[Federal Register Volume 65, Number 177 (Tuesday, September 12, 2000)]
[Proposed Rules]
[Pages 55102-55132]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-22901]



[[Page 55101]]

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Part III





Department of Agriculture





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Food and Nutrition Service



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7 CFR Part 226



Child and Adult Care Food Program; Improving Management and Program 
Integrity; Proposed Rule

  Federal Register / Vol. 65, No. 177 / Tuesday, September 12, 2000 / 
Proposed Rules  

[[Page 55102]]


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DEPARTMENT OF AGRICULTURE

Food and Nutrition Service

7 CFR Part 226

RIN 0584-AC24


Child and Adult Care Food Program; Improving Management and 
Program Integrity

AGENCY:  Food and Nutrition Service, USDA.

ACTION: Proposed rule.

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SUMMARY: This rule proposes changes to the Child and Adult Care Food 
Program regulations. These changes result from the findings of State 
and Federal Program reviews and from audits and investigations 
conducted by the Office of Inspector General. This rule proposes to 
revise: State agency criteria for approving and renewing institution 
applications; certain State- and institution-level monitoring 
requirements; Program training and other operating requirements for 
child care institutions and facilities; and other provisions which we 
are required to change as a result of the Healthy Meals for Healthy 
Americans Act of 1994, the Personal Responsibility and Work 
Opportunities Reconciliation Act of 1996, and the William F. Goodling 
Child Nutrition Reauthorization Act of 1998. Additional statutory 
changes resulting from enactment of Public Law 106-224, the 
Agricultural Risk Protection Act of 2000, will be addressed in one or 
more future rulemaking actions. The proposed changes are primarily 
designed to improve Program operations and monitoring at the State and 
institution levels and, where possible, to streamline and simplify 
Program requirements for State agencies and institutions.

DATES: To be assured of consideration, comments must be postmarked on 
or before December 11, 2000. Comments will also be accepted via E Mail 
submission at the following Internet address: [email protected].

ADDRESSES: Comments should be addressed to Mr. Robert Eadie, Chief, 
Policy and Program Development Branch, Child Nutrition Division, Food 
and Nutrition Service, Department of Agriculture, 3101 Park Center 
Drive, Room 1007, Alexandria, Virginia 22302-1594. All written 
submissions will be available for public inspection at this location 
Monday through Friday, 8:30 a.m.-5 p.m.

FOR FURTHER INFORMATION CONTACT: Mr. Edward Morawetz or Ms. Melissa 
Rothstein at the above address or by telephone at (703) 305-2620. A 
regulatory impact analysis was completed as part of the development of 
this proposed rule. Copies of this analysis may be requested from Mr. 
Morawetz or Ms. Rothstein.

SUPPLEMENTARY INFORMATION:

Background

Why is USDA issuing this proposed rule?

    In recent years, State and Federal Program reviews have found 
numerous cases of mismanagement, abuse, and, in some instances, fraud 
by child care institutions and facilities, especially (though not 
exclusively) in the family day care home component of the Child and 
Adult Care Food Program (CACFP). These reviews revealed weaknesses in 
State agency and institution management controls over Program 
operations, and examples of regulatory noncompliance by institutions, 
including failure to pay facilities or failure to pay them in a timely 
manner; improper use of Program funds for non-Program expenditures; and 
improper meal reimbursements due to incorrect meal counts or to 
miscategorized or incomplete income eligibility statements. In 
addition, audits and investigations conducted by the Office of 
Inspector General (OIG) have raised serious concerns regarding the 
adequacy of financial and administrative controls in CACFP.

Why did OIG conduct these audits and investigations?

    The Food and Nutrition Service (FNS) asked OIG to conduct an audit 
of the family day care home component of CACFP because of the results 
of State and Federal Program reviews. OIG selected five States for 
inclusion in the audit based on the States' total family day care home 
sponsor and provider enrollment, program costs, and geographic 
location. Then, it randomly selected family day care sponsors and 
providers within those five States to be included in the audits.

What did the OIG audits reveal?

    In 1995, OIG released a report (No. 27600-6-At) which presented the 
results of these five audits. The audits evaluated:
     The adequacy of FNS, State agency, and family day care 
home sponsors' financial and administrative controls over meal claims;
     The accuracy of Program and participation data and claims 
for reimbursement submitted by family day care home sponsors; and
     Whether State agencies and participating institutions 
complied with applicable laws, regulations, and guidance.
    These audits found serious types of regulatory noncompliance by 
both sponsors and homes, including:
     Meals claimed for absent children;
     Meals claimed for nonexistent homes and children;
     Lack of documentation for meal counts and/or menu records;
     Failure by sponsors to perform required monitoring visits; 
and
     Sponsors' failure to require providers to attend training.
    Later, OIG conducted additional audits of family day care home and 
child care center sponsors, many of which State or Federal Program 
administrators had suspected of having serious management problems.
    These targeted audits, which were released in August of 1999 and 
were referred to collectively as ``Operation Kiddie Care'' by OIG, 
confirmed the findings of the 1995 audits and developed additional 
findings as well.

What were OIG's recommendations to FNS in the 1995 audit?

    Based on its findings, OIG's 1995 audit recommended changes to 
CACFP review requirements and management controls. Their most 
significant recommendations were that the CACFP regulations be amended 
to require that:
     Sponsors and State agencies make unannounced monitoring 
visits to day care homes;
     Parental contacts be made in order to verify children's 
Program participation;
     Sponsor reviews of day care homes include, at a minimum, 
reconciliation of enrollment, attendance, and meal claim data;
     All family day care home providers receive training each 
year; and
     At a minimum, all State agency reviews include certain 
specified review elements.
    In total, the 1995 audit made fifteen recommendations. We have 
completed action on the five OIG recommendations from the national 
audit which do not require regulatory change. The other ten 
recommendations would require regulatory change, most of which are 
addressed in this preamble. Recommendations from the 1995 audit which 
were addressed in Public Law 106-224 will be addressed in a separate 
rulemaking action.
    We agree with the 1995 audit recommendations and believe they will 
support our efforts to improve CACFP administration. In some cases, we 
believe that OIG's recommendations

[[Page 55103]]

regarding family day care home sponsoring organizations and day care 
home providers have merit for other types of institutions and 
facilities participating in the Program as well.

Is the Department including in this proposal any of the recommendations 
from OIG's 1999 ``Operation Kiddie Care'' audit?

    Yes. Most of the ``Operation Kiddie Care'' audit's recommendations 
for regulatory changes also appear in this proposed rule. Those which 
are not addressed in this rule will be included in a separate 
rulemaking action, due to the fact that they were included in Pub. L. 
106-224. The single exception to this statement is that we have not 
incorporated, either in this proposal or in the separate rulemaking 
being developed to implement Pub. L. 106-224, the audit's 
recommendation for a major Program design change in the way that 
sponsoring organizations of family day care homes are reimbursed for 
their administrative expenses. We fully concur with OIG regarding the 
seriousness of the ``Kiddie Care'' audit's findings, and have already 
addressed a number of issues raised in that audit in Program training 
which was provided to State agency staff during the fall and winter of 
1999-2000. Nevertheless, we have not received sufficient input from the 
public and from Program stakeholders to make legislative or regulatory 
proposals regarding Program design or structure at this time.
    Therefore, we would like to use this opportunity to solicit comment 
on this recommendation from Program stakeholders and others who are 
knowledgeable of CACFP. The major program design recommendation from 
the ``Kiddie Care'' audit on which we are seeking public comment is 
OIG's proposal that we develop a new system of administrative 
reimbursement for sponsors of family day care homes. The current 
administrative reimbursement system for sponsors of family day care 
homes sets a cap on administrative expenses which is based on the total 
number of homes sponsored. Sponsors are paid the lesser of: the number 
of homes administered times a per home administrative rate; actual 
administrative costs; or the sponsor's approved budget. Thus, under the 
current structure, there is a built-in incentive for day care home 
sponsors to administer more homes, and a built-in disincentive to 
terminate homes' CACFP participation, even if the homes are doing a 
poor job of administering the Program, since a larger number of homes 
raises the ``ceiling'' on the sponsor's administrative earnings.
    The management improvement training provided to State Program 
administrators addresses this problem by providing State agencies with 
the tools to perform better and more thorough reviews of sponsors' 
budgets and budget revisions, administrative costs will be held to 
reasonable levels, regardless of the ``ceiling'' resulting from the 
homes times rates calculation. However, even if these budget review 
techniques are fully implemented and work as intended, the current 
system may perpetuate some of the incentive for sponsors to administer 
more homes, because their administrative cost ceiling will continue to 
be determined by the number of homes administered. We are therefore 
asking readers of this rule to comment on the following possible 
alternatives to the current system of administrative reimbursement for 
sponsors of family day care homes:
     Eliminate ``homes times rates'' as a component of the 
administrative cost system, instead paying sponsors the lesser of 
actual costs or approved budget amounts;
     Establish a fixed percentage of the meal reimbursement 
distributed to providers as the sponsor's administrative payment. In 
other words, if the sponsor disburses $300,000 per month in meal 
reimbursements to its providers, they would receive, in addition to the 
$300,000 in meal reimbursements for its providers, up to some fraction 
(perhaps 10 to 15 percent) of that amount to cover all of their 
approved and allowable administrative expenses;
     Pay sponsors a fixed fee for each reimbursable meal served 
by their providers;
     Lower the per home administrative rates for sponsors of 
more than 200 homes, to reduce their financial incentive to sponsor 
more homes; and
     Any other system of administrative reimbursement which 
commenters might recommend.
    Ultimately, we will analyze comments made in response to these 
possible alternatives to the current administrative reimbursement 
system, along with input gathered from other Program stakeholders, and 
either develop legislative proposals for congressional consideration or 
present a separate regulatory proposal for changes to this aspect of 
the Program, as appropriate. We plan to offer legislative proposals, 
and/or to issue another rulemaking or other guidance addressing these 
issues, as appropriate, no later than March 31, 2001.

How is the remainder of this preamble organized?

    This rule proposes revisions to CACFP regulations based on the 1995 
and 1999 OIG audit recommendations; the results of State and Federal 
administrative reviews; discussions with OIG and Program administrators 
regarding reviews, audits and investigations undertaken since 1995; and 
suggestions offered by Program administrators and included in 
comprehensive CACFP management improvement guidance which FNS issued in 
1997 and 1998.
    The preamble is divided into four parts:
    I. State agency review of institutions' Program applications;
    II. State agency and institution monitoring requirements;
    III. Training and other operational requirements; and
    IV. Other provisions mandated by Pub. L. 103-448, the Healthy Meals 
for Healthy Americans Act of 1994, Pub. L. 104-193, the Personal 
Responsibility and Work Opportunities Reconciliation Act of 1996, and 
Pub. L. 105-336, the William F. Goodling Child Nutrition 
Reauthorization Act of 1998.
    While many of the changes proposed in Parts I-III of this preamble 
are discretionary changes designed to improve Program management and 
streamline Program operations, the Department is also including a 
number of changes to the CACFP regulations which it is required to make 
by Pub. Laws 103-448, 104-193, and 105-336. Although the Department 
encourages public comments on its approach to implementing the changes 
required by these three laws, commenters are reminded that the 
provisions of these laws, amending the Richard B. Russell National 
School Lunch Act (NSLA), require that these changes be made. Most of 
the mandatory changes are located in Part IV of this preamble, though 
some appear in other parts of the preamble, depending on whether the 
statutory change was thematically related to the discretionary changes 
being discussed in another part of the preamble. Non-discretionary 
provisions will be identified in the preamble discussion.
    In addition to the statutory provisions above, on June 20, 2000, 
President Clinton signed the Agricultural Risk Protection Act (ARPA) of 
2000. Section 243 of that Act, entitled ``Child and Adult Care Food 
Program Integrity'', mandated a number of changes to CACFP designed to 
reduce the risk of Program fraud, abuse, or mismanagement. To implement 
these

[[Page 55104]]

mandated changes, we will soon address in a separate complementary 
rulemaking action provisions which relate to many of the issues and 
provisions which are addressed in this rulemaking. The new statutory 
changes affecting CACFP to be addressed in the second rulemaking are as 
follows:
    (1) Restructuring of the definition of the term ``institution'' 
[Sec. 243(a)(1)-(7) of ARPA];
    (2) Change to basic institution eligibility criteria:
    (a) Institutions must not have been determined ineligible to 
participate in any publicly-funded program [Sec. 243(a)(8)(A)];
    (b) Requirement that sponsors employ an appropriate number of 
monitoring staff [Sec. 243(a)(8)(B)];
    (c) Restrictions on outside employment for sponsor employees [Sec. 
243(a)(8)(D)]; and
    (d) State bonding requirements [Sec. 243(a)(8)(D)];
    (3) Conditions for approval of institutions [Sec. 243(b)(1)] 
including:
    (a) Requiring all institutions participating in CACFP to be 
financially viable, administratively capable, and have internal 
controls in place to ensure Program accountability;
    (b) Eliminating the participation of private nonprofit institutions 
which are in a ``moving towards tax exempt'' status; and
    (c) Requiring that new sponsors demonstrate a need for their 
services, by showing that they provide Program benefits to currently 
unserved facilities or children.
    (4) Basic monitoring requirements [Sec. 243(b)(2)];
    (5) Provision of Program information to parents [Sec. 243(b)(4)];
    (6) Allowable administrative expenses for sponsoring organizations 
[Sec. 243(b)(5)];
    (7) Termination or suspension of participating organizations, 
corrective action, hearings, disqualified list [Sec. 243(c)];
    (8) Funds recovery [Sec. 243(d)];
    (9) Limitation on center sponsors' administrative expenses [Sec. 
243(e)];
    (10) Provider transfers [Sec. 243(f)];
    (11) Addition of third State to for-profit demonstration project 
[Sec. 243(g)];
    (12) Training and technical assistance on fraud and abuse 
identification and prevention [Sec. 243(h)];
    (13) At-risk program [Sec. 243(i)]; and
    (14) Withholding of State Administrative Expense Funds (SAE) due to 
State failure to train or monitor [Sec. 243(j)].

Part I. State Agency Review of Institutions' Program Applications

A. State Agency Review of a New Institution's Application

What does the law say with regard to the duration of an application?

    Section 204(a)(3) of Pub. L. 101-147 amended section 17(d) of the 
NSLA (42 U.S.C. 1766(d)) by adding a new paragraph (2)(A) which 
requires the Department to ``develop a policy that allows institutions 
providing child care . . . , at the option of the State agency, to 
reapply for assistance . . . at 2-year intervals.'' It also requires 
that State agencies choosing this option must ``confirm on an annual 
basis'' that each participating institution is in compliance with the 
licensing and approval requirements set forth at section 17(a)(1) (42 
U.S.C. 1766(a)(1)). Later, in 1994, section 116(b) of Pub. L. 103-448 
amended section 17(d)(2)(A) (42 U.S.C. 1766 (d)(2)(A)) by extending the 
two-year CACFP reapplication interval to three years. The enactment of 
these provisions lessened the burden placed on State agencies and 
institutions by eliminating the requirement for an annual Program 
application. In addition, the provisions gave State agencies the option 
of allowing institutions to apply for participation at other than 
annual intervals.

Are three-year and one-year applications the only options available to 
the State agency?

    No. Although the statute requires reapplication for participation 
at least once every three years, we believe that it does not require 
annual or biennial applications to be the only alternatives to the 
triennial option. Therefore, this rule proposes to remove the 
references to an annual application found in the introductory 
paragraphs of current sections 226.6(b) and 226.6(f), and in section 
226.7(g), and to further revise section 226.6(b) to require each 
institution to reapply for participation at a time determined by the 
State agency, as long as not more than three years have elapsed since 
its last application approval. This proposal would not prevent 
administering agencies from retaining an annual application process; 
rather, it would give State agencies the option to consider whether the 
annual renewal of applications represents the most efficient and 
effective means of carrying out their Program responsibilities, and to 
consider any length of application between 12 and 36 months. In 
addition, if an institution submits a renewal application, and the 
State agency has not conducted a review of that institution since the 
last agreement was signed or extended but has reason to believe that 
such a review is immediately necessary, the State agency may approve 
the institution for a period of less than one year, pending the 
completion of such a review.

Is the Department proposing changes other than giving State agencies 
the option of using three-year applications?

    Yes. We are aware of the desirability of establishing less 
burdensome application requirements. The original requirements were 
promulgated at a time when State agencies and institutions were 
required to deal with a new and rapidly expanding program. However, by 
1990, when we convened the Task Force on Paperwork Reduction in Child 
Nutrition Programs (which was mandated by section 108 of Pub. L. 101-
147, the Child Nutrition and WIC Reauthorization Act of 1989), the 
CACFP application was frequently cited as including redundant and 
unnecessary elements, and as requiring the annual submission of 
information for which updates either are not needed that frequently or 
are already collected in monthly reports. We therefore believe it is 
appropriate to consider regulatory changes other than the single change 
(giving State agencies the option of taking applications on an up to 
three-year cycle) required by the statute.

