895]]

Department and the States will be updating the lists at least annually, 
or more often if necessary.
    Alternatively, under the second option, if a day care home provider 
does not want to have income applications collected from the households 
of enrolled children, section 17(f)(3)(A)(iii)(III)(cc), as amended by 
the Act, provides that the provider may elect to have the sponsor 
identify only those children in tier II homes who are considered 
categorically eligible by virtue of their participation, or their 
parent's participation, in a Federally or State supported program with 
an income eligibility limit that does not exceed the standard for free 
or reduced price meals. In this situation, the day care home would 
receive the tier I reimbursements for meals served to the categorically 
eligible children, and the tier II rates of reimbursement for meals 
served to all other children.
    It is the Department's position that the above option is only 
possible in those limited situations where the provider knows which 
enrolled children are categorically eligible, or when the sponsoring 
organization has direct access to eligibility information for other 
qualifying programs. For example, a day care home sponsoring 
organization which is also a school food authority would be able to 
identify, without applications being collected from households, 
children in tier II homes who are categorically eligible based on their 
or a sibling's receipt of free or reduced price school meals. 
Similarly, a provider may be able to identify as categorically eligible 
those children in tier II homes whose care is paid through State child 
care vouchers that are issued based on equivalent eligibility 
guidelines (assuming that programs permit the provider to share the 
eligibility information with the sponsor). In these cases, the sponsor 
would distribute income applications only to the households of the 
children identified as participating in programs making them 
categorically eligible for tier I rates. The households would have the 
option of completing the information relating to the qualifying program 
rather than the income information.
    In most situations, however, providers and/or sponsors will only be 
able to identify children whose meals are eligible for tier I 
reimbursement by having income applications distributed to the 
households of all enrolled children, a fact that the Act does not 
explicitly recognize. Therefore, we envision that, when the provider 
elects this option, the process will most often operate as it does now 
in child care centers and as under the first option discussed above: 
applications will be distributed to all households of children in the 
care of the tier II day care provider in order to identify all income-
eligible children in that home. These applications will gather 
information on participation in other qualifying programs, or will 
request family size and income information.
    Though direct certification of eligibility can be a more 
streamlined, less burdensome method of determining eligibility, it also 
raises issues related to access to information and household 
confidentiality. The Department is interested in receiving comments on 
the merits of permitting direct certification of eligibility for 
sponsoring organizations of day care homes. Depending on the nature of 
these comments, we may issue a proposed rule on such a provision in the 
future.
    Finally, as a third option set forth in the Act, a provider may 
elect to receive tier II reimbursements for meals served to all 
children in the home, regardless of income. In this case, the 
sponsoring organization would not be required to collect any income 
applications, nor would it need to attempt to identify categorically 
eligible children.
    The law is deliberately structured to give the provider in a tier 
II day care home, rather than the sponsor, the choice as to whether or 
not income applications will be collected from households of children 
enrolled in the home since this choice will have an effect on the 
amount of reimbursement received by the provider. When a provider 
elects to have income applications collected, however, it is the 
responsibility of the sponsoring organization to collect them, to 
determine the eligibility of the children, and to maintain the 
confidentiality of the information collected.
    Sponsors also will now have the responsibility of informing 
providers of their reimbursement options under the law. It is important 
for States to assist sponsors in carrying out this responsibility. 
Therefore, in addition to amending the regulations to incorporate the 
above-discussed provisions, the Department encourages State agencies 
during the implementation phases of this regulation to utilize a 
portion of the grant money provided under section 17(f)(3)(D) of the 
NSLA, as amended by section 708(e)(2) of Pub. L. 104-193, to further 
the efforts of sponsors in informing and educating day care home 
providers of their options.
    It is the Department's opinion that in making the sponsoring 
organization, rather than the day care home provider, responsible for 
eligibility determinations, Congress recognized the need to provide an 
extra level of confidentiality to the households of children attending 
day care homes. Therefore, this rule also prohibits sponsoring 
organizations of day care homes from making free and reduced price 
eligibility information concerning individual households available to 
day care homes and otherwise limits the use of such information to 
persons directly connected with the administration and enforcement of 
the Program. Although sponsors are prohibited from releasing 
eligibility information concerning individual households, this rule 
will permit sponsors to inform providers in tier II homes of the 
numbers (not names) of identified income-eligible enrolled children. 
This will afford providers in tier II homes with more precise 
information concerning the accuracy of the reimbursement being paid to 
them by their sponsors, while protecting the confidentiality of 
individual households, as the law intended. In addition, the Department 
notes that section 9(b)(2)(C)(iii) of the NSLA was amended by section 
108 of the Healthy Meals for Healthy Americans Act (Pub. L. 103-448) to 
clarify the permissible uses of free and reduced price information. The 
Department is currently developing regulations concerning this 
provision, and will make any necessary changes to the CACFP regulations 
at that time.
    In addition, there is a concern that a provider in a tier II home 
will be unable to precisely calculate reimbursement without knowing the 
income eligibility status of each enrolled child in the home. The 
Department believes that allowing sponsoring organizations to inform 
providers in tier II homes of the numbers of identified income-eligible 
children, as discussed above, addresses this concern to a great extent, 
while at the same time protecting the confidentiality of the households 
of enrolled children. However, the Department is interested in 
receiving public comment on how best to balance the confidentiality of 
households with the needs of tier II day care home providers. Any 
comments that we receive will be addressed in a future rulemaking.
    Accordingly, this rule amends sections 226.2, 226.6(f)(2), 
226.18(b) and 226.23(e)(1) to incorporate the above provisions and to 
help ensure that providers are informed of their reimbursement options 
under the law. Specifically, the definition of Documentation in section 
226.2 is amended to incorporate the expanded categorical eligibility 
provided in the law for use by tier II day care homes.

[[Page 896]]

Section 226.6(f)(2) is further amended to require that the annual 
management plan submitted to the State agency by sponsoring 
organizations include a description of the sponsor's system of 
notifying tier II day care home providers of their options for 
reimbursement. For the implementation period, this rule requires that 
sponsors submit a plan amendment describing this system by April 1, 
1997. Section 226.6(f) is further amended by adding a new paragraph, 
(10), which requires State agencies to annually provide sponsoring 
organizations with a list of State-funded programs which meet the 
special categorical eligibility requirements for children in tier II 
homes. Section 226.18(b) is amended to require that the agreement 
between the sponsoring organization and the day care home specify the 
responsibility of the sponsoring organization, upon the request of a 
tier II day care home, to collect applications and to determine the 
income eligibility of enrolled children, and/or to identify 
categorically eligible children. In addition, section 226.18(b) is 
further amended to require that the agreement include the sponsor's 
responsibility to inform providers of their options for reimbursement 
under the law. Finally, sections 226.23(e)(1)(i) and (iv) are amended 
by deleting the language exempting sponsoring organizations of day care 
homes from distributing income applications; by adding language to 
clarify that sponsors, at the request of the provider, must collect 
applications, determine the income eligibility of children in tier II 
day care homes, and maintain the information in a confidential manner; 
by adding language to indicate that sponsoring organizations may inform 
providers in tier II homes of the numbers of income-eligible enrolled 
children; and by clarifying the categorical eligibility procedures that 
apply to households of children in tier II day care homes, as discussed 
above.

Meal Counting and Reporting Procedures

    Under this rule, all meals served in tier I homes or in tier II 
homes without any identified income-eligible children will be 
reimbursed at one rate--all tier I or all tier II, respectively. In 
such homes, meals can continue to be counted and reported to the 
sponsor as required by current regulations. However, for those tier II 
homes with a mix of income-eligible and non-income-eligible children, 
the introduction of two levels of reimbursement for meals necessitates 
a change in the way meals are counted and reported.
    The following sections of the preamble discuss the various options 
available under the law for meal counting and reporting in tier II day 
care homes with a mix of income-eligible and nonincome-eligible 
children. It is important to consider the options in the context of the 
affected population. In the Department's opinion, it is likely that a 
relatively small percentage of day care homes participating in the 
program will contain a mix of income-eligible and non-income-eligible 
children, and therefore, be eligible for two levels of reimbursement. 
The majority of homes will likely be either tier I day care homes 
(i.e., those located in low-income areas or operated by a low-income 
provider) or tier II day care homes without any income-eligible 
children. The Department also recognizes that the mix of participating 
homes may vary significantly from one sponsor to another, thus making 
it important to provide as much flexibility as possible to sponsors in 
their meal counting and claiming options, while at the same time 
continuing to maintain program integrity.
Actual Meal Counts
    Though it is a common current method of meal counting and 
reporting, taking actual meal counts is not currently required by 
regulations, and under a two-tiered reimbursement rate structure could 
impose an additional burden on some providers and sponsoring 
organizations. Under an actual counts system, for all tier II homes 
which elect to have income-eligible children identified, sponsors would 
have to collect and evaluate additional income applications, and/or 
identify new categorically eligible children, each time the enrollment 
of such a tier II home changes, or reimburse meals served to newly 
enrolled children whose income status has not been determined at the 
lower tier II rates. Because of the potential financial benefit, it is 
likely that providers under an actual meal count system will expect 
their sponsoring organizations to take immediate action to determine 
the income status of newly enrolled children.
    Since only sponsors have access to the income eligibility 
information for each enrolled child in each of their day care homes, 
providers under an actual count system would now be required to record 
meal counts by each enrolled child's name. [Though we understand that a 
number of sponsoring organizations currently require providers to 
record meal counts by each enrolled child's name for monitoring 
purposes, it is not currently required by regulation.] Recording meal 
counts by each enrolled child's name is necessary under an actual count 
system because providers will not have access to income eligibility 
information or income status. Then, each provider would submit the meal 
count records, by child's name, to the sponsor. Finally, using the 
information collected and maintained by the sponsor on the income 
status of each enrolled child, the sponsor would identify and aggregate 
the total number of meals served which are eligible for tier I 
reimbursements, and the total number of meals served which are eligible 
for tier II reimbursements. This process would be performed for each 
``mixed'' tier II home under a sponsor which uses actual meal counts in 
order to prepare the sponsoring organization's monthly claim for 
reimbursement.
    One benefit of an actual count system is that reimbursements are 
more precisely targeted, as is the intention of the Act. However, the 
management sophistication of the sponsoring organization, the number of 
``mixed'' tier II homes under a particular sponsorship, and the 
stability or instability of day care home enrollment in a sponsorship 
are also factors which must be considered when assessing the merits of 
various counting and claiming systems. The Act recognizes the potential 
burden on some sponsors and providers of performing actual meal counts, 
and includes a provision for simplified meal counting and reporting 
procedures, which is discussed below.
``Simplified'' Meal Counts
    In addition to the usual method of recording and reporting actual 
meal counts, section 708(e)(1) of the Act added section 
17(f)(3)(A)(iii)(IV) to the NSLA to require that the Department 
establish simplified meal counting and reporting procedures for tier II 
day care homes that receive two levels of reimbursement for meals 
served to enrolled children. The Act sets forth two possible 
alternatives that may be used, and also gives the Department the 
authority to develop its own simplified procedures.
    The first simplified alternative set forth in the Act involves the 
sponsor setting, for each tier II day care home, annual percentages of 
the number of meals served that are to be reimbursed at the tier I and 
tier II reimbursement rates. The percentages would be based on the 
number of enrolled children identified as being from income-eligible 
households, and the number not from such households, in a specified 
month or other period. This procedure is currently an option for State 
agencies

[[Page 897]]

for providing reimbursement in CACFP child care centers, adult day care 
centers, and outside-school-hours care centers, and is referred to in 
section 226.9(b)(2) of the regulations as ``claiming percentages.''
    For example, under the ``claiming percentages'' alternative, if in 
the month of September a tier II day care home had 5 enrolled children, 
2 of whom were determined by the sponsor to be eligible for free or 
reduced price meals, the home's claiming percentage for the coming year 
would be set at 40 percent tier I reimbursement and 60 percent tier II 
reimbursement. To receive reimbursement, the provider would only need 
to submit total meal counts by type (breakfast, lunch/supper, and 
supplements) each month, as is currently the case. The sponsor would 
apply the established claiming percentage to determine the home's 
reimbursement: 40 percent of all meals served in the month would 
receive the tier I reimbursement rates; 60 percent would receive the 
tier II rates.
    A variation of ``claiming percentages'' is the ``blended rates'' 
method, also used by child care centers, adult day care centers, and 
outside-school-hours care centers, and contained in section 226.9(b)(3) 
of current regulations. Using the circumstances from the above example, 
by multiplying the tier I rate for lunches by 0.40 (40 percent), the 
tier II rate by 0.60 (60 percent), and then adding the products 
together, a ``blended rate'' would be derived. If the tier I rate for 
lunches is $1.5750 (the current rate through June 30, 1997), and the 
tier II rate is $0.95, this would result in a blended reimbursement 
rate of $1.20. All lunches served to enrolled children in the home 
would be reimbursed at this single rate. Again, the day care home would 
only need to submit total meal counts by type (breakfast, lunch/supper, 
supplements) to the sponsor. The total reimbursement paid to the home 
would be the same using either claiming percentages or blended rates.
    The other alternative, presented in new section 
17(f)(3)(A)(iii)(IV)(bb) of the NSLA, would annually place a tier II 
home into one of two or more ``reimbursement categories'' based on the 
percentage of income-eligible children in the home. Each reimbursement 
category would ``carry [ ] a set of reimbursement factors'' (i.e., the 
tier I rate, the tier II rate, or some other rate(s) within the range 
defined by tier I and tier II rates).
    One example of the second alternative could involve establishing 
multiple reimbursement rates within the range defined by the tier I and 
tier II rates, and then assigning a home a rate based on the percentage 
of income-eligible children in the home. For example, four lunch rates 
could be established as follows: at $0.95 (the tier II rate), $1.5750 
(the tier I rate for FY 1997), and two approximately equal points 
between the tier I and tier II rates--$1.16 and $1.36. Tier II homes 
with no income-eligible children would, of course, receive $0.95 for 
each lunch served to enrolled children, while tier II homes with all 
income-eligible children would receive the maximum rate (i.e., $1.5750) 
for each lunch served. However, homes with a mix of income-eligible and 
non-income-eligible children would be assigned one of the intermediate 
lunch rates ($1.16 or $1.36) based on the percentage of income-eligible 
children served. Homes with more than zero and up to 33.3 percent 
income-eligible children would receive $1.16 per lunch; homes with more 
than 33.3 percent and less than 66.7 percent income-eligible children 
would receive $1.36 per lunch; and homes with 66.7 percent or more 
income-eligible children would receive the maximum tier I rate of 
$1.5750. Again using the previous example, a home in which 40 percent 
of the children were income-eligible would receive $1.36 per lunch, an 
amount which is 16 cents per lunch higher than that derived with 
claiming percentages or blended rates.
    Another variation of the ``reimbursement categories'' alternative 
set forth in the law would also involve assigning a home a rate based 
on the percentage of income-eligible children in the home. However, in 
this variation, only the tier I and tier II rates would be used. Any 
home with 50 percent or more income-eligible children would receive the 
tier I rates for all meals served; a home with less than 50 percent 
income-eligible children would receive the tier II rates for all meals 
served. In the above example, a home with 2 of 5 enrolled children 
identified as income-eligible (40 percent), would receive the tier II 
reimbursement rate of $0.95 for all lunches served.
    Given the small number of children enrolled in the typical family 
day care home, any method other than actual counts would be especially 
sensitive to changes in enrollment. Any change in enrollment which 
results in a different mix of eligibility categories will change the 
actual percentage of income-eligible children in the home, thus skewing 
the reimbursements above or below the level which the home would 
receive under an actual meal count system. Again using the above 
example, if one income-eligible child is withdrawn from care, the 
home's actual percentage of children eligible for tier I meal 
reimbursements would decline from 40 percent to 25 percent. Under most 
of the simplified methods described above, the provider would then 
receive more reimbursement than would be the case if actual meal counts 
by category of reimbursement were used.
Counting and Claiming Methods Permitted by This Regulation
    Based on its analysis of the relative advantages and disadvantages 
of each of the methods discussed above, the Department has decided to 
allow actual meal counts, claiming percentages, or blended rates for 
counting, reporting, and reimbursement of meals served in tier II day 
care homes serving children eligible for both tier I and tier II rates. 
In order to provide maximum flexibility, and recognizing the diversity 
and varying levels of management sophistication of sponsoring 
organizations, this interim rule provides sponsoring organizations the 
option of which of the methods to use for their day care homes. 
However, each sponsor must use only one method for all of its homes, 
and will be permitted to change this method no more frequently than 
annually. This limitation will minimize the potential for 
administrative confusion and allow State agencies to track each 
sponsor's system for oversight and claims edit purposes. Further, to 
mitigate the effects of enrollment changes when using the simplified 
methods, we are exercising the discretion provided to the Department 
under new section 17(f)(3)(A)(iii)(IV)(cc) of the NSLA, which permits 
``such other simplified procedures as the Secretary may prescribe,'' by 
requiring that claiming percentages or blended rates for each home be 
adjusted at least semiannually by the sponsor, rather than annually as 
is the case for centers.
    At this time, we are not adopting the use of the ``reimbursement 
categories'' approach described in the law and in two examples above. 
The above example involving multiple rates makes clear that at this 
time such an approach is potentially a far more complicated and 
unfamiliar method that does not offer any distinct advantages over 
claiming percentages or blended rates. Further, the option of 
reimbursing at the tier I rates for all meals served in a tier II home 
with 50 percent or more income-eligible children is far less precise in 
targeting benefits. The Department is also concerned that there is 
potential for abuse with this method, since a provider would gain 
substantial financial benefit when there are 50 percent or more income-
eligible

