[Federal Register Volume 65, Number 157 (Monday, August 14, 2000)]
[Rules and Regulations]
[Pages 49474-49481]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-20489]


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DEPARTMENT OF AGRICULTURE

7 CFR Parts 3015, 3016 and 3019

RIN 0503-AA16


Uniform Administrative Requirements for Grants and Cooperative 
Agreements to State and Local Governments and Uniform Administrative 
Requirements for Grants and Agreements with Institutions of Higher 
Education, Hospitals, and Other Non-Profit Organizations

AGENCY: Department of Agriculture

ACTION: Final rule.

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SUMMARY: The United States Department of Agriculture (USDA) is revising 
its grants management regulations in order to bring the entitlement 
programs it administers under the same regulations that already apply 
to nonentitlement programs and to identify exceptions to these general 
rules that apply only to entitlement programs

DATES: This rule is effective August 14, 2000. Implementation shall be 
phased in by incorporating the provisions into awards made after the 
start of the next Federal entitlement program year.

FOR FURTHER INFORMATION CONTACT: Gerald Miske, Supervisory Management 
Analyst, Fiscal Policy Division, Office of the Chief Financial Officer, 
USDA, Room 5411 South Building, 1400 Independence Avenue, S.W., 
Washington, D.C. 20250; FAX (202) 690-1529; telephone (202) 720-1553.

SUPPLEMENTARY INFORMATION:

Background

    The administrative requirements for awards and subawards under all 
USDA entitlement programs are currently in 7 CFR part 3015, ``Uniform 
Federal Assistance Regulations.'' The corresponding requirements for 
awards and subawards to State and local governmental organizations 
under USDA nonentitlement programs are in subparts A through D of 7 CFR 
part 3016, ``Uniform Administrative Requirements for Grants and 
Cooperative Agreements to State and Local Governments.'' The 
administrative requirements for awards and subawards to 
nongovernmental, non-profit organizations are in 7 CFR part 3019, 
``Uniform Administrative Requirements for Grants and Agreements With 
Institutions of Higher Education, Hospitals, and Other Non-Profit 
Organizations.'' This final rule expands the scope of parts 3016 and 
3019 to include entitlement programs, and deletes administrative 
requirements for awards and subawards under such programs from the 
scope of part 3015. It also establishes, in subpart E to part 3016, 
certain exceptions to the general administrative requirements that will 
apply only to the entitlement programs. The following text outlines the 
evolution of these changes.
    On March 11, 1988, USDA joined other Federal agencies in publishing 
a final grants management common rule applicable to assistance 
relationships established by grants and cooperative agreements, and by 
subawards thereunder, to State and local governments (53 FR 8044). 
Prior to that date, administrative requirements for awards and 
subawards under all USDA

[[Page 49475]]

programs were codified at 7 CFR part 3015. The USDA implemented the 
common rule at 7 CFR part 3016 . At that time, the common rule did not 
apply to entitlement programs such as the Food Stamp and Child 
Nutrition Programs administered by the Food and Nutrition Service, 
USDA, and the entitlement grant programs administered by the Department 
of Health and Human Services (DHHS). However, subpart E of part 3016 
was reserved with the express intention of including provisions 
specifically tailored to the entitlement programs. Pending the 
publication of subpart E to part 3016, the USDA entitlement programs 
have remained under part 3015. These programs included:
    (1) Entitlement grants under the following programs authorized by 
the Richard B. Russell National School Lunch Act (42 U.S.C. 1751 et 
seq): (a) National School Lunch Program, General and Special Meal 
Assistance (sections 4 and 11 of the Act, respectively), (b) Commodity 
Assistance (section 6 of the Act), (c) Summer Food Service Program for 
Children (section 13 of the Act), and (d) Child and Adult Care Food 
Program (section 17 of the Act);
    (2) Entitlement grants under the following programs authorized by 
the Child Nutrition Act of 1966 (42 U.S.C. 1771 et seq), (a) Special 
Milk Program for Children (section 3 of the Act), (b) School Breakfast 
Program (section 4 of the Act), and (c) State Administrative Expense 
Funds (section 7 of the Act); and
    (3) Entitlement grants for State Administrative Expenses under the 
Food Stamp Act of 1977 (7 U.S.C. 2011 et seq) (sections 4(b) and 16 of 
the Act).
    The exclusion of these programs from the scope of part 3016 caused 
that regulation to apply only to USDA's nonentitlement programs. The 
principal nonentitlement programs administered by the Food and 
Nutrition Service include the Special Supplemental Nutrition Program 
for Women, Infants and Children (WIC), the Commodity Supplemental Food 
Program (CSFP), the WIC Farmers' Market Nutrition Program (FMNP), the 
Nutrition Education and Training Program (NET), and the Emergency Food 
Assistance Program (TEFAP).
    On August 24, 1995, USDA published an interim final rule at 7 CFR 
part 3019 in order to implement the revised Office of Management and 
Budget (OMB) Circular A-110, ``Uniform Administrative Requirements for 
Grants and Agreements with Institutions of Higher Education, Hospitals, 
and Other Non-Profit Organizations'' (60 FR 44122). As with part 3016, 
USDA did not include entitlement programs in the scope of part 3019. In 
excluding entitlements from the scope of part 3019 at the time of its 
initial publication, USDA anticipated issuing a document that would 
provide a single set of grant and subgrant administrative rules for all 
types of organizations operating USDA entitlement programs.
    On February 17, 1998, USDA published a Notice of Proposed 
Rulemaking (Proposed Rule) (63 FR 7734) as the first step in developing 
such a document. USDA received six requests for additional time for 
comment. Accordingly, on May 22, 1998, USDA published a 30 day 
extension to the initial 90 day comment period (63 FR 28294). Excluding 
the time extension requests, USDA received comments within the time 
period from 45 interested parties.