What other general changes to the application process does this rule 
propose?

    There are four.
    First, this rule proposes to reorganize sections 226.6(b) and (f). 
It proposes that section 226.6(b) set forth the broad requirements for 
the information which institutions must include in their applications, 
and that section 226.6(f) specify the frequency with which the 
institution would be required to update the information contained in 
its original application.
    On September 26, 1995, we issued updated guidance pertaining to the 
multi-year application renewal option. This guidance gave State 
agencies an opportunity to implement the statutory changes prior to 
publication of a regulation, and also enabled them to eliminate from 
their applications any unnecessary or duplicative information which 
renewing institutions were previously required to submit. That guidance 
also provided State agencies with broad parameters for determining how 
often they need to require institutions to submit updated information 
concerning various aspects of the institution's Program operations.

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Most of the provisions of that guidance are being proposed without 
change in this rule.
    Second, current Program regulations at sections 226.6(b), 226.6(f), 
226.7(g), 226.15(b), 226.16(b) and 226.23(a) all establish various 
requirements for Program applications. We propose to consolidate these 
requirements so that State agencies and institutions may more easily 
refer to them in the regulations during the application process.
    Third, we also believe it is useful to differentiate between the 
application requirements for ``new'' and ``renewing'' institutions. It 
is appropriate to recognize these distinctions since institutions 
applying to enter the Program for the first time, or to re-enter the 
Program after a lapse in participation, should be evaluated on a 
different basis than those which have been participating for some time. 
Even greater attention needs to be paid to first-time applicants and 
applicants re-entering the Program after a lapse in participation, so 
that they will successfully operate the Program from the start.
    We believe that the need to ensure that new applicants are brought 
into the Program successfully is best served by a regulation which 
establishes specific minimum requirements for applications submitted by 
new institutions, but which allows State agencies to largely manage the 
continued participation of renewing institutions through the 
application renewal process in the manner they see fit. Therefore, this 
rule proposes very specific application requirements for new 
institutions. However, for renewing institutions, this rule proposes to 
specify only that the reapplication be evaluated on the basis of the 
institution's ability to operate the Program properly, efficiently, and 
effectively as documented in its management plan (if the institution 
sponsors child care facilities), its administrative budget, and its 
prior record in operating the Program. The proposed revisions to 
section 226.6(f) would specify those information elements which 
institutions would be required to update on a regular basis, regardless 
of the duration of time which the State agency allows an application to 
be in effect.
    Fourth, and finally, the results of OIG audit activity have 
convinced us that State agencies must be explicitly required to consult 
the seriously deficient list when reviewing any institution's 
application for participation. In several instances, OIG found that an 
institution or individual which had been terminated from CACFP for 
cause and placed on the seriously deficient list by one State was 
subsequently admitted to participation by another State. Thus, we are 
proposing to add regulatory language requiring that a State agency 
consult the seriously deficient list, and deny the application of any 
institution or individual on the list, whenever it reviews any 
institution's application to participate.
    Accordingly, this proposed rule would remove the requirements for 
application content and the application process found at section 
226.6(b)(1)-(10), section 226.6(f)(2) and (3), section 226.15(b), and 
section 226.23(a); add definitions of ``new'' and ``renewing'' 
institutions to section 226.2; revise and reorganize sections 226.6(b) 
and (f); and make other changes to relocate, revise, or delete the 
requirements of these and other parts of the current regulations, as 
follows.

Won't a shorter Program application give State agencies less 
information about the institutions whose potential ability to operate 
the Program is being assessed?

    No. Although some may view less frequent applications and fewer 
application requirements as contrary to this proposal's stated intent 
to improve Program management, we do not believe that streamlined, 
multi-year application procedures for renewing institutions will impede 
State agencies' ability to improve Program management. In fact, the 
less frequent processing of renewal applications, coupled with the 
elimination of unnecessary information on the application, should allow 
State agencies to devote more time to evaluating applicant 
institutions' potential ability to operate the Program properly, 
efficiently, and effectively, especially through review of the 
administrative budgets submitted by all institutions and the management 
plans submitted by sponsoring organizations of homes and/or centers.

What specific application requirements are in the current regulations?

    Section 226.6(b) of the current regulations establishes the broad 
State agency requirements governing the annual application process for 
institutions and for the facilities on whose behalf sponsoring 
organizations apply. As part of the annual application/re-application 
process, an institution must currently:
     Renew its Program agreement;
     Submit current enrollment and free and reduced price meal 
eligibility information [centers only];
     Submit enrollment information and an assurance that 
providers' own children enrolled in the Program are eligible for free 
and reduced price meals [sponsoring organizations of family day care 
homes only];
     Issue a nondiscrimination policy statement and media 
release;
     Submit a management plan [sponsoring organizations only];
     Submit an administrative budget;
     Submit documentation that child care facilities are in 
compliance with licensing/approval requirements;
     Submit documentation that they are in compliance with the 
requirements pertaining to receipt of Title XIX or Title XX benefits 
[proprietary centers only];
     Indicate a preference for commodities or cash-in-lieu of 
commodities [centers only]; and
     Indicate a preference to receive all, part or none of an 
advance payment.
    Current section 226.6(b)(10) also requires State agencies to:
     Notify institutions within 15 calendar days of receipt of 
an incomplete application;
     Provide technical assistance to institutions which 
submitted an incomplete application; and
     Approve or disapprove applications within 30 calendar days 
of receipt of a complete application.
    Current sections 226.6(f)(1)-(3) and 226.7(g) expand upon the 
requirements of sections 226.6(b)(1), (5), and (6) by describing the 
information to be included in the Program agreement and the management 
plan, and by establishing requirements pertaining to the State agency's 
review and approval of the administrative budget. Current section 
226.15(b) reiterates the annual institution application requirements 
set forth in section 226.6(b) and requires that nonprofit institutions 
submit evidence of their tax exempt status in accordance with section 
226.15(a). Current section 226.16(b) reiterates the annual application 
requirements pertaining to institutions which are sponsoring 
organizations of child care facilities, and section 226.23(a) requires 
that each institution submit, and State agencies approve, a free and 
reduced price policy statement to be used in all child care and adult 
day care facilities under the institution's supervision as part of the 
annual application process.

What changes to the current requirements does this rulemaking propose, 
and why?

    Current section 226.6(b), introductory paragraph and (b)(1): 
Program agreement--
    First, all references to the agreement under the current 
introductory

[[Page 55106]]

paragraph to section 226.6(b) would be removed; current section 
226.6(b)(1) would be removed and replaced with a new section 
226.6(b)(1); and the specific requirements pertaining to agreements 
which appear at current section 226.6(f)(1) would be relocated to a new 
section 226.6(b)(2) dealing with agreements.
    Second, the basic requirement that State agencies establish an 
application process, and the general requirements of that process, 
would be included in the introductory text of proposed section 
226.6(b)(1).
    In addition, the introductory text would require State agencies to 
establish a reapplication process and to meet the statutorily mandated 
deadlines for review of an institution's application. However, this 
paragraph would only specify that applications be in effect for a 
maximum of 36 months. Otherwise, State agencies would be free to 
establish their own reapplication requirements, provided that the 
requirements of section 226.6(f)--which would specify the timeframes 
for submitting and re-submitting documentation of compliance with 
specific Program requirements, as discussed below--are met.
    Proposed section 226.6(b)(1)(i) would contain the minimum 
requirements for new applicants, and would include most of the required 
elements of the application set forth at current section 226.6(b)(1)-
(10), modified slightly as discussed below, as well as the specific 
language regarding the content of the sponsor's management plan found 
at current section 226.6(f)(2). The modifications to the wording of the 
requirements set forth in current section 226.6(b)(1)-(10) are 
necessitated by the distinctions being drawn in this proposal between 
new applicants and renewing institutions; these specific items will now 
only be required of new applicants. In addition, current section 
226.6(b)(10), which makes the institution's ``choice to receive all, 
part, or none of the advance payment'' a part of the application, must 
be modified due to Pub. L. 104-193's elimination of the requirement 
that State agencies make advance payments available to Program 
institutions upon request.
    Proposed section 226.6(b)(1)(ii) would require State agencies to 
establish procedures for reviewing the applications of renewing 
institutions no more than annually and no less than every three years. 
The proposed rule would allow State agencies to determine the remaining 
content of the renewal application, provided that institutions continue 
to update Program information elements as set forth in the proposed 
revision to section 226.6(f).
    As noted previously, under this proposed revision to the 
application process, State agencies would continue to be responsible 
for distributing to, and collecting from, participating institutions 
certain Program information and data, and for ensuring that the CACFP 
is being operated in compliance with all regulatory requirements. In 
this proposed rule, these additional State agency responsibilities for 
information collection or dissemination outside of the application 
process are grouped into three paragraphs within revised and 
reorganized section 226.6(f), ``Miscellaneous responsibilities''. 
Section 226.6(f)(1) would delineate responsibilities, including the 
collection or distribution of certain information, which State agencies 
would be required to perform annually; section 226.6(f)(2) would list 
State agency responsibilities to be performed at least once every three 
years; and section 226.6(f)(3) would enumerate those State agency 
responsibilities which could be complied with at intervals established 
at the State agency's discretion, though not more frequently than 
annually.
    Current section 226.6(b)(2): Child care center requirements 
pertaining to free and reduced price eligibility 
    The current regulations at section 226.6(b)(2) require that centers 
submit current free and reduced price eligibility information annually. 
This requirement would be relocated to proposed section 
226.6(b)(1)(i)(A), and new independent centers and new sponsors of 
centers would continue to be required to submit such information to the 
State agency with their initial application. In addition, collection of 
this information by the State agency would be required annually at 
proposed section 226.6(f)(1) to enable the State agency to use this 
information to construct an annual claiming percentage or blended rate 
for each participating child care center in accordance with section 
226.9(b) of the current regulations. In States where the administering 
agency mandates the ``actual count'' method for centers, such 
information would already be submitted on a monthly basis.
    Current section 226.6(b)(3): Family day care home sponsoring 
organization requirements for submission of enrollment information--
    Current section 226.6(b)(3) requires sponsors of family day care 
homes to annually provide aggregate enrollment information for the 
homes they sponsor and to confirm the eligibility of providers' 
children for free and reduced price meals. Under this proposed rule, 
these requirements would be maintained for new sponsoring organizations 
of family day care homes at revised section 226.6(b)(1)(i)(B), in that 
sponsors would be required to provide an estimate of their annual 
aggregate enrollment for planning purposes; State agencies could 
include or exclude this requirement from sponsoring organizations' 
renewal applications. The specific data reporting requirements 
pertaining to tier I and tier II homes and meals, which are currently 
found at section 226.6(f)(11), have been included in proposed section 
226.6(b)(1)(i)(B) as a required part of the application for new family 
day care home sponsoring organizations, and current section 
226.6(f)(11) is proposed to be deleted. These data reporting 
requirements would only be included in proposed section 226.6(f)(1) 
indirectly, insofar as the estimated number of homes and children 
enrolled would be an integral part of the institution's budget which 
the State agency would collect annually in accordance with proposed 
section 226.6(f)(1)(vi). The fact that this information will be 
collected monthly on the FNS-44 form, starting in Fiscal Year 2000, 
means that sponsoring organizations would far exceed this requirement.
    Current sections 226.6(b)(4), 226.15(b)(5), and 226.23(a): 
Nondiscrimination policy statement and media release--
    Current sections 226.6(b)(4) and 226.15(b)(5) require the 
``issuance of a nondiscrimination policy statement and media release'' 
as part of the annual application. The wording of this requirement at 
proposed section 226.6(b)(1)(i)(C) will be altered slightly to require 
that each new institution submit its free and reduced price policy 
statement, its nondiscrimination policy statement, and a copy of its 
media release announcing the Program's availability at participating 
child care facilities. Because section 722 of Pub. L. 104-193 
prohibited institutions from being required to re-submit the policy 
statement unless it was substantively changed, section 226.6(b)(1)(ii) 
would prohibit State agencies from requiring resubmission unless the 
institution has made substantive changes to the statement. However, all 
institutions would continue to be required, at proposed section 
226.6(f)(1), to annually submit to the State agency documentation that 
they had issued a media release which informed the public of the 
Program's availability, and State agency collection of the 
nondiscrimination statement would be done on an ``as needed'' basis 
(i.e., only when the institution made substantive changes to its free 
and reduced price

[[Page 55107]]

policy) under proposed section 226.6(f)(3). Because these requirements 
would now be located at proposed section 226.6(f), the current 
requirements at section 226.15(b)(5) would be removed. Finally, the 
current requirement at section 226.23(a) for the institution to submit 
its free and reduced price policy statement with its application would 
be revised to conform to the new requirements of Pub. L. 104-193.
    Current section 226.6(b)(5): Sponsoring organization management 
plans--
    The current requirement at section 226.6(b)(5), under which 
sponsoring organizations must annually submit a management plan as part 
of their application, would be moved to proposed section 
226.6(b)(1)(i)(D), governing the submission of applications by new 
institutions, as would the substance of current section 226.6(f)(2), 
which details the specific elements which must be included in a 
sponsor's management plan. Because it is such a critical document in 
establishing a sponsoring organization's ability to perform its Program 
responsibilities, this rule also proposes to specifically require an 
updated management plan to be part of sponsoring organizations' renewal 
applications. Because of this proposal to require submission of a 
current management plan with the renewal application, we propose to 
leave more frequent updates of the plan to the State agency's 
discretion if the State agency has chosen to take applications less 
frequently than annually and to include the management plan update 
requirement at revised section 226.6(f)(2), meaning that the State 
agency would be required to collect the amended plan from sponsors no 
less frequently than every three years.
    The only portion of the management plan which would require annual 
updating would be the sponsoring organization's administrative budget, 
as discussed in the next paragraph of this preamble. Of course, 
justification for changes to a sponsoring organization's budget 
assumptions might also require amendments to other portions of the 
management plan dealing with staffing, projected growth or decline in 
the number of providers sponsored, or other factors.
    Current sections 226.6(b)(6) and 226.15(b)(3): Institutions' 
administrative budgets--
    Current sections 226.6(b)(6) and 226.15(b)(3) require that 
institutions annually submit administrative budgets with their 
application. Current sections 226.6(f)(3) and 226.7(g) require the 
State agency to:
     Review and approve administrative budgets;
     Limit the allowable administrative costs of family day 
care home sponsoring organizations to the administrative costs in their 
approved budgets; and
     Establish administrative cost limits for other 
institutions [e.g., independent centers and sponsors of centers] as it 
sees fit.
    This proposed rule would continue to require, at proposed sections 
226.6(b)(1)(i)(E) and (b)(1)(ii), that both new and renewing 
institutions submit administrative budgets for State agency approval 
with their applications. In addition, this rule proposes at section 
226.6(f)(1) that revised budgets be submitted for State agency review 
and approval by all sponsoring organizations each year, and at proposed 
section 226.6(f)(3) that the administrative budgets of independent 
centers be submitted as frequently as the State agency deems necessary. 
[Note: routine adjustments to annual budget projections are reviewed by 
State agencies for all CACFP institutions on an ongoing basis, in 
accordance with section 226.7(g)]. Finally, the reference to ``annual'' 
budgets currently found in section 226.7(g) would be deleted, since 
budgets for independent centers would no longer be required on an 
annual basis. However, all budgets, whenever submitted, would be 
required to demonstrate the institution's ability to manage Program 
funds in accordance with this Part, OMB circulars, FNS Instruction 796-
2, and the Department's Uniform Financial Management Requirements.
    Our September 26, 1995, guidance concerning application 
requirements permitted institutions which sponsored only centers to 
submit budget revisions every three years. However, due to concerns 
raised by OIG in the Kiddie Care audits regarding the amount of 
administrative costs claimed by some sponsors of centers, this rule 
proposes to require all sponsoring organizations (whether of homes and/
or centers) to resubmit their entire budget for annual review by the 
State agency. The 1995 guidance remains in effect until such time as 
the Department issues a final version of this proposed rule, but the 
Department encourages State agencies to review the administrative 
budgets of center sponsors on a more frequent basis than was required 
in the 1995 guidance.
    Finally, to underscore the importance of the State agency's review 
of the institution's budget, we propose to specifically state that all 
approved costs in the budget shall be necessary, reasonable, allowable, 
and allocable in accordance with Department financial management 
regulations, OMB circulars, and the CACFP Financial Management 
Instruction. The audits conducted by OIG revealed State agency budget 
review to be a particular weakness in a number of States, and it is 
important to emphasize the purpose of the budget review and the budget 
amendment process in the regulatory text itself.
    Current sections 226.6(b)(7), 226.15(b)(4), and 226.16(b)(3): 
Licensing and Approval Information--
    The current application requirements at sections 226.6(b)(7), 
226.15(b)(4), and 226.16(b)(3) require documentation of licensing or 
approval to be submitted each year. As previously noted, section 
17(d)(2)(B) of the NSLA requires that State agencies exercising the 
option to take applications at other than annual intervals are 
nevertheless required to ``confirm on an annual basis that each such 
institution is in compliance with the licensing or approval provisions 
of [section 17(a) of the law].'' (emphasis added) Therefore, this rule 
continues to require (at section 226.6(b)(1)(i)(F)) that facilities 
submit documentation of their licensure or approval. The Department 
also proposes that revised section 226.6(f)(1) include the requirement 
that State agencies annually obtain from institutions or facilities the 
licensure or approval status of any facility which is required to be 
licensed or approved.
    However, with regard to this requirement, the Department wishes to 
stress that this system would not necessarily have to include the 
submission of the same ``hard copy'' paper documentation year after 
year. Some State CACFP agencies have made arrangements with the State 
licensing agency to provide them with computerized updates, either by 
providing a list of all licensed facilities or by notifying the CACFP 
State agency on an ``exception'' basis of any child care facility whose 
license/approval has lapsed or been terminated. The Department 
encourages such arrangements in the interest of reducing administrative 
burden, while maintaining Program integrity and statutory and 
regulatory compliance.
    Current sections 226.6(b)(7) and 226.15(a): Tax-exempt status 
information--
    Current regulations at section 226.6(b)(7) and 226.15(a) require 
institutions to document their tax-exempt status as part of their 
application. This requirement would be retained for new sponsors at 
proposed section 226.6(b)(1)(i)(G). However, we