[[Page 898]]

children in the home during the month of the ``category'' 
determination. Finally, the use of the ``reimbursement categories'' 
approach could significantly reduce the Federal cost savings attributed 
to this provision.
    To further alleviate the potential burden on sponsors of the meal 
counting and reporting provisions being implemented, this interim rule 
will not establish any specific dates for recalculation of claiming 
percentages or blended rates for homes, or for determining the income 
eligibility of enrolled children when utilizing either the simplified 
methods or actual counts. Rather, by requiring changes to the 
percentages/rates at each home no less frequently than every six 
months, and redeterminations of individual eligibility at least 
annually (as discussed below), sponsors will be able to implement a 
system to more evenly distribute the work load associated with these 
options over the course of the year.
    The claiming percentages/blended rates alternative set forth in 
section 708(e)(1) of the Act indicates that the claiming percentage or 
blended rate be established based on the percentage of identified 
income-eligible children enrolled in a home ``in a specified month or 
other period.'' Although this interim regulation does not prescribe a 
specific time period for the enrollment determination, the Department 
believes it may be appropriate to consider methods which more 
accurately capture the income status of children enrolled in the home. 
Therefore, we are interested in receiving comments on two potential 
alternatives which would provide greater accuracy. The first 
alternative would involve a sponsor calculating the claiming percentage 
or blended rate based on a home's enrollment for an entire month using 
a list of enrolled children submitted by the day care home. The sponsor 
would assess the income eligibility status of each of the children 
enrolled in the home during the month and, using the enrollment list, 
derive the appropriate claiming percentage or blended rate. For 
example, if a home's enrollment list for the month of January indicates 
that 10 children were enrolled during the month, the home's claiming 
percentage or blended rate would be based on the number of identified 
income-eligible children, divided by 10. The second alternative would 
involve the day care home submitting an attendance list for the 
specified month. In contrast to the enrollment list, the sponsor using 
an attendance list would determine the claiming percentage or blended 
rate for the home using a weighted average of each enrolled child's 
level of participation during the month. The Department believes that 
both of these methods achieve greater accuracy in reimbursement 
payments, though, especially in the case of the attendance list, may 
impose an additional burden on the sponsor and day care homes.
    Under the claiming percentages/blended rates option, for all tier 
II homes which elect to have the sponsor determine the income 
eligibility of enrolled children, the sponsor would make individual 
income eligibility determinations for enrolled children on an annual 
basis. The claiming percentage or blended rate would be set for the 
home at least every six months, taking into account any changes in 
enrollment that occurred in the six-month period. For example, for a 
tier II day care home that enters the program in January, the sponsor 
would take applications and determine the income eligibility of all 
enrolled children prior to the beginning of program operations. Based 
on the income status of the children enrolled in the home, a claiming 
percentage or blended rate would be established for the home. That 
percentage or rate would be used to reimburse meals served in the home 
for the next six months, regardless of changes in the home's enrollment 
during that period. By July, the sponsor would have assessed the income 
eligibility of those children new to the home since the January 
calculation, and would calculate a new claiming percentage or blended 
rate, to be used for the next six months, based on the income 
eligibility of each child enrolled in the home. Any child whose income 
status has not been determined at the time of the recalculation would 
be figured in the calculation at the tier II rate. The status of all 
children whose income eligibility had been determined in January would 
remain the same for the July calculation; redeterminations for these 
children would occur the following January.
    The Department has some concerns about the potential for abuse of 
the claiming percentage/blended rates method; for example, low-income 
children who will not be in care on a regular basis could be enrolled 
by the provider during the month of the calculation so that the 
claiming percentage or blended rate is more favorable to the provider. 
Therefore, in an attempt to minimize potential abuse, this rule 
provides State agencies the authority to require a sponsoring 
organization to recalculate the claiming percentage or blended rate of 
any of its homes before the required semiannual calculation if a State 
agency has reason to believe that a home's percentage of income-
eligible children has changed significantly or was incorrectly 
established in the previous calculation. State agencies and sponsors 
should be aware of and look for such potential abuse when conducting 
their monitoring activities. The Department is especially interested in 
receiving comments on ways to further minimize this potential abuse. 
This issue will be considered further and may be addressed in future 
guidance or in a future rulemaking concerning the overall management 
and integrity of the Program.
    Although the claiming percentages/blended rates method will be 
adopted by this interim rule as the ``simplified meal counting and 
reporting procedures'' required by law, the Department is especially 
interested in receiving public comment on the second possible 
alternative in the law, described above as the ``reimbursement 
categories'' method, which is not being included in this interim rule. 
The Department is also interested in suggestions on other systems of 
meal counting and reporting that would not place undue burden on day 
care home providers or sponsors, but would provide for reimbursement 
payments that accurately reflect the income level of the households of 
enrolled children.
    Accordingly, this rule amends section 226.13(c) to require that 
State agencies reimburse sponsoring organizations of day care homes 
based on the number of meals served to enrolled children, by meal type 
(breakfast, lunch/supper, and supplements) and by category (tier I and 
tier II), multiplied by the appropriate rates of reimbursement as 
established in the law. For the reasons discussed previously in this 
preamble, section 226.13(c) will no longer include the specific base 
reimbursement rates. The rule also adds a new section, 226.13(d), to 
set forth the meal counting requirements for day care homes, and to 
allow sponsoring organizations to select the reimbursement method 
(either actual counts, claiming percentage, or blended rates) that they 
will use to pay providers in tier II day care homes with a mix of 
incomeeligible and non-income-eligible children. If a sponsoring 
organization elects to use claiming percentages or blended rates, this 
rule requires in section 226.13(d) that they be recalculated at least 
every six months, unless the State agency requires the sponsor to 
recalculate a home's claiming percentage or blended rate before the 
required semiannual calculation if it has reason to believe that a 
home's percentage of income-eligible children has changed

[[Page 899]]

significantly or was incorrectly established in the previous 
calculation. The claiming percentages or blended rates are based on 
individual income eligibility determinations made on an annual basis in 
accordance with section 226.23(e)(1).
    For a detailed discussion of the implementation phases of this 
regulation, please refer to the Implementation section in the preamble 
below.

Implementation

    In order to comply with the Act and implement the provisions of 
this regulation on July 1, 1997, sponsoring organizations will have to 
undertake several duties in advance of that date. First, using census 
data provided to the CACFP State agency by the Department, school data 
provided by the CACFP State agency by the State agency that administers 
the NSLP, or day care home providers' income information, all day care 
homes must be determined to be either tier I or tier II day care homes. 
As discussed above, once a home is designated as a tier I day care 
home, all meals served to enrolled children in the home are eligible 
for tier I rates of reimbursement (except for providers' own children, 
who must be income eligible). All tier II homes, unless they elect 
otherwise, will receive the tier II rates of reimbursement for all 
meals served to enrolled children.
    For all tier II homes in which the provider elects to have income-
eligible children identified, however, the sponsor must: (1) Collect 
applications and/or identify categorically eligible children; and (2) 
elect to use either actual meal counts, claiming percentages or blended 
rates as the method of reimbursement for all of its homes. If the 
information is not collected in order to separate actual meal counts by 
incomeeligible and non-income-eligible children, or to calculate a 
claiming percentage or blended rate for a tier II day care home by the 
July 1 implementation date, such a home must receive the lower tier II 
reimbursement rates for all meals served until the claiming percentage 
or blended rate is calculated, or the income status of children in an 
``actual counts'' home is determined.

Reimbursement Factors for Tier II Homes

    Section 708(e)(1) of the Act amended section 17(f)(3)(A)(iii)(I) of 
the NSLA to establish the reimbursement factors for meals served in 
tier II day care homes at 95 cents for lunches and suppers, 27 cents 
for breakfasts, and 13 cents for supplements, with adjustments made to 
the rates on July 1, 1997, and each July 1 thereafter. As is the case 
with tier I day care home reimbursement factors, the Act further 
amended section 17(f)(3)(A)(iii)(I)(bb) of the NSLA to require that 
these factors be rounded to the nearest lower cent increment, and that 
adjustments be based on changes to the Consumer Price Index for ``food 
at home'' instead of ``food away from home.'' As provided for in the 
Act, adjustments to the rates in subsequent years will be based on the 
unrounded rate from the preceding school year. As discussed in the 
preamble above, the base reimbursement rates will not be included in 
the regulatory language.
    Accordingly, this rule further amends section 226.4(c) to indicate 
that, except for meals served to children identified as income 
eligible, as discussed above, all meals served in tier II day care 
homes will be reimbursed at the rates established in the law for tier 
II day care homes. Section 226.4(g) is also further amended to 
incorporate the revised method of adjusting the rates of reimbursement 
for tier II day care homes.

General Requirements for State Agencies, Sponsors and Homes

State Agency Program Reviews

    Section 226.6(l) currently requires State agencies to maintain 
documentation of reviews of sponsoring organizations conducted, 
corrective actions prescribed, and follow-up efforts. This section 
further indicates that State agency reviews shall assess sponsoring 
organizations' compliance with regulations and Departmental and FCS 
instructions. Due to the significant financial benefit associated with 
classification of a day care home as a tier I home, this interim rule 
specifically requires that State agency reviews of sponsoring 
organizations of day care homes include an evaluation of the 
documentation used by sponsors to classify homes as tier I homes. 
Furthermore, due to the potentially significant financial liability to 
a State agency if homes are misclassified as tier I homes by sponsors, 
the Department strongly encourages--but will not require--State 
agencies to review the documentation supporting classification of tier 
I day care homes which qualify on the basis of school or census data at 
the time the sponsor initially makes the determination. Verification 
requirements for tier I homes qualifying on the basis of the provider's 
household income are addressed in this preamble below.
    Accordingly, this rule amends section 226.6(l) to require that 
State agency reviews include the provision discussed above.

Documentation

    In addition to changing the method by which sponsoring 
organizations reimburse meals served in day care homes, the amendments 
made to the CACFP by the Personal Responsibility and Work Opportunity 
Reconciliation Act of 1996 also necessitate changes in the records that 
day care home sponsors and providers are required to maintain. Section 
226.15(e) sets forth the recordkeeping requirements for institutions, 
including sponsoring organizations of day care homes. In addition to 
documentation of the enrollment of each child in day care, and income 
eligibility information for enrolled providers' children, sponsors will 
now be required to maintain income eligibility information for children 
enrolled in tier II day care homes that have elected to have sponsors 
collect free or reduced price information. This includes family size 
and income information and/or evidence of categorical eligibility for 
children who participate in, or who have a parent participating in, a 
Federally or State supported child care or other benefit program with 
an income eligibility limit that does not exceed the standard for free 
or reduced price meals. Finally, sponsors will also be required to 
maintain documentation of information used to classify day care homes 
as tier I day care homes. This would include the appropriate school or 
census data, and/or applications from providers whose households have 
been verified as eligible for free or reduced price meals.
    Sections 226.18 (e) and (f) set forth similar recordkeeping 
requirements for day care homes. These provisions include the 
requirement that day care home providers maintain daily records of the 
number of children in attendance and the number of meals, by type 
(breakfast, lunch/supper, supplements), served to enrolled children. In 
addition, sponsors are required to submit family size and income 
information only for providers' own children, and day care homes must 
maintain documentation of this information. Under this rule, tier II 
day care homes in which the provider elects to have the sponsoring 
organization identify enrolled children who are eligible for free or 
reduced price meals, and whose sponsor employs ``actual counts'' 
claiming methods, will now be required to maintain and submit to the 
sponsor the number and types of meals (breakfast, lunch/supper, 
supplements) served each day to each enrolled child by name.

[[Page 900]]

    Accordingly, this rule amends section 226.15(e)(3) to add the above 
requirements for documentation for sponsoring organizations of day care 
homes. In addition, section 226.18(f) is amended by removing the second 
sentence, which restricts the collection and maintenance of family size 
and income information to that used to determine the eligibility of 
providers' own children, since this information may now also be 
collected from the households of children in tier II homes. Finally, 
section 226.18(e) is amended to add the recordkeeping requirements for 
tier II day care homes in which actual meal counts are used, as 
discussed above.

Verification

    Section 17(f)(3)(A)(iii)(V) of the NSLA, as amended by section 
708(e)(1) of Pub. L. 104-193, authorizes the Secretary to establish any 
necessary minimum verification requirements for tier II day care homes. 
In addition, the definition of tier I day care home in section 
17(f)(3)(A)(ii)(I) of the NSLA requires that a day care home that 
qualifies as a tier I home on the basis of the provider's household 
income must have this income ``verified by the sponsoring organization 
of the home under regulations established by the Secretary,'' as 
mentioned earlier in this preamble.
    Current requirements for conducting verification of eligibility of 
participants in various types of institutions, which include sponsoring 
organizations of day care homes, are contained in section 226.23(h). 
Because day care homes are considered ``nonpricing programs,'' State 
agencies currently follow the provisions of section 226.23(h)(1), for 
``nonpricing programs,'' to verify the applications of day care home 
providers' own children. This section requires that State agencies 
review all applications on file to ensure that (1) the application has 
been correctly and completely executed by the household; (2) the 
institution (i.e., sponsoring organization) has correctly determined 
and classified the eligibility of enrolled participants; and (3) the 
institution (i.e., sponsoring organization) has accurately reported to 
the State agency the number of enrolled participants meeting the 
criteria for free or reduced price eligibility and the number that do 
not. This section also permits States to conduct additional 
verification to determine the validity of information provided by 
households on the application, in accordance with section 226.23(h)(2), 
the verification procedures for ``pricing programs.''
    Now that applications will be collected from the households of some 
children enrolled in tier II day care homes, the amount of verification 
activity required to be conducted by State agencies will increase. 
However, this interim rule is not making any change to the current 
regulations for verification by State agencies, which will continue to 
follow the requirements set forth in sections 226.23(h)(1)-(2). 
Therefore, under this interim rule, State agencies will have the option 
of conducting the more extensive verification of applications under 
section 226.23(h)(2), which would include parental contact to verify 
the information provided on the applications, but are not required to 
do so. The Department recognizes the importance of verification to 
reduce the potential for fraud and abuse in the program and is 
considering what amount of additional verification is appropriate. The 
Department is considering the possibility of addressing the broad 
subject of verification of applications in a future proposed rulemaking 
concerning the overall management and integrity of the Program.
    However, as required by the law, this rule adds the requirement 
that sponsoring organizations conduct verification of the provider's 
income, prior to approving the application, for all day care homes that 
qualify as tier I homes on the basis of the provider's income. Since 
the information provided on the application results in a large direct 
benefit to the provider, in the form of higher reimbursements (tier I) 
for meals served to all children in care, sponsors will be required to 
perform the more extensive verification of the provider's eligibility 
as described for pricing programs in current section 226.23(h)(2)(i). 
This involves verifying the income and other information provided on 
the approved application through collection of information from the 
household.
    Accordingly, this rule amends section 226.23(h) by adding a new 
paragraph, (6), that contains these new requirements for verification 
by sponsors of family day care homes.

