[Federal Register Volume 64, Number 203 (Thursday, October 21, 1999)]
[Rules and Regulations]
[Pages 56669-56675]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-27431]



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  Federal Register / Vol. 64, No. 203 / Thursday, October 21, 1999 / 
Rules and Regulations  

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DEPARTMENT OF AGRICULTURE

Food and Nutrition Service

7 CFR Part 246

RIN 0584-AC64


Special Supplemental Nutrition Program for Women, Infants and 
Children (WIC): Food and Nutrition Services and Administration Funding 
Formulas Rule

AGENCY: Food and Nutrition Service, USDA.

ACTION: Final rule.

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SUMMARY: This final rule amends both the food and the nutrition 
services and administration (NSA) funding formulas to improve the 
effectiveness of WIC funds distribution now that WIC is in a relatively 
stable funding environment. The amended food funding formula helps to 
ensure food funds are allocated to State agencies that can utilize the 
funds to maintain current participation as well as to direct funds, as 
available, to State agencies that are receiving a smaller portion of 
funding relative to their proportion of the WIC eligible population 
than other State agencies. The amended NSA funding formula simplifies 
the funding formula by deleting obsolete components and revising 
existing components to more equitably distribute funds among State 
agencies.

EFFECTIVE DATE: This rule is effective October 1, 1999.

SUPPLEMENTARY INFORMATION:

Background

Proposed Rule

    The Food and Nutrition Service (FNS) published a proposed rule on 
October 13, 1998 in the Federal Register (63 FR 54629) outlining the 
revisions of the food and nutrition services and administration funding 
formulas for WIC. The proposed rule provided for a 90-day comment 
period, which ended on January 11, 1999. Two hundred twenty-two comment 
letters were received from a variety of sources, including State and 
local agencies, Members of Congress, advocacy groups and other public 
interest groups. FNS has given all comments careful consideration in 
the development of this final rule and would like to thank all 
commenters who responded to the proposal.

Need for Revisions to the WIC Funding Formulas

    The WIC Program has consistently demonstrated its effectiveness in 
promoting the health and nutritional well being of low-income women, 
infants and children at nutritionally related medical or dietary risk. 
The WIC Program has grown and changed significantly during the past few 
years. However, as growth has plateaued, FNS believes that it is 
appropriate to change both the NSA and food funding formulas to enhance 
their effectiveness at distributing funds fairly and equitably among 
WIC State agencies in an environment in which appropriations are 
relatively stable.
    The WIC Program is a fixed grant program, not a Federal entitlement 
program, and is not guaranteed unlimited funds. WIC State agencies must 
manage within a finite appropriation level. However, State agencies 
have considerable latitude to manage program costs to accommodate 
variable funding levels.
    The formulas in this rule better provide State agencies with the 
equal opportunity to serve eligible persons who apply for benefits. 
Currently, State agency funding levels are not necessarily proportional 
to their WIC eligible population. The revised formulas are intended to 
allocate funds more fairly among State agencies under a relatively 
stable funding environment.

Nutrition Services and Administration (NSA) Funding Formula

    The current WIC NSA funding formula became effective April 1, 1988. 
The objectives of the formula were to ensure a reasonable measure of 
funding stability while providing funding levels that enabled 
equivalent services to participants across State agencies and to 
promote incentives for reducing food costs so that more persons may be 
served.
    The current NSA formula is, however, complicated and requires a 
tremendous amount of data collection--some of which may no longer be 
needed or has little impact on the actual allocation of funds. Further, 
some data are not available in time to permit issuance of final grants 
at the beginning of the fiscal year. As a result, FNS feels that the 
current NSA funding formula is no longer the most efficient and 
effective means of distributing NSA funds.

Current NSA Provisions--General

    The WIC regulations at 7 CFR 246.16 (c)(2) set forth both the NSA 
funding requirements as established in Section 17 (h) of the Child 
Nutrition Act of 1966 (42 U.S.C. 1786(h)) and the process by which NSA 
funds are allocated to State agencies. The current NSA funding formula 
meets the legislative requirements by: (1) Establishing a ``target'' 
NSA funding level, referred to as parity, that each State agency should 
receive as its fair share NSA grant; (2) preserving stability by 
guaranteeing, to the extent funds are available, the prior year NSA 
grant level, and then gradually moving State agencies to their parity 
target level; and (3) addressing the varying needs of each State agency 
by allocating regional discretionary funds based on regional and 
National priorities.
    The following is a discussion of each provision, as proposed, 
comments received on the proposal, and an explanation of the provisions 
set forth in this final rule.