[[Page 55108]]

propose to place the periodic resubmission of such documentation at the 
State agency's discretion at revised section 226.6(f)(3).
    Public Law 105-336 amended the provision which allowed institutions 
to participate after they had applied for, but before they had 
officially received, their tax-exempt status. Subsequently, Public Law 
106-224 removed this provision from the law entirely, meaning that only 
institutions which have received their tax exempt status under the 
Internal Revenue Code of 1986 are permitted to participate. This change 
will be addressed in a second rulemaking.
    Current sections 226.6(b)(8) and 226.15(b)(6): Proprietary center 
requirements--
    Current regulations at sections 226.6(b)(8) and 226.15(b)(6) set 
forth the application requirements for proprietary centers. Such 
centers are permitted to participate in a given month only if at least 
25 percent of their licensed capacity or enrolled participants receive 
funding under Title XX of the Social Security Act (42 U.S.C., section 
1397, et seq.) The requirement that a new applicant proprietary center 
document its eligibility would be retained at proposed section 
226.6(b)(1)(i)(H). However, no similar requirement would be included 
for renewing institutions at proposed section 226.6(b)(1)(ii) since, as 
a condition of their eligibility, such centers are required to document 
compliance with the 25 percent requirement each month. Therefore, this 
rule proposes to place the periodic resubmission of such documentation 
at revised section 226.6(f)(3), since the State agency is already 
receiving this information on a monthly basis as part of the claiming 
process.
    Current sections 226.6(b)(9) and 226.6(f)(5)-(6): Information on 
commodities--
    The current application requirement at section 226.6(b)(9) under 
which institutions are to indicate their preference for commodities or 
cash-in-lieu of commodities would be included in the requirements for 
new applicants at proposed section 226.6(b)(1)(i)(I) and in proposed 
section 226.6(f)(3) as a general State agency responsibility. This 
would provide State agencies with the flexibility to allow institutions 
to change the initial statement of preference submitted with their 
original application on an ``as needed'' basis. The requirement for 
annual submission of this information by institutions at current 
section 226.6(h) would be deleted by removing the first sentence and by 
making conforming changes to the remainder of the paragraph.
    The current provisions at sections 226.6(f)(5)-(6), which require 
that State agencies determine institutions' preferences with regard to 
receiving commodities or cash-in-lieu of commodities and make available 
information regarding foods available in plentiful supply, have been 
relocated in this proposed rule into revised section 226.6(h), which 
addresses State agencies' overall responsibilities relating to 
commodity distribution.
    Current section 226.6(b)(10): Advance payment information--
    The current application requirement at section 226.6(b)(10) 
governing the institution's election to receive advance payments would 
be relocated in a new section 226.6(f)(3)(vii) as a general State 
agency responsibility. As previously noted, section 708(f) of Pub. L. 
104-193 amended section 17(f) of the NSLA (42 U.S.C. section 1766(f)) 
by making payment of advances optional at the State agency's 
discretion. Because a State agency could elect to issue no advance 
payments whatsoever, this proposed rule would remove all references to 
advances at proposed section 226.6(b)(1).
    Current section 226.15(b)(1): Demonstration of nonprofit status--
    The current application requirement at section 226.15(b)(1) 
pertaining to the annual demonstration of nonprofit status reiterates 
the requirement at section 226.15(a) that all but proprietary 
institutions must demonstrate their nonprofit status. As already 
mentioned above, we are proposing to relocate this requirement at new 
section 226.6(f)(3) as a general State agency responsibility, to be 
reviewed by the State on an ``as needed'' basis.
    Current section 226.6(f)(4): Procurement requirements--
    Current section 226.6(f)(4) requires State agencies to annually 
determine that all meal procurements with food service management 
companies are in conformance with bid and contractual requirements of 
section 226.22. Because this is an annual requirement on State agencies 
and has nothing to do with the institution application process, this 
rule proposes to incorporate the requirement into revised section 
226.6(j) dealing with ``Procurement provisions.''
    Current sections 226.6(f)(7)-(10): Other State agency 
responsibilities--
    This proposed rule would relocate current sections 226.6(f)(7)-
(10), which deal with State agency responsibilities regarding 
information made available to pricing programs, the conduct of 
verification, and implementation of the two-tiered reimbursement system 
for family day care homes. Current sections 226.6(f)(7), (f)(9), and 
(f)(10) would be relocated at proposed section 226.6(f)(1)(i)-(iii), 
since they relate to information which the State agency must provide 
annually to some institutions. Current section 226.6(f)(8), which 
relates to the State agency's collection of verification as part of an 
administrative review, would be moved to proposed section 
226.6(f)(3)(viii), which would require that verification be conducted 
as part of State agency reviews of institutions conducted in accordance 
with section 226.6(l).
    Accordingly, we propose to reorganize and revise sections 226.6(b) 
and 226.6(f) as described above; to make conforming changes, as 
necessary, to current sections 226.15(b) and 226.16(b); and to revise 
current sections 226.6(j), 226.7(g), and 226.23(a), as described above.

What do the current regulations say with regard to Program agreements?

    Under the current regulations at sections 226.6(b)(1) and 
226.6(f)(1), renewal of an institution's Program agreement is required 
as part of the annual reapplication process. These provisions were 
established prior to the change to section 17 of the NSLA which now 
gives State agencies the option to take applications from participating 
institutions no less frequently than every three years.

The law requires that State agencies have the option of renewing 
applications every three years; what does the law state regarding the 
length of an institution's agreement?

    The NSLA has never specified the duration of the Program agreement 
between the State agency and the institution. Recently, however, 
section 102(d) of Pub. L. 105-336 amended section 9(c) of the NSLA (42 
U.S.C. section 1758(c)) by requiring State agencies which administer 
any combination of the child nutrition programs (i.e., the National 
School Lunch, School Breakfast, Child and Adult Care Food or Summer 
Food Service Programs) to enter into a single permanent agreement with 
a school food authority which administers more than one of these 
programs. The law is still silent with regard to the length of the 
agreement between the State agency and non-school institutions.

What is the Department proposing with regard to the length of the 
Program agreement for non-school institutions?

    Consistent with section 17(d)(2) of the NSLA (42 U.S.C. section 
1766(d)(2)), which permits State agencies to take applications every 
three years, we propose that Program agreements for

[[Page 55109]]

non-school institutions should run for between one and three years. 
Thus, this proposed rule continues to link the length of the Program 
application and agreement for non-school institutions, while requiring 
State agencies to enter into permanent agreements with institutions 
which are schools and which, in accordance with Pub. L. 105-336, 
operate more than one child nutrition program administered by the same 
State agency. This proposed rule would continue to require that any 
Program agreements covering more than one Federal fiscal year stipulate 
that the agreement is contingent in subsequent fiscal years upon the 
availability of Federal funds and would, under the circumstances 
described in the discussion of renewal applications above, also permit 
the State agency to renew the institution's agreement for less than one 
year, pending the completion of a review of the institution by the 
State agency.
    Accordingly, this rule proposes to amend sections 226.6(b), 
226.6(b)(1) and 226.6(f)(1) by removing all references to the Program 
agreement, and by establishing a new section 226.6(b)(2), as described 
above, covering all Program agreements.

B. State Agency Notification to Applicant Institutions

Prior to 1996, what were the legal requirements regarding a State 
agency's handling of an institution's application to participate in 
CACFP?

    There were three requirements in section 17(d)(1) of the law. State 
agencies were required to:
     Notify institutions in writing of their approval or 
disapproval within 30 days.
     If an incomplete application was submitted, notify the 
institution in writing within 15 days.
     If an incomplete application was submitted, ``provide 
technical assistance, if necessary, to the institution for the purpose 
of completing its application.''

What changes to these requirements have been enacted, and how are these 
changes reflected in this proposed rule?

    First, section 708(c) of Pub. L. 104-193 of the Personal 
Responsibility and Work Opportunity Reconciliation Act of 1996 amended 
section 17(d)(1) by removing the requirement that State agencies 
provide an institution with technical assistance when the institution 
submitted an incomplete Program application. However, the elimination 
of the statutory requirement did not eliminate the State agency's 
responsibility to assist applicants; rather, it emphasized the 
institution's need to take primary responsibility for the initiation of 
its program.
    Accordingly, the Department proposes to amend current section 
226.6(b)(10) [proposed section 226.6(b)(1)(iv)] by removing the 
requirement that State agencies provide technical assistance to 
institutions submitting incomplete applications, and replacing that 
with language recommending that State agencies provide this assistance.
    Second, with regard to the law's requirement that State agencies 
notify an institution within 15 days of its submission of an incomplete 
application, we have observed that, as State agencies experience 
increased workloads and simultaneous staff reductions, it has become 
difficult for them to meet this requirement. Since the law has been 
amended to allow State agencies to take applications every three years, 
we now believe that it is necessary to provide State agencies with 
additional time to review all applications, and that the up-to-30-day 
period now prescribed by the law provides a more reasonable amount of 
time for State agencies to review the application to determine if it is 
complete and, if it is, to approve or deny it. Renewing institutions 
would, of course, continue to participate in the Program during the 
State agency's review of their application.
    Therefore, we proposed to amend section 17(d)(1) of the law by 
eliminating the requirement that State agencies notify institutions 
that their applications are incomplete within 15 days of receipt. This 
concept was included in the Administration's 1998 child nutrition 
reauthorization proposals and later incorporated in H.R. 3666. 
Ultimately, this concept was included in section 107(d) of Pub. L. 105-
336, which amended section 17(d)(1) to require that a State agency 
notify an institution of its approval or denial ``within thirty days 
after the date the complete application is received.'' Thus, a State 
agency has 30 days from its initial receipt of a complete application 
to either approve or deny the application. The conference report 
accompanying the bill (H. Report 105-786, October 6, 1998) encouraged 
State agencies to inform applicants as quickly as possible if their 
application is incomplete.
    Accordingly, this rule proposes to further revise current section 
226.6(b)(10) [proposed section 226.6(b)(1)(iv)] to allow States to 
notify applying institutions of their approval or disapproval within 30 
days of receiving a complete application.

II. State Agency and Institution Review and Oversight Requirements

What were OIG's recommendations for changes to the monitoring 
requirements?

    As discussed above, OIG's national audit of the family day care 
home component of CACFP made a number of recommendations for changes to 
the current State agency and sponsoring organization monitoring 
requirements. Among these were recommendations to require that:
     Some or all sponsor reviews of day care homes and State 
agency monitoring visits to homes be unannounced;
     Routine parental contacts be made as part of the State 
agency and sponsor monitoring of day care homes in order to verify 
children's Program participation;
     Sponsors and day care providers keep more detailed 
information on enrollment forms, including a record of each child's 
normal hours of care and normal places (i.e., at day care, school, or 
home) of receiving meals throughout the day;
     Minimum sponsor review requirements--including 
reconciliation of enrollment, attendance, and meal claim data--be 
established;
     Sponsors routinely perform certain ``edit checks'' on all 
meal claims submitted by their facilities; and
     Minimum standards for State agency review coverage be 
established.
    After the release of this national audit, OIG informally 
recommended that the Department:
     Address the matter of placing seriously deficient child 
care facilities (family day care homes and child care centers) on a 
list of seriously deficient facilities, much as the Department 
currently maintains a list of seriously deficient institutions; and
     Give State agencies explicit regulatory authority to limit 
the transfer of family day care home providers from one sponsoring 
organization to another.
    Finally, the ``Operation Kiddie Care'' audit made an additional 
recommendation related to sponsor monitoring--that the regulations 
prescribe a maximum number of family day care homes for which each 
sponsor monitor would have responsibility.

What is FNS's response to these recommendations?

    We largely concur with these recommendations and believe that their 
implementation will aid our ongoing efforts to improve Program 
management.

[[Page 55110]]

However, those audit recommendations which are now statutorily mandated 
as a result of the enactment of Pub. L. 106-224 (specifically, those 
dealing with unannounced visits, seriously deficient facilities, 
provider transfer limits, and sponsor monitoring staff) will be 
addressed in a second rulemaking.

Does FNS believe that OIG's recommended changes should apply to 
sponsored centers as well?

    Yes. Although OIG's 1995 audit and recommendations applied 
specifically to the family day care component of CACFP, many of these 
findings should be extended to sponsored centers as well. Portions of 
the ``Operation Kiddie Care'' audit pointed to problems with sponsored 
centers that, in our opinion, can be addressed by extending some of our 
regulatory proposals for home sponsors to sponsors of centers as well. 
In addition, the owner and director of a large sponsor of child care 
centers were recently convicted of fraud and other felonies for 
illegally obtaining millions of dollars from CACFP. Coupled with the 
fact that the center component of the Program still accounts for over 
40 percent of CACFP's annual expenditures of roughly $1.6 billion, this 
case and other recent review and audit findings demonstrate that there 
is a compelling need for better monitoring and controls in sponsored 
centers as well.

Will FNS propose a similar extension of the new monitoring requirements 
to independent centers or the adult day care component of CACFP?

    To date, we have not had significant audit or review findings which 
would indicate the existence of similar problems in these types of 
institutions. Therefore, we do not believe it is necessary to propose 
all of these changes for all types of institutions and facilities. The 
preamble and regulatory text will differentiate between those changes 
which we propose to apply to all facilities or institutions, and those 
which we propose to apply to a subset of institutions or facilities.

Aren't CACFP institutions facing new resource constraints? Won't they 
have difficulty implementing some of these proposed review 
requirements?

    Yes, many CACFP institutions face funding and resource constraints. 
For example, as a result of the enactment of Pub. L. 104-193, the 
Personal Responsibility and Work Opportunity Reconciliation Act of 
1996, sponsors of family day care homes were required to implement a 
new, two-tiered system of reimbursement to their providers. That system 
(which was implemented in an interim rule published at 62 FR 889 
(January 7, 1997) and further refined in a final rule published at 63 
FR 9087 (February 24, 1998)), went into effect on July 1, 1997, and 
required family day care home sponsoring organizations to engage in a 
broad range of new administrative responsibilities.
    The cumulative impact of this ``tiering'' system and the changes 
proposed in this rulemaking will be significant for some family day 
care home sponsoring organizations. Therefore, we believe that it is 
necessary to find ways to focus regulatory requirements pertaining to 
sponsors' reviews of their facilities to increase efficiency and 
improve Program compliance. Our proposals for changes to the current 
requirements pertaining to institution monitoring of sponsored 
facilities appear in Part II(F) of this preamble.
    Finally, we are also proposing other modifications to the current 
monitoring requirements for sponsored child care centers and outside-
school-hours care centers These changes are intended to streamline 
Program administration and to provide CACFP administrators with 
additional flexibility in the use of their monitoring resources. The 
proposed changes are also discussed in Part II(F) of this preamble.

A. Household Contacts

What did the OIG audit say about household contacts?