Comments on Proposed Rule and Responses

    In publishing the proposed rule, USDA specifically solicited 
comments on: (1) Applying the provisions of part 3016 to USDA 
entitlement program awards and subawards to State and local 
governmental organizations; (2) applying the provisions of part 3019 to 
USDA entitlement program awards and subawards to nongovernmental Non-
Profit Organizations; and (3) adopting proposed exceptions to be 
included in subpart E of part 3016. The exceptions proposed for subpart 
E included: (1) Requiring States and other governmental program 
operators to conduct procurements under USDA entitlement programs in 
accordance with Sec. 3016.36(b) through (i); (2) requiring governmental 
grantees and subgrantees to adopt the requirement in Sec. 3019.43 which 
prohibits the award of a contract under a Federal program to a firm 
that had performed certain services to orchestrate that procurement; 
and (3) establishing program regulations as the authoritative source 
for financial reporting requirements under the Food Stamp and Child 
Nutrition Programs.

Applying the Provisions of 7 CFR Parts 3016 and 3019 to Entities 
Operating USDA Entitlement Programs.

    Eight of the commenters were in favor of the proposal to provide a 
single set of regulations governing the administration of grants and 
subgrants. Conversely, six commenters stated that no change to the 
current regulation should be made. However, further review of the 
underlying basis for opposing change disclosed that the comments were 
more specifically related to contracting provisions proposed for 
subpart E to part 3016, as opposed to the overall concept of applying 
parts 3016 and 3019 to USDA's entitlement program awards and subawards.
    Therefore, in the absence of any specific objections to the 
proposal, USDA is amending parts 3016 and 3019 to apply those 
provisions to entitlement awards and subawards.

Adopting Proposed Exceptions to be Included in Subpart E of Part 3016

    By far, the largest number of the comments received were related to 
this issue. The USDA had proposed to depart from the Federalism 
principle set out in Sec. 3016.36(a) with respect to State grantee and 
governmental subgrantee procurements under entitlement programs by 
requiring States to follow the rules set out in Sec. 3016.36(b) through 
(i). The USDA made this proposal primarily to strengthen competition in 
grantee and subgrantee procurements under entitlement programs. While 
State rules generally contain detailed competition requirements, USDA 
had sought to ensure a minimum, uniform level of competition in 
procurements under its entitlement programs. In doing so, USDA 
recognized that the rules stated at Sec. 3016.36(b) through (i) did not 
comprise a complete procurement system but rather formed an outline in 
which each State's own procurement regulations must provide the 
details. Under the proposed rule, therefore, Federal rules would have 
taken precedence over State rules only where the latter failed to 
provide for such minimum requirements.
    One commenter agreed with the proposal on the basis that it would 
simplify administrative oversight and reduce uncertainty in grants 
management. However, thirteen of the commenters strongly opposed the 
departure from Federalism. These commenters pointed out that the 
approach could result in disparate treatment of procurements under 
entitlement programs versus those under other programs. Several 
commenters also argued that USDA had not provided sufficient 
justification for such a broad approach. Upon further review, USDA 
agrees that its concerns for competition in procurements under its 
entitlement programs can be resolved without mandating specific Federal 
requirements on such a global scale. Therefore, USDA has revised the 
final rule to remove the requirement in the proposed Sec. 3016.60(a) 
which would have required States to follow the procurement rules set 
out in Sec. 3016.36(b) through (i). As an alternative, the final rule 
authorizes

[[Page 49476]]

States to use either State rules, in accordance with Sec. 3016.36(a), 
or to adopt the requirements in Sec. 3016.36(b) through (i). It should 
be noted that USDA does not intend that these revisions change the 
longstanding relationships between States and subrecipients. Some of 
the interpretive language in the Proposed Rule preamble may have 
resulted in a misunderstanding of current practice with regard to State 
oversight of subrecipient procurements. The USDA's position continues 
to be that as part of their oversight responsibilities, States are to 
require that local governments follow the requirements in 
Sec. 3016.36(b) through (i) and that non-profit organizations follow 
the requirements in part 3019. Section 3016.37 still governs 
relationships other than procurements.
    The Federal government's interest in ensuring maximum competition 
dictates that certain practices cannot be allowed. Increasing and 
ensuring competition provides the greatest opportunity to procure the 
highest quality goods and services at the lowest possible cost. Lower 
costs, in turn, help extend the purchasing power of grants under the 
nutrition-assistance programs vital to the health of vulnerable 
populations such as children and the needy. Therefore, regardless of 
whether States choose to follow State rules or the requirements in 
Sec. 3016.36(b) through (i), States must ensure that the requirements 
set out in subpart E of this final rule are followed.
    The USDA has addressed below the special provisions in subpart E of 
part 3016 that will apply to entitlement programs and the related 
comments.