Current NSA Parity Component

    The current parity target level is based primarily on the number of 
participants projected to be served by State agencies. Using food grant 
levels allocated for the current fiscal year, FNS projects the number 
of participants each State agency is expected to serve taking into 
consideration its State-reported per participant food costs and 
inflation. In addition to projected participation, three adjustments 
are made to this participation-based formula to recognize factors 
believed to affect the cost of Program administration. These include:
    (a) Economies of scale--recognizes the higher per participant costs 
associated with smaller participation levels (currently an adjustment 
is made at three levels: 5,000 or fewer

[[Page 56670]]

participants; 5,001-15,000 participants; and more than 15,000 
participants);
    (b) Salary differentials--considers the differential salary levels 
paid within each State for employees in Public Administration, Health 
and Social Services; and
    (c) Targeting of benefits to high-risk participants--considers the 
proportion of Priority I participants served by the State agency.
    Currently, eighty percent of funds available for allocation through 
the parity component are allocated in accordance with projected 
participation, adjusted by the economy of scale factor. This is done on 
the basis of administrative grant per participant (AGP) rates that are 
adjusted for the higher per participant costs associated with smaller 
participation levels (15,000 or fewer participants per month). Twenty 
percent of funds available for the parity grant component are allocated 
on the basis of differential salary levels and service to Priority I 
participants.

Proposed ``Fair Share'' Component

    Renaming the Parity Component. The term ``parity'' is used to 
describe the basic concept of gradually moving State agencies to a 
funding level that represents their respective ``fair share'' of 
available funds. FNS believes that the term ``fair share'' better 
describes the purpose and intent of this component and, therefore, 
proposed that the current ``parity'' component be renamed the ``NSA 
fair share'' component. This change would also provide continuity with 
terminology used in the food funding formula.
    The majority of commenters addressing this issue agreed to change 
the term ``parity'' to ``fair share''--only two commenters disagreed 
with the change. The provision remains unchanged from the proposed 
rule.
    Food Cost Data Used in Calculating Projected Participation. The NSA 
funding formula projects the number of participants to be served by 
each State agency by dividing the current year food grant level by the 
State-reported per participant food cost, adjusted for inflation. Prior 
to fiscal year 1999, the data used was the closed-out per participant 
food cost data for the 12-month period beginning in July and ending in 
June prior to the fiscal year for which the grants are being 
calculated. Closed-out food cost data is usually available 150 days 
after the report month. Therefore, the closed-out food cost data for 
June is not available to FNS until late November, at which time the 
final grants could be calculated for release on January 1.
    To allow for the calculation of final WIC grants at the beginning 
of the fiscal year, FNS proposed that April through March closed-out 
food cost data be used. As is currently done, an inflation adjustment 
would be applied to the food cost data to more accurately project 
actual food costs and to adjust for inflationary increases that may 
occur during the remainder of the fiscal year. While other time frames 
were considered for use, it was felt that a 12-month base of food cost 
data was necessary to take into consideration seasonal fluctuations of 
food prices. While the current regulations do not address the specific 
months of food cost data used in the calculations, FNS wanted to obtain 
comments concerning the change in the time frames.
    Based on lengthy deliberations, it was concluded that we had the 
statutory authority to use April through March closed out food cost 
data for the calculation of fiscal year 1999 grants. WIC State agencies 
were very supportive of this change, which allowed final grants to be 
issued on October 1, 1998.
    This change was further supported in the comments received on this 
provision in the proposed rule. Although the time frame for the closed-
out food costs will now be April through March, the final rule will 
continue to be silent on the actual dates used in the calculation for 
the funding formula.
    Economy of Scale/Bands. As noted above, NSA costs are affected by 
economy of scale. There are certain fixed administrative costs in the 
delivery of program benefits incurred by a State agency that do not 
vary regardless of the size of the caseload. Therefore, State agencies 
with larger participation levels are able to realize reductions in 
administrative expenditures per person (AEP) as these fixed costs are 
spread among more participants. Smaller State agencies, particularly 
Indian Tribal Organizations (ITOs), have comparatively higher costs per 
participant. Although the current NSA funding formula includes a size-
adjusted cost factor, other alternatives and adjustment factors were 
examined to determine if the current adjustments adequately recognize 
the various range of administrative expenditures for State agencies of 
differing sizes.
    The proposed rule recommended retention of the current bands until 
updated NSA cost information needed to determine new band sizes is 
available. It was felt that the data upon which the AEP bands are 
currently based remains the best available. However, more research and 
analysis is needed to understand how economies of scale actually affect 
WIC NSA costs, what specific costs are most influenced, the 
participation level(s) at which economies of scale vary and how much 
allowance should be made at each of those levels.
    Commenters were asked to provide suggestions as to how economies of 
scale can be objectively and fairly determined for future 
consideration. While no commenters provided concrete suggestions, the 
majority of commenters were in agreement that the current bands should 
be retained until further analysis could be conducted. FNS will study 
the economies of scale (bands) as part of its commitment to improve the 
data used in the funding formulas. Additionally, the General Accounting 
Office (GAO) is conducting a three-year study on WIC NSA costs which 
may provide additional data that can be utilized in determining 
appropriate band sizes and adjustment factors. Therefore, until FNS' 
further analysis is completed and appropriate baseline data is 
available, we will continue to use the current bands of 5,000 or fewer; 
5,001 to 15,000; and over 15,000. The corresponding percent adjustment 
between bands will also be retained.
    Salary and Priority I Participant Targeting Component. The combined 
salary and targeting component determines 20 percent of a State 
agency's NSA fair share target level. In an effort to simplify the 
funding formula and to delete obsolete components, both the salary and 
targeting components were analyzed to determine whether they have a 
significant and appropriate impact on the final NSA grant allocations.
    Salary Component. Salary data were incorporated into the current 
funding formula in recognition that salary costs represent by far the 
most significant contributor to WIC NSA costs. Additionally, due to 
regional variations in labor costs, similar levels of service have 
different salary costs. The salary data used to compute differential 
salary levels for State agencies includes average annual salaries for 
government workers provided by the Bureau of Labor Statistics (BLS). As 
previously determined by FNS, the salary level for a GS-9, step I in 
the Federal Government's General Schedule pay scale is used for those 
State agencies and territories for which BLS data is unavailable. The 
most current data available from BLS usually reflects average salary 
levels paid two years prior to the applicable fiscal year for which 
funds are allocated.