Annual Requirements for Sponsoring Organizations

    Section 226.6(f) sets forth requirements that institutions, 
including sponsoring organizations of day care homes, must comply with 
on an annual basis. In addition to the current requirements, this rule 
also adds a requirement that sponsors annually submit current 
information on the total number of tier I and tier II day care homes, 
and a breakdown showing the total number of children enrolled in tier I 
homes, the total number of children enrolled in tier II homes, and the 
number of identified income-eligible children in tier II homes (i.e., 
those for whom tier I reimbursements would be claimed). Submission of 
these data will provide States with information necessary to help 
ensure that the reimbursement claims subsequently submitted by sponsors 
accurately reflect enrollment by reimbursement category. In addition, 
this information will be necessary to conduct the study of the tiering 
system's impact mandated by section 708(l) of the Act and will provide 
information regarding the characteristics of program beneficiaries.
    Accordingly, this rule further amends section 226.6(f) by adding 
new paragraph (11) to require that the above described information on 
tier I and tier II day care homes and enrolled children be provided by 
sponsoring organizations to State agencies on an annual basis.

Monthly Reporting by Sponsoring Organizations

    Section 226.13(b) requires that each sponsoring organization 
report, on a monthly basis to the State agency, the total number of 
meals, by type (breakfast, lunch/supper, supplements), served to 
children enrolled in day care homes. Due to the changes made to the 
reimbursement structure for day care homes by Pub. L. 104-193, 
sponsoring organizations will now be required to report the number of 
meals served by type and by category (i.e., tier I and tier II). This 
information will enable State agencies to pay claims to sponsoring 
organizations at the appropriate levels of reimbursement.
    Accordingly, this rule amends section 226.13(b) to add the 
requirement that sponsoring organizations of day care homes report to 
the State agency on a monthly basis the number of meals served by type 
and by category.

Free and Reduced Price Policy Statements

    Section 226.23 of the regulations requires that each institution, 
including a day care home sponsoring organization, submit when it 
applies for participation in the Program, a written policy statement 
concerning free and reduced price meals for use in all facilities under 
its jurisdiction. Under section 226.23(b), the policy statement for 
sponsoring organizations of day care homes must consist of an assurance 
to the State agency that all participants are served the same meals at 
no separate charge, and that there is no discrimination in the course 
of food

[[Page 901]]

service. With the establishment of tier I and tier II day care homes 
under the Personal Responsibility and Work Opportunity Reconciliation 
Act, different meal reimbursements may now be received for children in 
the same day care home. Therefore, the Department believes it is 
important for the sponsoring organization's policy statement to also 
include an assurance that there will be no identification of tier I and 
tier II recipients in day care homes, and that sponsoring organizations 
will not share income eligibility information concerning individual 
households with the day care homes and will limit the use of the 
information to persons directly connected with the administration and 
enforcement of the Program.
    The Department notes that section 703 of Pub. L. 104-193 amended 
section 9(b)(2)(D) of the NSLA to prohibit the requirement of annual 
submission of free and reduced price policy statements once the initial 
policy has been submitted unless there are substantive changes to the 
original statement. However, it is the Department's position that a 
change of the magnitude of the institution of the tiering system for 
day care homes in the CACFP constitutes a ``substantive change'' in the 
free and reduced price policy, and thus the revised free and reduced 
price policy statement must be submitted to the State agency for 
approval. Accordingly, this rule amends section 226.23(b) to add the 
above requirement.

Providers' Own Children

    The Personal Responsibility and Work Opportunity Reconciliation Act 
did not make any changes to the current requirements concerning 
providers' own children. In order to receive reimbursement for meals 
served to providers' own children, the provider's household must meet 
the income eligibility guidelines for free or reduced price meals. The 
definitions of tier I and tier II homes in the law are such that meals 
served to providers' own children could only be eligible for 
reimbursement in tier I day care homes. Any provider in a non-needy 
area whose own children are eligible for reimbursement would, by virtue 
of being low income, meet the definition of a tier I home. It should be 
noted, however, that income eligibility still must be determined for 
providers' own children in homes that sponsors approve as tier I homes 
based on census or school data. Since current regulations already 
reflect the requirements of the law, this rule does not make any 
changes to the regulatory language concerning providers' own children.

List of Subjects

7 CFR Part 210

    Breakfast, Children, Food assistance programs, Grant programs--
Social programs, Lunch, Meal Supplements, Nutrition, Reporting and 
recordkeeping requirements, School Nutrition Program, Surplus 
agricultural commodities.

7 CFR Part 226

    Day care, Food assistance programs, Grant programs-health, infants 
and children, Records, Reporting and recordkeeping requirements, 
Surplus agricultural commodities.

    Accordingly, 7 CFR Parts 210 and 226 are amended as follows:

PART 210--NATIONAL SCHOOL LUNCH PROGRAM

    1. The authority citation for 7 CFR Part 210 continues to read as 
follows:

    Authority: 42 U.S.C. 1751-1760, 1779.

    2. In Sec. 210.9, a new paragraph (b)(20) is added to read as 
follows:


Sec. 210.9  Agreement with State agency.

* * * * *
    (b) Annual agreement. * * *
    (20) No later than March 1, 1997, and no later than December 31 of 
each year thereafter, provide the State agency with a list of all 
elementary schools under its jurisdiction in which 50 percent or more 
of enrolled children have been determined eligible for free or reduced 
price meals as of the last operating day of the preceding October.
* * * * *
    3. In Sec. 210.19, a new paragraph (f) is added to read as follows:


Sec. 210.19  Additional responsibilities

* * * * *
    (f) Cooperation with the Child and Adult Care Food Program. No 
later than March 15, 1997, and no later than February 1 each year 
thereafter, the State agency shall provide the State agency which 
administers the Child and Adult Care Food Program with a list of all 
elementary schools in the State participating in the National School 
Lunch Program in which 50 percent or more of enrolled children have 
been determined eligible for free or reduced price meals as of the last 
operating day of the preceding October. In addition, the State agency 
shall provide the current list, upon request, to sponsoring 
organizations of day care homes participating in the Child and Adult 
Care Food Program.

PART 226--CHILD AND ADULT CARE FOOD PROGRAM

    1. The authority citation for Part 226 continues to read as 
follows:
    Authority: Secs. 9, 11, 14, 16, and 17, National School Lunch 
Act, as amended (42 U.S.C. 1758, 1759a, 1762a, 1765, and 1766).

    2. In Sec. 226.2:
    a. The definition of Documentation is amended by redesignating 
paragraph (c) as paragraph (d), and by adding a new paragraph (c); and
    b. definitions of Tier I day care home and Tier II day care home 
are added.
    The additions read as follows:


Sec. 226.2  Definitions.

* * * * *
    Documentation means * * *
    (c) For a child in a tier II day care home who is a member of a 
household participating in a Federally or State supported child care or 
other benefit program with an income eligibility limit that does not 
exceed the eligibility standard for free and reduced price meals:
    (1) the name(s), appropriate case number(s) and name of the 
qualifying program(s) for the child(ren); and
    (2) the signature of an adult member of the household.
* * * * *
    Tier I day care home means (a) a day care home that is operated by 
a provider whose household meets the income standards for free or 
reduced-price meals, as determined by the sponsoring organization based 
on a completed free and reduced price application, and whose income is 
verified by the sponsoring organization of the home in accordance with 
Sec. 226.23(h)(6);
    (b) a day care home that is located in an area served by a school 
enrolling elementary students in which at least 50 percent of the total 
number of children enrolled are certified eligible to receive free or 
reduced price meals; or
    (c) a day care home that is located in a geographic area, as 
defined by FCS based on census data, in which at least 50 percent of 
the children residing in the area are members of households which meet 
the income standards for free or reduced price meals.
    Tier II day care home means a day care home that does not meet the 
criteria for a Tier I day care home.
* * * * *
    3. In Sec. 226.4:
    a. Paragraph (c) is revised; and
    b. Paragraph (g)(1) is revised.
    The revisions read as follows:


Sec. 226.4  Payments to States and use of funds.

* * * * *

[[Page 902]]

    (c) Day care home funds. For meals served to children in day care 
homes, funds shall be made available to each State agency in an amount 
no less than the sum of products obtained by multiplying:
    (1) The number of breakfasts served in the Program within the State 
to children enrolled in tier I day care homes by the current tier I day 
care home rate for breakfasts;
    (2) The number of breakfasts served in the Program within the State 
to children enrolled in tier II day care homes that have been 
determined eligible for free or reduced price meals by the current tier 
I day care home rate for breakfasts;
    (3) The number of breakfasts served in the Program within the State 
to children enrolled in tier II day care homes that do not satisfy the 
eligibility standards for free or reduced price meals, or to children 
from whose households applications were not collected, by the current 
tier II day care home rate for breakfasts;
    (4) The number of lunches and suppers served in the Program within 
the State to children enrolled in tier I day care homes by the current 
tier I day care home rate for lunches/suppers;
    (5) The number of lunches and suppers served in the Program within 
the State to children enrolled in tier II day care homes that have been 
determined eligible for free or reduced price meals by the current tier 
I day care home rate for lunches/suppers;
    (6) The number of lunches and suppers served in the Program within 
the State to children enrolled in tier II day care homes that do not 
satisfy the eligibility standards for free or reduced price meals, or 
to children from whose households applications were not collected, by 
the current tier II day care home rate for lunches/suppers;
    (7) The number of supplements served in the Program within the 
State to children enrolled in tier I day care homes by the current tier 
I day care home rate for supplements;
    (8) The number of supplements served in the Program within the 
State to children enrolled in tier II day care homes that have been 
determined eligible for free or reduced price meals by the current tier 
I day care home rate for supplements; and
    (9) The number of supplements served in the Program within the 
State to children enrolled in tier II day care homes that do not 
satisfy the eligibility standards for free or reduced price meals, or 
to children from whose households applications were not collected, by 
the current tier II day care home rate for supplements.
* * * * *
    (g) * * *
    (1) The rates for meals served in tier I and tier II day care homes 
shall be adjusted annually, on July 1 (beginning July 1, 1997), on the 
basis of changes in the series for food at home of the Consumer Price 
Index for All Urban Consumers published by the Department of Labor. 
Such adjustments shall be rounded to the nearest lower cent based on 
changes measured over the most recent twelve-month period for which 
data are available. The adjustments shall be computed using the 
unrounded rate in effect for the preceding school year.
* * * * *
    4. In Sec. 226.6:
    a. The second sentence of paragraph (f)(2) is revised;
    b. Paragraphs (f)(9), (f)(10), and (f)(11) are added; and
    c. A new sentence is added after the third sentence of paragraph 
(l) introductory text.
    The additions and revision read as follows:


Sec. 226.6  State agency administrative responsibilities.

* * * * *
    (f) * * *
    (2) * * * Such a plan shall include: detailed information on the 
organizational administrative structure; the staff assigned to Program 
management and monitoring; administrative budget; procedures which will 
be used by the sponsoring organization to administer the Program in and 
disburse payments to the child care facilities under its jurisdiction; 
and, for sponsoring organizations of day care homes, a description of 
the system for making tier I day care home determinations, and a 
description of the system of notifying tier II day care homes of their 
options for reimbursement. For initial implementation of the two-tiered 
reimbursement structure for day care homes, by April 1, 1997, each 
sponsoring organization of day care homes shall submit an amendment to 
its plan, subject to review and approval by the State agency, 
describing its systems for making tier I day care home determinations 
and for notifying tier II day care homes of their options for 
reimbursement.
* * * * *
    (9) Coordinate with the State agency which administers the National 
School Lunch Program to ensure the receipt of a list of elementary 
schools in the State in which at least one-half of the children 
enrolled are certified eligible to receive free or reduced price meals. 
The State agency shall provide the list to sponsoring organizations by 
April 1, 1997, and by each February 15 thereafter. The State agency 
also shall provide each sponsoring organization with census data, as 
provided to the State agency by FCS upon its availability on a 
decennial basis, showing areas in the State in which at least 50 
percent of the children are from households meeting the income 
standards for free or reduced price meals. In addition, the State 
agency shall ensure that the most recent available data is used if the 
determination of a day care home's eligibility as a tier I day care 
home is made using school or census data. Determinations of a day care 
home's eligibility as a tier I day care home shall be valid for one 
year if based on a provider's household income, three years if based on 
school data, or until more current data are available if based on 
census data. However, a sponsoring organization, the State agency, or 
FCS may change the determination if information becomes available 
indicating that a home is no longer in a qualified area.
    (10) Provide all sponsoring organizations of day care homes in the 
State with a listing of State-funded programs, participation in which 
by a parent or child will qualify a meal served to a child in a tier II 
home for the tier I rate of reimbursement.
    (11) Require each sponsoring organization of day care homes to 
submit the total number of tier I and tier II day care homes that it 
sponsors; a breakdown showing the total number of children enrolled in 
tier I day care homes; the total number of children enrolled in tier II 
day care homes; and the number of children in tier II day care homes 
that have been identified as eligible for free or reduced price meals.
* * * * *
    (1) * * * Program reviews shall include State agency evaluation of 
the documentation used by sponsoring organizations to classify their 
day care homes as tier I day care homes. * * *
* * * * *
    5. In Sec. 226.13:
    a. Paragraph (b) is revised;
    b. Paragraph (c) is revised; and
    c. New paragraph (d) is added.
    The addition and revisions read as follows:


Sec. 226.13  Food service payments to sponsoring organizations for day 
care homes.

* * * * *
    (b) Each sponsoring organization shall report each month to the 
State agency the total number of meals, by type (breakfasts, lunches, 
suppers, and

[[Page 903]]

supplements) and by category (tier I and tier II), served to children 
enrolled in approved day care homes.
    (c) Each sponsoring organization shall receive payment for meals 
served to children enrolled in approved day care homes at the tier I 
and tier II reimbursement rates, as applicable, and as established by 
law and adjusted in accordance with Sec. 226.4. However, the rates for 
lunches and suppers shall be reduced by the value of commodities 
established under Sec. 226.5(b) for all sponsoring organizations for 
day care homes which have elected to receive commodities. For tier I 
day care homes, the full amount of food service payments shall be 
disbursed to each day care home on the basis of the number of meals 
served, by type, to enrolled children. For tier II day care homes, the 
full amount of food service payments shall be disbursed to each day 
care home on the basis of the number of meals served to enrolled 
children by type, and by category (tier I and tier II) as determined in 
accordance with paragraphs (d)(2) and (d)(3) of this section. However, 
the sponsoring organization may withhold from Program payments to each 
home an amount equal to costs incurred for the provision of Program 
foodstuffs or meals by the sponsoring organization on behalf of the 
home and with the home provider's written consent.
    (d) As applicable, each sponsoring organization for day care homes 
shall:
    (1) Require that tier I day care homes submit the number of meals 
served, by type, to enrolled children.
    (2) Require that tier II day care homes in which the provider 
elects not to have the sponsoring organization identify enrolled 
children who are eligible for free or reduced price meals submit the 
number of meals served, by type, to enrolled children.
    (3) Not more frequently than annually, select one of the methods 
described in paragraphs (d)(3) (i)-(iii) of this section for all tier 
II day care homes in which the provider elects to have the sponsoring 
organization identify enrolled children who are eligible for free or 
reduced price meals. In such homes, the sponsoring organization shall 
either:
    (i) Require that such day care homes submit the number and types of 
meals served each day to each enrolled child by name. The sponsoring 
organization shall use the information submitted by the homes to 
produce an actual count, by type and by category (tier I and tier II), 
of meals served in the homes; or
    (ii) Establish claiming percentages, not less frequently than 
semiannually, for each such day care home on the basis of the number of 
enrolled children determined eligible for free or reduced-price meals. 
The State agency may require a sponsoring organization to recalculate 
the claiming percentage for any of its day care homes before the 
required semiannual calculation if the State agency has reason to 
believe that a home's percentage of income-eligible children has 
changed significantly or was incorrectly established in the previous 
calculation. Under this system, day care homes shall be required to 
submit the number of meals served, by type, to enrolled children; or
    (iii) Determine a blended per-meal rate of reimbursement, not less 
frequently than semiannually, for each such day care home by adding the 
products obtained by multiplying the applicable rate of reimbursement 
for each category (tier I and tier II) by the claiming percentage for 
that category. The State agency may require a sponsoring organization 
to recalculate the blended rate for any of its day care homes before 
the required semiannual calculation if the State agency has reason to 
believe that a home's percentage of income-eligible children has 
changed significantly or was incorrectly established in the previous 
calculation. Under this system, day care homes shall be required to 
submit the number of meals served, by type, to enrolled children.
    6. In Sec. 226.14, the introductory text of paragraph (a) is 
amended by adding a sentence after the first sentence to read as 
follows:


Sec. 226.14  Claims against institutions.

