[Federal Register Volume 64, Number 102 (Thursday, May 27, 1999)]
[Proposed Rules]
[Pages 28763-28768]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-13554]


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 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
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  Federal Register / Vol. 64, No. 102 / Thursday, May 27, 1999 / 
Proposed Rules  

[[Page 28763]]


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DEPARTMENT OF AGRICULTURE

Food and Nutrition Service

7 CFR Part 274

[Amendment No. 345]
RIN 0584-AC44


Food Stamp Program, Regulatory Review: Electronic Benefit 
Transfer (EBT) Provisions of the Personal Responsibility and Work 
Opportunity Reconciliation Act of 1996

AGENCY: Food and Nutrition Service, USDA.

ACTION: Proposed rule.

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SUMMARY: On August 22, 1996, the President signed the Personal 
Responsibility and Work Opportunity Reconciliation Act of 1996. This 
rule proposes to implement the Electronic Benefit Transfer provisions 
found in Section 825 of this law which affect the Food Stamp Program. 
These provisions are meant to encourage implementation of Electronic 
Benefit Transfer systems to replace food stamp coupons.

DATES: Comments on this rulemaking must be received on or before July 
26, 1999 to be assured of consideration.

ADDRESSES: Comments should be submitted to Jeffrey N. Cohen, Chief, 
Electronic Benefit Transfer Branch, Benefit Redemption Division, Food 
and Nutrition Service, USDA, 3101 Park Center Drive, Alexandria, 
Virginia, 22302. Comments may also be datafaxed to the attention of Mr. 
Cohen at (703) 305-0232. All written comments will be open for public 
inspection at the office of the Food and Nutrition Service during 
regular business hours (8:30 a.m. to 5 p.m., Monday through Friday) at 
3101 Park Center Drive, Alexandria, Virginia, Room 718.

FOR FURTHER INFORMATION CONTACT: Questions regarding this rulemaking 
should be addressed to Mr. Cohen at (703) 305-2517.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

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

Executive Order 12372

    The Food Stamp Program is listed in the Catalog of Federal Domestic 
Assistance under No. 10.551. For the reasons set forth in the final 
rule in 7 CFR 3015, Subpart V and related Notice (48 FR 29115), this 
Program is excluded from the scope of Executive Order 12372 which 
requires intergovernmental consultation with State and local officials.

Regulatory Flexibility Act

    This rule has been reviewed with regard to the requirements of the 
Regulatory Flexibility Act of 1980 (5 U.S.C. 601-612). Shirley R. 
Watkins, the Under Secretary for Food, Nutrition, and Consumer 
Services, has certified that this proposed rule will not have a 
significant economic impact on a substantial number of small entities. 
State and local welfare agencies will be the most affected to the 
extent that they administer the Food Stamp Program.

Paperwork Reduction Act

    This rule does not contain additional reporting or recordkeeping 
requirements other than those that have been previously approved by the 
Office of Management and Budget (OMB) under the Paperwork Reduction Act 
of 1995 and assigned OMB control numbers 0584-0083 and 0505-0008.

Executive Order 12988

    This rule has been reviewed under Executive Order 12988, Civil 
Justice Reform. This rule is intended to have preemptive effect with 
respect to any State or local laws, regulations or policies which 
conflict with its provisions or which would otherwise impede its full 
implementation. This rule is not intended to have retroactive effect 
unless so specified in the ``Effective Date'' paragraph 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 Food Stamp Program 
the administrative procedures are as follows: (1) for Program benefit 
recipients--State administrative procedures issued pursuant to 7 U.S.C. 
2020(e)(1) and 7 CFR 273.15; (2) for State agencies--administrative 
procedures issued pursuant to 7 U.S.C. 2023 set out at 7 CFR 276.7 (for 
rules related to non-quality control (QC) liabilities) or Part 283 (for 
rules related to QC liabilities); (3) for Program retailers and 
wholesalers--administrative procedures issued pursuant to 7 U.S.C. 2023 
set out at 7 CFR 278.8.