[[Page 56671]]

    FNS recognizes that the salary component is a controversial area 
and that there are strong opinions and arguments supporting both the 
inclusion and deletion of the salary component in the NSA funding 
formula. The proposed rule retained the current salary component, which 
would continue to equal 10 percent of the NSA fair share component of 
the NSA funding formula. However, comments on whether the current 
salary factor contributes to an appropriate and fair allocation of NSA 
funds were welcomed.
    As anticipated, there were many comments on this provision. The 
majority of the commenters thought this provision should be retained. 
These commenters generally stated that the salary component is needed 
due to their States' higher cost of living and that salaries constitute 
the largest component of administrative budgets. However, States 
opposing the provision argued that the BLS data does not accurately 
reflect the cost of salaries paid to WIC staff and that many other 
factors, such as a state's geography or multilingual needs, affect the 
cost of providing services. Therefore, they believe it would be more 
appropriate to make grant adjustments based on these other factors when 
determining NSA funding needs.
    After much consideration of this provision, FNS has decided to 
retain the current salary component. The salary component would 
continue to equal 10 percent of the NSA fair share component of the NSA 
funding formula. The provision is reflected at revised 
Sec. 246.16(c)(2)(i) of program regulations.
    Targeting Component. The targeting component was originally 
designed to provide an incentive for targeting benefits to the highest 
risk participants, Priority I women and infants, as defined in current 
program regulations at Sec. 246.7 (e)(4)(i). At the time it was 
incorporated into the NSA funding formula in 1988, the food funding 
formula also included a targeting component. In a time when WIC was not 
able to meet the need for program benefits of the highest risk 
individuals, targeting funds to those State agencies that were serving 
a greater proportion of high-risk individuals was a necessary 
objective. Now, however, based on estimates derived from State-reported 
participation data, nationwide, virtually all fully eligible infants 
are receiving services through the WIC Program and most fully eligible 
women are participating at some point during their pregnancies. 
Therefore, FNS proposed that the targeting component be deleted since 
it is no longer needed to encourage and support service to Priority I 
participants.
    The majority of commenters supported the deletion of the targeting 
component. Reasons cited by the commenters to support deletion included 
simplification, the effect on the overall NSA grant is negligible, and 
that it would promote consistency with the food funding formula, which 
deleted its targeting component in 1994. Therefore, the final rule 
retains the provision to delete the targeting component. This deletion 
is reflected at revised Sec. 246.16(c)(2)(i) of program regulations. 
The deletion of the targeting components allows 100 percent of the NSA 
fair share funds to be allocated based on projected participation 
levels, adjusted for State agency size and salaries (90 percent) and 
salary differentials (10 percent).