    OIG's audit of family day care home sponsoring organizations 
revealed that fewer than one in six currently make parental contacts a 
part of their normal provider reviews. They recommended that household 
contacts be made a routine part of a sponsoring organization and/or 
State agency's review protocols in order to confirm their child's 
enrollment and attendance, and the specific meals routinely received by 
the child, at the family day care home being reviewed. Such contacts 
can serve to establish the accuracy and completeness of the provider's 
claims for reimbursement by identifying providers who inflate meal 
claims, either by claiming meals for a child not in attendance or by 
claiming service of a particular meal at times of the day when the 
child is not in care (e.g., the child routinely eats breakfast at 
school or at home, not at the day care home).

Is USDA proposing to require that sponsoring organizations or State 
agencies make household contacts?

    Only under certain specific circumstances.
    We do not agree that household contacts should be made routinely. 
In addition to being extremely time-consuming when it proves difficult 
to contact a household, we have concerns regarding the privacy of 
households with children in care and the efficacy of using this 
technique on a routine basis. Since households with children in care 
rarely have contact with representatives from the sponsoring 
organization, it seems less likely that they would be willing to 
respond to telephone inquiries regarding their children's care 
arrangements.
    At the same time, we are deeply concerned with OIG's finding that 
``block claiming'' (i.e., claiming the same number and type of meals 
served every day) by child care facilities often goes unchallenged by 
their sponsoring organizations. We therefore believe that, in order to 
deter the type of fraud documented in recent audits and investigations, 
it is necessary to propose that, under certain circumstances, household 
contact be a required part of sponsoring organization and State agency 
reviews of child care facilities.

Under what circumstances does USDA propose to require that sponsoring 
organizations make household contacts?

    We propose to require that, when facilities claim the same number 
and type of meals served for ten or more consecutive days, or claim an 
unusually high number of meals for more than one day in a claiming 
period, sponsoring organizations contact at least one half of the 
households of children in care at that facility (not including family 
day care providers' households when their children are in care) for the 
purpose of verifying their children's enrollment and attendance and the 
specific meal service(s) which those children routinely receive in 
care.
    We realize that using this 10-day claiming ``trigger'' could alert 
unscrupulous providers, and cause them to ``block claim'' their meals 
for a period of less than 10 days. We are therefore proposing 
additional language which encourages sponsoring organizations to 
utilize household contacts whenever they note suspicious claiming 
patterns by their sponsored facilities, and not only in the two 
circumstances described above which require household contacts.
    Accordingly, we propose to add a new paragraph, Section 
226.16(d)(5) entitled ``Household Contacts'', which specifies the 
circumstances under which sponsoring organizations would be required to 
contact one-half of the households of children in care in a sponsored 
facility, excluding the

[[Page 55111]]

provider's household in a family day care home. This paragraph would 
also encourage the use of household contacts whenever sponsors note 
suspicious claiming patterns by their facilities.
    We further propose to require that sponsoring organizations observe 
the following guidelines in making household contacts:
    (1) Household contacts should be made in writing or by telephone. 
If a sponsor chooses to contact a household by telephone, it would be 
required to first notify the household in writing that they should 
expect a call from a particular sponsor employee for the purpose of 
verifying their children's receipt of meals in day care. This notice 
would also provide written assurance that any information provided will 
be confidential and that the sponsor will only use the information for 
Program purposes.
    We believe that these precautions will help to address possible 
parental concerns regarding the provision of information about their 
child's day care schedule, and will also allow the sponsoring 
organization some flexibility in determining which method of household 
contact is likely to yield a higher and more accurate rate of response. 
Public Law 106-224 requires that households with children in CACFP-
supported child care facilities receive information about CACFP, along 
with the name and address of the sponsor and State administering 
agency, from either the sponsor or the facility. Prior receipt of this 
information should help parents understand that their provider receives 
Federal reimbursement for meals served to their children, and that that 
may be contacted by the State or local administering agency to verify 
their children's participation and attendance. The requirement to 
inform parents about CACFP will be addressed in a subsequent rule which 
addresses the changes mandated by ARPA.
    (2) If contact cannot be made with one-quarter of the selected 
households in a center or with all of the selected households in a 
family child care home, or if any of the households in the sample fails 
to support the validity of the provider's claim, the sponsoring 
organization must make an unannounced visit to the sponsored center or 
home within one week, in order to review the validity of the facility's 
meal counting and claiming procedures.
    Although Public Law 106-224 mandated the use of unannounced visits 
by sponsoring organizations, it did not specifically consider the use 
of unannounced visits as a way of ``following up'' on the results of 
household contacts. We believe, however, that the use of an unannounced 
visit under this circumstance will be an effective means of 
establishing the validity of a provider's, or a sponsored center's, 
monthly claim.

What if households do not respond to the written or telephone 
inquiries? How will the sponsor meet its requirement to contact a 
particular number of households if some households refuse to respond?

    We recognize that parents may not respond to the sponsor's inquiry 
and that, in cases of ``ghost children'' (i.e., fictitious children), 
no parent exists to be contacted. Thus, in some cases, factors beyond 
the sponsoring organization's control would prevent it from contacting 
the requisite number of households. Therefore, this rule will propose 
to count an unsuccessful contact toward meeting the required number of 
households to contact if the sponsoring organization makes two 
documented attempts at contact over a two-week period. Because the 
household contact requirement was triggered by a suspicious meal 
claiming pattern, we would still require that an unannounced visit take 
place if a center sponsor could not contact one-quarter of the selected 
households in their sample, or if a home sponsor could not contact all 
of the households in its sample.
    Accordingly, this rule further proposes to add to Section 226.2 a 
definition of ``household contact'' and to further amend new Section 
226.16(d)(5). Both of these sections would require adherence to the 
procedures described in the paragraphs above whenever household 
contacts are utilized.

How many households will a sponsoring organization usually be required 
to contact?

    It depends on the type of facility which the organization sponsors.
    In the case of sponsoring organizations of family day care homes, 
the average CACFP home serves only seven or eight children, including 
the provider's own (Source: ``Early Childhood and Child Care Study'', 
1997). Excluding the provider, a requirement to contact one-half of the 
households of children in care would usually entail contact with 
between two to three households, depending on the number of provider's 
children in care and the number of households with more than one child 
in care at the home.
    In the case of sponsored CACFP child care centers, which average 
about 66 enrolled children (Source: ``Early Childhood and Child Care 
Study'', 1997), the requirements for household contact would probably 
be in the neighborhood of 15-20 households, again depending on the 
number of households with more than one child in care at the center. 
However, this increased workload is commensurate with the increased 
risk of Program abuse and financial loss to the government if a center 
is not accurately reporting its meal claims.

Under what circumstances does USDA propose to require that State 
agencies make household contacts?

    This rule also proposes to require that State agencies include some 
level of parental contact in their reviews of sponsored day care homes 
or centers when, as part of their review of the sponsoring 
organization's records, they detect block claiming or inordinately high 
meal counts. As with the household contact requirement described for 
sponsors in the preceding paragraphs, we are proposing that State 
agencies be required to contact one-half of the households of children 
in a sponsored child care facility (excluding the provider's own 
children in a family day care home) when one of these claiming patterns 
is detected. The purpose of this requirement would be to deter 
fraudulent claims for ``ghost'' children by providers, centers, or 
sponsors, a practice found by OIG in a disturbing number of its audits. 
Like sponsoring organizations, unannounced State agency visits to the 
facility would be triggered if one-quarter of the households selected 
in a sponsored center, or any of the selected households in a family 
day care home, could not be contacted, or if any of the households 
contacted failed to corroborate the facility's meal claim. We propose 
that the procedures for the conduct of household contacts by a State 
agency be identical to those described above for household contacts 
made by sponsoring organizations. Finally, in order to ensure that 
sponsors are properly implementing these requirements, this rule also 
proposes that State agencies be required to include a review of a 
sponsor's records of household contact as part of its normal review of 
a sponsor.

Would State agencies also be required to conduct household contacts if 
suspicious claiming patterns were discovered in an independent center?

    Yes. Although OIG attention has focused on sponsoring organizations 
and their facilities, the same potential for improper claiming exists 
among

[[Page 55112]]

independent centers. If a State agency review or its edit check of a 
claim reveals block claiming or an unusually high meal claim for one or 
more days, this will also trigger a requirement for household contact 
by the State agency.
    Accordingly, this rule would further amend proposed sections 
226.6(l)(2) and 226.6(l)(4) by adding the requirement that State agency 
reviews of institutions include a review of the institution's conduct 
of household contacts. This rule proposes to further amend section 
226.6(l)(4) to require that State agencies make household contacts 
under the same circumstances, and utilizing the same procedures, as 
those described for sponsoring organizations.

B. Enrollment Forms

What are the current regulatory requirements pertaining to children's 
enrollment forms?

    Current regulations at sections 226.15(e)(2) and (3) require that 
each institution keep a record of each child's enrollment and copies of 
all income eligibility forms used to establish a child's eligibility 
for free or reduced price meals in child care centers or tier I 
reimbursements in mixed tier 2 family day care homes. Current section 
226.16(a) specifically extends these requirements to sponsoring 
organizations, while sections 226.17(b)(7), 226.18(b) and (e), 
226.19(b)(8), and 226.19a(b)(8) state that child care centers, family 
day care homes, outside-school-hours care centers, and adult day care 
centers, respectively, must maintain documentation of enrollment for 
each Program participant.

What did the OIG audit find regarding enrollment forms?

    In its audit of family day care homes, OIG noted several serious 
problems related to the information contained on enrollment forms. The 
most serious of these involved inaccurate meal counts for breakfasts 
and suppers. OIG noted that daily meal counts were often inflated by 
claiming that children regularly received a breakfast or supper in care 
when, in fact, that meal was normally received elsewhere. In addition, 
OIG noted that, in many of the family day care homes reviewed, 
enrollment forms which parents are required to complete when their 
child enters care were often inaccurate, out-of-date, or incomplete. 
The audit attributed these problems to shortcomings in the current 
regulatory requirements pertaining to enrollment forms.

What regulatory changes did the OIG audit recommend?

    The audit noted that there is no current requirement that 
enrollment forms be updated on a regular basis or that they contain an 
indication that the child's parents have seen the form and verified its 
accuracy. OIG also noted that other useful information--such as a 
record of each child's normal hours of care and the place (i.e., at day 
care, school, or home) where each child normally receives each meal 
service throughout the day--is not required to be on the enrollment 
forms. The audit recommended that enrollment forms be updated annually, 
be signed by parents, and include information which would enable 
reviewers to verify the number of children enrolled and in attendance 
at the home, and the number and type(s) of meals normally consumed by 
each child.

What action has the Department taken in response to these 
recommendations?

    To address these concerns, we have developed and distributed to 
State agencies an optional prototype enrollment form to be signed by 
the child's parent or guardian and updated at least annually. The 
prototype includes information not currently required on the enrollment 
form, such as normal days and hours of care and the meals to be 
received at the family day care home and at school, where applicable.
    Although this rule does not propose requiring that this prototype 
be used, it does require that all enrollment forms capture certain 
information which will allow reviewers to compare the data on the 
enrollment forms to attendance records and meal claims. Specifically, 
this rule proposes to require that the enrollment form include the 
child's normal hours in care and the meals usually received in care by 
that child, and that the form be updated annually and signed by a 
parent at each update. We believe that requiring this information on 
all enrollment forms will improve Program management by facilitating 
reviewers' comparison of current enrollment against attendance records 
and meal claims. In addition, based on the findings of recent audits 
and investigations, we believe that these new requirements should also 
be extended to enrollment forms kept on file for children in child care 
centers.
    Accordingly, we propose to amend sections 226.15(e)(2) and (3) to 
require that all enrollment forms be signed by a parent, be updated 
annually, and include information on each child's normal days and hours 
of care and the meals normally received in care. We are also proposing 
that identical changes regarding the content of enrollment forms be 
added to sections 226.17(b)(7), 226.18(e), and 226.19(b)(8)(i). 
Finally, this rule proposes to amend the first sentence of section 
226.18(e) to clarify that family day care homes, like all other types 
of facilities participating in the Program, must retain enrollment 
records for each child in care.

C. Standard Review Elements Required for Sponsor Review of 
Facilities

What are the current regulatory requirements pertaining to sponsor 
monitoring?

    Current regulations at section 226.16(d)(4) require sponsors to 
review centers or homes at least three times per year, but do not 
specify the areas to be covered during the review.

What were OIG's general suggestions regarding sponsoring organization 
monitoring requirements?

    In addition to the recommendations for unannounced visits and 
household contacts discussed above, OIG also made three more general 
suggestions intended to improve sponsor monitoring of family day care 
homes:
     Requiring that each sponsoring organization review of a 
family day care home cover certain basic elements of Program management 
(such as recordkeeping, attendance at training, and menus), including a 
reconciliation of enrollment and attendance records with provider meal 
claim data;
     Requiring each sponsoring organization to hire enough 
staff to adequately perform the monitoring function, and to express 
``adequate monitoring staff'' in terms of a number of homes which a 
monitor could reasonably be expected to oversee; and
     Using routine computerized or manual edit checks to detect 
errors when processing their facilities' monthly meal claims.
    The first of these recommendations is addressed in this section of 
the preamble, while the third is addressed in section II(D) below. It 
should be noted with respect to the first of these recommendations 
that, although FNS Instruction 786-5, Rev. 1 (``Provider Claim 
Documentation and Reconciliation'', November 8, 1991), establishes that 
sponsoring organizations should reconcile meal claims submitted by 
family day care home providers with enrollment and attendance records, 
it does not establish how often such reconciliations should be done; 
does not require that they be part of the normal review process; and

[[Page 55113]]

does not state that they should be utilized in reviews by sponsors of 
child care centers.

What has USDA done in response to the recommendation concerning the 
second OIG recommendation: that USDA establish staffing standards for 
the monitoring function performed by sponsoring organizations of family 
day care homes?

    Because that recommendation is also included among the statutory 
changes required by Pub. L. 106-224, it will be addressed in a separate 
rulemaking which will include other changes required by the new law.

What has USDA done in response to the recommendation concerning 
standard review elements?

    We have developed separate optional prototype forms for use by 
sponsoring organizations in monitoring their sponsored family day care 
homes and child care centers. Before the development of these prototype 
review forms, there was only one prototype review form (FNS 345-1) for 
all facilities participating in CACFP. Based on input from OIG and 
Program administrators, we have concluded that the current review form 
is not sufficient to identify inflated meal counts and other 
significant Program problems. The 1995 audit recommended that a more 
detailed prototype be developed which would detect material Program 
weaknesses at child care facilities.
    Although this proposed rule does not require CACFP sponsors to 
employ the prototype review forms, we have made the forms available to 
State agencies and will require that, if State agencies or sponsors 
wish to develop different review forms, they include, at a minimum, a 
review of compliance with Program requirements pertaining to licensing 
or approval; health, safety and sanitation; attendance at training; day 
of review meal service; meal counts; meal pattern requirements; and 
menu and meal records. In addition, we propose to further amend section 
226.16(d)(4)(i) to require that each review of a sponsored facility 
include an assessment of whether the facility has corrected problems 
noted on the previous review(s).
    With regard to the recommendation for reconciliation of meal claims 
with attendance and enrollment records, this rule proposes to require 
that each on-site review include a thorough examination of the meal 
claims recorded by the facility for at least five days of operation 
during the current or previous claiming period. For each day examined, 
reviewers must use enrollment and attendance records to determine the 
number of children in care during each meal service and to compare 
these numbers to the numbers of breakfasts, lunches, suppers, an/or 
supplements claimed for that day. Based on that comparison, the 
reviewers must determine whether the claims were accurate. If there is 
a discrepancy between the number of children enrolled or in attendance 
on the day of review and prior claiming patterns, the reviewer must 
attempt to reconcile the difference and determine whether the 
establishment of an overclaim is necessary. In addition, after the on-
site review has been conducted, the sponsoring organization must 
analyze the review findings to determine whether household contacts, as 
defined in the proposed definition at section 226.2, should be 
initiated to determine the validity of providers' previous meal claims. 
As with other proposed changes, we also believe that these changes 
should be applied to sponsors of child care centers as well as to 
sponsors of family day care homes.
    Accordingly, we propose to further amend section 226.16(d)(4)(i) to 
require that sponsors' reviews of child care facilities include an 
assessment of: licensing or approval; health, safety and sanitation; 
attendance at training; day of review meal service; meal pattern 
requirements; menu and meal records; and compliance with the 
requirements pertaining to the annual update and content of enrollment 
forms. A facility review must also include a thorough examination of 
the facility's meal claims and a determination, based on the procedures 
described above, of whether the claims were accurate. In addition, we 
propose to further amend section 226.16(d)(4)(i) to require that each 
review of a sponsored facility include an assessment of whether the 
facility has corrected problems noted on the previous review(s).

Does this rule propose any additional changes to the requirements 
governing the content of sponsoring organizations' reviews?