Prohibiting Geographical Preference in Procurements Under USDA 
Entitlement Programs

    As explained in the preamble to the proposed rule, the USDA is 
concerned about the effects of geographical preference in procurements 
under the entitlement programs it administers. Geographical preference 
in procurement entails the use of procedures that give bidders and 
offerors a competitive advantage based solely on their location within 
the territory of the procuring entity. For example, a State's 
procurement rules may require that an out-of-state bidder's bid be 
surcharged a prescribed percentage, or that a bid submitted by a firm 
located within the state be discounted a prescribed percentage, for 
price comparison purposes. Such practices are inherently anti-
competitive. Indeed, the preamble to the March 11, 1988, grants 
management common rule expressed governmentwide policy on this matter 
by identifying ``* * * the application of unreasonably restrictive 
qualifications and any percentage factors that give bidding advantages 
to in-State or local firms* * *'' as ``* * * barriers to open and free 
competition which are not in the public interest.'' (53 FR 8039).
     Only open and free competition can ensure that program operators 
obtain the best products and services at the lowest possible prices, 
thereby maximizing the impact of scarce Federal resources. For example, 
the mission of USDA's Child Nutrition Programs is to improve children's 
health and well-being by providing them with nutritious, low-cost or 
free meals. These programs depend heavily on program operators' 
procurements. As noted above, increased competition enhances the 
program operators' ability to buy quality products at low prices, and 
thus enables them to offer better, lower cost meals to children. In 
these programs especially, maximum open and free competition is 
directly linked to the operators' ability to achieve program goals. It 
is therefore vital to the success of the programs.
    The USDA received very few comments on this subject. Those comments 
were divided with two in favor, two opposed and one questioning the 
absence of specific data. The primary argument in opposition was that 
prohibiting geographic preference would have a negative effect on 
partnerships between schools and the food industry. The USDA does not 
agree that the effect on such partnerships is of such a magnitude that 
the anti-competitive practice should be allowed. The USDA has 
considered the benefits of partnering between procuring entities and 
members of the food industry located within the territory of the 
procuring entity. We have weighed this benefit against the detriment to 
competition caused by providing such preferences. We find the benefit 
of partnering based on geographic location does not outweigh the damage 
such practices cause to competition. In making this finding, USDA has 
taken into account the ever increasing ability of procuring entities 
and offerors to consult and gather information and expertise across 
long distances via telephone, electronic mail, facsimile, video, 
telephone conferencing and the Internet. In light of this trend towards 
the increasing availability of information and ease of communications, 
we disagree that the use of geographic preferences is needed as a way 
to foster partnering relationships.
    This final rule prohibits geographic preference in procurements 
under USDA entitlement programs. In the proposed rule, this requirement 
was one of the items covered in Sec. 3016.36(b) through (i) (see 
Sec. 3016.36(c)(2)). Because, as discussed above, this final rule 
allows States to elect to use their own rules rather than 
Sec. 3016.36(b) through (i), the prohibition on geographic preferences 
is included in Sec. 3016.60(c) of subpart E as a mandatory procurement 
requirement.

Prohibiting the Award of a Contract to a Contractor That Previously Had 
Performed Certain Services Related to That Procurement for the Program 
Operator

    Under Sec. 3019.43, non-profit organizations are currently 
precluded from awarding contracts under USDA nonentitlement programs to 
firms ``that develop or draft specifications, requirements, statements 
of work, invitations for bids and/or requests for proposals'' for such 
procurements. The purpose of this regulation is to ``ensure objective 
contractor performance and eliminate unfair competitive advantage.'' 
Extending the applicability of part 3019 to USDA entitlement programs 
operated by non-profit organizations will result in equal application 
of this requirement to both entitlement and nonentitlement programs.
    USDA also proposed applying this requirement to State and local 
governmental program operators through a provision in part 3016, 
subpart E. USDA's intent in proposing this exception to the general 
rule was the same as that underlying the existing requirement for non-
profit organizations: to minimize the anti-competitive effect of less-
than-arm's length transactions under USDA entitlement programs.
    Three State agencies and one commenter representing a State agency 
agreed, explicitly stating that contractors involved in drafting 
specifications, requirements, statements of work, invitations for bids, 
or requests for proposals should be excluded from bidding. However, 
twenty-nine commenters disagreed with or had concerns regarding this 
proposed exception.
    The commenters' principal concerns were that: (1) food service 
personnel might lack the necessary knowledge to write bid 
specifications that would be correct, complete, precise, and 
understandable; (2) the only way to learn about products or services is 
to discuss specifications with potential bidders; (3) the prohibition 
would have a negative impact on the food manufacturers' willingness to 
develop products to meet school food service