NSA Stability Funds

    Throughout the deliberations on the possible revisions to the NSA 
funding formula, it was recognized that a critical aspect of NSA 
funding is the stability component. The stability grant helps to 
guarantee, to the extent funds are available, some measure of funding 
continuity that acknowledges that State agencies have fixed NSA costs 
that are relatively stable from year to year and are necessary for 
continued Program operations. In the event that available funding is 
insufficient to fund State agencies at their stability funding level, 
each State agency experiences a pro-rata reduction to its grant, as is 
done with the food funding formula.
    The stability component was continued in the proposed rule, with 
modification. The modification concerned the use of discretionary 
funding decisions when calculating the State agency's NSA stability 
grant level. Currently, discretionary funds become a permanent part of 
a State agency's stability grant the following year. Over time, 
discretionary funding decisions made by FNS may have unnecessarily 
inflated the grant allocations provided to particular States due to 
additional funding allocated for large one-time capital expenditures. 
Therefore, FNS proposed changes to the stability, or base, grant 
calculation to eliminate consideration of discretionary funding (or, as 
described below, ``operational adjustment'' funding) allocations made 
in the prior fiscal year.
    The majority of the commenters agreed that the NSA base funding 
level should be the prior year formula calculated grant prior to any 
discretionary funding adjustments. Commenters agreed that this change 
would eliminate the impact of large discretionary allocations made to 
States for one-time capital expenditures. Revised Sec. 246.16(c)(2)(ii) 
reflects the provision as proposed, which provides each State agency a 
base funding level equal to its NSA grant from the previous year prior 
to any operational adjustment funding allocations for that year. As is 
currently the case, each State agency's base funding level would be 
reduced by a pro-rata share if insufficient funds were available.
    As a result of this change in the calculation of the NSA base 
funding level, we believe the term stability no longer accurately 
reflects this component of the NSA funding formula. Therefore, the term 
NSA base funding level will be used, and represents the State agency's 
prior year formula calculated grant before any operational adjustment 
funding allocations are made. This change is reflected in the final 
rule in Sec. 246.2 of program regulations, from which is deleted the 
definition of stability funds, and also in Sec. 246.16 (c)(2) from 
which are deleted references to the term stability and the concept of 
stability funding.

NSA Residual Funds

    Currently, after NSA stability grants are determined, any remaining 
funds available for allocation are referred to as residual funds and 
are distributed according to Sec. 246.16(c)(2)(ii) of current program 
regulations. Residual funds represent funding that either: (1) Helps to 
cover NSA costs associated with increases in projected participation, 
or (2) moves State agencies closer to their parity, or, under the 
revised regulations, their fair share target funding level. The fair 
share for NSA funds is an administrative grant per person (AGP) for 
each projected participant, adjusted for factors that affect NSA costs.
    FNS proposed that priority for residual funds should be given only 
to State agencies below their NSA fair share target funding level. The 
fair share principle, which is participant-based, represents the amount 
of NSA funds needed by a State agency to support current participation 
projections based on the food grant the State agency will receive. The 
part of the current regulatory provision that provides funds on the 
basis of increased participation countervails the fair share objective 
by allocating funds to State agencies that are already over their fair 
share funding level.
    Therefore, FNS proposed that the NSA formula grant for each State 
agency be calculated based on each State agency's fair share target 
funding level, which considers the difference between the estimated 
cost of projected

[[Page 56672]]

participation (NSA fair share target level) and the prior year NSA base 
funding level. If a State agency's NSA fair share target funding level 
is greater than its base funding level, the State agency would be 
eligible to receive additional NSA funds proportionate to their 
respective shortfall from the fair share target funding level.
    Only 15 comments were received with respect to this provision. Over 
half the commenters supported the deletion of the component of the NSA 
funding formula regulations that distributes NSA funding based on 
increases in projected participation. Those in support of deletion 
cited simplification as the primary justification. Therefore, FNS 
retains the provision as proposed as reflected in revised 
Sec. 246.16(c)(2)(iii). As a result of this deletion, the term 
``residual funds'' is deleted from Sec. 246.2--Definitions.

Discretionary Funds

    The success of the WIC Program is due in large part to the 
flexibility of the program to accommodate individual State needs and 
initiatives. As the WIC Program continues to change and mature, the 
responsiveness of the Program to meet State agencies' varying needs and 
provide for program innovation becomes more critical.
    Section 246.16(c)(2)(iii) currently requires that ten percent of 
each State agency's total NSA grant level be subtracted and aggregated 
by FNS region to form FNS regional discretionary funding pools. In FY 
1999, these pools amounted to over $100 million nationally. Each FNS 
regional office then allocates the discretionary funds back to State 
agencies within the region on the basis of the varying needs of State 
agencies and national guidelines. Through the regional allocation of 
discretionary administrative funds, the funding process can satisfy 
many of the administrative and structural needs not accounted for in 
the NSA funding formula (e.g., one-time acquisition costs for 
management information systems).
    FNS considered the discretionary funding allocation process and the 
actual use of these funds. As a result of these considerations, it was 
determined that the term ``discretionary'' does not fully represent or 
accurately describe the use of these funds, and that many State 
agencies must use these funds for operational costs. Therefore, FNS 
proposed to change the name ``discretionary'' funds to ``operational 
adjustment'' (OA) funds. It was felt that this change will help clarify 
that the use of the funds are for both capital investments as well as 
operational activities, and that, in many cases, the funds are a 
critical part of a State agency's WIC grant and are needed to support 
ongoing operations.
    All commenters on this proposal agreed to change the name 
``discretionary'' funds to ``operational adjustment'' funds. The 
commenters felt that the new term better describes how the funds are 
used. Therefore, this provision of the final rule will stand as 
proposed.
    The degree to which FNS regions have been inconsistent in the 
methodology used to award discretionary fund allocations and the 
adherence to national guidelines was also considered. While some 
regions have used a competitive process to award the majority of 
available discretionary funds, other regions simply returned a large 
portion of the available discretionary funds to the State agencies in 
their region according to the distribution allocated through the 
funding formula. This inconsistency has caused concern as funding for 
projects becomes more competitive and funding levels for the program 
are being scrutinized. Further, FNS regions that include large State 
agencies that contribute significant amounts of funding to the regional 
fund have more flexibility than regions with smaller State agencies. 
FNS recognizes that regions have various funding resources and needs 
and, for most regions, the process employed for discretionary funds 
allocation is a mutually acceptable one in which the State agencies and 
the regions are satisfied with the process. These views were reflected 
in the proposed rule, which allowed up to 10 percent of the total 
regional NSA funds to be used for OA funding (formerly discretionary 
fund) allocations. However, regions would be given the authority to 
withhold less than 10 percent of the total regional NSA funds available 
if deemed appropriate for that region's needs.
    The majority of commenters agreed with the proposal that OA 
allocations should be equal to up to 10 percent of the total regional 
NSA funds and that regions should be given the authority to withhold 
less than ten percent if deemed appropriate. Commenters believe that 
this allows the FNS regions to make decisions based on the needs of WIC 
State agencies. The final provision will stand as proposed and is 
reflected in revised Sec. 246.16(c)(2)(iv) of program regulations.