    Yes. We are proposing two additional changes to clarify the minimum 
requirements for sponsors' reviews of facilities.
    The first change would require that at least one of the sponsor's 
annual visits include the observation of a meal service. We understand 
that many States and sponsoring organizations already include the 
observation of a meal service in all facility reviews. By proposing 
this requirement, we do not wish to discourage this practice. However, 
this proposed requirement will ensure that all sponsors observe at 
least one meal service per year at each facility and will provide 
additional scheduling flexibility to sponsors which are conducting more 
in-depth facility reviews . This proposal underscores our desire to 
ensure that the nutritional, as well as the fiscal, integrity of the 
meal service is being properly monitored.
    Accordingly, we propose to further amend section 226.16(d)(4)(iii) 
by adding the requirement that at least one review per year at each 
sponsored facility include the observation of a meal service.
    Second, we are proposing a slight alteration to the current 
requirements regarding meal counts. The current regulations at section 
226.15(e)(4) require institutions to keep ``[d]aily records indicating 
the number of participants in attendance and the number of meals, by 
type (breakfast, lunch, supper, and supplements) served to 
participants.'' However, this requirement has been broadened in FNS 
Instruction 796-2 (``Financial Management--Child and Adult Care Food 
Program'') to require that ``point of service meal counts'' be taken in 
all child care facilities. Although we believe that point of service 
counts are crucial for the conduct of institutional meal service in 
schools, they are not really feasible in all child care facilities. For 
child care centers, we propose to require that meal counts be taken at 
the time of meal service; for family day care homes, which serve meals 
to a limited number of children whose attendance varies only slightly 
from day to day, counts may be taken either at the time of meal service 
or at another time during the day.
    This clarification is being proposed in recognition of the 
realities of conducting home-based day care. The needs of the children 
in home-based child care are often more immediate and compelling than 
the need to record a meal count, meaning that it may not be feasible 
for a day care home provider to record meal counts at the time of meal 
service. Centers, on the other hand, generally conduct meal service in 
a way which facilitates time-of-service counting. Any delay in taking 
the meal count in a center would inevitably lead to estimates and 
errors due to the larger number of children typically being served. At 
the same time, we wish to strongly emphasize the need to require that, 
at a minimum, day care home providers record meal counts on a daily 
basis. One of the most serious and persistent problems noted by OIG was 
a failure to record meal counts until a full week, or even a month, 
after the fact. Therefore, we also wish to re-emphasize

[[Page 55114]]

to sponsor and State agency reviewers of day care homes that meals 
served prior to the day of review must be disallowed for reimbursement 
when they have not been recorded as of the day of review.
    Accordingly, we are proposing to amend sections 226.11(c)(1), 
226.15(e)(4), and 226.17(b)(8) to require time of service meal counts 
in child care centers. No change is proposed to section 226.18(e), 
which requires daily meal counts in family day care homes, but the 
Department does propose to explicitly require daily meal counts for 
family day care homes at sections 226.13(c) and 226.15(e)(4). The 
Department will later revise FNS Instruction 796-2 to clarify that 
daily meal counts (not point of service counts) are required in family 
day care homes and that meals served prior to the day of review may not 
be included in the claim for reimbursement when they have not been 
recorded by the time that the review is conducted.

D. Meal Claim Edit Checks

What regulatory requirements now exist to help ensure that the claims 
being submitted by facilities accurately reflect their actual meal 
service?

    Section 226.10(c) of the current regulations requires all 
institutions to report claims information in accordance with the State 
agency's financial management system and in sufficient detail to 
justify the amount of reimbursement claimed. However, these regulations 
establish no specific procedures which sponsors must utilize to 
determine the validity of facility claims, or which State agencies must 
utilize to determine the validity of institutions' claims.

What are edit checks?

    Edit checks are methods of comparing the information that appears 
on a claim for reimbursement with other information about the claiming 
facility's normal operations (e.g., enrollment, attendance, approved 
meal types) in order to help determine the claim's validity. An edit 
check by itself may identify erroneous claims, but more often will 
identify claiming patterns which raise ``red flags'' for those 
reviewing the claim (that is, areas calling for a closer examination 
and followup prior to payment of the claim). For example, one common 
edit check would be to compare the total number of meals claimed by a 
facility to the product of the number of children enrolled at the 
facility, times the number of serving days in the month, times that 
facility's number of approved meal services per day.

What were OIG's findings regarding claim edit checks?

    OIG's audit of the family day care home component found that very 
few sponsoring organizations make use of claim edit check techniques. 
In several cases, day care homes routinely claimed the maximum number 
of meals for each child each month, or regularly claimed weekend meal 
service, without being questioned or reviewed by their sponsor. In most 
other cases, sponsors performed a single edit check (e.g., comparing 
meals claimed against enrollment) which was not sufficient to detect 
many significant errors in the claiming process.

What is the Department doing in response to this finding?

    We share OIG's concerns. Therefore, we are proposing that sponsors 
be required to perform routine edit checks of monthly claims prior to 
submitting their consolidated claim to the State agency for payment.
    Specifically, we are proposing that sponsoring organizations be 
required to perform edit checks in order to detect and minimize 
inaccurate or fraudulent meal claims. Edit checks must:
     Verify that the facility has been approved to serve the 
types of meals claimed;
     Compare the number of children enrolled for care (taking 
an expected rate of absences into account) to the number of meals 
claimed; and
     Detect block claiming (i.e., no daily variation in the 
number of meals claimed).
    Edit checks must be performed for every day meals are claimed by a 
facility. Meal claims which cannot be reconciled with enrollment 
(taking an expected rate of absences into account) must be subjected to 
more thorough review to determine if the meal claims were accurate. The 
expanded amount of enrollment information proposed in Part II(B) of 
this preamble will allow sponsoring organizations to perform the meal 
claim edit checks which this rule proposes to require. In addition, we 
encourage State agencies to develop, and require the use of, any other 
edit checks they deem appropriate.
    In summary, this rule proposes to require two types of meal claim 
reviews:
     The five-day reconciliation of claims to enrollment and 
attendance data which will be accomplished during an on-site review, 
and which may be followed up with household contacts by the sponsoring 
organization; and
     The monthly meal claim edit checks performed by the 
sponsor when preparing its consolidated claim for reimbursement, and 
which will often be part of the sponsor's automated claims processing 
system.
    Both of these meal claim reviews will help to identify and resolve 
potential problems in facilities' meal claiming patterns. These 
internal controls in the payment process are being proposed in order to 
curtail the type of routine over-claiming of meals which OIG has 
reported in both of its national audits.
    Thus, this rule proposes to require that the reconciliation of meal 
counts against enrollment and attendance occur during on-site facility 
reviews, as discussed in section II(C) of this preamble, and whenever 
sponsors analyze their facilities' monthly meal counts as part of the 
sponsoring organization's claims preparation process. This system of 
internal controls in the payment process is necessary in order to 
curtail the inappropriate payments identified in the OIG audit and in 
other recent audit and review activity. Because many sponsors utilize 
computerized claim processing, and some will need to update their 
systems to reflect these proposed requirements, the final rule 
implementing this change would provide for some period of time during 
which sponsoring organizations could reprogram their claims payment 
systems.
    Accordingly, we propose to amend sections 226.10(c), 226.11(b), and 
226.13(b) to require that, prior to submitting their consolidated 
monthly claim to the State agency, sponsoring organizations compare 
facilities' meal claims against the most recent information on 
enrollment, licensed capacity, total days of operation, attendance 
patterns, and authorized meal services, for each meal type being 
claimed on each day of operation.

Are State agency edit checks of institutions' claims needed as well?

    Yes. Management evaluations have recently revealed several 
instances in which State agencies lack edit checks when processing 
institutions' monthly claims. In one instance, a State agency had made 
payments for suppers served when no facilities sponsored by that 
institution were approved to serve suppers. In another instance, the 
total number of meals claimed by an institution and paid for by the 
State agency in that month exceeded the product of operating days times 
children times approved meal types. For that reason, we believe it is 
also necessary for State agencies to employ edit checks when processing 
institutions' claims.

[[Page 55115]]

What are USDA's proposals regarding State agency edit checks?

    At a minimum, State-level edit checks should ensure that payments 
are made only for authorized meal types, and that increases in the 
number of facilities claiming meals, or the total number of meals being 
claimed, are consistent with the sponsoring organization's report of 
new facilities entering the Program and the number of serving days in 
the month (Note: section 226.16(b)(2) and (3) require sponsoring 
organizations to submit to the State agency an application to 
participate, as well as documentation of licensure or approval, for 
each child and adult care facility which it sponsors).
    We recognize that not all family day care homes claim Program meals 
each month, and that there will therefore be a normal monthly 
fluctuation in the number of meals being claimed by a sponsor. 
Nevertheless, it is reasonable to require that State agencies establish 
certain ``flags'', or indicators, in their automated claims processing 
systems which will alert them to the possibility of erroneous claims 
and trigger further efforts by the State agency to establish the 
claim's accuracy.
    Accordingly, we are proposing to revise section 226.7(k) to require 
State agencies to establish and utilize edit checks when processing 
claims.

E. Minimum State Agency Review Elements

What are the current regulatory requirements pertaining to State agency 
reviews of institutions?

    The current regulations governing State agency reviews of 
institutions are located at section 226.6(l). This section addresses 
the frequency of State agency reviews and requires that they ``assess 
institutional compliance with the provisions of this part and with any 
applicable instructions of FNS and the Department.'' However, current 
regulations do not specify the broad subject areas to be examined in 
these reviews, nor do they mandate any specific tests to determine the 
validity of meal claims.

What were OIG's findings and recommendations regarding State agency 
monitoring requirements?

    OIG found that State agencies' reviews of family day care home 
sponsoring organizations and day care home providers ``generally did 
not include sufficient tests to identify recordkeeping deficiencies and 
inflated meal claims, and to assess the adequacy of sponsor monitoring 
of [day care homes].'' We believe it is necessary to propose changes to 
existing review requirements in order to ensure a consistent, minimum 
national standard of State-level review of institutions.

What has USDA done in response to these recommendations?

    We have developed new prototype forms for State agency review of 
child care institutions (sponsoring organizations, independent child 
and adult care centers, independent outside-school-hours care centers, 
and proprietary title XIX and XX centers). These forms include sections 
covering required Program documents on file, facility licensing or 
approval, meal counts, administrative costs, sponsor training and 
monitoring of facilities, observation of meal service, and other 
Program requirements. This rule does not propose requiring State 
agencies to utilize these particular forms in conducting their reviews 
of participating institutions. However, State agencies will need to 
review their forms in order to ensure that the new minimum review 
requirements are captured on their review forms.
    Accordingly, we propose to further amend section 226.6(l)(3) to 
require that each State agency review of an institution also include 
State review of a sample of sponsored facilities in order to compare 
enrollment records, attendance records, and day-of-review meal counts 
observed during sponsor reviews to meal counts submitted by the 
facility on its monthly claim. In addition, this rule proposes to 
require that State agency reviews of institutions include a review of: 
required Program documents on file; documentation of facility licensing 
or approval; meal counts; administrative costs; sponsor training and 
monitoring of facilities; and observation of meal service.

F. Review Cycle for Sponsored Facilities

What are the current requirements for sponsoring organization review of 
facilities?

    The current regulations at section 226.16(d)(4) establish the 
requirements for sponsoring organization reviews of their facilities. 
Specifically, the regulations establish separate minimum requirements 
for facility reviews by sponsors of child and adult day care centers, 
family day care homes, and outside-school-hours care centers.
    The current regulations governing the review of sponsored centers 
and homes are similar in most respects. Both require that:
     The sponsored facility (except for outside-school-hours 
care centers) be reviewed three times per year;
     No more than six months elapse between reviews; and
     New facilities be reviewed during the early stages of 
their operation.
    However, there are some differences in the current requirements for 
reviewing different types of sponsored facilities:
     New homes are currently required to be reviewed in their 
first four weeks of operation, whereas new sponsored centers are to be 
reviewed during their first six weeks of operation;
     With State agency approval, sponsoring organizations of 
family day care homes are currently permitted to review each home an 
average of three times per year, meaning that they may devote a greater 
share of their review resources to the review of new or problem day 
care home providers, provided that the average number of annual visits 
per home is at least three. This allows family day care home sponsors 
more flexibility than sponsors of centers; and
     Sponsored outside-school-hours care centers are required 
to be reviewed six times per year although the Department on January 
11, 1993, issued guidance reducing this to three times per year for 
school-sponsored outside-school-hours care centers.

What changes are being proposed in this rule?

    We believe that different requirements for reviews of different 
types of sponsored facilities are not warranted. We are therefore 
proposing that sponsoring organizations of any type of facility be 
required to:
     Review each of its sponsored facilities three times per 
year;
     Allow no more than six calendar months between reviews; 
and
     Review each new facility within its first four weeks of 
Program operation.
    We also believe that all sponsoring organizations (not just 
sponsors of family day care homes) should have greater flexibility in 
their conduct of reviews. Due to the additional sponsor 
responsibilities being proposed in this rule, and the new 
administrative requirements resulting from the implementation of 
``tiering'' in the family day care component of the Program, we believe 
that sponsors need greater flexibility in order to better target and 
utilize their monitoring resources. We are therefore proposing that, if 
two facility reviews in a review cycle have been conducted without 
uncovering substantive problems (e.g., non-compliance with the meal 
pattern,

[[Page 55116]]

missing or inaccurate meal counts, submission of inaccurate claims, 
failure to keep required records, or a provider's unexplained absence), 
the sponsor should have the option of either not conducting a third 
review of that facility or of using the third review solely as an 
opportunity to conduct training at the facility. We also propose that 
sponsoring organizations be allowed to employ this option without State 
agency approval, provided that the average number of annual visits per 
home is three. This proposed change will allow sponsoring organizations 
the flexibility to target their reviews to newer facilities or 
facilities with a history of operational problems, as they see fit, 
while ensuring that there is no reduction in the sponsor's overall 
monitoring efforts.
    Accordingly, we propose to further amend section 226.16(d)(4) to:
     Make uniform the basic requirements for sponsors' review 
of all of their child and adult care facilities, regardless of the type 
of facility being reviewed;
     Permit sponsors to waive a third review at a facility, or 
to use the third review solely for on-site training, if the sponsor has 
conducted two reviews of the facility during the review cycle without 
discovering substantive problems; and
     Allow all sponsors to conduct an average of three reviews 
per facility per year across their sponsorship (i.e., the third review 
at one facility could be deferred in favor of performing an additional 
review at a facility experiencing more Program problems).

G. Disallowing Payment to Facilities

What were OIG's recommendations with regard to disallowing payments to 
facilities?

    The OIG audit of the family child care component of CACFP found 
that, in some instances where a provider had submitted claims for 
reimbursement for meals served to absent or nonexistent children, they 
still received Program payment for these meals. The audit stated ``that 
State agencies and sponsors may be reluctant to disallow payments and/
or request repayment of total meal claims made during a period when it 
was determined that a [day care home] * * * claimed meals 
[fraudulently] for absent and/or nonexistent children'' due to the 
wording of the current regulations at section 226.10(f). That section 
states that, ``If a State agency has reason to believe that an 
institution or food service management company has engaged in unlawful 
acts with respect to Program operations, evidence found in audits, 
investigations, or other reviews shall be a basis for non-payment of 
claims for reimbursement.'' According to OIG, this passage's failure to 
mention child and adult care facilities, as well as institutions and 
food service management companies, discouraged some State agencies and 
sponsors from withholding or recovering funds which had been improperly 
paid to facilities.
    We believe that State agencies and sponsors of child or adult care 
centers and/or day care homes clearly possess the authority to deny 
payment for improper claims, either at the time of submission or 
retroactively, in accordance with the sponsor-facility agreement, which 
requires the facility to operate the CACFP in accordance with Program 
regulations. When meals are served which do not conform to Program 
requirements, or when inaccurate claims are submitted, the State agency 
and sponsor have the authority and the responsibility to disallow 
payment for those meals.
    Nevertheless, we are aware that some State appeals officers are 
reluctant to uphold disallowances when the regulations do not 
specifically require such action on the part of the administering 
agency. This may be the case in section 226.10(f), which specifically 
mentions ``institutions and food service management companies'' without 
mentioning facilities.
    Therefore, we are proposing to amend section 226.10(f) to specify 
that facilities participating in CACFP shall have claims denied when 
audits, investigations, or other reviews reveal that they have claimed 
meals for absent or nonexistent children, claimed meals which did not 
meet the meal pattern, or otherwise engaged in unlawful acts with 
respect to Program operations.

H. Change to Audit Requirements

What change is the Department proposing?

    We are updating the language of the regulations at section 226.8(a) 
to reflect recent changes to government-wide auditing rules.

What are the changes to these government-wide auditing rules?