Public Law 104-4

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Pub. 
L. 104-4, establishes requirements for Federal agencies to assess the 
effects of their regulatory actions on State, local, and tribal 
governments and the private sector. Under section 202 of the UMRA, the 
Food and Nutrition Service generally must prepare a written statement, 
including a cost-benefit analysis, for proposed and final rules with 
``Federal mandates'' that may result in expenditures to State, local, 
or tribal governments in the aggregate, or to the private sector, of 
$100 million or more in any one year. When such a statement is needed 
for a rule, section 205 of the UMRA generally requires the Food and 
Nutrition Service to identify and consider a reasonable number of 
regulatory alternatives and adopt the least costly, more cost-effective 
or least burdensome alternative that achieves the objectives of the 
rule.
    This rule contains no Federal mandates (under the regulatory 
provisions of Title II of the UMRA) for State, local, and tribal 
governments or the private sector of $100 million or more in any one 
year. Thus today's rule is not subject to the requirements of sections 
202 and 205 of the UMRA.

Background

    On April 1, 1992, the Department issued a final rule establishing 
standards for operation of the Food Stamp Electronic Benefit Transfer 
System (EBT) as an alternative to coupons. Those regulations were 
promulgated in accordance with section 1729 of the Mickey Leland 
Memorial Domestic Hunger Relief Act of 1990 (Leland Act) (title XVII, 
Pub. L. 101-624) as part of a package of items aimed at improving the 
efficiency and effectiveness of program operations. With the exception 
of some minor corrections issued September 29, 1992,

[[Page 28764]]

these regulations have not been amended since their promulgation though 
other proposed changes are being considered through separate 
publications.
    FNS is proposing this rule to implement the provisions of section 
825 of the Personal Responsibility and Work Opportunity Reconciliation 
Act of 1996 (PRWORA) (Pub. L. 104-193) on August 22, 1996, which amends 
Section 7 of the Food Stamp Act of 1977, as amended (7 U.S.C. 2016(i)) 
(the Act). The specific provisions are discussed below.

Mandate EBT

    The Leland Act established EBT systems as operational issuance 
systems to provide food stamp benefits to eligible households. The 
PRWORA goes further by mandating that each State agency implement EBT 
for issuance of food stamp benefits no later than October 1, 2002, 
unless the Secretary provides a waiver for a State agency that faces 
unusual barriers to implementing an EBT system. Each State agency is 
encouraged to implement an EBT system as soon as practicable.
    In order to meet the requirement, State agencies must be issuing 
EBT benefits for food stamps statewide by October 1, 2002. Currently, 
all but a very few State agencies have submitted planning documents for 
the eventual implementation of EBT systems. Therefore, we expect that 
only a small pool of States or territories will be forced to take 
action as a result of this provision or request a waiver from the 
Secretary for timely implementation of EBT under the law. This rule 
proposes adding language in Section 274.12 (a), to mandate that each 
State agency implement an EBT system by the specified date unless a 
waiver is granted to the State. Any State agency that is not granted a 
waiver and is not fully implemented by October 1, 2002, will be out of 
compliance with these rules and may be subject to disallowance of 
administrative funds pursuant to the provisions of 7 CFR 276.4.