Food Funding Formula

Current Food Funding Provisions--General

    The current food funding formula, finalized on October 6, 1994, was 
developed for use during a time of participation growth and annual 
increases in WIC appropriations. The primary objectives were to: (1) 
Provide a greater share of funds to State agencies receiving 
comparatively less than their fair share of funds; (2) simplify the 
food funding formula and delete obsolete components; and (3) provide 
for a level of stability for State agencies. While the current food 
funding formula has met those objectives, WIC has now entered a time in 
which, at least for the foreseeable future, significant increases in 
appropriations are not likely. The emphasis must now be placed on 
shifting available funds among State agencies to reflect changes in 
distribution of the eligible population and to reach the maximum number 
of participants possible with available program resources.
    The following is a discussion of each provision, as proposed, and 
an explanation of the provisions set forth in this final rule:

Current Food Stability Component

    The stability component of the current food funding formula 
provides that each State agency receive its prior year food grant, 
adjusted for full inflation, contingent on available resources. If 
funding is inadequate to fund all State agencies at this level, each 
State agency would receive a reduced stability grant based on a pro-
rata reduction of funds.
    The current stability component, in a stable funding environment, 
results in little if any additional funding to assist State agencies 
that, for historical reasons or due to demographic shifts, do not have 
a share of WIC funding proportionate to their share of the eligible WIC 
population. These State agencies are considered to be ``under fair 
share''. Therefore, FNS proposed that the stability component of the 
food funding formula be modified to allow some funds to be available to 
allocate to under fair share State agencies to further the objective of 
funding equity among State agencies. In a relatively stable funding 
environment, mechanisms must be in place to allow for some movement of 
funds to correspond to shifts in eligible populations, and the ability 
of State agencies to fully utilize available funding to maximize 
participation.

[[Page 56673]]