    The current regulations at section 226.8(a) state that, unless 
exempt, State-and institution-level audits must be carried out in 
accordance with Office of Management and Budget (OMB) Circulars A-128 
and A-110 and with 7 CFR Part 3015, the Department's Uniform Federal 
Assistance Regulations. However, audit requirements for States, local 
governments, and nonprofit organizations can now be found in OMB 
Circular A-133, ``Audits of States, Local Governments, and Non-Profit 
Organizations'', and the Departmental regulations at 7 CFR Part 3052. 
These requirements apply to audits of State agencies and institutions 
for fiscal years beginning on or after July 1, 1996.
    Accordingly, we propose to update the references at section 
226.8(a).

What, if any, substantive changes have occurred in the audit 
requirements for State and local governments and for private nonprofit 
organizations?

    State agencies have already been informed of these changes. The 
most significant changes involved the threshold for the conduct of 
audits, which was raised from $25,000 to $300,000 and the express 
prohibition on using Federal funds for audits not required by 7 CFR 
Part 3052. That means that, if an institution expended less than 
$300,000 in total Federal resources (which includes both CACFP 
operating and administrative reimbursements, as well as the value of 
USDA commodities), it is now exempt from the Federal requirement to 
have an organization-wide audit or, in some cases, a program-specific 
audit.
    In addition, the Department is proposing two changes to sections 
226.8(b) and (c) which will bring those sections into conformance with 
the Department's regulations at 7 CFR Part 3052. Specifically, we 
propose to revise the language at section 226.8(b), which describes the 
circumstances under which a State agency may make a portion of audit 
funding available to institutions for the conduct of organization-wide 
audits, to reference the new Departmental regulations governing such 
funds use. Also, we propose to revise the language at section 226.8(c), 
which describes the circumstances under which the State agency may use 
audit funds for program-specific audits, to clarify that the funds may 
also be used for agreed-upon procedures engagements, as described at 7 
CFR Part 3052.230(b)(2).

What rules govern audits for proprietary institutions?

    The current regulations state that proprietary (for-profit) 
institutions not subject to organization-wide audit requirements must 
be audited by the State agency at least once every two years. Our 
policy has been to exempt proprietary institutions from this 
requirement if they received less than $25,000 per year in Federal 
Child Nutrition Program funds. Institutions were (and still are) also 
required to comply with the audit requirements of all other Federal 
departments or

[[Page 55117]]

agencies from which they receive funds or other resources.
    Now, Departmental regulations at 7 CFR Part 3052.210(e) provide 
State agencies with the authority to establish audit policy for 
proprietary institutions. Given the cost of these audits, we believe 
that States should raise the audit threshold for proprietary centers 
above the previously-established $25,000 figure.
    Accordingly, we propose to further amend section 226.8(a) with 
regard to audits of proprietary institutions; to amend the language at 
section 226.8(b) to include references to Departmental regulations 
governing the funding of organization-wide audits; and to amend the 
language at section 226.8(c) to clarify that 1\1/2\ percent audit funds 
may also be used for agreed-upon procedures engagements, as described 
at 7 CFR Part 3052.230(b)(2).

I. Income Eligibility of Family Day Care Home Providers Based on 
Food Stamp Participation

What did the Operation Kiddie Care audit reveal regarding family day 
care home providers claiming income eligibility on the basis of food 
stamp participation?

    The Operation Kiddie Care audit also uncovered problems regarding 
the CACFP participation of family day care home providers whose income 
eligibility is based on participation in the Food Stamp Program. OIG 
sampled 24 providers in two States who claimed reimbursement for meals 
served to their own children based on their food stamp participation 
(NOTE: These findings were developed by OIG prior to the July 1, 1997, 
implementation of the two-tiered reimbursement system for family day 
care home providers). Of these 24 providers, OIG determined that 14 had 
not revealed, or had understated, their self-employment income from 
providing child care. In these cases, the provider either should have 
received a lower food stamp allotment, or would have been ineligible to 
receive food stamps at all. In some cases, this would also have 
prevented them from claiming reimbursement for meals served to their 
own children in CACFP.
    Since the implementation of tiering, the fiscal consequences of 
underreporting child care income are potentially far greater. Providers 
qualify to receive Tier I rates for reimbursable meals served to all 
children in their care if they live in an eligible, low-income area, or 
if their household income is at or below 185 percent of the Federal 
income poverty guidelines. Providers claiming income eligibility on the 
basis of food stamp participation are only required to provide their 
name and food stamp case number to their sponsor in order to receive 
the higher, Tier I benefit for all children in their care. Furthermore, 
although sponsoring organizations are required to verify the 
information submitted by providers claiming Tier I eligibility based on 
income, there are no verification requirements, per se, for a provider 
claiming eligibility on the basis of food stamp participation. 
Therefore, if providers are improperly receiving food stamps, and if 
their actual household income exceeds 185 percent of the Federal income 
poverty guidelines, they would not be eligible to receive tier I 
reimbursement for CACFP meals served to all of the children in their 
care.

What did OIG recommend to address this problem?

    The Kiddie Care audit recommended that FNS take steps to minimize 
the possibility of this improper claiming of food stamp and CACFP 
benefits. In a number of cases, the office making the food stamp 
eligibility determination had been unaware that the household included 
a day care provider. Therefore, OIG recommended that sponsors share 
information concerning CACFP providers claiming eligibility on the 
basis of food stamp participation with the State agency, which would 
then provide the information to the State agency administering the food 
stamp program. In this way, food stamp eligibility offices would know 
which households included an individual self-employed as a CACFP day 
care home provider, and would be better able to discern the household's 
actual income. If some of these households were determined to be 
ineligible to receive food stamps, they would then be required to 
submit income eligibility statements detailing their household income, 
including their child care income and expenses, in order to qualify for 
tier I benefits in CACFP.

What is FNS proposing in this rule?

    We agree with this recommendation. We are therefore proposing to 
add, effective 6 months after issuance of the final rule, a requirement 
that sponsoring organizations of family day care homes provide to the 
State agency a list of all of their sponsored providers who qualify for 
tier I eligibility on the basis of food stamp participation. Within 30 
days of receipt, the State agency would be required to provide this 
information to the State agency responsible for the administration of 
the Food Stamp Program. Once this information was provided to the State 
Food Stamp agency, they are required, under 7 CFR Part 273.12(c) to use 
the information in determining the household's food stamp eligibility. 
That information will be available to FNS for review during the normal 
course of conducting management evaluations, and review of the State 
agency's implementation of this requirement will be included in our 
Management Evaluation guidelines.
    Accordingly, we propose to amend revised section 226.6(f)(1) by 
adding a new paragraph, (x), requiring that State agencies annually 
collect from each sponsoring organization of family day care homes a 
list of day care home providers qualifying to receive tier I benefits 
on the basis of their participation in the Food Stamp Program. This 
proposed new paragraph will also require State agencies to share this 
information with the State agency administering the food stamp program 
within 30 days of receipt.

III. Training and Other Operational Requirements

    As discussed in the ``Background'' section of this preamble, OIG's 
national audit of family day care homes made recommendations for 
changes to the current requirements for the training of day care 
providers by sponsoring organizations. Specifically, OIG recommended 
that the CACFP regulations be strengthened to require that all 
participating child care providers attend a minimum number of hours in 
Program and child care training each year, and that minimum content 
requirements be established for such training. Current section 226.18 
requires that the agreement between a sponsoring organization and a 
family day care home provider include a statement of the sponsor's 
responsibility to train the day care home provider; however, this 
provision has, in some cases, been interpreted to mean that training 
must be offered to day care home providers, and not that providers are 
actually required to attend the training. OIG also recommended that 
sponsor monitors receive, at a minimum, training on the same content 
areas provided to sponsored facilities.
    We are also proposing a number of other miscellaneous changes that 
have been suggested by Program administrators in recent years. These 
include:
     Giving State agencies the authority to place restrictions 
on meal service times;
     Providing State agencies with greater flexibility on 
payment procedures for new child care and outside-school-hours care 
centers;

[[Page 55118]]

     Stating expressly that State agencies are required to 
issue and enforce the provisions of all Program guidance issued by FNS;
     Stating expressly that sponsoring organizations of family 
day care homes may neither use temporarily nor retain any portion of 
providers' food reimbursement, except as specified in section 
226.13(c); and
     Eliminating obsolete language with regard to the 
participation of adult day care centers.

A. Training Requirements for Sponsored Facilities and Sponsor 
Monitors

What are the current regulatory requirements for sponsor training of 
facility staff?

    The current regulations at section 226.15(e)(11) require 
institutions to maintain records which document:
     The date(s) and location(s) of all training sessions 
conducted;
     The topics covered at the session(s); and
     The attendees at each training session.
    In addition, sections 226.16(d)(2) and (3) require sponsors to 
provide training to all sponsored child and adult care facilities in 
Program duties and responsibilities prior to beginning Program 
operations, and to provide additional training sessions not less 
frequently than annually afterwards. These requirements are designed to 
ensure that facility staff are familiar with Program requirements prior 
to beginning their work with CACFP, and that the staff of facilities 
participating in CACFP continue to receive additional training on a 
regular basis.

What were OIG's findings and recommendations with regard to facility 
training?

    OIG found that compliance with these training requirements is not 
uniformly monitored and enforced by State agencies and institutions. 
Some CACFP administrators have interpreted current regulations to 
require that sponsoring organizations offer training to day care home 
providers, rather than requiring that the providers actually attend the 
training. In fact, section 226.18 is not entirely clear on this point; 
currently, the agreement between providers and sponsors must simply 
include a statement of the sponsor's responsibility to train the day 
care home's staff. OIG recommended that all participating family day 
care home providers receive a minimum number of hours in Program and 
child care training each year, and that sponsors and State agencies 
verify that providers receive training at least annually.

What does the Department propose in this rule?

    We believe it is imperative that staff at sponsored child and adult 
care facilities receive training both before and during their CACFP 
participation. Therefore, we propose to clarify that day care providers 
are required to attend training prior to participation in the CACFP, 
and at least annually thereafter.
    However, within these broad parameters, we also believe that it is 
necessary to provide State agencies with some flexibility in defining 
the format, content, length, frequency, and other aspects of the 
required training process. For example, some State agencies may wish to 
impose Statewide policies on how sponsors of centers and homes handle 
missed training sessions, or whether technical assistance provided 
during monitoring visits can be counted towards meeting minimum 
training requirements. Other State agencies may prefer to handle these 
matters on a case-by-case basis. Some State agencies may choose to 
require that facility staff receive training in the provision of 
``quality child care,'' whereas others may be unwilling to mandate 
training not directly related to the CACFP. Finally, since State CACFP 
administrators will be familiar with what training requirements, if 
any, are imposed by their State licensing authorities, they will be in 
the best position to determine how CACFP training might complement any 
training provided to child care staff as a result of licensing-related 
or other State requirements.
    Accordingly, we propose to amend sections 226.16(d)(2)-(3) to 
require that sponsors provide training to, and require the attendance 
of, key staff from all sponsored child care facilities in Program 
duties and responsibilities prior to the facility's participation in 
CACFP, and no less frequently than annually thereafter. We also propose 
to amend sections 226.17(b), 226.18(b)(2), 226.19(b)(7), and to add a 
new section 226.19a(b)(11), to clarify that key child care home, child 
care center and adult day care center staff (as defined by the State 
agency) are required to attend Program training prior to the facility's 
participation in CACFP, and at least annually thereafter, on content 
areas established by each State administering agency.

Will the Department establish requirements on training content to State 
agencies?

    Recognizing that some State agencies will want to have Federal 
guidance on training, we have developed materials designed to help 
sponsors of child care facilities provide training on quality program 
operations. This guidance, entitled ``Guide to Provider Standards'' and 
``Guide to Center Standards,'' can be used by State agencies and 
sponsors to measure the proficiency of facility staff in conducting 
their CACFP (and broader child care) responsibilities, and by sponsors 
to train facility staff in areas in which they may be deficient. The 
three standards established in the guidance are that facility staff:
     Comply with CACFP administrative requirements;
     Comply with CACFP meal service requirements and serve 
nutritious meals; and
     Promote the health, safety and well-being of the children 
in care.
    This guidance was developed in a cooperative effort with State 
administrators and its use is strongly encouraged.
    In addition, we are proposing in this rule that certain content be 
covered in the training of all sponsored child care facilities. 
Although we wish to provide as much flexibility as possible to State 
agencies, it is clear that all sponsored facilities must be thoroughly 
familiar with Program requirements if they are to properly operate the 
Program. These basic Program requirements must be included in all 
training of sponsored facilities:
     Serving meals which meet the CACFP meal patterns;
     An explanation of the Program's reimbursement system;
     Taking accurate meal counts;
     Submitting accurate meal claims, including an explanation 
of how the sponsor will review the facility's claims; and
     Complying with recordkeeping requirements.

Does the Department expect providers to receive the same training every 
year?

    No, but we expect that even providers with long experience in CACFP 
can use ``reminders'' regarding these basic features of the Program. 
Although sponsors may want to design their training to experienced 
providers differently, a review of these Program features must be a 
part of every provider's annual training.

[[Page 55119]]

Don't sponsor monitors need the same training?

    Yes. A sponsor monitor can hardly be expected to ensure Program 
accountability if he/she is not thoroughly familiar with these Program 
requirements. Therefore, we are also proposing that sponsor monitors 
receive the same training as providers, both before they begin their 
monitoring duties and on an annual basis thereafter.

Does the Department also propose to adopt the OIG recommendation to 
require that State agencies and sponsoring organizations verify that 
facilities have received training?

    Yes. The OIG audit recommended that day care home sponsors and 
State agencies verify, at least annually, that participating providers 
actually received required training. As discussed in Parts II(C) and 
(E) of the preamble above, we have developed prototype sponsor and 
State agency review forms which include a section on verifying that 
appropriate facility personnel have received training in accordance 
with regulatory requirements. Although use of these prototype forms is 
optional, we propose to require that, at least once a year, sponsor 
reviews of all child care facilities include an assessment of 
compliance with training requirements and that State agency reviews of 
sponsors always include this component.
    Accordingly, we propose to further amend section 226.6(l) to 
require that, as part of their administrative reviews, State agencies 
assess the compliance of sponsoring organizations with the training 
requirements set forth at section 226.16(d). In addition, we propose to 
further amend section 226.16(d) to require that at least annually, as 
part of a review, sponsoring organizations verify that one or more 
staff from each child care facility has attended the training offered 
by the sponsor and that these staff receive training on CACFP meal 
patterns, an explanation of the Program's reimbursement system, meal 
counts, the claims process and claim review, and Program recordkeeping 
requirements, before entering the Program and on an annual basis 
thereafter. Finally, we also propose to add a new paragraph, section 
226.15(e)(15), which would require that sponsor monitoring staff be 
trained on these same content areas.

B. Times of Meal Service

What are the current restrictions on the time of meal service?

    Except for outside-school-hours care centers, current regulations 
do not require that meals be served at particular times of day, or that 
a certain amount of time must elapse between meal services. Even for 
outside-school-hours care centers, the regulations place restrictions 
on the time of meal service for suppers only.

Who has asked for changes to these requirements?

    In the past, some Program administrators have requested us to 
propose definite times of service for each meal type (e.g., breakfasts 
only to be served between 6:00 and 9:00 AM), or to require that a 
certain amount of time elapse between meal services.

How has the Department responded to these requests?

    We remain reluctant to establish such requirements on a national 
basis, for fear of restricting Program access. Single parents working 
the night shift, for example, often have tremendous difficulty finding 
suitable care for their children; it would be counterproductive to 
mandate rules that make it even harder for parents in this type of job 
situation to find appropriate, licensed or approved care for their 
children.
    However, recent audits and reviews have found child care facilities 
which regularly serve apparently unnecessary meals in order to maximize 
their claims for reimbursement (e.g., serving and/or claiming service 
of a snack at 4:30 and a supper at 5:45 to an after-school child who is 
to be picked up by a parent at 6). Therefore, we are concerned about 
the potential for Program abuse. Although the proposed requirement to 
provide more information about children's hours of care and meals 
received on enrollment forms (see Part II(B) of the preamble, above) 
and to conduct edit checks of enrollment forms against monthly claims 
(see Part II(D) of the preamble) will certainly help identify these 
practices, it will only do so during reviews or monthly 
reconciliations, after the meal has been inappropriately served and 
claimed.

What is the Department proposing?