[[Page 49477]]

needs; (4) schools would either have to spend more money to get an 
acceptable product or schools would get inferior products and defeat 
the purpose of the program; and (5) this prohibition, when considered 
in conjunction with the proposal to have States follow the procurement 
requirements in Sec. 3016.36(b) through (i), would unduly emphasize 
lowest cost to the detriment of other needs and benefits.
    Following lengthy study of the comments on this issue, especially 
those opposing the prohibition in new Sec. 3016.60(b), USDA concludes 
that there has been a misunderstanding of both the intent and the 
anticipated effect of this revision.
    The commenters' concerns listed above focus on a program operator's 
ability to obtain the information necessary to formulate specifications 
that will elicit responsive bids or offers of the desired product or 
service. Specifications comprise a statement of a program operator's 
need for a product or service. The USDA agrees that a program operator 
is in the best position to know its own needs. Under both the old rules 
and this final rule, that operator may consult with as many expert 
sources as necessary to obtain the information needed for an effective 
procurement. In proposing the prohibition against using contractors who 
previously drafted the bid specifications, USDA had no intention of 
prohibiting consultations between program operators and industry.
    Permissible practices include accessing publicly available 
information and contacting manufacturers and distributors directly. 
Examples of publicly available information include, but are not limited 
to: Product brochures; product specification handouts; information 
available on the Internet and in trade journals; recommendations from 
other program operators; and information obtained by visiting other 
program operations and attending industry and professional trade fairs. 
The types of information that a program operator can obtain through 
direct industry contacts include, but are not limited to: 
recommendations of one product over another; features that enable one 
to differentiate between available products; prices for specific 
products or product features; model numbers and other data that enable 
one to identify products that may meet one's needs; specification 
sheets; and, informational hand-outs. A program operator can do all 
these things in the course of conducting a proper procurement.
    Legislation enacted subsequent to the publication of the proposed 
rule further affirmed program operators' authority to obtain 
information needed for their procurements under USDA entitlement 
programs. Section 104(e) of the William F. Goodling Child Nutrition 
Reauthorization Act of 1998 (Goodling Act) (Pub. L. 105-336, 112 Stat. 
3143) amended the National School Lunch Act to provide that ``[i]n 
acquiring a good or service for programs under [such] Act or the Child 
Nutrition Act of 1966 (other than section 17 of that Act (42 U.S.C. 
1771 et seq.)) a State, State agency, school, or school food authority 
may enter into a contract with a person who has provided specification 
information to the State, State agency, school, or school food 
authority for use in developing contract specifications for acquiring 
such good or service.''(Emphasis added.) (Pub. L. 105-336, Sec. 104(e), 
112 Stat. 3143). The emphasized language makes clear Congress' intent 
to permit all States, State agencies, schools, or school food 
authorities operating programs under either the National School Lunch 
Act or the Child Nutrition Act of 1966 (except for the WIC program) to 
collect information from prospective contractors, yet still enter into 
contracts with such contractors.
    A program operator may not engage a contractor to actually write 
the bid or proposal terms, product specifications, procurement 
procedures, contract terms, etc., and then consider this same 
contractor for the resulting contract award. Congress made it clear, by 
prefacing the phrase ``in developing contract specifications'' with the 
words ``for use'' that it must be the State, State agency, school, or 
school food authority that does the actual development, drafting or any 
other form of bid specification preparation. The Conference Report 
accompanying the Goodling Act makes clear that this provision ``* * * 
is not intended to allow a potential contractor or other interested 
party to participate in the procurement process through drafting the 
procurement specifications, procedures or documents'' (H.R. Conf. Rep. 
No. 786,105th Cong., 2d Sess.38 (1998).) Prospective contractors who 
develop, draft or in any other way prepare bid specifications, may not 
enter into a contract based on those specifications.
    One commenter articulated the key distinction: A vendor that 
furnished information to a program operator for the program operator's 
use in formulating specifications for a procurement action may still be 
considered for the procurement award. But, a vendor engaged in actually 
drafting the specifications or other procurement documents may not be 
considered for the award. Both Federal law and regulations thus hold 
program operators responsible for their own specifications and 
procurement documents. Program operators must conduct their 
procurements under the USDA entitlement programs in a manner that 
avoids any appearances of, or actual, conflicts of interest.
    With regard to the related concern that lowest cost was being over 
emphasized to the detriment of quality, USDA is aware that industry 
specification advice is not the only information program operators use 
in formulating specifications. For example, the USDA supports those 
schools and institutions operating the Child Nutrition Programs in 
their efforts to identify children's preferences for different types of 
food products through student surveys, tastes tests, etc. Such quality 
factors will continue to be allowed as part of the specifications under 
these revised rules. We would note that this kind of information cannot 
be obtained through consultations with industry, yet obtaining it is an 
essential prerequisite both to discussing a school district's needs for 
products and services with industry representatives and to soliciting 
bids or offers from industry.
    With regard to balancing cost and quality, the method a program 
operator chooses for a procurement (small purchase, formal advertising 
with sealed bids, formal advertising for negotiable proposals, etc.) 
must be appropriate for the desired product or service. For example, 
for subgrantees subject to Sec. 3016.36(b) through (i), the formal 
advertising, sealed bid method described at Sec. 3016.36(d)(2) is 
appropriate when a program operator's public solicitation describes the 
desired product or service with sufficient precision that responsive 
bids will differ only in price. If this is not possible, a program 
operator should consider using the competitive negotiation method 
described at Sec. 3016.36(d)(3).
    Once a method is chosen for a particular procurement, however, the 
program operator must consistently observe the principles of that 
method. Negotiating under a sealed bid procurement, for example, is 
inappropriate; the lowest responsive bid must be accepted and 
unresponsive bids, regardless of price, must be rejected.
    In this regard, a program operator seeking to work with a 
contractor in developing a custom-made product that will meet program 
needs must exercise caution to avoid inappropriately blending the 
sealed bid and competitive