Proposed Stability Component

    Long consideration was given to stability food funding and whether 
full inflation should be guaranteed. Concerns were raised that if State 
agencies were not funded with full inflation, prior fiscal year 
participation levels may not be sustained, thereby forcing some State 
agencies to cut caseload. This concern, however, was countered by the 
objective of making available, to the extent possible, additional 
funding to under-fair-share State agencies. This would provide those 
States the opportunity to add participants to bring them closer to the 
level of service provided by State agencies that have received 
allocations at or above their fair share.
    After exploring options available, FNS proposed to modify 
Sec. 246.16(c)(3)(ii) to redefine stability as the prior-year food 
grant level, without any initial adjustments for inflation. Any funds 
remaining after guaranteeing prior year-end grant levels would be 
split. Fifty percent of the remaining funding would be provided for an 
inflation allowance based on the fair share funding level allocated 
with the new year appropriation instead of the prior year grant levels 
currently used in the formula. The remaining 50 percent would be 
allocated to under-fair-share State agencies to bring them closer to 
their fair share level. The funds subject to the 50/50 split would 
include current year appropriated funds and unspent recoverable funds 
from the prior fiscal year.
    These changes to the stability component would help to ensure that 
even in a funding environment in which the program receives only a 
modest increase above prior year grant levels, State agencies with less 
than their fair share of funds would continue to receive a greater 
increase in funding relative to over fair share State agencies.
    To determine the amount of funds allocated to each State agency, 
FNS proposed that State agencies would initially receive their prior 
year end food grant as their stability grant. As is currently done, if 
funds are insufficient to fund all State agencies at the prior year end 
grant level, each State agency would receive a pro-rata reduction to 
its grant. If funds are available in excess of prior year-end grant 
levels, 50 percent of such funds would be made available to each State 
agency for inflation. FNS proposed that an inflation allowance be 
calculated based on the difference between each State agency's inflated 
appropriated fair share grant level and their appropriated fair share 
grant level. The remaining 50 percent of available funds would be 
allocated to under-fair-share State agencies proportionate to their 
shortfall from their fair share target funding level. Once all State 
agencies have received their target food inflation level, 100 percent 
of all available funds would be allocated to under fair share State 
agencies. If sufficient funding is available to fund inflation and all 
under fair share State agencies up to their fair share target levels of 
funding, additional funds would be allocated according to Sec. 246.16 
(c)(3)(iii)(B) to any State agency requesting additional food funds.
    Approximately 99 percent of the 194 commenters on this provision 
were strongly opposed to the 50/50 split. The majority of commenters 
felt the 50/50 split was seriously flawed and strongly supported the 
original 80/20 split, i.e., 80 percent for inflation, 20 percent for 
under fair share State agencies, that was discussed during meetings 
between FNS and its State and local partners. Only two commenters 
favored the 50/50 split and one commenter suggested a 60/40 split of 
the remaining funds. Additionally, approximately 99 percent of the 
commenters opposed the calculation of inflation based on the fair share 
target funding level. The commenters were in support of calculating 
inflation based on prior year grants.
    The primary reason cited by the commenters supporting the 80/20 
split was that the 50/50 split would provide too few funds to State 
agencies for inflation. Commenters felt strongly that the 50/50 
distribution of funds could lead to reductions in current participation 
levels in over-fair-share State agencies.
    The commenters were equally concerned with the methodology used to 
calculate inflation. Of those responding to this provision, it was 
unanimously agreed upon that basing inflation levels on each State 
agency's fair share target grant level would further threaten to reduce 
the funds to over-fair-share States and would jeopardize current 
participation levels.
    FNS is persuaded by the concerns raised by commenters on this 
aspect of the proposed rule. Therefore, this final rule provides at 
Sec. 246.16(c)(3)(iii) that if funds are available in excess of prior 
year-end grant levels, 80 percent of such funds would be made available 
to each State agency for inflation. An inflation allowance will be 
calculated based on the prior year-end grant. The remaining 20 percent 
of available funds would be allocated to under-fair-share State 
agencies proportionate to their shortfall from their fair share target 
funding level.
    Many commenters recommended that the term ``prior year grant'' be 
used instead of ``stability'' funding. It was felt that the term 
``stability'' connotes ``adequate'' funding, which may not be the case. 
Commenters also felt for clarity we should identify this funding level 
as what it is, which is the prior year grant.
    FNS concurs with this suggestion. Therefore, the final rule uses 
the term ``prior year grant'' instead of ``stability funding'' and 
Secs. 246.2 and 246.16(c)(3)(iii) are modified accordingly.

Adjustments for Higher Cost Areas

    In calculating the fair share target food level for State agencies, 
current regulations permit an adjustment for the higher cost of food 
for State agencies located outside of the 48 contiguous States and the 
District of Columbia. This adjustment is done to ensure that the share 
of funds received by these State agencies is adequate to serve their 
share of the eligible population given their higher costs. Currently, 
five State agencies receive this adjustment. Current regulations allow 
for these adjustments after a State agency demonstrates that it has 
successfully implemented voluntary cost containment measures, such as 
improved vendor management practices, participation in multi-state 
agency infant formula rebate contracts or other cost containment 
efforts.
    FNS believes that the current adjustments and conditions under 
which adjustments may be applied are consistent with program objectives 
and consistent with high cost adjustments available to States in the 
National School Lunch Program and the School Breakfast Program. No 
comments were received on this component of the funding formula. 
Therefore, the final rule reflects no changes at 
Sec. 246.16(c)(3)(i)(B).

Food Spending Performance Standard

    The current food spending performance standard was implemented in 
fiscal year 1995. Failure to meet this standard results in an 
adjustment of the current year grant. The current standard requires 
each State agency to expend at least 97 percent of its food grant. 
Typically, State agencies cannot spend 100 percent of their WIC grants 
due to factors that are inherent to the program. For example, because 
the federal grant is the only source of funds for WIC in most states, 
State agencies must exercise caution to ensure that they do not spend 
more than their federal grant. In addition, because State agencies must 
estimate the value of vouchers and checks to distribute food benefits, 
they cannot determine the program's actual

[[Page 56674]]

food costs until the vouchers and checks have been redeemed and 
processed.
    While FNS recognizes that the structure of the program may cause 
some State agencies to have difficulty meeting this expenditure 
standard, the majority of State agencies should be able to expend at 
least 97 percent of its food funds in a stable funding environment. No 
comments were received on this provision of the proposed rule. 
Therefore, the 97 percent food spending performance standard will be 
retained in this final rule at Sec. 246.16(e)(2)(i) and the obsolete 
references to the performance standards for fiscal years 1995-1997 will 
be deleted.