Off-Line Technology

    7 CFR 274.12 established rules for the approval, implementation and 
operation of on-line EBT systems for food stamps. The Leland Act did 
not authorize the utilization of off-line EBT technology in which a 
self-contained benefit access device, such as a microprocessor card, 
commonly known as a smartcard, is used to access benefits. Off-line 
systems could only be approved under the waiver authority of section 17 
of the Act (7 U.S.C. 2026) as a demonstration project.
    The term ``on-line'' is deleted from the Act by section 825 of 
PRWORA, thereby eliminating the requirement that EBT systems be on-line 
systems. This rule proposes to amend 7 CFR 274.3 to define an off-line 
EBT system as a benefit delivery system in which a benefit allotment 
can be stored on a card and used to purchase authorized items at a 
point-of-sale terminal without real-time authorization from a central 
processor.
    The system architecture and functionality of off-line payment 
systems differs from that of on-line applications. As such, some of the 
technical standards codified in the existing rule may require revisions 
to relax or broaden language, supplement stated standards, or introduce 
new standards and requirements. Because industry standards for off-line 
electronic payment systems are still evolving, the Department is not in 
the position to propose standards specific to off-line systems in this 
rulemaking. However, we are interested in soliciting comments from the 
public at this time to provide input into our decision regarding what 
changes we should propose in the future as standards for off-line 
systems. We will also be looking at the experience gained in off-line 
demonstration projects in Ohio and Wyoming as we assess the need for 
further standards.
    In the meantime, this rule proposes the regulations be amended to 
simply allow for the implementation of off-line EBT systems by adding 
language to that effect. Pending publication of new off-line standards, 
proposals from State agencies to implement off-line systems will be 
evaluated on a case-by-case basis. The Department will base approvals 
on the on-line standards currently in our rules where they apply, on 
the most current off-line industry information available and on 
knowledge gained from off-line EBT systems operating at the time.

Cost Neutrality

    This section proposes several changes to the regulations. First, we 
are removing the requirement that EBT systems be cost neutral in any 
one year, since the requirement that cost neutrality be measured on an 
annual basis was removed from the Act by PRWORA. Section 7(i)(2)(A) of 
the Act prior to the PRWORA stated that EBT systems must be cost 
neutral to the Federal government. The regulations require State 
agencies to calculate a coupon issuance cap and at 7 CFR 
274.12(c)(3)(vi)(B) require that State agencies be responsible for the 
post-EBT implementation issuance costs that exceed the coupon issuance 
cap in any one year. Section 825 of PRWORA amends the Act to strike the 
language, ``in any 1 year'', effectively providing more flexibility in 
the determination and tracking of cost neutrality. The regulations are 
being modified to reflect this change. The State agencies will, 
however, still be required to submit an issuance cost cap, and the 
Federal Government will still be required to verify the cost cap 
submitted.
    National Cap. As a discretionary change, the Department is also 
proposing to amend the regulations at 7 CFR 274.12(c)(3)(i) to 
establish a national issuance cost cap figure. The Department would 
calculate the national issuance cost cap based on the State issuance 
costs that have been approved by FNS and on the direct Federal costs 
that are attributable to coupon issuance. The rule would allow State 
agencies to use the National issuance cost cap instead of conducting 
their own cap analysis. State agencies would still have the option of 
calculating their own cost cap if they wanted to do so. The current 
regulations at 7 CFR 274.12(c)(3)(i) through (vi), which specifically 
delineate the cost neutrality guidelines and the procedures for 
calculating the State coupon issuance cap, have been a repeated source 
of misunderstanding for States. Therefore, in the interest of 
clarifying these provisions, this section has been redrafted and 
reorganized to be more explicit.
    Prospective Certification. Finally, the Department is proposing a 
second discretionary provision to assess whether State agencies have 
met Federal cost neutrality requirements through prospective 
certification at the time the cap is submitted, eliminating the need to 
track operational costs throughout the life of the system. Currently, 
at the end of the EBT contract period, the State agencies are required 
to compare the actual EBT operational costs for the life of the EBT 
system to the coupon issuance cost cap to see that the actual costs do 
not exceed the cap. Prospective cost neutrality certification for EBT 
would follow the same approach that has been used for State eligibility 
systems, whereby the EBT cost projections are compared to a coupon 
issuance cap before system implementation to assess the cost neutrality 
of the system. If the comparison demonstrates the proposed system will 
cost less than the coupon system, no further measurement will be 
required for the life of the EBT system unless there is a substantial 
increase in system costs due to contract re-negotiation or some other 
change. Any such cost increase will require prior

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approval and submittal of an Implementation APD Update. Cost neutrality 
will be reassessed for any significant cost increases during system 
life, and for any subsequent EBT systems the State agency may develop 
and implement. This method will significantly simplify the process used 
to determine a State's EBT system cost neutrality.