    (a) * * * State agencies shall assert overclaims against any 
sponsoring organization of day care homes which misclassifies a day 
care home as a tier I day care home unless the misclassification is 
determined to be inadvertent under guidance issued by FCS. * * *
* * * * *
    7. In Sec. 226.15:
    a. Paragraph(e)(3) is revised;
    b. Paragraphs (f) through (j) are redesignated as paragraphs (g) 
through (k), respectively; and
    a. A new paragraph (f) is added.
    The addition and revision read as follows:


Sec. 226.15  Institution provisions.

* * * * *
    (e) * * *
    (3) Documentation of: the enrollment of each child at day care 
homes; information used to determine the eligibility of enrolled 
providers' children for free or reduced price meals; information used 
to classify day care homes as tier I day care homes; and information 
used to determine the eligibility of enrolled children in tier II day 
care homes that have been identified as eligible for free or reduced 
price meals in accordance with Sec. 226.23(e)(1).
* * * * *
    (f) Day care home classifications. Each sponsoring organization of 
day care homes shall determine which of the day care homes under its 
sponsorship are eligible as tier I day care homes. A sponsoring 
organization may use current school or census data provided by the 
State agency or free and reduced price applications collected from day 
care home providers in making a determination for each day care home. 
Determinations of a day care home's eligibility as a tier I day care 
home shall be valid for one year if based on a provider's household 
income, three years if based on school data, or until more current data 
are available if based on census data. However, a sponsoring 
organization, State agency, or FCS may change the determination if 
information becomes available indicating that a home is no longer in a 
qualified area.
* * * * *
    8. In Sec. 226.18:
    a. Paragraphs (b)(11) and (b)(12) are added;
    b. Paragraph (e) is amended by adding a new sentence after the 
first sentence; and
    c. Paragraph (f) is amended by removing the second sentence.
    The additions and revision read as follows:


Sec. 226.18  Day care home provisions.

* * * * *
    (b) * * *
    (11) The responsibility of the sponsoring organization to inform 
tier II day care homes of all of their options for receiving 
reimbursement for meals served to enrolled children.
    (12) The responsibility of the sponsoring organization, upon the 
request of a tier II day care home, to collect applications and 
determine the eligibility of enrolled children for free or reduced 
price meals.
* * * * *
    (e) * * * Each tier II day care home in which the provider elects 
to have the sponsoring organization identify enrolled children who are 
eligible for free or reduced price meals, and in which the sponsoring 
organization employs a meal counting and claiming system in accordance 
with Sec. 226.13(d)(3)(i), shall maintain and submit each month to the 
sponsoring organization daily records of the

[[Page 904]]

number and types of meals served to each enrolled child by name. * * *
* * * * *
    9. In Sec. 226.23:
    a. Paragraph (b) is amended by adding a sentence at the end of the 
paragraph;
    b. Paragraph (e)(1)(i) is revised;
    c. Paragraph (e)(1)(iv) is revised; and
    d. Paragraph (h)(6) is added.
    The additions and revisions read as follows:


Sec. 226.23  Free and reduced price meals.

* * * * *
    (b) * * * This statement shall also contain an assurance that there 
will be no identification of children in day care homes in which meals 
are reimbursed at both the tier I and tier II reimbursement rates, and 
that the sponsoring organization will not make any free and reduced 
price eligibility information concerning individual households 
available to day care homes and will otherwise limit the use of such 
information to persons directly connected with the administration and 
enforcement of the Program.
* * * * *
    (e)(1) * * *
    (i) For the purpose of determining eligibility for free and reduced 
price meals, institutions shall distribute applications for free and 
reduced price meals to the families of participants enrolled in the 
institution. Sponsoring organizations of day care homes shall 
distribute applications for free and reduced price meals to day care 
home providers who wish to enroll their own eligible children in the 
Program. At the request of a provider in a tier II day care home, 
sponsoring organizations of day care homes shall distribute 
applications for free and reduced price meals to households of all 
children enrolled in the home, or, if the provider in a tier II day 
care home so elects, shall distribute such applications only to 
households identified as being categorically eligible for tier I meals. 
These applications, and any other descriptive material distributed to 
such persons, shall contain only the family-size income levels for 
reduced price meal eligibility with an explanation that households with 
incomes less than or equal to these levels are eligible for free or 
reduced price meals. Such forms and descriptive materials may not 
contain the income standards for free meals. However, such forms and 
materials distributed by child care institutions other than sponsoring 
organizations of day care homes shall state that, if a child is a 
member of a food stamp household or AFDC assistance unit, the child is 
automatically eligible to receive free Program meal benefits, subject 
to the completion of the application as described in paragraph 
(e)(1)(ii) of this section; such forms and materials distributed by 
sponsoring organizations of day care homes shall state that, if a child 
or a child's parent is participating in or subsidized under a Federally 
or State supported child care or other benefit program with an income 
eligibility limit that does not exceed the eligibility standard for 
free or reduced price meals, meals served to the child are 
automatically eligible for tier I reimbursement, subject to the 
completion of the application as described in paragraph (e)(1)(ii) of 
this section, and shall list any programs identified by the State 
agency as meeting this standard; such forms and materials distributed 
by adult day care centers shall state that, if an adult participant is 
a member of a food stamp household or is a SSI or Medicaid participant, 
the adult participant is automatically eligible to receive free Program 
meal benefits, subject to the completion of the application as 
described in paragraph (e)(1)(iii) of this section. Sponsoring 
organizations of day care homes shall not make free and reduced price 
eligibility information concerning individual households available to 
day care homes and shall otherwise limit the use of such information to 
persons directly connected with the administration and enforcement of 
the Program. However, sponsoring organizations may inform tier II day 
care homes of the number of identified income-eligible enrolled 
children.
* * * * *
    (iv) If they so desire, households applying on behalf of children 
who are members of food stamp households or AFDC assistance units may 
apply for free meal benefits under this paragraph rather than under the 
procedures described in paragraph (e)(1)(ii) of this section. In 
addition, households of children enrolled in tier II day care homes who 
are participating in a Federally or State supported child care or other 
benefit program with an income eligibility limit that does not exceed 
the eligibility standard for free and reduced price meals may apply 
under this paragraph rather than under the procedures described in 
paragraph (e)(1)(ii) of this section. Households applying on behalf of 
children who are members of food stamp households, AFDC assistance 
units, or, for children enrolled in tier II day care homes, other 
qualifying Federal or State programs, shall be required to provide:
    (A) The names and food stamp, AFDC, or for tier II homes, other 
case number of the child(ren) for whom automatic free meal eligibility 
is claimed; and
    (B) the signature of an adult member of the household as provided 
for in paragraph (e)(1)(ii)(G) of this section. In accordance with 
paragraph (e)(1)(ii)(F) of this section, if a case number is provided, 
it may be used to verify the current certification for the child(ren) 
for whom free meal benefits are claimed. Whenever households apply for 
benefits for children not receiving food stamp, AFDC, or for tier II 
homes, other qualifying Federal or State program benefits, they must 
apply in accordance with the requirements set forth in paragraph 
(e)(1)(ii) of this section.
* * * * *
    (h) * * *
    (6) Verification procedures for sponsoring organizations of day 
care homes. Prior to approving an application for a day care home that 
qualifies as tier I day care home on the basis of the provider's 
household income, sponsoring organizations of day care homes shall 
conduct verification of such income in accordance with the procedures 
contained in paragraph (h)(2)(i) of this section.

    Dated: December 30, 1996.
Ellen Haas,
Under Secretary for Food, Nutrition, and Consumer Services.

Appendix to the Preamble

    Note: This appendix will not appear in the Code of Federal 
Regulations

ECONOMIC IMPACT ANALYSIS

1. Title: Child and Adult Care Food Program: Improved Targeting of Day 
Care Home Reimbursements

2. Statutory Authority: Personal Responsibility and Work Opportunity 
Reconciliation Act of 1996 (P.L. 104-193)

3. Background

    This interim rule amends the Child and Adult Care Food Program 
(CACFP) regulations governing reimbursement rates for meals served 
in family or group day care homes by incorporating provisions of the 
Personal Responsibility and Work Opportunity Reconciliation Act of 
1996 (P.L. 104-193); these provisions reduce the reimbursement rates 
for meals served to children who do not qualify for low-income 
subsidies. Specifically, this rule develops a two tier reimbursement 
structure for meals served to children enrolled in family or group 
day care homes. Under this structure, the level of reimbursement for 
meals served to enrolled children will be determined by: (1) the 
location of the day care home; (2) the income of the day care 
provider; or (3) the income of each enrolled child's household.

[[Page 905]]

This interim rule targets CACFP meal reimbursement payments to low-
income children and the day care home providers who serve them, 
where low-income is defined as not exceeding 185 percent of the 
Federal income poverty guidelines. This interim rule retains near-
current reimbursement rates for meals served to children by 
providers residing in low-income areas or served by providers who 
are low-income. Near-current reimbursements will also be retained 
for meals served to children who are identified as low-income even 
if the provider neither resides in a low-income area nor is low-
income. Meals served to all other children will be reimbursed at the 
lower rates. These changes will be effective July 1, 1997.

4. Cost/Benefit Assessment of Economic and Other Effects

Benefits

    The need to reduce overall Federal expenditures has prompted a 
review of many programs and led to the legislative decision to 
improve the targeting of CACFP benefits to low-income children. To 
accomplish targeting of benefits, the Personal Responsibility and 
Work Opportunity Reconciliation Act of 1996 establishes two tiers of 
day care homes and reimbursement rates. Under tiering, any CACFP 
participating day care home (DCH) located in a low-income area or 
operated by a low-income provider is eligible for tier I status, 
where low-income areas are determined by local school or census 
data. All meals served in tier I DCHs are reimbursed at the higher 
set of reimbursement rates. All DCHs not qualifying for tier I are 
tier II DCHs. Meals served in tier II DCHs are reimbursed at the 
lower set of rates, with the exception that meals served to 
documented low-income children are reimbursed at the higher set of 
rates.
    The initial establishment of the Child Care Food Program (CCFP) 
in November, 1975 required both types of CCFP providers, day care 
centers and DCHs, to make individual eligibility determinations 
based on each participating child's household size and income. Meal 
reimbursement rates paid to sponsors for meals served in DCHs were 
based on each enrolled child's documented eligibility for free, 
reduced price or paid meals. In order to be a DCH, which denotes a 
CCFP participating home in this analysis, a home has always had to 
(1) meet State licensing requirements, or be approved by a State or 
local agency and (2) be sponsored by an organization that assumes 
responsibility for ensuring the DCH's compliance with Federal and 
State regulations (these licensing and sponsorship requirements are 
still in effect).
    In the years following establishment of the program, concerns 
were raised that the paperwork and recordkeeping requirements were 
creating barriers to DCH participation in the CCFP. In 1978, P.L. 
95-627 eliminated free and reduced price eligibility determinations 
for individual children in DCHs (but left unchanged day care 
centers' individual eligibility determination requirements), and 
established a single reimbursement rate for each type of meal served 
in DCHs (lunches/suppers, breakfasts), and such changes encouraged 
day care providers' participation in the CCFP by reducing their 
administrative paperwork burden. The Omnibus Budget Reconciliation 
Act of 1981 added the requirement of a means test for providers to 
claim reimbursements for meals served to their own children in care. 
With this sole exception, all DCHs continued to receive the same 
reimbursements for all meals served to children in care, regardless 
of each child's income.
    The day care portion of the CCFP (The CCFP was renamed the Child 
and Adult Care Food Program (CACFP) in 1989 when an adult day care 
component was added.) has experienced dramatic growth in both DCH 
participation and Federal government costs. From fiscal year 1986 to 
fiscal year 1995, the number of participating DCHs increased from 
82,000 to 193,000, an increase of 134 percent. During the same 
period, meal reimbursements in nominal dollars increased from around 
$190 million to about $730 million, a 280 percent increase.1,2 
Program growth has occurred primarily among non-low-income children: 
table 1 shows that the proportion of low-income DCH participants 
decreased rapidly after individual eligibility determinations were 
eliminated in 1978. The table shows the proportion of DCH children 
with household incomes below 130 percent of the Federal income 
poverty guidelines decreased by 33 percentage points between 1977 
and 1982 and by an additional 9 between 1982 and 1986. During the 
same periods the percentage of non-low-income children (above 185 
percent of poverty) increased 46 and 7 percentage points, 
respectively. While empirical data is unavailable, it is believed 
that the income status of children in DCHs in 1996 was comparable to 
that in 1986. The growth in DCHs among non-low-income children is 
the impetus for P.L. 104-193's targeting of DCH benefits to low-
income children.

                         Table 1.--Income Eligibility Status of Children in DCHs by Year                        
----------------------------------------------------------------------------------------------------------------
                                                    Percent of DCH children in poverty strata by year(s)        
                                           ---------------------------------------------------------------------
            Percent of poverty                                             Change                      Change   
                                                1977a         1982b     between 1977-     1986c     between 1982-
                                                                            1982                        1986    
----------------------------------------------------------------------------------------------------------------
130............................           58            25           -33            16            -9 
131-185...................................           24            11           -13            13            +2 
185............................           18            64           +46            71            +7 
                                           ---------------------------------------------------------------------
      Total...............................          100           100           N/A           100           N/A 
----------------------------------------------------------------------------------------------------------------
a Percentage represent the proportion of meals served by category: free (to children from hoseholds with income 
  130% of Federal income poverty guidelines), reduced price (131-185% of poverty), and paid (185% of poverty). Since most DCHs operating in 1977 were non-pricing, that is did not charge separately for
  each meal served, it is assumed children in care of different income strata have equal propensitives consume  
  meals, which implies the proportion of meals served by category in 1977 is a reasonable proxy for children's  
  income eligibility percentages (assuming children eligible for free or reduced-price benefirts generally      
  became approved to receive them).                                                                             
b Taken from a citation of the Evaluation of Child Care Food Program: Results of the Child Care Food Program:   
  Results of the Child Impact Study Telephone Survey and Pilot Study in the Study of the Child Care Food Program
  \1\ report.                                                                                                   
c Taken from Study of the Child Care Food Program.\1\                                                           

    The 1986 Study of the Child Care Food Program (CCFP Study) \1\ 
that was conducted by Abt. and sponsored by USDA Food and Nutrition 
Service, found that approximately 70 percent of the children 
enrolled in DCHs in 1986 would not have been eligible for free or 
reduced price meals had a means test been performed on them. The 
establishment of a two tier reimbursement system focuses Federal 
child care benefits on children who are low-income.
    The two tier reimbursement rate structure is expected to effect 
significant Federal budgetary savings. The six year projected 
savings (fiscal years 1997-2002) are approximately $2.2 billion (see 
table 4). The savings would result from 1) a reduction in the 
reimbursement rates for meals served in tier II (non-low-income) 
DCHs and 2) a decrease in the rate of growth of day care home 
participation in the CACFP and savings in sponsor administrative 
payments and audit expenditures resulting from this slower rate of 
growth. The estimated savings assume that in fiscal years 1997-2002 
approximately 70 percent of the children in care will be ineligible 
for the higher reimbursement rates. This 70 percent assumption 
follows from the income levels of the children who participated in 
1986.1
    The reduction in reimbursement rates for meals served to 
children in tier II DCHs who are not documented income-eligible 
would result in savings of approximately $1.9 billion over the next 
six years (fiscal years

[[Page 906]]

1997-2002). Rates for all meals served to these children-lunches/
supper, breakfasts, and supplements-would decrease as shown in table 
2. The rate change would result in a savings of about $0.63 for 
every lunch or supper served during fiscal year 1998, the first full 
fiscal year in which the new two tier system will be in effect. The 
savings would increase to about $0.70 per meal by fiscal year 2002. 
Breakfast savings would range from almost $0.61 per meal served in 
fiscal year 1998 to almost $0.66 in fiscal year 2002, and supplement 
savings would range from about $0.35 cents in fiscal year 1998 to 
almost $0.39 cents in fiscal year 2002.