Eligibility Data

    Data on the number of individuals estimated to be income eligible 
for program benefits is produced annually at the national level. State-
level estimates of income-eligible infants and children are produced 
using similar data. These estimates, in turn, are used to estimate the 
fair share funding levels for WIC food grants.
    Much consideration was given as to the reliability and accuracy of 
the income eligible data. Current regulations stipulate at 
Sec. 246.16(c)(3)(i) that the income eligible data be calculated by FNS 
using the best available, nationally uniform, indicators. FNS continues 
to believe that the current methodology is the best available data and 
proposes no changes at this time. However, FNS will reevaluate the 
method for estimating the potential eligible population if new data 
sources or methods become available that could improve the current 
estimation process.
    All commenters addressing this section were in support of continued 
work in estimating the potential eligible data. FNS is committed to 
ensuring that WIC eligibles estimates are developed using the best data 
and methods available. In prior years the agency has devoted 
substantial resources to research and analysis of data sources and 
technical approaches to eligibles estimation, and the estimation 
approaches have been improved as a result of these efforts. We fully 
anticipate that such efforts will continue and FNS will continue to 
update and improve the estimation process over time.

Executive Order 12866

    This rule has been determined to be significant under Executive 
Order 12866, and has been reviewed by the Office of Management and 
Budget. An impact analysis statement has been prepared and is available 
upon request.

Public Law 104-4

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) (2 
U.S.C. 1531 et seq.) 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 (2 U.S.C. 1532), FNS 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 (2 U.S.C. 1535) generally requires 
FNS to identify and consider a reasonable number of regulatory 
alternatives and adopt the least costly, most 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, or tribal 
governments or the private sector of $100 million or more in any one 
year. Thus, this rule is not subject to the requirements of sections 
202 and 205 of the UMRA.

Regulatory Flexibility Act

    This final rule has been reviewed with regard to the requirements 
of the Regulatory Flexibility Act (5 U.S.C. 601-612). Shirley R. 
Watkins, Under Secretary, Food, Nutrition and Consumer Services, has 
certified that this rule will not have a significant economic impact on 
a substantial number of small entities. This rule affects how FNS 
calculates food and NSA grant allocations for State agencies. State 
agencies are not small entities under the Regulatory Flexibility Act.

Paperwork Reduction Act

    This final rule does not contain reporting or record keeping 
requirements subject to approval by the Office of Management and Budget 
under section 3507 of the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507).

Executive Order 12372

    The Special Supplemental Nutrition Program for Women, Infants and 
Children (WIC) is listed in the Catalog of Federal Domestic Assistance 
Programs under No. 10.557. For the reasons set forth in the final rule 
in 7 CFR, part 3015, subpart V, and related Notice (48 FR 29114), this 
program is included in the scope of Executive Order 12372 which 
requires intergovernmental consultation with State and local officials.

Executive Order 12988

    This final rule has been reviewed under Executive Order 12988, 
Civil Justice Reform. This rule is intended to have a 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 
applications of its provisions, all applicable administrative 
procedures must be exhausted (7 U.S.C 6912(e)).

List of Subjects in 7 CFR Part 246

    Food assistance programs, Food donations, Grant programs--Social 
programs, Indians, Infants and children, Maternal and child health, 
Nutrition education, Public assistance programs, WIC, Women.

    For reasons set forth in the preamble, 7 CFR part 246 is amended as 
follows:

PART 246--SPECIAL SUPPLEMENTAL NUTRITION PROGRAM FOR WOMEN, INFANTS 
AND CHILDREN

    1. The authority citation for part 246 continues to read as 
follows:

    Authority: 42 U.S.C. 1786.


Sec. 246.2  [Amended]

    2. In Sec. 246.2, the definitions of Residual funds and Stability 
funds are removed.
    3. In Sec. 246.16:
    a. Paragraph (c)(2)(i) is revised.
    b. Paragraph (c)(2)(ii) is revised.
    c. Paragraphs (c)(2)(iii) and (c)(2)(iv) are redesignated as 
paragraphs (c)(2)(iv) and (c)(2)(v), respectively, and a new paragraph 
(c)(2)(iii) is added.
    d. Newly redesignated paragraph (c)(2)(iv) is revised.
    e. Newly redesignated paragraph (c)(2)(v) is amended by removing 
the words ``discretionary funds'' and adding, in their place, the words 
``operational adjustment funds''.
    f. The heading of paragraph (c)(3)(i) and the first sentence of 
paragraph (c)(3)(i)(A) are revised.
    g. Paragraph (c)(3)(ii) is revised.
    h. The heading of paragraph (c)(3)(iii)and paragraph (c)(3)(iii)(A) 
are revised.
    i. The first sentence of paragraph (e)(2)(i) is revised.

[[Page 56675]]

The revisions and an addition read as follows:


Sec. 246.16  Distribution of funds.