    We are sympathetic to State agencies' requests to have specific 
regulatory authority to impose limits on meal services. In States where 
Program reviews have uncovered patterns of abuse involving claiming of 
multiple meals to children in care for a brief amount of time, or where 
main meals such as breakfasts and lunches are routinely served only a 
short time apart, we wish to provide State agencies with appropriate 
tools for eliminating such mismanagement. In these circumstances, it is 
appropriate for State agencies to have regulatory authority to support 
their attempts to limit this type of abuse.
    However, we ask State agencies to exercise care in implementing 
restrictions on meal service times that might limit the amount of 
quality care available to children whose parents work unusual hours or 
experience unique circumstances. In the example cited above, the child 
receiving a supplement at 4:30 p.m. may need one as soon as he arrives 
at day care if he ate lunch at school at 11:30 a.m.; similarly, he may 
also need to receive a supper prior to leaving care if his commute home 
is a particularly long one. In addition, homes and centers serving 
infants and toddlers may need to provide meals more frequently given 
these children's tendency to eat smaller portion sizes more frequently 
throughout the day. State agencies may wish to limit their use of this 
authority to particular sponsorships or particular facilities which 
have been found to be providing meals inappropriately to children.
    Accordingly, we propose to add section 226.20(k), entitled ``Time 
of meal service'', to provide State agencies with the authority to 
require that child care facilities allow a certain amount of time 
between meal services or that meal services not exceed a specified 
duration. We further propose to redesignate current paragraphs (k)-(p) 
as (l)-(q), respectively.

C. Reimbursement to Institutions When Approved for Participation

What are the current rules pertaining to reimbursement of new 
institutions?

    Current section 226.11(a) states that payment for meals served in 
child and adult care centers may only be made to institutions operating 
under an agreement with the State agency for meal types specified in 
the agreement. State agencies have the option to reimburse child and 
adult care centers for meals served in the calendar month preceding the 
calendar month in which the agreement is executed, provided that the 
center has records to document participant eligibility, the number of 
meals served, and that the meals met Program requirements. The State 
agency does not have a similar option with regard to reimbursing family 
day care homes for meals served prior to execution of an agreement.

Why is the Department proposing a change to this provision?

    State agencies have expressed concern that the current regulation's 
wording limits their flexibility by:

[[Page 55120]]

     Setting up an expectation that centers will always be paid 
for meals served in the calendar month preceding execution of the 
agreement; and
     Not specifically citing the State agency's authority to 
defer payments for a period of time after the execution of an agreement 
with an institution and/or its facilities.
    We did not intend to establish an expectation that new centers 
would always be reimbursed for meals served in the month prior to 
execution of their agreement. However, we do not agree with State 
agencies which wish to defer reimbursement to approved centers until 
after the date they sign the Program agreement. Rather, we believe the 
regulations should clarify that State agencies are required to begin 
reimbursing centers for meals when a Program agreement is signed and 
all Program requirements are being met.
    Accordingly, we propose to add language to section 226.11(a) to 
clearly establish State agencies' authority to defer payment for meals 
served in centers until the day on which the center executes a Program 
agreement with the State agency.

D. Regulations and Guidance

Are State agencies required to ensure compliance with Federal guidance 
as well as regulations?

    Yes. Section 226.6(l) makes State agencies responsible for 
monitoring institutions' compliance with Program regulations ``and with 
any applicable instructions of FNS and the Department.'' Although this 
requirement and case law have demonstrated that State agencies have the 
authority and the responsibility to apply Federal guidance which 
interprets the regulations and the law, we believe it is necessary to 
clarify this fact. Comparable regulatory language already exists in 
other programs, such as the Summer Food Service Program (see 7 CFR 
section 225.15(a)).
    Accordingly, we propose to further amend section 226.6(l) to 
clarify State agencies' authority in this regard, and to add a new 
paragraph, section 226.15(m), which requires institutions to comply 
with all regulations, instructions, and guidance materials issued for 
the CACFP.

E. Sponsor Disbursement of Food Service Payments to Family Day Care 
Providers

What are the rules governing sponsors' disbursement of meal service 
payments to family day care homes?

    The regulations at sections 226.13(c) and 226.18(b)(7) state that 
sponsoring organizations of family day care homes shall disburse the 
full amount of meal service earnings to providers, except that, with 
the provider's prior written consent, the sponsor may deduct the costs 
of providing meals or foodstuffs to the provider. In recent years, we 
have been asked whether the regulations would permit sponsors:
     To temporarily retain some portion of the providers' meal 
service payments; or
     With or without prior written consent, to subtract the 
costs of other goods or services (e.g., liability insurance premiums, 
toys, or educational materials) provided to the family day care 
provider.
    The intent of the current regulations is to prohibit any retention 
of meal service payments by the sponsoring organization, except in the 
single instance described in the regulations (a written agreement for 
the provision of meals or foodstuffs by the sponsor to the provider). 
We are well aware that sponsors often sell related goods or services to 
family day care home providers, including providers they do not 
sponsor. However, because sponsoring organizations of family day care 
homes are required to be public entities or to have nonprofit status 
under the Internal Revenue Code, such sales must generally be handled 
through a separately-incorporated proprietary subsidiary of the 
sponsoring organization. There is no reason for the government to 
facilitate proprietary transactions through the retention of food 
service payments provided under the CACFP. We intend there to be no 
exceptions save that specified in the current rule.

What if the sponsor retains the providers' payments temporarily?

    This practice amounts to interest-free ``borrowing'' by the sponsor 
from the provider, and is prohibited by the regulations. Provider 
payments are not the property of the sponsor. Sponsors that improperly 
retain provider payments for any period of time have misappropriated 
these funds, in violation of the statute authorizing CACFP.
    Accordingly, we propose to amend sections 226.13(c) and 
226.18(b)(7) to further clarify the limitations on sponsoring 
organizations' temporary or permanent retention of meal service 
payments, except when it is expressly permitted by the regulation or 
permitted by the State agency due to questions concerning the 
legitimacy of the provider's claim.

F. Technical Change: Elimination of Obsolete Adult day Care 
Provision

Why is the Department proposing this change?

    In 1988, Pub. L. 100-175, the Older Americans Act Amendments of 
1987, permitted adult day care centers to participate in the CACFP 
under certain circumstances. Although the law was enacted on November 
29, 1987, its provisions with regard to these centers' participation in 
CACFP were retroactively effective back to October 1, 1987. Therefore, 
we published an interim rule (53 FR 52584, December 28, 1988) which 
amended section 226.25 to establish the guidelines under which adult 
day care centers could claim reimbursement for meals served between 
October 1 and November 29, 1987. The sole purpose of these provisions 
was to deal with the one-time circumstance of making retroactive 
payments to adult day care centers.
    Accordingly, we propose to remove section 226.25(g).

IV. Non-Discretionary Changes Required by Public Laws 104-193 and 
105-336

What is a ``non-discretionary change''?

    A ``non-discretionary'' change is a specific change to the 
regulations that is mandated by law. That is, if a law is enacted which 
eliminates one of the previously-reimbursable meal services in a child 
nutrition program, a Federal administering agency literally has ``no 
discretion'' with regard to whether it will change the regulations to 
implement the law and eliminate the meal service. If it fails to make 
this change, the Federal agency is in violation of the law.
    Most of the other changes being proposed in this rule are 
``discretionary'', in that they are designed to carry out the law's 
intent but were not specifically mandated by law. Thus, CACFP 
reimbursement must be made only for eligible meals served to 
participants, but the law does not specifically mandate that USDA 
ensure this by establishing a system of performance standards for 
institutions, as it proposed in Section I of this preamble.

Why is USDA including non-discretionary changes in a proposed rule?

    Generally, because changes to the statute must be implemented in 
the regulations, non-discretionary changes are published in an 
``interim'' or ``final'' regulation, which has the force of law upon 
publication. However, this

[[Page 55121]]

proposed rule includes a number of non-discretionary changes to the 
CACFP which were mandated by Pub. L. 104-193, the Personal 
Responsibility and Work Opportunities Reconciliation Act of 1996, and 
Pub. L. 105-336, the William F. Goodling Child Nutrition 
Reauthorization Act of 1998. Although not all of these changes relate 
to Program management, the primary focus of this rule, it is expedient 
to include these changes in this proposal.
    Commenters are encouraged to respond to the specific way in which 
we are proposing to implement these changes, but are asked not to 
comment on the changes themselves, which we are required by law to 
incorporate into the Program regulations.

A. Issuance of Advances to Institutions Participating in CACFP

How did the law change the rules governing advance payments to 
institutions?

    Prior to the passage of Public Law 104-193, section 17(f)(4) of the 
NSLA required State agencies to ``provide advance payments* * * * to 
each approved institution in an amount that reflects the full level of 
valid claims customarily received from such institution for one month's 
operation.'' Section 708(f)(2) of Public Law 104-193 amended section 
17(f)(4) to make issuance of advances discretionary, at the State 
agency's option.

How does USDA propose to implement this change to the law?

    We believe that the law intended to provide State agencies with 
broad discretion in this area, and that State agencies may choose one 
of a number of options. State agencies may choose to:
     Issue advances to all institutions;
     Issue advances to no institutions;
     Issue advances to those institutions with records of 
adequate Program administration; or
     Issue advances to one or more type(s) of institution 
(e.g., issue advances only to independent centers).
    However, we also believe that, if a State agency chooses the third 
or fourth option listed above, it must have valid reasons for 
distinguishing between types of institutions, or between individual 
institutions, to which it will/will not issue advances. We also wish to 
note that a State agency's decision to employ the third option (not to 
issue advances to one or more institutions due to their record in 
administering the Program) is an appealable action in accordance with 
section 226.6(k).
    Accordingly, we propose to amend section 226.10(a) of the 
regulations to make State agency issuance of advances to institutions 
optional.

B. Change to Method of Rounding Meal Rates in Child Care and Adult 
Day Care Centers

How did the law change with regard to the method of rounding meal 
rates?

    Section 704(b)(1) of Public Law 104-193 amended section 11(a)(3)(B) 
of the NSLA by changing the method to be used by the Department in 
making annual adjustments to the national average payment rate for paid 
meals served in the NSLP and SBP. This change also affected the method 
of rounding used to calculate the annual adjustment to the rate for 
paid meals served in child care centers and adult day care centers 
participating in the CACFP because, under sections 17(c)(1)-(3) and 
17(o)(3) of the NSLA, these rates are linked to the rates and rounding 
methods established in section 11(a)(3)(B). Later, section 103(b) of 
Public Law 105-336 extended the same rounding procedure to the free and 
reduced price meal rates in NSLP, SBP, and the center-based component 
of CACFP, effective July 1, 1999.
    Prior to this change, the Department rounded all meal rates paid to 
child and adult day care centers in the same manner. Each year, the 
previous year's rate was adjusted for inflation and then rounded up or 
down to the nearest one-quarter cent. This rounding methodology for 
meals served in centers is set forth in the regulations at section 
226.4(g)(2). Public Law 104-193 changed this rounding method for meals 
served at the paid rate in child and adult day care centers by 
requiring that the unrounded amount for the preceding 12-month period 
be adjusted for inflation, then rounded down to the nearest whole cent. 
Later, Public Law 105-336 extended the same rounding procedure to the 
free and reduced price meal rates in NSLP, SBP, and the center-based 
component of CACFP, effective July 1, 1999.
    Accordingly, this rule proposes to modify the language at section 
226.4(g)(2) regarding the rounding of meals served in child and adult 
day care centers to conform to the requirements of Pub. Laws 104-193 
and 105-336. In addition, this rule proposes to change the word 
``supplements'' to ``meals'' at section 226.4(g)(2) of the regulations 
since this paragraph is clearly intended to describe the method of 
adjusting and rounding the rates for all meals (not just supplements) 
served in child and adult day care centers.

C. Elimination of the Aid to Families With Dependent Children 
(AFDC) Program

    Perhaps the most significant change made by the Personal 
Responsibility and Work Opportunities Reconciliation Act of 1996 was 
the elimination of the Aid to Families with Dependent Children, or 
AFDC, Program. This Federally-run entitlement program was replaced by a 
series of State-run programs with different requirements, all funded 
under a Federal block grant called the Temporary Assistance to Needy 
Families (TANF) program.

What effect did this change have on CACFP?

    In regulatory terms, this change had little impact on the Child 
Nutrition Programs. Section 109(g)(1)(B)(i) of Public Law 104-193 made 
conforming changes to the statutes governing the Child Nutrition 
Programs which required that households which were categorically 
eligible for free meal benefits in these programs by virtue of their 
AFDC recipiency would also be categorically eligible for free meals 
based on their receipt of TANF benefits.
    Accordingly, we propose to remove the definition of ``AFDC 
assistance unit'' at section 226.2 and replace it with a definition of 
``TANF recipient''. In addition, we propose to remove all references to 
``AFDC assistance unit'', ``AFDC case number'', and all other 
references to ``AFDC'' throughout the Part 226 regulations and to 
replace them with references to ``TANF recipient'', ``TANF case 
number'', and ``TANF'', respectively.

D. State Agency Outreach Requirements

What changes did Public Law 104-193 make relating to Program outreach?

    Section 708(a) of Public Law 104-193 amended the statutory 
``purpose statement'' for CACFP by amending section 17(a) of the NSLA. 
Previously, the law had required us to assist States to ``initiate, 
maintain, and expand nonprofit food service programs for children in 
institutions providing child care.'' Section 708(a) deleted the words 
``and expand'' from this sentence. In addition, section 708(h) of Pub. 
L. 104-193 revised section 17(k) of the NSLA in its entirety. 
Previously, this section of the law had required State agencies to 
``facilitate expansion and effective operation of the Program'' and to 
annually notify each nonparticipating institution of the Program's 
availability, the requirements for participation, and the procedures 
for application. As a result of Public Law 104-193, this section of the 
law now requires State

[[Page 55122]]

agencies to ``provide sufficient training, technical assistance, and 
monitoring to facilitate effective operation of the program.''

Did this change eliminate outreach from the CACFP?

    No. State agency outreach is still an allowable and desirable 
Program activity. Although Public Law 104-193 removed two specific 
requirements for State agency outreach, it nonetheless maintained, and 
even reinforced, the State agency's responsibility to foster Program 
expansion in low-income and rural areas.
    Previously, Public Law 101-147 had made additional funds available 
to sponsoring organizations of day care homes for expansion into rural 
or low-income areas. Public Law 103-448 had permitted day care home 
sponsors to use their administrative funds to defray the licensing-
related costs of non-participating low-income day care home providers. 
Public Law 104-193 underscored Congress' commitment to these provisions 
by mandating that we publish interim regulations implementing these 
changes and giving them the force of law, which was done in 1998 (63 FR 
9721, February 26, 1998). Thus, although the specific requirement to 
notify non-participating institutions was removed, the law continues to 
promote program expansion among rural and low-income family day care 
home providers, and the regulations continue to require State agencies 
to perform outreach activities, especially in rural and low-income 
areas.

What changes to the rule is the Department proposing?

    Accordingly, we propose to amend:
     Section 226.6(a) to require that State agencies continue 
to commit sufficient resources to facilitate Program expansion in low-
income and rural areas; and
     Section 226.6(g), entitled ``Program expansion'', to 
eliminate the language requiring that State agencies take specific 
actions to facilitate expansion, while retaining the broader 
requirement that State agencies take action to expand the availability 
of Program benefits, especially in low-income and rural areas.

E. Prohibition on Payment of Incentive Bonuses for Recruitment of 
Family Day Care Homes

What change did the law make with regard to employee payments by family 
day care home sponsoring organizations?

    Section 708(b) of Public Law 104-193 amended section 17(a)(2)(D) of 
the NSLA by prohibiting any family day care home sponsoring 
organization which employs more than one person from basing payment to 
employees on the number of family day care homes recruited.
    Because these terms were not narrowly defined by Congress, we have 
broadly construed the terms ``employee'' and ``payment''. For example, 
sponsoring organizations often pay individuals (including family day 
care home providers whom they sponsor for CACFP) to perform specific 
program functions, such as training, monitoring, or recruitment. 
Although that person is not a full-time employee of the family day care 
home sponsoring organization, we nevertheless believe that they were 
intended to be covered by this prohibition. We also believe that 
Congress intended to prohibit any form of payments (including bonuses, 
free trips, or any other perquisite or gratuity) based solely on 
recruitment made to any full-time or part-time employee, contractor, or 
family day care home provider.

Can a family day care home sponsor still pay persons to perform 
recruitment functions?

    Yes. The recruitment of family day care home providers to 
participate in CACFP is not prohibited. In fact, as noted in the 
previous section of this preamble, the law continues to encourage 
recruitment of new providers in low-income and rural areas. This means 
that family day care home sponsors are permitted to pay employees or 
contractors to perform recruitment functions. However, the person being 
paid cannot be reimbursed solely on the basis of the number of homes 
recruited. Similarly, including the number of homes recruited as an 
evaluation factor when measuring an employee or contractor's 
performance is permissible, whereas providing a bonus or award for 
recruiting a certain number of homes would not be permissible.

How does USDA propose to implement this change?

    Accordingly, we propose to amend section 226.15 by adding a new 
paragraph (g) which prohibits sponsoring organizations of family day 
care homes from making payments to employees or contractors solely on 
the basis of the number of family day care homes recruited, and by 
redesignating current sections 226.15(g)-(k) as sections 226.15(h)-(l), 
respectively.