Differentiate Food Stamp Eligible Items

    The PRWORA requires, to the extent practicable, the establishment 
of system approval standards for measures that permit a system to 
differentiate items of food that may be bought using food stamps from 
items that may not. This resulted in a study to determine to what 
extent optical scanner technology, the only technology currently able 
to differentiate between eligible and non-eligible items, could be used 
in tandem with EBT to meet this requirement. A report of the study was 
delivered to Congress in August 1998, explaining there must also be a 
linkage of the scanner to an electronic cash register at the point-of-
sale (POS) so that the information from scanned and eligible items can 
be passed to the EBT system. Technically, this is feasible in about 95 
percent of all authorized retailers. However, this would be cost 
prohibitive, requiring the introduction of hardware and software in all 
Food Stamp authorized stores at an estimated initial cost of $4.60 
billion, of which $3.30 billion is for the estimated 68 percent of 
program authorized stores that do not currently scan. To maintain this 
functionality, an additional $752 million annually is estimated. Based 
on this information, no regulatory change is being proposed.

Replacement Card Fee

    The PRWORA amends the Act to allow a State agency to collect a 
charge for replacement of an EBT card by reducing the monthly allotment 
of the household receiving the replacement card. Prior to the enactment 
of the PRWORA, the EBT regulations allowed for approval of a card 
replacement fee; however, the fee could not be collected from a 
household's food stamp benefit allotment. This rule proposes to amend 
current regulations at 7 CFR 274.12 (f)(5)(v) to add this provision.
    State agencies with currently operating EBT systems need to inform 
FNS if they intend to institute a process for collection of replacement 
card fees from client households' allotments. If a State agency is in 
the process of developing an EBT system and intends to charge 
households for replacement cards, they must include the procedure for 
collection of the fees in their EBT system design documents. FNS will 
need to know how replacement card fees will be accounted for by the 
State agencies.
    If FNS is already sharing in the cost for replacement cards with 
the State agency through an existing contract, the amount collected 
must be reported as program income on the SF-269 report. Alternatively, 
the State agency's EBT processor may handle collection of the 
replacement card fee and reduce the billing to the State by the amount 
collected. At the State agency's request, FNS can establish a special 
authorization number in the FNS retailer database to be utilized by the 
State agency for the purpose of reconciling the funds drawn for the 
replacement fees.

Photograph on EBT Card

    The PRWORA specifies that State agencies may require that EBT cards 
contain a photograph of one or more members of a household. This does 
not change what is allowable under current regulations. However, the 
language in the PRWORA further specifies that the State agency must 
establish procedures to ensure that any other appropriate member of the 
household or any authorized representative of the household may utilize 
the EBT card if a photo is used. Any State agency wishing to use photos 
on the EBT cards should specify in their plans how they intend to 
address this concern of the Agency. This rule proposes to amend the 
current regulations accordingly by adding paragraph (iv) at CFR 
274.12(h)(6).