* * * * *
    (c) * * *
    (2) * * *
    (i) Fair share target funding level determination. For each State 
agency, FNS will establish, using all available NSA funds, an NSA fair 
share target funding level which is based on each State agency's 
average monthly participation level for the fiscal year for which 
grants are being calculated, as projected by FNS. Each State agency 
receives an adjustment to account for the higher per participant costs 
associated with small participation levels and differential salary 
levels relative to a national average salary level. The formula shall 
be adjusted to account for these cost factors in the following manner: 
90 percent of available funds shall provide compensation based on rates 
which are proportionately higher for the first 15,000 or fewer 
participants, as projected by FNS, and 10 percent of available funds 
shall provide compensation based on differential salary levels, as 
determined by FNS.
    (ii) Base funding level. To the extent funds are available and 
subject to the provisions of paragraph (c)(2)(iv) of this section, each 
State agency shall receive an amount equal to 100 percent of the final 
formula-calculated NSA grant of the preceding fiscal year, prior to any 
operational adjustment funding allocations made under paragraph 
(c)(2)(iv) of this section. If funds are not available to provide all 
State agencies with their base funding level, all State agencies shall 
have their base funding level reduced by a pro-rata share as required 
by the shortfall of available funds.
    (iii) Fair share allocation. Any funds remaining available for 
allocation for NSA after the base funding level required by paragraph 
(c)(2)(ii) of this section has been completed and subject to the 
provisions of paragraph (c)(2)(iv) of this section shall be allocated 
to bring each State agency closer to its NSA fair share target funding 
level. FNS shall make fair share allocation funds available to each 
State agency based on the difference between the NSA fair share target 
funding level and the base funding level, which are determined in 
accordance with paragraphs (c)(2)(i) and (c)(2)(ii) of this section, 
respectively. Each State agency's difference shall be divided by the 
sum of the differences for all State agencies, to determine the percent 
share of the available fair share allocation funds each State agency 
shall receive.
    (iv) Operational adjustment funds. Each State agency's final NSA 
grant shall be reduced by up to 10 percent, and these funds shall be 
aggregated for all State agencies within each FNS region to form an 
operational adjustment fund. The Regions shall allocate these funds to 
State agencies according to national guidelines and shall consider the 
varying needs of State agencies within the region.
* * * * *
    (3) * * *
    (i) Fair share target funding level determination. (A) For each 
State agency, FNS will establish a fair share target funding level 
which shall be an amount of funds proportionate to the State agency's 
share of the national aggregate population of persons who are income 
eligible to participate in the Program based on the 185 percent of 
poverty criterion. * * *
* * * * *
    (ii) Prior year grant level allocation. To the extent funds are 
available, each State agency shall receive a prior year grant 
allocation equal to its final authorized grant level as of September 30 
of the prior fiscal year. If funds are not available to provide all 
State agencies with their full prior year grant level allocation, all 
State agencies shall have their full prior year grant level allocation 
reduced by a pro-rata share as required by the shortfall of available 
funds.
    (iii) Inflation/fair share allocation. (A) If funds remain 
available after the allocation of funds under paragraph (c)(3)(ii) of 
this section, the funds shall be allocated as provided in this 
paragraph (c)(3)(iii). First, FNS will calculate a target inflation 
allowance by applying the anticipated rate of food cost inflation, as 
determined by the Department, to the prior year grant funding level. 
Second, FNS will allocate 80 percent of the available funds to all 
State agencies in proportionate shares to meet the target inflation 
allowance. Third, FNS will allocate 20 percent of the available funds 
to each State agency which has a prior year grant level allocation, as 
determined in paragraph (c)(3)(ii) of this section and adjusted for 
inflation as determined in this paragraph (c)(3)(iii), which is still 
less than its fair share target funding level. The amount of funds 
allocated to each State agency shall be based on the difference between 
its prior year grant level allocation plus target inflation funds and 
the fair share funding target level. Each State agency's difference 
shall be divided by the sum of the differences for all such State 
agencies, to determine the percentage share of the 20 percent of 
available funds each State agency shall receive. In the event a State 
agency declines any of its allocation under either this paragraph 
(c)(3)(iii) or paragraph (c)(3)(ii) of this section, the declined funds 
shall be reallocated in the percentages and manner described in this 
paragraph (c)(3)(iii). Once all State agencies receive allocations 
equal to their full target inflation allowance, any remaining funds 
shall be allocated or reallocated, in the manner described in this 
paragraph (c)(3)(iii), to those State agencies still under their fair 
share target funding level.
* * * * *
    (e) * * *
    (2) * * *
    (i) The amount allocated to any State agency for food benefits in 
the current fiscal year shall be reduced if such State agency's food 
expenditures for the preceding fiscal year do not equal or exceed 97 
percent of the amount allocated to the State agency for such costs. * * 
*
* * * * *
    Dated: October 13, 1999.
Shirley R. Watkins,
Under Secretary, Food, Nutrition and Consumer Services.
[FR Doc. 99-27431 Filed 10-20-99; 8:45 am]
BILLING CODE 3410-30-P