[[Page 49478]]

proposal procedures. The program operator may engage the contractor to 
develop the product and supply the finished product to the program, 
thus providing all qualified vendors the opportunity to compete for an 
award to both develop and supply the product. It would not be 
acceptable, however, for the same program operator to negotiate with 
the same contractor to develop the product and then, in a separate 
procurement action, publicly solicit bids to supply the product; the 
product would only be available from the firm that developed it.
    We cannot overemphasize, however, that neither the sealed bid 
method nor the competitive proposal method requires a program operator 
to award a contract to a vendor that lacks the capability to 
successfully perform under the terms and conditions of the proposed 
procurement. Nor is a program operator required to award a contract to 
a bidder whose bid does not meet bid specifications simply because that 
bidder submitted the lowest price; any unresponsive bid must be 
rejected.
    Other than the geographic preference and conflict of interest 
prohibitions in Sec. 3016.60, the procurement regulations applicable to 
USDA entitlement program grantees and subgrantees remain essentially 
unchanged from prior practice. Grantees and subgrantees are encouraged 
to incorporate quality and taste related factors into the 
specifications and evaluation requirements as appropriate under each 
procurement mechanism and in accordance with applicable State and local 
procurement regulations.
    The regulations continue to allow program operators to use small 
purchase, sealed bid, and competitive proposals procurement methods. 
All three methods allow program operators to incorporate quality as a 
procurement consideration. Under the sealed bid method, which requires 
that awards be made on the basis of lowest price, quality 
considerations, when sufficiently definite, can be built into the 
specifications, or a two-step bidding process may be used. Quality 
considerations under the sealed bid method are not an award factor, but 
a responsiveness issue assessing compliance with the specifications, 
which is why the specifications must be sufficiently definite. Awards 
cannot be made to a bidder offering a nonconforming product.
    Under the competitive proposals method, quality considerations not 
only can be built into the product specifications for responsiveness, 
but also can be used as evaluation factors in making the award 
determination. The competitive proposals method allows for the use of 
less definite factors. The following hypothetical case illustrates this 
point.
    A school district solicits sealed bids for fresh or frozen pizza 
products, inviting bids from all potential suppliers. Among other 
specifications, the solicitation requires that the pizza products be 
tasty. To assess conformance with the taste specification, the school 
district requires that bidders provide pizza product samples with their 
bids. The school district will assess taste acceptability through blind 
taste tests by students, rating samples as either acceptable or 
unacceptable. Bids providing unacceptable samples will be considered 
nonresponsive for failure to conform with the specification 
requirements. The solicitation instructs that award will be made to the 
lowest price supplier whose pizza product conforms to all specification 
requirements, including taste acceptability.
    Five suppliers of fresh and frozen pizza submit prices and bid 
samples. The bids are as follows:

----------------------------------------------------------------------------------------------------------------
                                                                         Price per
                 Supplier                          Product type           serving               Taste
----------------------------------------------------------------------------------------------------------------
A........................................  Frozen......................      $0.27  Unacceptable.
B........................................  Fresh.......................       0.57  Acceptable.
C........................................  Fresh.......................       0.40  Acceptable.
D........................................  Frozen......................       0.54  Acceptable.
E........................................  Fresh.......................       0.56  Acceptable.
----------------------------------------------------------------------------------------------------------------

    The school district correctly awards the contract to Supplier C. Of 
the four suppliers whose products ranked acceptable for taste (those of 
Suppliers B, C, D, and E), Supplier C submitted the lowest bid. The 
school district correctly rejects the Supplier A's bid even at the 
lowest price because the product did not conform to the specification 
requiring an acceptable taste.
    USDA has revised the proposed regulatory language in new section 
3016.60(b) to make express the authority of, and limitations on, 
program operators to acquire information from prospective contractors 
as spelled out in the Goodling Act; and to otherwise clarify the 
aspects of this provision that have been misunderstood. New paragraph 
3016.60(b) makes clear that a grantee or subgrantee may not contract 
with a party who has developed, drafted, or in any other way prepared 
specifications, procedures, or documents for such contract; and that, 
conversely, a prospective contractor may provide information to a 
grantee or subgrantee, which the grantee or subgrantee may then use to 
develop its own documents and specifications, and still enter into a 
contract with the grantee and subgrantee.