Anti-Tying Restrictions

    Section 825 of the PRWORA includes the following provision: A 
company may not sell or provide EBT services, or fix or vary the 
consideration for EBT services, on the condition or requirement that 
the customer obtain some additional point-of sale service from the 
company or an affiliate of that company; or not obtain some additional 
point-of-sale service from a competitor of the company or competitor of 
any affiliate of the company. The law also states that the Department 
must consult with the Board of Governors of the Federal Reserve System 
before promulgating any regulations regarding this provision. After 
consultation with the Federal Reserve, the Department has determined 
that this provision serves no purpose in the EBT environment.
    It is the Department's understanding that this anti-tying provision 
was intended to prevent large EBT contractors that might underprice 
their commercial service offerings from squeezing smaller banks out of 
the point-of-sale marketplace. Some had hoped this language would 
diminish the competitive advantage of a State agency's chosen EBT 
contractor to provide these other commercial point-of-sale services at 
retail locations for which they were already providing EBT services. 
However, the legislative language states that the cost of EBT services 
cannot be varied, rather than the cost of commercial services cannot be 
varied. In fact, there is already no way to tie EBT services to 
receiving additional commercial point-of-sale services when EBT is 
provided by the Government at no cost to authorized retailers. Anti-
tying prevents the conditioning of any service on the purchase of 
another service or product. Since EBT is non-conditioned, the Federal 
Reserve agrees that the existing anti-tying laws are not relevant in 
the EBT environment. Therefore, the Department is not proposing any 
regulation change at this time, but does welcome any comments on the 
anti-tying provision.

System Compatibility

    PRWORA included that it is the sense of Congress that States 
operate EBT systems in a manner that is compatible with one another. 
The Department is not proposing any changes since the current 
regulations already require system compatibility. EBT regulations at 7 
CFR 274.12(h) Performance and Technical Standards, require that States 
ensure EBT systems comply with point of sale (POS) technical standards 
as established by the American National Standards Institute (ANSI) or 
International Organization for Standardization (ISO), where applicable. 
FNS has further worked to develop a technical specification for EBT 
food stamp transactions from a POS by bringing together a Technical 
Specification Committee comprised of EBT processors in association with 
the Electronic Funds Transfer Association (EFTA) EBT Operating Rules 
Committee. The purpose of creating this specification was to provide a 
standard POS/EBT system interface that retailers could use in multi-
state retail operations and to allow for interstate transactions.
    Also, 7 CFR 274.12(h)(5) Third Party Processors, requires State 
agencies to afford retailers the opportunity to use third party 
processors and to provide interface specifications and certification 
standards in order for the third party processors to participate in the 
EBT system. Because most third party processors operate in more than 
one State, we are supporting compatibility

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by requiring access for third party processors. FNS also supports 
compatibility by working with the National Automated Clearing House 
Association (NACHA) EBT Council on issues related to interoperability 
including the recent implementation of a test to determine the volume 
and cost of interstate transactions.

Regulation E

    Section 907 of the PRWORA amends Section 904 of the Electronic 
Funds Transfer Act, commonly known as Regulation E, to exempt from 
coverage government EBT accounts held for recipients of State-
administered needs-tested assistance programs, including the Food Stamp 
Program. This provision does not amend the Food Stamp Act and 
therefore, there is no change proposed to our current regulations.

Implementation

    The Department is proposing that the provisions of this rulemaking 
become effective no later than 30 days after publication of the final 
rule. State agencies may implement the provisions anytime after 
publication, however, EBT systems must be in place no later than 
October 1, 2002, unless the State is granted a waiver by the 
Department.

List of Subjects in 7 CFR Part 274

    Administrative practice and procedure, Food stamps, Fraud, Grant 
programs--social programs, Reporting and recordkeeping requirements, 
State liabilities.

    Accordingly, 7 CFR part 274 is proposed to be amended as follows:

PART 274--ISSUANCE AND USE OF COUPONS

    1. The authority citation for 7 CFR part 274 continues to read as 
follows:

    Authority: 7 U.S.C. 2011-2032.

    2. In Sec. 274.3, a new paragraph (a)(5) is added to read as 
follows:


Sec. 274.3  Issuance systems.

