Federal Register, Volume 62 Issue 4 (Tuesday, January 7, 1997)

[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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Rules and Regulations
Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by the Superintendent of Documents.
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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

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
1977^{a 1982^{b between 1977- 1986^{c 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}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}}