Clarification of Conditions for Use of the Small Purchase Procurement 
Method

    Purchases using informal, small purchase methods can generally be 
made in less time and at less expense because such methods are simpler 
than formal procurement methods. State and local governments' ability 
to use the small purchase method for these programs is generally 
expressed as a dollar level known as the small purchase threshold. The 
Federal small purchase threshold under both Sec. 3016.36 and 
Sec. 3019.44 is tied to the level set at 41 U.S.C. 401(11) (currently 
$100,000). Two commenters expressed concern that many program operators 
may not realize the benefits of this feature of this rule because State 
and local government procurement rules often set small purchase 
thresholds lower than the Federal $100,000 level. The commenters' 
assessment of the effect of the lower State and local thresholds is 
correct when applied to this final rule. When a lower State or local 
small purchase threshold exists, only procurements below that level can 
be conducted using the simplified procedures. A formal method (sealed 
bid or competitive proposal) must be used for those procurements above 
the State or local level.

Financial Reporting Requirements

    The USDA proposed a third specific exception to be included in 
subpart E of 7 CFR 3016: the exclusion of the USDA entitlement programs 
listed at Sec. 3016.4(b), except the Food Distribution Program on 
Indian

[[Page 49479]]

Reservations, from the financial reporting provisions in Sec. 3016.41. 
No comments were received on this proposal. The exception language 
proposed for subpart E, Sec. 3016.61 has been incorporated into the 
final rule.

Editorial and Technical Changes

    The USDA made an editorial change in part 3015 to correct the name 
of the USDA office responsible for Federal assistance policy. Finally, 
USDA made a technical change in Sec. 3016.4 to recognize the recent 
reclassification of the Food Distribution Program on Indian 
Reservations from nonentitlement to entitlement. No comments were 
received on these two changes. Therefore, the changes have been 
incorporated into the final rule.

Regulatory Impact Analysis

Executive Order 12866

    The Office of Management and Budget reviewed the Proposed Rule and 
determined the rule to be significant under Executive Order 12866. In 
accordance with the provisions of Executive Order 12866, USDA prepared 
a cost benefit assessment which analyzed the economic impact of this 
rule on States, other grantees, and subgrantees operating USDA 
entitlement programs. The economic impact analysis had two discrete 
dimensions: bringing these programs under the umbrella of parts 3016 
and 3019, and establishing the deviations and exceptions stated in 
subpart E to part 3016.
    As stated in the Proposed Rule, USDA believes that both dimensions 
would have a negligible economic impact.
    However, USDA does not have the database needed to quantify the 
foregoing generalizations about the costs and savings associated with 
this rule. Accordingly, USDA requested commenters to provide feedback 
on the economic impact of this rule. One of the commenters referred to 
the issue of economic impact of the overall rule in relation to USDA's 
proposal to set aside the Federalism principle to require the State to 
use Sec. 3016.36(b) through (i) in conducting procurements under USDA 
entitlement programs. However, no commenter provided any substantive 
information on this subject or referred USDA to sources where it could 
be found. Since USDA has revised the final rule to avoid setting aside 
the Federalism principle, the one comment received in this regard is 
now moot. Several comments contained references to the potential cost 
of implementing certain specific provisions within the rule. These 
comments are discussed in the appropriate sections above.
    As noted above, under this rule, financial reporting requirements, 
with the exception of the Food Distribution Program on Indian 
Reservations, will continue to be contained in the program-specific 
regulations rather than in part 3016. Because the reporting 
requirements themselves remain unchanged, this provision of the rule 
will have no economic impact on grantees and subgrantees.
    The Office of Management and Budget has reviewed this final rule 
and determined the rule to be not significant.

Executive Order 13132

    Executive Order 13132 (E.O. 13132) on ``Federalism'' (64 FR 43255, 
August 10, 1999) requires Federal agencies to have an accountable 
process to ensure ``meaningful and timely input by State and local 
officials in the development of regulatory policies that have 
federalism implications.'' The final rules for 7 CFR parts 3015 and 
3019 have no federalism implications. 7 CFR part 3016 is already 
applicable to State and local governments operating nonentitlement 
programs. A proposed revision to 7 CFR part 3016 was published as a 
Proposed Rule on February 17, 1998, to make the rule applicable to 
State and local governments operating entitlement programs. It should 
be noted that this Proposed Rule was published prior to the November 2, 
1999, implementation of E.O. 13132. However, in the spirit of E.O 
13132, USDA had already included substantial intergovernmental 
consultation in the development of the Proposed Rule. Subsequently it 
was determined that the Proposed Rule included a potential Federalism 
implication related to Sec. 3016.36 which deals with procurement. The 
USDA met with State and local officials on multiple occasions to 
discuss proposed policy changes for entitlement programs and, in 
particular, to discuss the subject matter of the Proposed Rule. In 
addition, during the comment period USDA received comments on the 
Proposed Rule from eight State agencies in seven States and twenty 
local governments in eleven States. In light of comments received, the 
proposed provision for States to follow Federal rules in procurement 
was changed in this final rule to give States the option of following 
State or Federal procurement rules. We believe this change is in 
accordance with Federalism principles.