    (a) * * *
    (5) An off-line Electronic Benefit Transfer system in which benefit 
allotments can be stored on a card and used to purchase authorized 
items at a point-of-sale terminal without real-time authorization from 
a central processor.
* * * * *
    3. In Sec. 274.12:
    a. Paragraph (a) is revised.
    b. Paragraph (b)(1) is amended by removing the second sentence and 
removing the word ``However,'' from the third sentence.
    c. Paragraphs (c)(3)(i) through (c)(3)(vi) are removed.
    d. Paragraphs (e), (f), (g), (h), (i), (j), (k), (l), and (m) are 
redesignated as paragraphs (f), (g), (h), (i), (j), (k), (l), (m), and 
(n), respectively, and a new paragraph (e) is added.
    e. Newly redesignated paragraph (g)(5)(v) is revised.
    f. In newly redesignated paragraph (i), a new paragraph (i)(6)(iv) 
is added.
    The revisions and additions read as follows:


Sec. 274.12  Electronic Benefit Transfer issuance system approval 
standards.

    (a) General. This section establishes rules for the approval, 
implementation and operation of Electronic Benefit Transfer (EBT) 
systems for the Food Stamp Program as an alternative to issuing food 
stamp coupons. State agencies must implement EBT systems no later than 
October 1, 2002, unless the Secretary provides a waiver for a State 
agency that faces unusual barriers to implementing an EBT system. In 
general, these rules apply to both on-line and off-line EBT systems, 
unless stated otherwise herein, or unless FNS determines otherwise for 
off-line systems during the system planning and development process.
* * * * *
    (e) Cost Neutrality. The State agency must operate its EBT system 
in a cost-neutral manner, whereby the Federal cost of issuing benefits 
in the State after implementation of the EBT system does not exceed the 
Federal cost of delivering coupon benefits under the previous coupon 
issuance system. The amount up to which the State agency may consider 
its EBT system cost neutral is defined by the coupon issuance cap. The 
issuance cost cap is expressed in terms of a cost per case month 
derived by dividing the annual total cost of issuance by the total 
number of households issued food stamp benefits during the year the 
costs were incurred. In determining its coupon issuance cap, the State 
agency shall use either the national issuance cap, as determined by 
FNS, or calculate a coupon issuance cap based on the State agency's 
statewide issuance costs under the current coupon issuance system.
    (1) The National Coupon Issuance Cap is a case-month issuance 
amount, as calculated by FNS. The national issuance cost cap is based 
on nationwide Federal coupon issuance costs, as validated by FNS, and 
includes the issuance costs identified in paragraphs (e)(2)(i) and 
(e)(2)(ii) of this section. FNS will make the national cost cap figure 
available to State agencies who opt for this method of determining the 
cost neutrality of their EBT systems.
    (2) A State Coupon Issuance Cap is based upon individual States' 
statewide coupon issuance costs, multiplied by the percentage of 
Federal financial participation, plus Federal-only coupon issuance 
costs. Such costs, to be represented as a cost per case-month, shall be 
calculated using State issuance costs for the four consecutive Federal 
fiscal quarters preceding the submission of the EBT Implementation APD. 
An alternative base period may be used with approval from FNS, if the 
State agency can demonstrate that the alternative period would be more 
accurate or other circumstances prevent the use of the required base 
period. A State agency may also request approval from FNS to develop 
coupon issuance caps based on costs from individual counties, selected 
project areas, or other subdivision of the State operating EBT which 
will then be combined into a blended statewide coupon issuance cap 
prior to statewide EBT implementation.
    (i) State coupon issuance costs shall include, but not be limited 
to, direct allowable costs for personnel, fringe benefits, travel, 
equipment, supplies, contracts, construction and other direct costs 
associated with coupon issuance. Such costs may be direct charges to 
the State agency for Food Stamp Program administration that have been 
allocated from a larger cost pool to the Food Stamp Program and to the 
coupon issuance function. Indirect costs, defined as costs which are 
included in the State agency's indirect cost proposal and approved for 
cost charging through an indirect cost rate, shall not be included in 
determining the cap.
    (ii) Federal coupon issuance costs associated with coupon issuance 
in the State agency that shall include:
    (A) Costs for coupon printing, shipping, processing and 
reconciliation. The case-month figure associated with these costs is 
provided by FNS;
    (B) Monthly mail issuance losses up to the tolerance limit approved 
by FNS;
    (C) Monthly duplicate issuance losses, except for mail issuance 
losses, absorbed by FNS; and
    (D) Allowable State coupon issuance costs multiplied by the 
applicable percentage rate of Federal financial participation.
    (iii) The State agency shall provide narrative explanations and 
satisfactory supporting documentation to clarify each cost item and how 
it was calculated. When allocated costs are included in the coupon 
issuance cap, the State agency must provide a narrative explanation of 
how the charge was allocated to the Food Stamp Program and to coupon 
issuance. The allocation method must be objective,