                    Table 2.--Changes in Tier II DCH Meal Reimbursement Rates Due to Tiering                    
----------------------------------------------------------------------------------------------------------------
                                                                Projected meal reimbursement rates              
                                                 ---------------------------------------------------------------
          Fiscal year               Meal type                        Tier II DCH rates                          
                                                   DCH rates before   after P.L. 104-    Difference    Percent  
                                                     P.L. 104-193           193                         change  
----------------------------------------------------------------------------------------------------------------
1998..........................  Lunch/Supper....            $1.6175            $0.9900      $0.6275        -38.8
                                Breakfast.......             0.8850             0.2800       0.6050        -68.4
                                Supplement......             0.4825             0.1300       0.3525        -73.1
1999..........................  Lunch/Supper....             1.6600             1.0100       0.6500        -39.2
                                Breakfast.......             0.9050             0.2900       0.6150        -68.0
                                Supplement......             0.4950             0.1400       0.3550        -71.7
2000..........................  Lunch/Supper....             1.7050             1.0400       0.6650        -39.0
                                Breakfast.......             0.9275             0.3000       0.6275        -67.7
                                Supplement......             0.5075             0.1400       0.3675        -72.4
2001..........................  Lunch/Supper....             1.7500             1.0700       0.6800        -38.9
                                Breakfast.......             0.9525             0.3100       0.6425        -67.5
                                Supplement......             0.5225             0.1400       0.3825        -73.2
2002..........................  Lunch/Supper....             1.7975             1.1000       0.6975        -38.8
                                Breakfast.......             0.9750             0.3200       0.6550        -67.2
                                Supplement......             0.5350             0.1500       0.3850        -72.0
----------------------------------------------------------------------------------------------------------------

    The growth of day care home participation in the CACFP is 
projected to slow as a result of the two tier rate structure, as 
some would-be providers are expected to perceive the program as 
offering insufficient financial incentive and/or being more 
administratively burdensome, relative to the financial benefits, 
than under prior law. This slowing in homes' participation is 
projected to cause a slowing in the rate of growth of sponsor 
administrative payments and meals served. As shown in table 3, it is 
estimated that in fiscal year 1998, the first full year of tiering, 
27 million fewer meals will be served than would have been served 
under the current reimbursement rate structure (due to a slower 
growth rate in day care home participation). The six year effect 
(fiscal years 1997-2002) of this projected slowing of growth is a 
decrease in the number of meals served by 376 million, which is 
measured relative to the number projected under pre-July 1, 1997 
reimbursement rates. The six year (fiscal years 1997-2002) projected 
savings from this slowing of program growth is approximately $300 
million, measured in nominal dollars.

                            Table 3.--Changes in DCH Meal Growth Rate Due to Tiering                            
----------------------------------------------------------------------------------------------------------------
                                                       Projected meals (in thousands) b                         
                             -----------------------------------------------------------------------------------
         Fiscal year                                   After P.L. 104-193                                       
                               Before P.L. ------------------------------------------  Difference      Percent  
                                 104-193       Tier I        Tier II        Total        (total)       change   
----------------------------------------------------------------------------------------------------------------
1997 a......................       817,177       243,528       568,232       811,760        -5,417          -0.7
1998........................       860,488       249,982       583,290       833,272       -27,216          -3.2
1999........................       904,372       256,356       598,164       854,520       -49,852          -5.5
2000........................       948,687       262,637       612,819       875,456       -73,231          -7.7
2001........................       993,275       268,809       627,221       896,029       -97,246          -9.8
2002........................     1,039,959       275,126       641,960       917,086      -122,873         -11.8
----------------------------------------------------------------------------------------------------------------
1997-2002...................     5,563,958     1,556,437     3,631,687     5,188,124      -375,834          -6.8
----------------------------------------------------------------------------------------------------------------
a Tiering does not become effective until the beginning of the fourth quarter (July 1, 1997) of fiscal year     
  1997.                                                                                                         
b In fiscal year 1995, national DCH meal counts imply the average DCH served 19 breakfasts, 31 lunches/suppers, 
  and 31 supplements in an average week.                                                                        

Costs

    This interim rule promulgates the two tier CACFP meal 
reimbursement system specified in P.L. 104-193. This system was 
designed to reduce Federal child care subsidies to providers and 
parents who are non-low-income. Tiering will reap a projected $2.2 
billion in Federal savings over the next six fiscal years through 
(1) lower meal reimbursement payment rates for non-low-income DCH 
providers and non-low-income children and (2) secondary savings 
stemming from the lower rates, including the decrease in DCH growth 
rate. The non-low-income providers will likely pass some of their 
revenue loss on to their clientele (primarily non-low-income 
parents) through higher child care fees. Non-low-income providers 
and parents will thus bear most of ing from the projected $2.2 
billion reduction in Federal expenditures--as was the intent of P.L. 
104-193. In addition to these fiscal costs, operating the two tier 
system will place new

[[Page 907]]

administrative burdens (costs) on DCH sponsors, State CACFP and 
State National School Lunch Program (NSLP) agencies, and NSLP school 
food authorities. The following analysis will show these 
administrative costs are minor in comparison with the costs to non-
low-income providers and parents.

                                                                 Table 4.--Federal CACFP DCH Costs Before and After P.L. 104-193                                                                
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                        Before P.L. 104-193                             After P.L. 104-193                                           Change                     
                                               -------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                               Meal                                     Total DCH                               
                  Fiscal year                                  Total    Admin. and             ------------------------------------ Admin. and --------------------------    Meal     Admin. and
                                                 Total DCH     meals       audit     Total DCH    Tier I      Tier II      Total       audit                               (percent)     audit  
                                                                                                   meal        meal        meal                    Dollars      Percent                (percent)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1997 a........................................    $952,099    $809,639    $142,460    $871,012    $242,083    $487,300    $729,383    $141,630      -$81,087        -8.5        -9.9        -0.6
1998..........................................   1,026,020     875,034     150,986     693,686     257,400     289,518     546,918     146,768      -332,324       -32.4       -37.5        -2.8
1999..........................................   1,104,105     943,294     160,810     727,323     270,711     305,178     575,950     151,374      -376,781       -34.1       -38.9        -5.9
2000..........................................   1,186,699   1,015,754     170,945     758,701     284,903     321,110     606,013     152,688      -427,998       -36.1       -40.3       -10.7
2001..........................................   1,273,343   1,091,954     181,389     796,114     299,951     337,907     637,858     158,256      -477,229       -37.5       -41.6       -12.8
2002..........................................   1,365,473   1,173,027     192,446     835,559     315,070     356,536     671,607     163,952      -529,913       -38.8       -42.7       -14.8
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1997-2002.....................................   6,907,739   5,908,702     999,035   4,682,396   1,670,179   2,097,550   3,767,729     914,667    -2,225,342       -32.2       -36.2       -8.4 
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
a Tiering does not become effective until the beginning of the fourth quarter (July 1, 1997) of fiscal year 1997.                                                                               

    The costs of tiering for DCH providers will be addressed first 
and then followed by a discussion of the costs for families with 
children in tier II DCHs. The new administrative burdens that 
tiering imposes on DCH sponsors will be discussed next and then 
followed by an examination of the administrative costs for CACFP 
State agencies, NSLP State agencies, and NSLP school food 
authorities.
    Implementation and use of the tiering system will have both 
implementation and periodically recurring costs for the entities 
discussed above. The implementation costs will depend highly on the 
specifics of the State and local CACFP procedures currently in place 
and on the reimbursement procedures selected under the new rule, and 
will therefore vary greatly across States and localities. Because of 
the lack of information on these current practices, quantification 
of the implementation costs, within a reasonable degree of accuracy, 
is precluded. It is recognized that these costs may be significant, 
especially for State CACFP agencies (sponsors will need more 
technical assistance). The recurring costs are more evident and 
quantifiable, and what follows is a discussion of the recurring 
costs the affected entities will incur.
I. Costs to Providers
    For CACFP providers the costs of tiering will have an 
administrative burden component, but will be primarily financial, 
due to the lower meal reimbursement rates, and will fall on 
providers operating tier II DCHs tier II DCHs will experience a 
decrease in CACFP reimbursements; the majority of the $2.2 billion 
in projected savings is due to lower reimbursements to non-mixed 
tier II DCHs (a mixed tier II DCH is a tier II DCH where at least 
one child in care is documented income-eligible; meals served to 
such children are reimbursed at the higher rates). Non-mixed tier II 
DCHs comprise an estimated 64 percent of all DCHs (see Costs to 
Sponsors for explanation). For the average non-mixed tier II DCH, 
the July 1, 1997 tier II rate decrease will cause weekly CACFP 
revenues to decline 51 percent, from $82 to $402, which follows 
directly from the average DCH's weekly meal mix footnoted in table 3 
and the meal reimbursements shown in table 2. Since the average DCH 
has about 6 children in care,\6\ this $42 decrease ($82-$40) 
represents about $7 per child.

a. Potential Tier II Provider Responses to Lower CACFP Reimbursements

    Providers of tier II DCHs will most likely respond to decreased 
CACFP revenues through some combination of raising fees, absorbing 
the loss, providing care for more children, and reducing operating 
costs. Studies of the day care market corroborate this. They find 
that in general providers will not try to pass all of the CACFP loss 
on to the families they serve,3,4 but rather employ some of 
these other options as well.
    The amount which non-low-income providers can pass on through 
higher fees will depend on the character of their local day care 
market. Tier II providers in markets that are competitive on the 
basis of fee will be discouraged from passing all of the loss on to 
parents, as they need to keep fees approximately in line with the 
local going rate to retain their customers.\4\ Providers in less 
competitive markets, such as those where there is a child care 
shortage, will be able to raise fees and pass most of their loss 
along to parents. An example of a fee competitive market is one 
where there are several day care homes operating in a moderate 
income neighborhood, all having nearly equal appeal to parents and 
nearly equal fees, but with only a few of the homes being tier II 
DCHs (the rest being non-CACFP homes or tier I DCHs). Although the 
tier II DCH providers would be tempted to raise fees in response to 
the CACFP reimbursement rate decrease, the non-CACFP and tier I DCHs 
would probably leave their fees unchanged; their doing so may cause 
the tier II DCHs to leave their fees unchanged as well. Empirical 
data on the relative extent of these two market scenarios is 
unavailable. However, because the markets affected by tiering serve 
mostly non-low-income families who, if fees are raised, would 
probably choose to pay higher fees to stay with their current 
provider, fee competitive markets may be the less common variety.
    Data from the 1990 Profile of Child Care Settings Study \3\ 
(PCCS) and the 1976 National Day Care Home Study \3\ (NDCH) provide 
information on the likelihood that providers will respond to 
decreased CACFP reimbursements by absorbing the loss or providing 
care for more children. The PCCS and NDCH studies indicate that most 
tier II CACFP providers are not in a position to completely absorb a 
significant portion of the reduction in meal reimbursements. The 
1976-80 NDCH study found that homes like DCHs (sponsored and 
regulated) do not make even moderate operating surpluses (profits)-
the mean net hourly wage for providers in regulated, sponsored homes 
was $1.92 (in 1976 dollars), 83 percent of the 1976 minimum wage 
rate of $2.30 per hour (all DCHs are sponsored and regulated, but 
not all sponsored, regulated homes are DCHs, i.e., participate in 
the CACFP). The PCCS study suggests that providers' economic 
situation may have even worsened since the NDCH study: PCCS found 
that in real dollars, fees for regulated, sponsored homes decreased 
between the period 1976-80 and 1990. Thus, the PCCS data suggests 
that providers in sponsored homes, such as DCHs, do not have much of 
an operating surplus to buffer a cut in subsidies. Other PCCS 
findings indicate that most providers will not consider taking more 
children into care as a means of increasing revenues to offset the 
decrease in CACFP reimbursements. PCCS found that most providers of 
sponsored, regulated homes are operating near their legal capacity 
and that over half of all such providers surveyed indicated they are 
unwilling to take more children into care.

b. Most Probable Provider Responses to Lower CACFP Reimbursements

    The PCCS and NDCH data, and the data suggesting that some day 
care markets may discourage the raising of fees4 imply that in 
general tier II providers will respond to decreased meal 
reimbursements by reducing operating costs; absorbing a small 
portion of the decrease; and raising fees a modest amount, but will 
not respond by providing care for more children.

c. Effects on Non-Mixed Tier II Providers

    Tier II providers who respond to decreased CACFP revenues by 
noticeably reducing operating costs or sharply raising fees may, 
however, only exacerbate their income shortage, as parents may be 
unwilling to accept the providers' decreased child care expenditures 
(reduced operating costs) or higher fees and could respond by moving 
their children to other providers, which would decrease the original 
provider's income until replacement children could be found. 
However, given that fees for DCHs (i.e., regulated and sponsored 
providers) tend to be higher than those found in unregulated

[[Page 908]]

day care homes,5,6 parents who patronize DCHs have demonstrated 
a willingness to pay a premium for regulated care and are therefore 
less likely to be sensitive to an increase in provider fees.
    The new reimbursement rates will have a significant economic 
impact on non-mixed tier II DCHs. Based on FCS program data \2\ and 
projected increases in the food at home series of the Consumer Price 
Index, when DCH reimbursement rates are first tiered on July 1, 1997 
the weighted average per meal rate for non-mixed tier II DCHs will 
drop from the tier I level of $1.01 down to $0.49, a 51 percent 
decrease. The July 1, 1997 rate cut will cause the average non-mixed 
tier II DCH's weekly CACFP revenues to decline from $82 to $40, a 
$42 decrease (a 51 percent decline), where the average DCH serves an 
average weekly meal mix of 19 breakfasts, 31 lunches/suppers, and 31 
supplements \2\ to six children.\6\ These estimates incorporate the 
dynamic nature of the regulated day care market, where the annual 
provider turnover rate is approximately 20 percent \1\: they assume 
that lowering the meal reimbursement rates will decrease the 
incentive for day care homes to join the CACFP and also increase the 
rate of departure for existing DCHs. Numerically, this translates 
into the expectation that the lower rates will cause the annual rate 
of growth in DCHs to decrease from around 5 percent to about 2.5 
percent.

d. Effects on Mixed Tier II Providers

    Although minor in comparison with non-mixed tier II CACFP 
revenue decreases, tiering's actual meal count system will place a 
new administrative burden on some portion of the sub-group of mixed 
tier II providers (an estimated 10 percent of DCHs are mixed tier 
II) whose sponsors require them to use an actual meal counts system 
(some providers already keep such counts). There will be no new 
burden for providers using either of the ``simplified'' meal counts 
systems (as explained in the Costs to Sponsors, Sponsor Meal 
Claiming Burden section). In an actual counts system, the mixed tier 
II DCHs would provide the sponsor, for each child in care, the 
number of reimbursable meals the child was served, by meal type and 
would also identify each child by name. This reporting requirement 
represents an increase in burden over the current system where some 
providers only record and provide sponsors with the total number of 
reimbursable meals served, by meal type. Few DCHs are expected to 
incur this burden, however, as this system is burdensome for the 
sponsors; it is being assumed that only 5 percent of sponsors will 
choose an actual count system, and that in addition, all such 
sponsors will be small-serving no more than 50 DCHs, on average only 
30 (see the Costs to Sponsors, Sponsor Meal Claiming Burden 
section). The estimated weekly provider burden associated with an 
actual count system in an average DCH (serving 6 children \6\ and 
operating 5 days a week \1\) is 30 minutes, which assumes a burden 
of 1 minute per child per day. The estimated annual burden for such 
a home is therefore 25 hours. This translates into an annual fiscal 
er provider. This calculation assumes that providers of regulated, 
sponsored care are making about $5.30 per hour for their services 
($5.30 is an inflation adjusted version of the NDCH study \5\ 
finding that providers of sponsored, regulated homes earned an 
average of $1.92 per hour in 1976).