Civil Rights Impact Analysis

    The USDA does not believe that this rule will have a significant 
civil rights impact and invited comments on this position. No comments 
were received.

Paperwork Reduction Act

    The information collection requirements of this rule were 
previously approved for USDA under #0505-0008 for entitlement and 
nonentitlement programs. However, that number has been retired because 
the reporting and recordkeeping requirements of this rule are the same 
as those required by OMB Circulars A-102 and A-110 and have already 
been cleared by OMB. The USDA believes this rule will not impose 
additional information collection requirements on grantees and 
subgrantees.

Regulatory Flexibility Act

    In accordance with the requirements of the Regulatory Flexibility 
Act (5 U.S.C. 605(b)), the USDA Chief Financial Officer has reviewed 
this rule and certifies that it does not have a significant economic 
impact on a substantial number of small entities. The potential 
economic impact is discussed above in connection with Executive Order 
12866.

List of Subjects

7 CFR part 3015

    Grant programs, Intergovernmental relations.

7 CFR part 3016

    Grant programs.

7 CFR part 3019

    Grant programs.

    Issued at Washington, DC.
Sally Thompson,
Chief Financial Officer.
    Approved:
Dan Glickman,
Secretary of Agriculture.
    Accordingly, USDA amends 7 CFR chapter XXX as set forth below.

PART 3015--UNIFORM FEDERAL ASSISTANCE REGULATIONS

    1. The authority citation for part 3015 is revised to read as 
follows:

    Authority: 5 U.S.C. 301; 31 U.S.C. 901-903; 7 CFR 2.28, unless 
otherwise noted.
    2. In Sec. 3015.1, revise paragraphs (a)(l), (a)(3), (a)(4) and (d) 
to read as follows:


Sec. 3015.1  Purpose and scope of this part.

    (a)(l) This part specifies the set of principles for determining 
allowable costs under USDA grants and cooperative agreements to State 
and

[[Page 49480]]

local governments, universities, non-profit and for-profit 
organizations as set forth in OMB Circulars A-87, A-21, A-122, and 48 
CFR 31.2, respectively. This part also contains the general provisions 
that apply to all grants and cooperative agreements made by USDA.
* * * * *
    (3) Rules for grants and cooperative agreements to State and local 
governments are found in part 3016 of this chapter.
    (4) Rules for grants and cooperative agreements to institutions of 
higher education, hospitals, and other non-profit organizations are 
found in part 3019 of this chapter.
* * * * *
    (d) Responsibility for developing and interpreting the material for 
this part and in keeping it up-to-date is delegated to the Office of 
the Chief Financial Officer.
    3. In Sec. 3015.2, revise paragraphs (d)(3), (d)(4), (d)(5), and 
(d)(6) to read as follows:


Sec. 3015.2  Applicability.

* * * * *
    (d) * * *
    (3) Agencies or instrumentalities of the Federal government,
    (4) Individuals,
    (5) State and local governments, and
    (6) Institutions of higher education, hospitals and other non-
profit organizations.
* * * * *

PART 3016--UNIFORM ADMINISTRATIVE REQUIREMENTS FOR GRANTS AND 
COOPERATIVE AGREEMENTS TO STATE AND LOCAL GOVERNMENTS

    4. The authority citation for part 3016 is revised to read as 
follows:

    Authority: 5 U.S.C. 301; 31 U.S.C. 901-903; 7 CFR 2.28.


Sec. 3016.4    [Amended]

    5. In Sec. 3016.4 remove paragraphs (a)(4) through (6), redesignate 
paragraphs (a)(7) through (10) as (a)(4) through (7) and revise 
paragraph (b) to read as follows:
    Sec. 3016.4  Applicability.
* * * * *
    (b) Entitlement programs. In USDA, the entitlement programs 
enumerated in this paragraph are subject to subparts A through D and 
the modifications in subpart E of this part.
    (1) Entitlement grants under the following programs authorized by 
The National School Lunch Act:
    (i) National School Lunch Program, General Assistance (section 4 of 
the Act),
    (ii) Commodity Assistance (section 6 of the Act),
    (iii) National School Lunch Program, Special Meal Assistance 
(section 11 of the Act),
    (iv) Summer Food Service Program for Children (section 13 of the 
Act), and
    (v) Child and Adult Care Food Program (section 17 of the Act);
    (2) Entitlement grants under the following programs authorized by 
The Child Nutrition Act of 1966:
    (i) Special Milk Program for Children (section 3 of the Act),
    (ii) School Breakfast Program (section 4 of the Act), and
    (iii) Entitlement grants for State Administrative Expense Funds 
(section 7 of the Act); and
    (3) Entitlement grants under the following programs authorized by 
the Food Stamp Act of 1977:
    (i) Food Distribution Program on Indian Reservations (section 4(b) 
of the Act), and
    (ii) State Administrative Expense Funds (section 16 of the Act).
    6. Subpart E is added to read as follows:

Subpart E--Entitlement

Sec.
3016.60   Special procurement provisions.
3016.61   Financial reporting.