[[Page 28767]]

demonstrate a reasonable cause and effect relationship between the type 
of cost and the basis for the allocation, and represent consistent 
application for all similar costs. If time studies are used as the 
basis for allocation of costs to issuance, FNS must approve the 
definition of issuance used in the instructions to study participants.
    (iv) All issuance costs included in the coupon issuance cap are 
subject to validation by FNS prior to FNS approval. Validation entails 
the review of the State's accounting system and applicable source 
documentation to determine that the costs were actually incurred, were 
reasonable, were allocated properly to the Food Stamp Program and to 
the issuance functional category, and were reported to FNS on the 
standard financial Status Report (Form SF-269).
    (3) The State agency should submit its coupon issuance cap or 
indicate it has opted to use the national coupon issuance cap as part 
of the Implementation APD process. The coupon issuance cap must be 
approved prior to implementation of the pilot, and shall be effective 
from the first date benefits are issued to households through the EBT 
system during the pilot project.
    (4) Coupon Issuance Cap Inflation. Each State's approved issuance 
cap and the national cost cap will be adjusted each Federal fiscal year 
based on the percentage change in the most recently published Gross 
Domestic Product Implicit Price Deflator Index (GDP Price Deflator) 
calculated from the percentage change in the index between the first 
quarter of the current calendar year and the first quarter of the 
previous year, as published each June by the Bureau of Economic 
Analysis. FNS will compute the inflated cap for each State each year 
and provide the revised cap to State agencies annually.
    (5) Calculating Cost Neutrality. The determination of cost 
neutrality will be assessed on a prospective basis; that is, FNS will 
make a determination prior to system implementation whether the 
proposed EBT system will be cost neutral based on a comparison of the 
coupon issuance costs to the projected costs of the EBT system as 
proposed in the Implementation APD. The State Agency may choose how 
they determine coupon issuance costs; either according to paragraph 
(e)(1) or paragraph (e)(2) of this section. After approval of its 
coupon cost cap and prior to system implementation, the State agency 
shall submit to FNS an analysis comparing the coupon issuance costs to 
the projected EBT costs over the seven years of system operation or 
other specified period of time defining the life of the system. The 
State shall project the statewide issuance costs including EBT system 
design, development, start-up and operations through the defined life 
of the system. For cost per case month comparisons, the projection will 
include the same caseload estimates as the coupon cap calculation. 
Statewide cost projections for issuance costs after EBT implementation 
must include all of the direct EBT costs, and projections for all 
categories of allocated costs which were included in the coupon cost 
cap calculation using the same allocation methodology as in the cost 
cap calculation. The State agency may request approval to limit the 
issuance cost comparison for cost neutrality purposes to only the costs 
incurred for the area served by EBT and to not include residual coupon 
issuance costs; that is, costs associated with issuing coupons to 
recipients in areas not yet converted to EBT. Cost neutrality would 
then be measured by comparing the coupon issuance cap multiplied by the 
number of EBT cases to the EBT cost of operation. With the addition of 
each new area served by EBT, the State agency would then be required to 
recalculate a blended State cap figure, incorporating the coupon 
issuance costs of the newly added area with the previously approved 
issuance cap, for use in comparison to the EBT costs for the areas 
served by EBT. The projection shall include any costs allocated to an 
EBT cost pool if applicable.
    (i) EBT planning costs are to be excluded from the cost neutrality 
assessment and shall include costs attributed to the preparation of the 
Planning APD, all activities leading to the development of the EBT 
implementation plan and the completion of the documentation contained 
in the FNS approved Implementation APD.