II. Costs to Families

    Tiering imposes few costs on low-income families. One cost, 
limited to low-income families with children in mixed tier II DCHs, 
is their being asked to provide household income information. 
Although the families are not obligated to provide this information, 
based on NSLP data,\7\ it is expected that 90 percent will (see 
Costs to Sponsors section for explanation). Providing this 
information consumes time and could lessen a family's privacy. 
Sponsors have the authority to verify the income information at a 
later time, in which case the family would be contacted and asked to 
submit supporting documentation for the income figures provided, 
representing a second burden and further intrusion on family 
privacy. Despite being authorized to conduct income verifications, 
few sponsors are expected to do so in light of the associated 
burden. As explained below, there may also be a limited number of 
low-income families with children in non-mixed tier II DCHs; these 
families will experience costs similar to those described below for 
non-low-income families.
    Tiering is intended to reduce subsidies to non-low-income 
families, which as previously stated, is the intent of P.L. 104-193. 
This reduction has potential cost implications for these families. 
The Costs to Providers section explained that providers will likely 
respond to the decrease in CACFP reimbursements through some 
combination of reducing operating expenses, raising fees, and 
absorbing the loss. At one extreme of the day care market, an area 
not fee-competitive in which DCH providers have the freedom to 
increase fees to completely offset the reduced reimbursements, fees 
could increase by about $7 a week per child. This would recent 
increase over the average weekly fees, $70, that parents of non-low-
income children currently pay for care ($70 is an inflation-adjusted 
version of the CCFP Study's figure of $49).\1\ At the other extreme 
of the day care market, a highly fee competitive setting, fees would 
remain unchanged. Although empirical data on the relative extent of 
these market types is unavailable, data from the Costs to Providers 
section suggest that the former market type may be more common: 
first, the markets affected by tiering are serving non-low-income 
families who, if fees are raised, would probably choose to pay the 
higher fees to stay with their current provider; and second, 
families patronizing DCHs, which tend to charge higher fees than 
unregulated providers, have demonstrated a willingness to pay more 
for the higher quality of regulated care.

a. Competitive Markets

    In child care markets where providers need to hold fees down to 
retain customers, providers are constrained to react to the rate 
decrease through some mixture of absorbing the cut and cutting 
operating costs. The providers being considered here are primarily 
those operating non-mixed tier II DCHs, the group that will 
experience the greatest tiering related CACFP revenue drop. To cut 
costs, these tier II providers may change their management practices 
relating to food service and developmental opportunities and 
materials, among other potential changes. Although intended as cost 
cutting measures, some of these changes could have effects on the 
children in care. In the area of developmental opportunities and 
materials, lower reimbursements may leave providers somewhat less 
able to afford the non-essential games, books, audio or video tapes, 
etc. that were attainable when CACFP reimbursements were covering a 
greater proportion of food expenses. There are also a number of 
areas in food service where providers could reduce costs, and these 
would impact children in tier II DCHs. One way to reduce costs would 
be deciding that certain snacks under the old, higher CACFP 
reimbursements will not be served under the new, lower rates, such 
as an afternoon snack. Providers might also respond by decreasing 
meal portions, although by specifying minimum serving sizes, CACFP 
regulations limit the extent to which this could be done. Other 
means of cutting food service costs could include replacing more 
expensive ingredients and food items with less expensive ones. While 
purchasing lower quality items and ingredients may have detrimental 
nutritional implications, substituting something more affordable 
could also represent a nutritional improvement if wise choices are 
made. The CACFP study mandated by P.L. 104-193 will compare the 
nutritional quality of meals served in post-tiering tier II DCHs 
with the quality of meals served in those DCHs before tiering, among 
other pre/post-tiering comparisons.
    Should a tier II provider choose to cut operating costs, a 
family may find the resulting conditions unacceptable and seek out 
another provider. The search for a new provider entails costs in the 
time spent finding a new provider, the potential for lost wages, and 
the potential for subsequent transportation and added inconvenience 
costs if the more suitable providers are not as conveniently located 
as the original caregiver. It is also possible that providers 
constrained to hold fees down will exit the DCH market, which would 
also require a family to find another provider.
    Under the fee competitive market scenario just considered, which 
primarily affect non-low-income families, there is the potential 
that some of the low-income children in mixed tier II DCHs will 
experience some of the same costs the children in non-mixed tier II 
DCHs will experience. Although some of the meals served in a mixed 
tier II DCH will be eligible for the higher reimbursement rates, 
others will not. If the provider is constrained to not raise fees to 
recoup the decreased reimbursements for the non-low-income families, 
the provider will experience a net decrease in revenue as discussed 
above, the provider will likely respond to this net decrease by 
either reducing operating costs or absorbing the loss. Reducing 
operating costs would affect the low-income children in care. 
However, USDA believes only 10 percent of all DCHs will be mixed and 
that only a portion of these mixed homes are in competitive fee 
markets; under these conditions, few low-income children would be 
affected.

[[Page 909]]

b. Non-Competitive Markets

    In the other child care market being considered, where providers 
are not as constrained to hold fees down, providers will likely 
respond to the rate decrease primarily through increased fees. As 
suggested earlier in this section, because tiering mainly affects 
non-low-income families who will likely choose to pay increased 
provider fees, this type of market may be more common than the 
competitive fee variety. In non-fee competitive markets, families 
can respond to increased fees by either paying the higher fees, 
moving their children to more affordable providers, or dropping out 
of the labor force (fully or in part) to care for their children. 
Each choice has different costs for families. In cases where the 
parents elect not to move the child, the parents will be assuming 
greater responsibility for food costs than under the previous system 
where the Federal government was performing that function (the 
intent of P.L. 104-193). In the case where the provider raises fees 
enough to completely offset the reduced reimbursements, fees could 
increase by about $7 a week per child, representing a 10 percent 
increase over pre-tiering average fees.1 In the second case, where 
the parents move a child to achieve lower fees, the child may have 
to break established relationships with the current provider and 
other children in care. The third alternative, dropping out of the 
labor force, would presumably occur rarely, as the raising of fees 
will primarily affect higher income families who will probably 
choose to absorb the increase.

c. Effects of Tiering on Child Care Choices

    Studies show that child care regulations enforce practices 
beneficial to childhood development,\5\ but the preceding discussion 
on the relationship between lower meal reimbursements and higher 
fees implies that under tiering the number of families choosing 
sponsored, regulated care may decrease. The 1976-80 NDCH Study 
compared fees among unregulated providers; regulated but unsponsored 
providers; and providers who are both regulated and sponsored. The 
study found that providers who are both regulated and sponsored had 
the highest fees. In the years since that study, fees charged by 
regulated and sponsored providers have decreased until equaling the 
fees charged by regulated but unsponsored providers.\3\ This 
equaling of fees in regulated homes coincided with the post-1978 
rapid growth of DCHs. CACFP reimbursements--available only to 
sponsored, regulated homes--may have played a role in bringing down 
fees charged by regulated, sponsored providers to equal fees of 
regulated, unsponsored providers, which suggests that tiering's 
lowering of CACFP rates may cause regulated, sponsored fees to rise. 
Even if the post-1978 decline in regulated, sponsored provider fees 
is attributable to other factors, it is likely (as discussed in the 
Costs to Providers section) that decreased CACFP reimbursements will 
cause regulated, sponsored providers to raise fees, at least in some 
markets, which may shift children into more affordable, possibly 
unregulated homes. Similarly, the decreased CACFP reimbursements 
might cause some currently regulated and sponsored providers to 
consider moving out of regulated care. Therefore, the possibility 
that CACFP rates will no longer encourage the placement of children 
in regulated care is another cost that tiering may bring to non-low-
income children and even some low-income children.

d. Intended Effect of Tiering

    An important fact, worth reiterating, is that tiering primarily 
affects families with incomes above 185 percent of the Federal 
income poverty guidelines (non-low-income), as intended by P.L.104-
193 The only low-income families potentially affected by tiering 
will be those with children in tier II DCHs. This presumably 
encompasses few families, as it is believed, as mentioned earlier, 
that (1) only 10 percent of all DCHs will be mixed (having both non-
low-income and documented low-income children in care) and that only 
40 percent of the children in an average mixed DCH will be low-
income (see Tier II Household Income-Eligibility Determination 
Burden under Costs to Sponsors); and (2) that the clear majority of 
all other low-income children will be in tier I DCHs. Similarly, the 
providers affected by tiering will presumably be all non-low-income, 
since providers with incomes below 185 percent of the Federal income 
poverty guidelines are eligible for tier I status. The Federal 
income poverty guidelines are designed to take into account family 
size, so that a given household will qualify for low-income status 
at a lower income level than will a household that has more 
children.

III. Costs to Sponsors

    The two tier structure will impose several new administrative 
burdens on organizations that sponsor DCHs, including determining 
and documenting which DCHs and children are entitled to receive the 
higher set of reimbursement rates; verifying the income of all 
providers who qualify for tier I status based on provider income; 
and collecting and reporting separate tier I and tier II meal, 
enrollment, and provider counts.

a. Tiering Determination Burden

    All sponsors will be responsible for determining whether each of 
their DCHs is tier I or II. A sponsor can approve a DCH for tier I 
status if the DCH is located in a low-income area or the provider is 
low-income. A low-income area is defined as one in which the local 
elementary school has at least one-half of its enrollment approved 
for free or reduced price NSLP lunches, or an area in which at least 
one-half of the resident children are low income, according to the 
most recent census data. A sponsor can also approve a DCH for tier I 
status if sponsor can demonstrate low-income status (income no more 
than 185 percent of the Federal income poverty guidelines). If a 
sponsor finds a provider to be low-income, the sponsor must verify 
the provider's income before formally approving the DCH for tier I 
status. Sponsors must annually re-determine every Tier I eligibility 
determination based on a provider's income. Because verification is 
a non-trivial burden to sponsors, it is expected that whenever 
possible sponsors will approve providers for tier I on the basis of 
area eligibility. Area eligibility determinations offer sponsors the 
added benefit of being valid for three years when school data is 
used and until more recent data is available, when census data is 
used, at most ten years.
    The verification that sponsors will perform on income-approved 
tier I providers consists of obtaining pay stubs, tax returns, or 
some other form of independent income documentation to establish 
that the information provided on providers' tier I income 
applications is accurate. The proposed rule mandates this 
verification to protect the government against providers' financial 
incentive to qualify for tier I; the average tier I provider would 
receive 42 more dollars a week in CACFP meal reimbursements in 1998 
than would the average non-mixed tier II provider (as was explained 
in the Costs to Providers section). Collecting corroborating income 
documentation from providers for tier I income eligibility 
determinations represents an increase over the current CACFP DCH 
application review requirements, which were established by the 
Omnibus Budget Reconciliation Act of 1981, P.L. 97-35. P.L. 93-35 
eliminated CACFP DCH meal reimbursements for providers' own children 
in care, unless a provider submits an application demonstrating low-
income status. Sponsors are not required to obtain supporting income 
information for these applications and typically make eligibility 
determinations based on the application information alone. After 
P.L. 104-193 providers will submit enrollment applications, which 
have different sponsor verification requirements. The first type 
will be submitted by providers seeking to qualify for tier I, so 
that, if approved for tier I, all meals served in the applying 
provider's home, including those to the provider's own children in 
care, would be reimbursed at the higher rates. The second type of 
application would be submitted by providers approved for tier I by 
area eligibility seeking to claim meals served to their own children 
in care. P.L. 104-193 does not supersede P.L. 97-35, so the 
requirement that a DCH provider demonstrate low-income status in 
order to claim meals served to the provider's own children will 
remain in effect. For income applications for tier I status, P.L. 
104-193 requires that income verification (collection of 
substantiating income documentation) be performed. For applications 
from area-approved tier I providers seeking to claim meals served to 
their own children, sponsors will continue to approve these 
applications based on application content alone, which entails no 
new burden for sponsors.
    Provider income data from special tabulations of PCCS data \6\ 
together with data on average household sizes \8\ indicate that 
about 20 percent of all DCH providers are low-income and are 
therefore eligible for tier I on the basis of income. Empirical data 
on the percentage of DCHs that qualify for tier I on the basis of 
area eligibility is unavailable. An estimate for this percentage was 
derived using (1) the finding from the CCFP Study that 30 percent of 
all enrolled DCH children are low-income and (2) the assumption that 
DCH children are equally

[[Page 910]]

distributed across all DCHs, i.e., 10 percent of DCHs provide care 
for 10 percent of total DCH enrollment, regardless of the DCH's 
tiering status. Applying this distribution assumption to income-
eligible tier I DCHs (20 percent of all DCHs) implies they enroll 20 
percent of total DCH enrollment. Applying the distribution 
assumption to mixed tier II DCHs, which comprise 10 percent of all 
DCHs implies they enroll 10 percent of total DCH enrollment. Then, 
taking the assumption that 40 percent of mixed tier II DCH 
enrollment is low-income and applying it to the mixed tier II 
enrollment percentage (10 percent of total DCH enrollment) implies 
the low-income children in mixed tier II DCHs comprise 4 percent of 
total DCH enrollment (4% is 40% of 10%). Therefore, the enrollment 
in income-eligible tier I DCHs and mixed tier II DCHs, whose meals 
are all reimbursed at the higher rates, represents 24 percent of 
total DCH enrollment. The CCFP Study's finding that 30 percent of 
total DCH enrollment is low-income was then used as a basis for 
assuming that approximately 30 percent of all DCH meals will be 
reimbursed at the higher rates. When the 30 percent assumption is 
compared to the 24 percent of DCH enrollment receiving higher rates 
(in income-eligible tier I and mixed tier II DCHs), it implies that 
the residual percentage of enrollment whose meals are reimbursed at 
higher rates, 6 percent of total (30-24), is receiving care in area-
eligible tier I DCHs. Since 6 percent of total DCH enrollment 
resides in area-eligible tier I DCHs, the enrollment distribution 
assumption implies area-eligible tier I DCHs represent 6 percent of 
all DCHs. With 20 percent of all DCHs being income-eligible for tier 
I and another 6 percent being area-eligible for tier I, a total of 
26 percent of all DCHs are expected to become tier I DCHs.m
    It is assumed that a substantial proportion of low-income, 
income-eligible tier I providers reside in low-income areas, thereby 
making them area-eligible also. The burden associated with verifying 
incomes for income-eligible providers will presumably cause sponsors 
to approve DCHs for tier I on the basis of area eligibility whenever 
possible. It was therefore assumed that one-half of the income-
eligible DCHs (10 percent of total) will be approved for tier I on 
the basis of area eligibility rather than income, which together 
with the 6 tier I by area eligibility. The remaining one-half of 
tier I income-eligible DCHs, 10 percent of total, will be approved 
on the basis of income.
    The dynamic nature of the DCH market will increase sponsors' 
tiering determination burdens. Data from the CCFP Study indicates 
the DCH market has an annual provider turnover rate of approximately 
20 percent.\1\ This volatility will lead sponsors to make more 
tiering determinations than would be necessary for a stable DCH 
population. See section e: Quantification of New Burdens for 
Sponsors for the quantification of sponsors' tiering determination 
burden.