Sec. 3016.60  Special procurement provisions.

    (a) Notwithstanding Secs. 3016.36(a) and 3016.37(a), States 
conducting procurements under grants or subgrants under the USDA 
entitlement programs specified in Sec. 3016.4(b) may elect to follow 
either the State laws, policies, and procedures as authorized by 
Secs. 3016.36(a) and 3016.37(a), or the procurement standards for other 
governmental grantees and all governmental subgrantees in accordance 
with Sec. 3016.36(b) through (i). Regardless of the option selected, 
States shall ensure that paragraphs (b) and (c) of this section are 
followed
    (b) When conducting a procurement under the USDA entitlement 
programs specified in Sec. 3016.4(b) of this part, a grantee or 
subgrantee may enter into a contract with a party that has provided 
specification information to the grantee or subgrantee for the 
grantee's or subgrantee's use in developing contract specifications for 
conducting such a procurement. In order to ensure objective contractor 
performance and eliminate unfair competitive advantage, however, a 
person that develops or drafts specifications, requirements, statements 
of work, invitations for bids, requests for proposals, contract terms 
and conditions or other documents for use by a grantee or subgrantee in 
conducting a procurement under the USDA entitlement programs specified 
in Sec. 3016.4(b) shall be excluded from competing for such 
procurements. Such persons are ineligible for contract awards resulting 
from such procurements regardless of the procurement method used. 
However, prospective contractors may provide grantees or subgrantees 
with specification information related to a procurement and still 
compete for the procurement if the grantee or subgrantee, and not the 
prospective contractor, develops or drafts the specifications, 
requirements, statements of work, invitations for bid, and/or requests 
for proposals used to conduct the procurement.
    (c) Procurements under USDA entitlement programs specified in 
Sec. 3016.4(b) shall be conducted in a manner that prohibits the use of 
statutorily or administratively imposed in-State or local geographic 
preferences except as provided for in Sec. 3016.36(c)(2).


Sec. 3016.61  Financial reporting.

    The financial reporting provisions found in Sec. 3016.41 do not 
apply to any of the USDA entitlement programs listed in Sec. 3016.4(b) 
except the Food Distribution Program on Indian Reservations. The 
financial reporting requirements for these entitlement programs are 
found in the following program regulations:
    (a) For the National School Lunch Program, 7 CFR part 210;
    (b) For the Special Milk Program for Children, 7 CFR part 215;
    (c) For the School Breakfast Program, 7 CFR part 220;
    (d) For the Summer Food Service Program for Children, 7 CFR part 
225;
    (e) For the Child and Adult Care Food Program, 7 CFR part 226;
    (f) For State Administrative Expense Funds under section 7 of the 
Child Nutrition Act of 1966, 7 CFR part 235; and
    (g) For State Administrative Expenses under section 16 of the Food 
Stamp Act of 1977, 7 CFR part 277.

PART 3019--UNIFORM ADMINISTRATIVE REQUIREMENTS FOR GRANTS AND 
AGREEMENTS WITH INSTITUTIONS OF HIGHER EDUCATION, HOSPITALS, AND 
OTHER NON-PROFIT ORGANIZATIONS

    7. The authority citation for part 3019 is revised to read as 
follows:

    Authority: 5 U.S.C. 301; 31 U.S.C. 901-903; 7 CFR 2.28.
    8. In Sec. 3019.1, designate the existing text as paragraph (a) and 
add paragraph (b) to read as follows:

[[Page 49481]]

Sec. 3019.1  Purpose.

* * * * *
    (b) This part also applies specifically to the grants, agreements 
and subawards to institutions of higher education, hospitals, and other 
non-profit organizations that are awarded to carry out the following 
entitlement programs:
    (1) Entitlement grants under the following programs authorized by 
The Richard B. Russell National School Lunch Act:
    (i) National School Lunch Program, General Assistance (section 4 of 
the Act),
    (ii) Commodity Assistance (section 6 of the Act),
    (iii) National School Lunch Program, Special Meal Assistance 
(section 11 of the Act),
    (iv) Summer Food Service Program for Children (section 13 of the 
Act), and
    (v) Child and Adult Care Food Program (section 17 of the Act).
    (2) Entitlement grants under the following programs authorized by 
The Child Nutrition Act of 1966:
    (i) Special Milk Program for Children (section 3 of the Act), and
    (ii) School Breakfast Program (section 4 of the Act).
    (3) Entitlement grants for State Administrative Expenses under The 
Food Stamp Act of 1977 (section 16 of the Act).
    9. In Sec. 3019.2, remove the last sentence in paragraph (e) 
introductory text and paragraphs (e)(1) through (e)(5).
[FR Doc. 00-20489 Filed 8-11-00; 8:45 am]
BILLING CODE 3410-90-P