    (ii) The cost neutrality assessment must include system design and 
development and start-up costs . For assigning the costs to start-up, 
the start-up period for the EBT project shall begin from the approval 
date of the Implementation APD or with the ratification of a contract 
for EBT services, whichever is earlier and end with the first EBT 
benefit issuance in the pilot area.
    (iii) The operations phase is defined as beginning with the first 
EBT issuance in the pilot area. The State agency shall identify the 
allowable EBT operational costs which include, as appropriate, but are 
not limited to: labor hours and costs by job category and by program 
for each unit, direct non-labor costs by program for each agency, 
vendor charges, if any, computer usage (CPU, disk storage, tapes, 
printing), the equipment amortization/lease and maintenance (including 
POS hardware and installation costs), telecommunications installations, 
recurring telecommunications costs, benefit card stock and equipment, 
supplies, printing and reproduction, travel, postage, automated 
clearinghouse charges, wire transfer fees and other such settlement 
fees, and other direct costs. Indirect costs, as defined in paragraph 
(e)(2)(i) of this section, shall not be included as EBT system 
operational costs.
    (iv) For the purposes of claiming Federal financial participation 
in State capital expenditures and for the purposes of projecting the 
cost to EBT, costs for EBT equipment purchased directly by the State 
agency shall be charged from the time operations begin in accordance 
with Sec. 277.18(i)(3) of this chapter and Sec. 277.18, Appendix A of 
this chapter. Equipment costs shall include the cost of installation 
and shall be separate from those transaction costs identified in the 
EBT contract. Costs for EBT equipment purchased directly by the State 
agency shall be identified in the EBT system budget as a separate 
component, both for the pilot and the fully operational system and 
shall be applied to the issuance funding cap as amortized.
    (6) FNS must review and approve the cost neutrality analysis 
submitted by the State.
    (i) If the comparison demonstrates the proposed system will cost 
less than the coupon issuance system, no further measurement will be 
required for the life of the system unless there is a substantial 
increase in system costs requiring prior approval as described in 
Sec. 277.18(c)(2)(ii)(C) of this chapter and the submittal of an 
Implementation APD Update as outlined in the FNS Handbook 901 (APD 
Handbook).
    (ii) Any State agency that cannot show cost neutrality will be 
required to track EBT costs throughout the life of the system and 
reimburse FNS for any excess at the end of the defined system life.
    (iii) Any subsequent EBT systems developed or implemented will 
require an updated cost neutrality assessment incorporating the revised 
costs of the new system.
* * * * *
    (g) * * *
    (5) * * *
    (v) The State agency may impose a replacement fee by reducing the 
monthly allotment of the household receiving the replacement card, 
however the fee may not exceed the cost to

[[Page 28768]]

replace the card. If the State agency intends to collect the fee by 
reducing the monthly allotment, it must follow FNS reporting procedures 
for collecting program income. States agencies currently operating EBT 
systems must inform FNS of their proposed collection operations. States 
in the process of developing an EBT system must include the procedure 
for collection of the fee in their system design document. All plans 
must specify how the State agency intends to account for card 
replacement fees and include identification of the replacement 
threshold, frequency and circumstances in which the fee shall be 
applicable.
* * * * *
    (i) * * *
    (6) * * *
    (iv) State agencies may require the use of a photograph of one or 
more household members on the card. If the State agency does require 
the EBT cards to contain a photo, it must establish procedures to 
ensure that all appropriate household members or authorized 
representatives are able to access benefits from the account as 
necessary.
* * * * *
    Dated: May 17, 1999.
Shirley R. Watkins,
Under Secretary for Food, Nutrition, and Consumer Services.
[FR Doc. 99-13554 Filed 5-26-99; 8:45 am]
BILLING CODE 3410-30-U