b. Household Income-Eligibility Determination Burden on Sponsors

    This interim rule mirrors P.L. 104-193 in the method it 
prescribes for approving low-income children in tier II DCHs for the 
higher meal reimbursement rates. Tier II DCHs wishing to secure 
higher reimbursements for their low-income children (``mixed'' tier 
II DCHs) are to direct their sponsor to collect income information 
from the households of the children in care. Sponsors so directed 
must request information from every household served by the 
requesting DCH. Sponsors have the responsibility of determining the 
income-eligibility for each responding household. Meals served to 
children with household incomes not exceeding 185 percent of the 
Federal income poverty guidelines--income-eligible/low-income 
children--are eligible to receive the higher reimbursement rates. 
Also eligible for the higher rates are meals served to children who 
participate in or live in households that participate in any Federal 
or State means tested program with an equivalent income eligibility 
standard-at or below 185 percent of the Federal income poverty 
guidelines.
    Sponsors must maintain supporting documentation for all children 
approved for higher meal reimbursement rates. At least annually, 
sponsors must re-determine the eligibility of all children 
previously deemed income-eligible and also give all children 
previously deemed not income-eligible another opportunity to 
demonstrate low-income status. For the purposes of this analysis, it 
is assumed that sponsors will meet the annual re-determination 
requirement by cycling through each of their mixed DCHs once a year 
and making income-eligibility determinations on all children 
currently enrolled at that time. Sponsors must also make income-
eligibility determinations for children who enter a mixed tier II 
DCH after the sponsor has made its annual income-eligibility 
determinations for that DCH. The schedule that sponsors will use to 
perform these latter income determinations is determined by the 
sponsor's choice of meal claiming system. Although it is providers 
who decide whether the sponsor must make income-eligibility 
determinations, sponsors decide which meal count system the sponsor 
and all its DCHs will use. The meal count system chosen determines 
the schedule on which income-eligibility determinations are made for 
children who enter mixed DCHs after the annual eligibility re-
determination review has occurred. Sponsors can choose between an 
actual counts system and a ``simplified'' counts version. Each of 
these systems and its associated income-eligibility determination 
schedule is described below.
    The interim rule does not prescribe any additional income 
eligibility determination requirements, beyond annual re-
determinations, for sponsors using an actual counts system. Rather, 
the provider's incentive structure under this system will determine 
the income-eligibility determination schedule used. In this system, 
providers of mixed tier II DCHs must report the number of meals 
served to each child by type and identify each child by name. 
Sponsors then use income-eligibility information to determine which 
set of reimbursements each child's meals are entitled to, with meals 
served to documented income-eligible children entitled to 
reimbursement at the higher rates. With reimbursements being 
determined on a per-child basis in actual meal count systems, 
providers of mixed tier II DCHs have the incentive to maximize the 
number of documented income-eligible children in their care. A 
provider can do this by directing its sponsor to make an eligibility 
determination on each new child upon the child's entering the 
provider's DCH. Assuming that most providers in actual count systems 
will behave in this manner, sponsors in these systems will be making 
income-eligibility determinations on an irregular, ongoing basis.
    The interim rule prescribes the income-eligibility determination 
schedule that sponsors employing simplified counting must use to 
determine the income-eligibility of children who enter mixed tier II 
DCHs outside the sponsor's annual income-eligibility determination 
cycle. The schedule requires that at least semi-annually, sponsors 
make income-eligibility determinations on all children who enter a 
mixed DCH in the prior 6 months. Given that sponsors are already 
required to annually re-determine eligibility, sponsors using a 
simplified counting system will likely perform income-eligibility 
determinations twice a year: annual re-determinations at the 
beginning of the year and a second determination at mid-year for 
those children who entered a mixed DCH sometime in the preceding 6 
months.
    The two meal count systems will require sponsors to make near 
equal numbers of eligibility determinations; the burdens are 
expected to be equal. See section e: Quantification of Burdens for 
the burden estimates.

c. Data Collection and Reporting Burden for Sponsors

    Tiering will place several new, although minor, reporting 
requirements on sponsors. Sponsors will now have to annually collect 
and report to their State CACFP agency separate enrollment counts 
for tier I and tier II DCHs and an enrollment count for documented 
income-eligible children in mixed tier II DCHs (those DCHs serving 
at least one documented low-income child). Sponsors must also 
annually report the number of tier I and tier II DCHs they sponsor. 
Finally, in the management plan that every sponsor submits to its 
agency, the sponsor will now have to include a description of how it 
will make DCH tiering determinations.

d. Sponsor Meal Claiming Burden

    Under tiering, sponsors will have new burdens related to meal 
counting and claiming. Before tiering, sponsors were only required 
to claim meals by meal type. Under tiering, sponsors will have to 
claim meals both by reimbursement category and, within each 
category, by meal type. The claiming of meals served in tier I and 
tier II DCHs remains straightforward. It simply entails separating 
claims submitted by tier I and tier II DCHs, which amounts to 
categorizing the meals, and then, within each category, summing meal 
counts by type. In contrast, claiming for mixed DCHs requires that 
for each mixed DCH sponsors split out the meals by reimbursement 
category, which will typically be a more time consuming process than 
that for non-mixed DCHs. After the

[[Page 911]]

meals from mixed DCHs are separated by category, the meals are 
summed, within each category, by meal type, just as was done for 
claims from tier I and tier II DCHs. The method that sponsors use to 
split out mixed DCH claims depends on whether the sponsor is using 
an actual or simplified meal counting system, as described below.
    As previously noted, in an actual count system, mixed tier II 
DCHs record the number of meals served to each enrolled child, by 
meal type, and provide the sponsor with a claim that lists the meals 
served to each child by type and identifies each child by name. In 
such a system, the sponsor splits the meals into reimbursement 
categories by determining the appropriate reimbursement category for 
each child's meals based on the child's income eligibility status--
the reason each child is identified by name. In contrast, in a 
simplified count system, the sponsor splits the counts into the two 
reimbursement categories by applying either blended rates or 
claiming percentages to the provider's aggregated counts (both 
blended rates and claiming percentages produce identical claims). In 
the case of claiming percentages, a sponsor computes, for each DCH, 
the number of meals of each type entitled to the higher 
reimbursements by multiplying the total number of meals claimed of 
that type by the proportion of children in that DCH who have been 
determined income-eligible (all other meals are reimbursed at the 
lower reimbursements). The procedure for blended rates is 
essentially the same. In simplified count systems, the semi-annual 
collection of income information described in section b: Household 
Income-Eligibility Determination Burden is used to update the 
claiming percentages/blended rates for each DCH every six months. 
The updated claiming percentages/blended rates reflect the current 
proportion of income eligible children in the DCH.
    Simplified counting is less burdensome to sponsors than an 
actual count system. Actual counts require the sponsor to compare 
the provider's meal claim against a list of the DCH's income-
eligible children to identify which children's meals are entitled to 
the higher rate. The sponsor then groups meals by reimbursement 
category and finally, sums by type within each category to produce 
an aggregated count of meals by category and by type. In contrast, 
to reach the same result in a simplified system, the sponsor need 
only multiply the aggregate meal counts by the DCH's claiming 
percentages/blended rates. Because of the relative ease of meal 
claiming in a simplified counts system, it is expected that only 5 
percent of all sponsors will opt for actual counts and that all will 
be small sponsors (serving no more than 50 DCHs).

e. Quantification of New Burdens for Sponsors

    To quantify the effects of this interim rule on sponsors, a 
framework of estimates and assumptions, based on previous studies of 
the program and current program data, was constructed. Creating this 
framework, which enables the scaling of burden estimates according 
to sponsor size, produces more precise burden estimates. The first 
step in creating it, was dividing the approximately 1,240 current 
sponsors into three groups, as shown in table 5: (1) small sponsors 
which serve no more than 50 DCHs, on average about 30 DCHs; (2) 
medium sponsors which serve between 51 and 300 DCHs, on average 
about 200; (3) large sponsors which serve more than 300 DCHs, on 
average about 400.1,2

                Table 5.--Sponsor and DCH Characteristies               
------------------------------------------------------------------------
                                                   Sponsor size         
        Sponsor characteristics         --------------------------------
                                           Small      Medium     Large  
------------------------------------------------------------------------
Percent of all Sponsors................        50%        30%        20%
Percent of all DCHs Served.............         9%        40%        51%
Average Number of DCHs Served per                                       
 Sponsor...............................         30        200        400
Number of Sponsors (Total = 1,240) in                                   
 Category..............................        620        372        248
------------------------------------------------------------------------

    Based on these definitions, 50 percent of all sponsors are small 
in size and account for 9 percent of all DCHs; 30 percent are of 
medium size and account for 40 percent of all DCHs; and 20 percent 
are large and account for 51 percent of all DCHs.\1\,\2\ Next, based 
on DCH providers' and enrolled children's income data, respectively 
from special PCCS tabulations \6\ and the CCFP Study \1\ and other 
assumptions discussed above under Tiering Determination Burden, it 
was estimated that 26 percent of all DCHs will be approved for tier 
I; 64 percent will be tier II, and 10 percent will be mixed tier II, 
as shown in table 6.

                      Table 6.--DCH Characteristics                     
------------------------------------------------------------------------
                                                                 Percent
                            DCH Type                              of All
                                                                   DCHs 
------------------------------------------------------------------------
Tier I.........................................................       26
  Area Eligible Only...........................................        6
  Income Eligible Only.........................................       10
  Area & Income Eligible.......................................       10
                                                                --------
    Sum........................................................       26
========================================================================
  Approved by Area.............................................       16
  Approved by Income...........................................       10
                                                                --------
    Sum........................................................       26
========================================================================
Tier II........................................................       74
  Mixed........................................................       10
  Non-Mixed....................................................       64
------------------------------------------------------------------------

    Finally, it was assumed that 40 percent of sponsors will serve 
at least one mixed tier II DCH. This last assumption is rooted in 
the finding from the CCFP study \1\ that almost 70 percent of DCH 
children are non-low-income. When this finding is coupled with the 
assumption that smaller sponsors are more likely to serve 
economically homogeneous DCHs, by virtue of their limited geographic 
coverage, the implication is that small sponsors are less likely 
than medium or large sponsors to serve mixed tier II DCHs. This 
conclusion, together with the CCFP Study \1\ data that indicates 
nearly 50 percent of all sponsors are small, is the basis for 
assuming 40 percent of sponsors will serve at least one mixed tier 
II DCH. Based on these estimates and assumptions, the approximately 
193,000 DCHs in operation \2\ were distributed across the three size 
categories of sponsors based on the number of mixed tier II DCHs 
predicted for the average sponsor in each sponsor category and the 
relative sizes of the tier I and tier II DCH populations.
    The estimates for new sponsor burden contained in the interim 
rule are presented in table 7. Shown are estimates for the annual 
burden hours imposed on each sponsor category, and the percentage of 
sponsors affected within each sponsor category. Of the listed 
burdens, only Meal Claiming recurs periodically (monthly). The other 
burdens occur only once or twice a year (with the exception of 
household income determinations in an actual meal count system, but 
the number of sponsors involved is minimal, 5 percent of total, 
i.e., 60). The estimates make the assumption that economies of scale 
are realized only for Meal
    Claiming burdens, where the recurring nature of the burden would 
presumably give larger sponsors a sufficient incentive to establish 
efficient meal claiming systems.

[[Page 912]]



                       Table 7.--Estimated Annual Sponsor Burden From Two Tier DCH System                       
----------------------------------------------------------------------------------------------------------------
                                      Estimated Annual Sponsor Burden by       Estimated Percent of Sponsors    
                                             Sponsor Size (Hours)              Affected in Each Size Category   
              Burden               -----------------------------------------------------------------------------
                                       Small        Medium       Large        Small        Medium       Large   
----------------------------------------------------------------------------------------------------------------
Tiering Determinations:                                                                                         
    1. Low income Providers                                                                                     
     (Includes Verification)......            4           52           96          100          100          100
    2. Area Eligibility...........            2           28           51          100          100          100
    Tier II Household Income-                                                                                   
     Eligibility Determinations...            9           40           80           27           53           50
    Data Collection and Reporting                                                                               
     a............................            4           15           28          100          100          100
Meal Claiming:                                                                                                  
    1. Actual Counts System (with                                                                               
     mixed tier II DCHs)..........           20        N/A b        N/A b           10        N/A b        N/A b
    2. Simplified Counts System                                                                                 
     (with mixed tier II DCHs)....           10           45           67           16           52           50
    3. No Mixed Tier II DCHs......            5           22           34           74           48           50
----------------------------------------------------------------------------------------------------------------
a Includes tier I, tier II, and tier II low-income enrollment counts; tier I and tier II DCH counts; and        
  description of tiering determination method in sponsor management plan.                                       
b Due to the burden associated with actual meal counts systems, it is expected that only small sponsors will    
  choose actual counts.                                                                                         

    The tiering determinations burden estimates were calculated 
using data from the CCFP Study \1\ and special tabulations from PCCS 
\6\, which indicate that 26 percent of all DCHs are eligible for 
tier I and the assumption that sponsors will choose to approve 
providers for tier I on the basis of area eligibility whenever 
possible. Thus, it is assumed that 16 percent of all DCHs will be 
approved for tier I using area eligibility information, while the 
remaining tier I eligible DCHs (10 percent) will be approved using 
provider income information. For the burden estimate, these 
percentages were assumed to hold for the average sponsor in each 
sponsor category so that, for example, the average small sponsor 
(serving 30 DCHs) with its 4.8 tier I homes would approve 3.0 of the 
4.8 on the basis of area eligibility (4.8 * 16% / 26%) and the 
remaining 1.8 DCHs on the basis of the provider's income (4.8 * 10% 
/ 26%). The estimates incorporate the dynamic nature of the DCH 
market, which has an annual provider turnover rate estimated to be 
between 18 and 25 percent.\1\ This volatility will require sponsors 
to make more tiering determinations than would be necessary for a 
stable DCH population. Finally, the estimates for area eligibility 
assume that sponsors identify income-eligible DCHs using sponsors' 
preexisting knowledge of economic conditions in areas where DCHs 
reside and that sponsors are thereby able to easily identify DCHs 
lying far outside all income-eligible areas. This approach would 
allow sponsors to focus their efforts on DCHs with reasonable 
probabilities of qualifying for tier I by area eligibility. This 
analysis assumes such an approach will be taken and that the average 
sponsor will consider 3 homes for low-income area eligibility for 
every 2 it finds eligible and approves.
    The tier II household income-eligibility determinations 
estimates were calculated by estimating the income-eligibility 
burden associated with the average DCH and then multiplying that 
figure by the average number of DCHs a sponsor in each of the three 
categories oversees.\1\ The number of children in care in an average 
DCH was used as the starting point.\6\ This figure was then inflated 
to account for the fact that on average, there is a 30 percent 
turnover of children every 6 months in the average day care home.\9\ 
This inflated figure represents the number of children who could 
potentially submit an application over a year's time. From this 
group of potential applicants, the number of submitted applications 
was calculated using an assumed 90 percent application response rate 
(based on the NSLP's 80 percent rate) \7\ and the assumption that on 
average about 40 percent of the children in mixed tier II DCHs are 
income-eligible. There is a clear financial incentive for providers 
to encourage their low-income families to submit income information 
to sponsors. This incentive and providers' close relationships with 
parents suggest that providers will attempt to persuade parents to 
provide the income information and will thereby achieve a response 
rate greater than the NSLP's 80 percent; ninety percent was chosen. 
The assumption that 40 percent of children in mixed tier II DCHs are 
income-eligible. There is a clear financial incentive for providers 
to encourage their low-income families to submit income information 
to sponsors. This incentive and providers' close relationships with 
parents suggest that providers will attempt to persuade parents to 
provide the income information and will thereby achieve a response 
rate greater than the NSLP's 80 percent; ninety percent was chosen. 
The assumption that 40 percent of children in mixed tier II DCHs are 
income eligible is based on two assumptions: (1) most DCHs with more 
than 60 percent of their enrollment income-eligible will be tier I 
and 2) some tier II DCH providers that serve one or two income-
eligible children will not realize or avail themselves of the 
children's low-income status and therefore will not ask their 
sponsor to determine the children's income-eligibility (placing the 
DCH in the non-mixed tier II category). The two preceding 
assumptions suggest a percentage below 50 percent; forty percent was 
chosen.
    The data collection and reporting burden was calculated assuming 
that the average sponsor will spend about 12 hours complying with 
the new requirements in this area, with 10 of these hours for the 
new data related requirements and the remaining 2 for the 
requirement that each sponsor now provide a description of its plan 
for making DCH tiering determinations in its management plan. The 12 
hour burden implies annual burdens of 4, 15, and 28 hours for small, 
medium, and large sponsors, respectively. These estimates are 
consistent with this burden being an expansion on the current CACFP 
requirement that sponsors report quarterly the number of DCHs served 
and the DCHs' enrollment and submit annually a sponsor management 
plan.
    The meal claiming burden was calculated assuming that the 
monthly burden resulting from the new meal claiming requirements 
will be 2 hours for the average sponsor. This weighted average 
implies a burden that increases with sponsor size and the number of 
mixed tier II DCHs being served. The estimates make the assumption 
that an actual counts system will impose twice the meal claiming 
burden of a simplified counts system due to the relative difficulty 
that sponsors using actual counts are expected to have in producing 
meal claims broken down by reimbursement category and meal type 
(relative to the effort required under a simplified counts system). 
The estimates further assume that among sponsors using a simplified 
count system, the average meal claiming burden for sponsors without 
any mixed DC one-half the average burden for sponsors serving mixed 
DCHs. This assumption is consistent with the lower level of effort 
required to process meal claims from non-mixed DCHs. In addition, as 
described above, the estimates assume economies of scale so that the 
burdens are not directly proportional to the number of DCHs a 
sponsor serves.
    Table 8 translates the burdens displayed in table 7 into fiscal 
costs. The fiscal costs were produced assuming that wage rates for 
employees of child care centers3, $8.00 per hour in 1997 dollars 
(which has been adjusted for inflation), are reasonable proxies for 
the wage rates of workers in DCH sponsors. The table implies that 
the annual increase in administrative costs due to tiering, for the 
average small, medium, and large sponsor, are about $160, $1,200, 
and $2,100 (in 1997 dollars), respectively. These costs represent 
less than one percent of the total annual administrative payments 
the average small, medium, and large sponsor would receive from USDA 
(in 1997 dollars):

[[Page 913]]

$27 thousand, $150 thousand, and $270 thousand (in 1997 dollars), 
respectively.

                    Table 8 a.--Estimated Annual Sponsor Fiscal Cost From Two Tier DCH System                   
----------------------------------------------------------------------------------------------------------------
                                     Estimated Annual Sponsor Fiscal Cost      Estimated Percent of Sponsors    
                                      by Sponsor Size (In 1997 Dollars)        Affected in Each Size Category   
              Burden               -----------------------------------------------------------------------------
                                       Small        Medium       Large        Small        Medium       Large   
----------------------------------------------------------------------------------------------------------------
Tiering Determinations:                                                                                         
1. Low Income Providers (Includes                                                                               
 Verification)....................          $32         $416         $768          100          100          100
2. Area Eligibility...............           16          224          408          100          100          100
Tier II Household Income-                                                                                       
 Eligibility Determinations.......           72          320          640           27           53           50
Data Collection and Reporting b...           32          120          224          100          100          100
Meal Claiming:                                                                                                  
1. Actual Counts System (with                                                                                   
 mixed tier II DCHs)..............          160         cN/A         cN/A           10         cN/A         cN/A
2. Simplified Counts System (with                                                                               
 mixed tier II DCHs)..............           80          360          536           16           52           50
3. No Mixed Tier II DCHs..........           40          176          272           74           48           50
Weighted Average Cost.............          158        1,201        2,124                                       
Average USDA Administrative                                                                                     
 Payments, Annual.................       27,000      150,000      270,000                                       
Wght. Avg. Cost as Percent of                                                                                   
 Admin. Payments..................          0.6          0.8          0.8                                       
----------------------------------------------------------------------------------------------------------------
a The sponsor costs shown in table 8 equal the burden hours multiplied by a wage rate of $8.00/hour, as         
  described in the text.                                                                                        
b Includes tier I, tier II, and tier II low-income enrollment counts; tier I and tier II DCH counts; and        
  description of tiering determination method in sponsor management plan.                                       
c Due to the burden associated with actual counts systems, it is expected that only small sponsors will choose  
  actual counts.                                                                                                

IV. Costs to CACFP State Agencies

    The costs to CACFP State agencies consist of their being 
required to provide sponsors with low-income area eligibility data; 
increased requirements related to sponsor review, particularly the 
auditing of the documentation for income-eligible children; and 
their obligation to provide sponsors with technical assistance. In 
terms of area eligibility data, these agencies will be responsible 
for providing (1) census data identifying all State census blocks 
where at least 50 percent of the children are from low-income 
households (no more than 185 percent of the Federal income poverty 
guidelines) and (2) an annually updated list of all State elementary 
schools that have more than 50 percent of their enrollment certified 
to receive free or reduced-price lunches under the NSLP (implies hof 
no more than 185 percent of Federal income poverty guidelines). The 
agencies' other responsibility relating to area eligibility data is 
determining in which instances census data should be used over NSLP 
information: The interim rule states that sponsors are in general 
supposed to use the most recent school data available in making 
tiering determinations, but that the State CACFP agency should 
determine when census data should supersede it, by following 
instructions in forthcoming guidance from USDA. For the average 
State CACFP agency, it is estimated that its obligation to provide 
sponsors with elementary school data annually and providing census 
data as it becomes available represents an average annual burden of 
23 hours, which assumes each instance of data transmittal and 
subsequent follow-up takes 1 hour. This estimated burden is 
equivalent to $184 using the same wage assumptions used in table 8.
    Tiering will also increase State agencies' sponsor review 
requirements. When reviewing sponsors, State agencies will now have 
to review the documentation used to deem children in tier II DCHs 
income-eligible for the higher meal reimbursements as well as the 
documentation for tier I providers approved on the basis of income. 
However, the agency is only held responsible for ensuring that the 
application form is completed correctly and that the stated income 
actually falls below 185 percent of the Federal income poverty 
guidelines. The state is given the option to verify the 
documentation, but because of the amount of time involved in 
verification, it is expected that very few will routinely do so. The 
agencies are also responsible for ensuring that the most current 
data available was used in making area eligibility determinations (a 
negligible burden), but are not required to verify the 
determinations. For the average State CACFP agency, it is estimated 
that performing these reviews amounts to an annual burden of 23 
hours, with some States expending much less than this amount and 
others much more, depending on the size and number of sponsors in 
the State. This estimated burden is equivalent to $184 using the 
same wage assumptions used in table 8.
    State CACFP agencies will likely see an appreciable increase in 
their training and technical assistance burden as the transition to 
the new two tier system is made. Under the new system, State 
agencies will have to provide new guidance and training on all new 
aspects of CACFP introduced by tiering, for example, DCH tiering 
determinations, new meal counting and claiming procedures, and new 
data reporting requirements. This burden will likely persist for the 
first several years the new system is in place. It is believed that 
the new training and technical assistance burdens represents about 
10-20 hours of new burden per sponsor per year for a State agency. 
For the average State, this implies an annual burden of between 230 
and 460 hours (between $1,840 and $3,680) for the first several 
years of tiering and presumably abating thereafter. The Personal 
Responsibility and Work Opportunity Reconciliation Act of 1996 (P.L. 
104-193) provides some funds to help State CACFP agencies make the 
transition. It directs the Secretary of Agriculture to set aside $5 
million of fiscal year 1997 CACFP funds for one-time grants to State 
CACFP agencies. These grants must be used to aid States, sponsors, 
and DCHs with making the transition to the new system. P.L. 104-193 
allows each of the 54 State agencies to retain up to 30 percent of 
its total grant for State agency use. If all States agencies 
retained the maximum allowable, a total of approximately $1.5 
million would be retained at the State level, with the remaining 
$3.5 million going to DCHs and their sponsors.
    The interim rule adds a new requirement to the management plans 
that sponsors must submit annually. Now, each sponsor must describe 
the approach it will use to make DCH tiering determinations. 
Reviewing this component of the plan will presumably place minimal 
additional burden on the State agency.
    There is the potential that in some States the decreased CACFP 
reimbursements will lead to an increase in the State-wide average 
fee charged by providers. This increase may have the effect of 
increasing State expenditures for subsidized child care, as a 
State's subsidized care payments are often based on the average fee 
that providers in the State are charging. Being unable to predict a 
numerical value for the effect the reimbursement rate cut will have 
on provider fees, as discussed previously under Costs to Providers, 
quantifying this potential cost to States is precluded. However, 
this interim rule does not require States to increase their payments 
for subsidized child care.

V. Costs to NSLP State Agencies and NSLP School Food Authorities

    Under P.L. 104-193, State NSLP agencies are required to annually 
provide a list of all State elementary schools in which at least 50 
percent of the enrollment is certified to receive free or reduced-
price NSLP lunches. However, these agencies do not currently collect 
school-level information. NSLP School Food Authorities (SFAs), which 
are generally school districts, are the only

[[Page 914]]

entities other than the schools that collect this data. SFAs are 
also more able than schools to provide the data to the NSLP State 
agency. The interim rule accommodates this situation by directing 
SFAs to inform their State NSLP agency of the elementary schools 
that have at least 50 percent of their enrollment certified to 
receive free or reduced-price NSLP lunches. It is estimated \10\ 
that roughly 5,000 SFAs will contain the approximately 11,000 
elementary schools meeting this criterion, and that the annual 
average reporting burden on an SFA will be roughly 1.5 hours ($12). 
The NSLP State agencies will receive the lists of elementary schools 
from their SFAs, compile and presumably do basic error checking on 
them, and pass the compiled listings on to the State CACFP agencies. 
It is estimated that the average NSLP State agency burden associated 
with this work will be 2.5 hours.

Comparison of Costs and Benefits

    The analysis presented here finds that the DCH tiering structure 
established by P.L. 104-193 and promulgated by this interim rule 
will accomplish its objective of targeting Federal child care 
benefits to low-income children. This targeting will save a 
projected $2.2 billion in Federal tax revenues over the next 6 years 
(fiscal years 1997-2002). Non-low-income providers (tier II DCHs 
providers) and non-low-income families with children in tier II DCHs 
will bear most of the costs resulting from the Federal government's 
$2.2 billion savings. Low-income families with children in tier II 
DCHs may also bear some costs, but States may offset this by opting 
to increase child care subsidies. The analysis further found that 
while targeting will place new administrative burdens on sponsors, 
State CACFP and NSLP agencies, and NSLP school food authorities, 
these burdens are relatively modest.

5. Requirements for Regulatory Analyses Established by Regulatory 
Flexibility Act

    The Regulatory Flexibility Act (P.L. 96-354) establishes 
requirements for analyses of regulatory actions that are expected to 
have a significant economic impact on a substantial number of small 
entities. P.L. 96-354 was enacted at the urging of small businesses 
after repeated claims that uniform application of regulations 
regardless of business size was disproportionately damaging to small 
entities. It is expected that this rule will have an economically 
significant impact on tier II DCH providers due to the large 
decrease in reimbursement rates for meals served in those DCHs. This 
rule will also affect sponsoring organizations, considered to be 
``small organizations'' by P.L. 96-354, although the economic impact 
on them is expected to be minimal. The specific effects for sponsors 
and tier II providers were discussed under the Costs to Providers 
and Costs to Sponsors sections of the Cost/Benefit Assessment.
    The Act also requires that analyses estimate the type of 
professional skills necessary to reporting or record keeping 
requirements. The new reporting and record keeping required by this 
rule require no skills beyond those necessary for current program 
reporting and record keeping requirements.
    Another P.L. 96-354 requirement is that analyses describe the 
steps taken by the promulgating agency (Food and Consumer Service, 
FCS) to minimize the economic impact on small entities. 
Specifically, the ``analysis shall also contain a description of any 
significant alternatives to the interim rule which accomplish the 
stated objectives of applicable statutes and which minimize any 
significant economic impact of the proposed rule on small 
entities.'' There are no significant alternatives available to FCS 
that both (1) accomplish the stated objectives of P.L. 104-193 AND 
(2) minimize any significant economic impact on small entities.
    The interim rule implements, in accordance with statute and with 
the statutory intent to target benefits, the programmatic changes 
mandated by the Personal Responsibility and Work Opportunity 
Reconciliation Act of 1996 (P.L. 104-193). The rule's only 
economically significant impacts are the decreased meal 
reimbursements for meals served in tier II DCHs; FCS cannot mitigate 
this effect other than by making targeting less accurate, which 
would be contrary to the spirit of P.L. 104-193. The only other 
class of small entities affected by this regulatory action are 
sponsors. The analysis finds that the costs that sponsors will incur 
in meeting the new program requirements established by this interim 
rule will be less than one percent of the payments each sponsor 
receives from USDA for operating the CACFP in its DCHs. The small 
size of this burden implies that this interim rule's economic impact 
on sponsors is minimal and that in the few areas where FCS had 
discretion, it made choices free from deleterious economic effects 
for sponsors. For example, FCS considered several alternatives for 
how often sponsors using simplified meal counting systems must re-
determine the claiming percentage or blended reimbursement rate for 
each of their mixed DCHs using the income-status of currently 
enrolled children. P.L. 104-193 required that these re-
determinations be made at least annually. FCS considered annual, 
semi-annual, and quarterly re-determinations and chose, for the 
interim rule, to require semi-annual re-determinations, having 
decided semi-annual represents the best compromise between effective 
targeting of benefits and limiting sponsor burden. The interim rule 
places no reporting requirements on homes or sponsors beyond those 
mandated by P.L. 104-193.
    FCS is soliciting comments on the less-economically significant, 
burden related provisions of this rule and will consider all 
received comments when crafting the final rule and when revising the 
burden estimates for the final economic impact analysis.

6. References

1. Glantz, Frederic, Judith Layzer, and Michael Battaglia. Study of 
the Child Care Food Program. Alexandria, VA: U.S. Department of 
Agriculture, Food and Nutrition Service, Office of Analysis and 
Evaluation, August 1988.
2. Department of Agriculture, Food and Consumer Service Program 
Information Division, ``Program Information Report.'' August 26, 
1996.
3. Kisker, Ellen E., Sandra L. Hofferth, Deborah A. Phillips, and 
Elizabeth Farquhar. A Profile of Child Care Settings: Early 
Education and Care in 1990, Volume I. Princeton, NJ: Mathematica 
Policy Research, Inc., 1991.
4. Glantz, Frederic. ``Family Day Care Myths and Realities.'' 
October 1989, Paper Presented at the October 1989 meeting of the 
Association for Public Policy Analysis and Management, Washington, 
DC.
5. Fosburg, Steven, Judith D. Singer, Barbara Dillon Goodson, Donna 
Warner, Nancy Irwin, Lorelei R. Brush, Janet Grasso. Family Day Care 
in the United States: National Day Care Home Study Summary of 
Findings. DHHS Publication No. (OHDS) 80-30282. Washington, D.C.: 
U.S. Department of Health and Human Services, 1981.
6. Kisker, Ellen Eliason, Valarie A. Piper. Participation in the 
Child and Adult Care Food Program: New Estimates and Prospects for 
Growth. Alexandria, VA: U.S. Department of Agriculture, Food and 
Nutrition Service, Office of Analysis and Evaluation, April 1993.
7. Burghardt, John, Anne Gordon, Nancy Chapman, Philip Gleason, and 
Thomas Fraker. The School Nutrition Dietary Assessment Study: School 
Food Service, Meals Offered, and Dietary Intakes. Alexandria, VA: 
U.S. Department of Agriculture, Food and Nutrition Service, Office 
of Analysis and Evaluation, October 1993.
8. Heiser, Nancy. Characteristics of Food Stamp Households, Summer 
1990. Alexandria, VA: U.S. Department of Agriculture, Food and 
Nutrition Service, Office of Analysis and Evaluation, July 1992.
9. Hoffereth, Sandra L., April Brayfield, Sharon Deich, and Pamela 
Holcomb. National Child Care Survey, 1990. Washington, DC: Urban 
Institute, 1991.
10. Mathematica Inc., Special Tabulations of the School Nutrition 
Dietary Assessment Study data. Alexandria, VA: U.S. Department of 
Agriculture, Food and Consumer Service, Office of Analysis and 
Evaluation, February 1995.
---------------------------------------------------------------------------

    This analysis is consistent with the possibility that a limited 
number of non-low-income children will be in tier I DCHs, and that a 
similar limited number of low-income children will be in non-mixed 
tier II DCHs.
---------------------------------------------------------------------------

    Approved:


[[Page 915]]


    Dated: December 5, 1996.

William E. Ludwig,

Administrator, Food and Consumer Services.

    Dated: December 20, 1996.

Stephen B. Dewhurst,

Director, Office of Budget and Program Analysis.

    Dated: December 20, 1996.

Keith Collins,
Chief Economist.

    Dated: December 23, 1996.
Dan Dager,
Acting Executive Assistant to the Under Secretary for Food, Nutrition, 
and Consumer Services.
[FR Doc. 97-116 Filed 1-6-97; 8:45 am]
BILLING CODE 3410-30-P