F. Pre-Approval Visits by State Agencies to Private Institutions

What change did the recent reauthorization make to the rules for State 
agency visits to new private institutions?

    Section 107(c) of Public Law 105-336 amended section 17(d) of the 
NSLA (42 U.S.C. section 1766(d)) to require State agencies to visit 
private institutions (both non-profit and for-profit) applying for the 
first time prior to their approval to participate in CACFP. Section 
107(c) further requires State agencies to make ``periodic site visits 
to private institutions that the State agency determines have a high 
probability of program abuse.''

How does USDA propose to implement these changes in the regulations?

    It is clear that Congress intended to exclude from this pre-
approval visit requirement both public institutions and institutions 
which are adult day care centers, and to focus additional State agency 
resources on child care institutions, especially on sponsors of more 
than one child care facility. The conference report language (Conf. 
Report 105-786, October 6, 1998) focuses throughout on the Program 
management problems documented in OIG audits. These audits have been 
confined to sponsors of family child care homes and/or child care 
centers because these organizations account for such a large share of 
Program reimbursements.

Why require a pre-approval visit to private independent centers?

    We recognize that requiring State agencies to conduct a pre-
approval visit of each new independent center could, especially in 
geographically large and rural States, result in delays in approving 
such centers. In large, rural States, the remote location of some 
centers might require State agencies to delay pre-approval visits until 
such time as other duties brought them to that part of the State. Given 
Congress' documented concern with Program access in low-income and 
rural areas, we have addressed this issue in Program guidance issued on 
July 14, 1999. That guidance sets forth various ways in which the pre-
approval requirement might be met for independent centers (including 
obtaining information gathered by the State licensing agency in its 
previous visit(s) to the center), and also describes certain 
circumstances under which we would be willing to entertain State agency 
requests to delay the pre-approval requirement for one or more 
independent centers. Thus, the

[[Page 55123]]

guidance provides State agencies with options for meeting the legal 
requirement with respect to independent centers, but ensures that a 
pre-approval visit to sponsoring organizations by the State agency will 
always occur.
    Accordingly, we propose to further amend revised section 
226.6(b)(1)(i) to require State agencies to conduct pre-approval visits 
to new private child care institutions.

G. Provision of Information on the WIC Program

What does the law require with regard to distribution of information on 
the WIC Program?

    Section 107(i) of Public Law 105-336 requires us to provide State 
agencies with information concerning the Special Supplemental Nutrition 
Program for Women, Infants and Children (WIC) Program. It also requires 
State agencies to ``ensure that each participating family and group day 
care home and child care center (other than an institution providing 
care to school children outside school hours) receive materials'' that 
explain WIC's importance, its income eligibility guidelines, and how to 
obtain benefits. In addition, State agencies must provide these 
facilities with periodic updates of this information and must ensure 
that the parents of enrolled children receive this information.

How does USDA propose to implement this change?

    On April 14, 1999, we provided the required information to each 
State agency administering the CACFP. We propose to require State 
agencies to distribute this information to each institution 
participating in the Program, to require that the institution make this 
information available to each sponsored facility (except sponsored 
outside-school-hours care centers), and to ensure that institutions 
and/or facilities make this information available to the households of 
participating children.
    Accordingly, we propose to amend section 226.6 by adding a new 
paragraph (q) which includes the requirements for State agencies with 
respect to dissemination of WIC information. We also propose to amend 
section 226.15 by adding a new paragraph (n) which sets forth the 
institution's requirements for dissemination of WIC information to 
parents.

H. Audit Funding

What change did the law make to audit funds available to State 
agencies?

    Section 107(e) of Public Law 105-336 amended section 17(i) of the 
NSLA (42 U.S.C. section 1766(i)) by reducing the amount of audit 
funding made available to State agencies. Prior to this change, State 
agencies could receive up to two percent of Program expenditures during 
the preceding fiscal year to conduct Program audits. This was changed 
to one and one-half percent of Program expenditures in the previous 
fiscal year, beginning in fiscal year 1999. In addition, in order to 
meet mandatory ten-year budget targets, the law also mandated a further 
reduction (to one percent) in fiscal years 2005 through 2007; however, 
the conference report made clear Congress' intent to restore funding 
which would maintain the level at one and one-half percent in those 
three years.

How does USDA propose to implement this change?

    Accordingly, we propose to amend section 226.4(h) by removing the 
words ``2 percent'' and substituting in their place the words ``1\1/2\ 
percent''.

Executive Order 12866

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

Regulatory Flexibility Act

    This 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 for Food, Nutrition, and Consumer Services, has 
certified that this rule will not have a significant economic impact on 
a substantial number of small entities. When implemented, this proposed 
rule will primarily affect the procedures used by State agencies in 
reviewing applications submitted by, and monitoring the performance of, 
institutions which are participating or which wish to participate in 
the Child and Adult Care Food Program. Those proposed changes which 
would affect institutions and facilities will not, in the aggregate, 
have a significant economic impact.

Executive Order 12372

    This Program is listed in the Catalog of Federal Domestic 
Assistance under No. 10.558 and is subject to the provisions of 
Executive Order 12372, which requires intergovernmental consultation 
with State and local officials (7 CFR Part 3015, Subpart V, and final 
rule related notice published in 48 FR 29114, June 24, 1983, and 49 FR 
22676, May 31, 1984). Over the past five years, the Department 
informally consulted with State administering agencies, Program 
sponsors, and CACFP advocates on ways to improve Program management and 
integrity in CACFP. Discussions with State agencies took place in the 
joint Management Improvement Task Force meetings held between 1995 and 
2000; in three biennial National meetings of State and Federal CACFP 
administrators (1996 in Seattle, 1998 in New Orleans, and 2000 in 
Chicago); at the December 1999 meeting of State Child Nutrition Program 
administrators in New Orleans; and in a variety of other small- and 
large-group meetings. Discussions with Program advocates and sponsors 
occurred in the Management Improvement Task Force meetings held in 
1999-2000; in annual National meetings of the Sponsors Association, the 
CACFP Sponsors Forum; the Western Regional Office-California Sponsors 
Roundtable from 1996-2000; and in a variety of other small-and large-
group meetings.

Public Law 104-4

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Pub. 
L. 104-4, requires Federal agencies to assess the effects of their 
regulatory actions on State, local, and tribal governments and the 
private sector. Under Section 202 of the UMRA, the Food and Nutrition 
Service must usually prepare a written statement, including a cost-
benefit analysis, for proposed and final rules with ``Federal 
mandates'' that may result in new annual expenditures of $100 million 
or more by State, local, or tribal governments or the private sector. 
When such a statement is needed, section 205 of the UMRA requires the 
Food and Nutrition Service to identify and consider regulatory 
alternatives that would achieve the same result.
    This rule contains no Federal mandates (as defined in Title II of 
the UMRA) that would lead to new annual expenditures exceeding $100 
million for State, local, or tribal governments or the private sector. 
Therefore, the rule is not subject to the requirements of sections 202 
and 205 of the UMRA.

Executive Order 12988

    This proposed rule has been reviewed under Executive Order 12988, 
Civil Justice Reform. This proposed rule is intended to have preemptive 
effect with respect to any State or local laws, regulations, or 
policies which conflict

[[Page 55124]]

with its provisions or which would otherwise impede its full 
implementation. This proposed rule is not intended to have retroactive 
effect unless so specified in the ``Effective Date'' section of the 
preamble of the final rule. All available administrative procedures 
must be exhausted prior to any judicial challenge to the provisions of 
this rule or the application of its provisions. This includes any 
administrative procedures provided by State or local governments. In 
the CACFP, the administrative procedures are set forth at:
    (1) 7 CFR 226.6(k), which establishes appeal procedures; and
    (2) 7 CFR 226.22 and 7 CFR 3015, which address administrative 
appeal procedures for disputes involving procurement by State agencies 
and institutions.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507), this notice invites the general public and other public agencies 
to comment on the information collection. Written comments on the 
information collection requirements proposed in this rule must be 
received on or before November 13, 2000 by the Office of Information 
and Regulatory Affairs, Office of Management and Budget (OMB), 3208 New 
Executive Office Building, Washington, DC 20503, Attention: Ms. Brenda 
Aguilar, Desk Officer for the Food and Nutrition Service. A copy of 
these comments may also be sent to Mr. Robert Eadie at the address 
listed in the ADDRESSES section of this preamble. Commenters are asked 
to separate their remarks on information collection requirements from 
their comments on the remainder of the proposed rule.
    OMB is required to make a decision concerning the collection of 
information proposed in this rule between 30 to 60 days after its 
publication in the Federal Register. Therefore, a comment to OMB is 
most likely to be considered if OMB receives it within 30 days of the 
publication of this proposed rule. This does not affect the 90-day 
deadline for the public to comment to the Department on the substance 
of the proposed rule.
    Comments are invited on: (a) Whether the collection of information 
is necessary for the Agency to perform its functions of the agency and 
will have practical utility; (b) the accuracy of the Agency's estimate 
of the burden of collecting the information, including whether its 
methodology and assumptions are valid; (c) ways to enhance the quality, 
utility, and clarity of the information to be collected; and (d) ways 
to minimize the burden of the information collection, including the use 
of appropriate automated, electronic, mechanical, or other 
technological collection techniques or other forms of information 
technology. The title and description of the information collections 
are shown below with an estimate of the annual reporting and 
recordkeeping burdens. Included in the estimate is the time for 
reviewing instructions, searching existing data sources, gathering and 
maintaining the data needed, and completing and reviewing the 
collection of information.
    Title: 7 CFR Part 226, Child and Adult Care Food Program.
    OMB Number: 0584-0055.
    Expiration Date: October 31, 2001.
    Type of request: Revision of existing collections.
    Abstract: This rule proposes to revise: the application process for 
institutions applying to participate in the CACFP; State- and 
institution-level monitoring requirements; Program training and other 
operating requirements for child care institutions and facilities; and 
other provisions which we are required to change as a result of the 
Healthy Meals for Healthy Americans Act of 1994, the Personal 
Responsibility and Work Opportunities Reconciliation Act of 1996, and 
the William F. Goodling Child Nutrition Reauthorization Act of 1998. 
The proposed changes are primarily designed to improve Program 
operations and monitoring at the State and institution levels and, 
where possible, to streamline and simplify Program requirements for 
State agencies and institutions.

                                      Estimated Annual Recordkeeping Burden
----------------------------------------------------------------------------------------------------------------
                                                  Annual  number                      Average
     Description of change           Section            of            Annual        burden per     Annual burden
                                                    respondents      frequency       response          hours
----------------------------------------------------------------------------------------------------------------
Enrollment documentation shall
 be updated annually, signed
 by a parent or legal
 guardian, and include
 information on child's normal
 days & hours of care & the
 meals normally received while
 in care
Total Existing Households.....  0...............               0               0               0               0
Total Proposed Households.....  7 CFR                  1,490,770               1             .33         491,954
                                 226.15(e)(2).
Total Existing Recordkeeping    0...............               0               0               0               0
 Burden.
Total Proposed Recordkeeping
 Burden--+491,954
Change--+491,954..............  0...............               0               0               0               0
----------------------------------------------------------------------------------------------------------------

List of Subjects in 7 CFR Part 226

    Accounting, Aged, Day care, Food and Nutrition Service, Food 
assistance programs, Grant programs--health, Indians, Individuals with 
disabilities, Infants and children, Intergovernmental relations, Loan 
programs, Reporting and recordkeeping requirements, Surplus 
agricultural commodities.
    Accordingly, 7 CFR Part 226 is proposed to be amended as follows:

PART 226--CHILD AND ADULT CARE FOOD PROGRAM

    1. The authority citation for part 226 continues to read as 
follows:

    Authority: Secs. 9, 11, 14, 16, and 17, National School Lunch 
Act, as amended (42 U.S.C. 1758, 1759a, 1762a, 1765 and 1766).

    2. In part 226:
    a. All references to ``AFDC'' are revised to read ``TANF''.
    b. All references to ``AFDC assistance unit'' are revised to read 
``TANF recipient''.
    3. In Sec. 226.2:
    a. Remove the definition of AFDC assistance unit.
    b. New definitions of Household contact, New institution, Renewing

[[Page 55125]]

institution, and TANF recipient are added in alphabetical order.
    The revision and additions specified above read as follows:


Sec. 226.2  Definitions

* * * * *
    Household contact means a contact made by a sponsoring organization 
or a State agency to a household with a child(ren) in a family day care 
home or a child care center (excluding family day care home providers' 
households when the provider's own children are in care). Such contact 
may be made in writing or by telephone; however, a telephone contact 
must be preceded by written notice to the household explaining the 
reason for the call, providing the name of the sponsor employee who 
will make the call, and providing assurance that any information 
provided will be confidential and will be used solely for Program 
purposes. The household contact shall ask an adult member of the 
household to verify the attendance and enrollment of the household's 
children and the specific meal service(s) which the children routinely 
receive while in care.
* * * * *
    New institution means an institution which is applying to 
participate in the Program for the first time, or an institution which 
is applying to participate in the Program after a lapse in Program 
participation.
* * * * *
    Renewing institution means an institution which is participating in 
the Program at the time the State agency requires the institution to 
submit a renewal application.
* * * * *
    TANF recipient means an individual or household receiving 
assistance (as defined in 45 CFR Sec. 260.31) under a State-
administered Temporary Assistance to Needy Families program.
* * * * *
    4. In Sec. 226.4:
    a. Paragraph (g)(2) is amended by removing the word ``supplements'' 
and adding in its place the word ``meals'', and by removing the second 
sentence and adding two new sentences in its place.
    b. Paragraph (h) is amended by removing the words ``two percent'' 
and adding in their place the words ``one and one-half percent''.
    The addition specified above reads as follows:


Sec. 226.4  Payments to States and use of funds

* * * * *
    (g) * * *
    (2) * * * Such adjustments shall be rounded to the nearest lower 
cent, based on changes measured over the most recent twelve-month 
period for which data are available. The adjustment to the rates shall 
be computed using the unrounded rate in effect for the preceding year.
* * * * *
    5. In Sec. 226.6:
    a. Paragraphs (a) and (b) are revised.
    b. Paragraphs (f) (1) through (f)(3) are revised, and paragraphs 
(f)(4) through (f)(11) are removed.
    c. Paragraph (g) is revised.
    d. Paragraph (h) is amended by revising the first sentence and by 
adding a new second sentence immediately thereafter.
    e. Paragraph (j) is revised.
    f. Paragraphs (l) and (m) are revised.
    g. A new paragraph (q) is added.
    The additions and revisions specified above read as follows:


Sec. 226.6  State agency administrative responsibilities.

    (a) State agency personnel. Each State agency shall provide 
sufficient consultative, technical, and managerial personnel to:
    (1) Administer the Program;
    (2) Provide sufficient training and technical assistance to 
institutions;
    (3) Monitor Program performance;
    (4) Facilitate expansion of the Program in low-income and rural 
areas; and
    (5) Ensure effective operation of the Program by participating 
institutions.
    (b) Program applications and agreements. (1) Application review 
process. Each State agency shall establish an application review 
process to determine the eligibility of new institutions, renewing 
institutions, and facilities for which applications are submitted by 
sponsoring organizations. In its review of any institution's 
application to participate in the Program, the State agency shall 
consult the list of seriously deficient institutions and shall deny the 
application of any institution on that list. The State agency shall 
enter into written agreements with institutions in accordance with 
paragraph (b)(2) of this section.
    (i) Application procedures for new institutions. Each State agency 
shall establish application procedures to determine the eligibility of 
new institutions under this part. At a minimum, such procedures shall 
require that institutions submit information to the State agency in 
accordance with paragraph (f) of this section. For new private child 
care institutions, such procedures shall also include a satisfactory 
pre-approval visit by the State agency to confirm the information in 
the institution's application and to further assess its ability to 
manage the Program. In addition, such procedures shall include:
    (A) For both sponsored and independent child care centers, adult 
day care centers and outside-school-hours care centers, submission of 
the number of enrolled children eligible for free, reduced price and 
paid meals;
    (B) For sponsoring organizations of day care homes:
    (1) Submission of the current total number of children enrolled;
    (2) An assurance that day care home providers' children enrolled in 
the Program are eligible for free or reduced price meals;
    (3) The total number of tier I and tier II day care homes that it 
sponsors;
    (4) The number of children enrolled in tier I day care homes;
    (5) The number of children enrolled in tier II day care homes; and
    (6) The number of children in tier II day care homes that have been 
identified as eligible for free or reduced price meals;
    (C) For all institutions, submission of the institution's 
nondiscrimination policy statement, free and reduced price policy 
statement, and media release;
    (D) For all sponsoring organizations, submission of a management 
plan which includes:
    (1) Detailed information on the sponsoring organization's 
administrative structure;
    (2) The staff assigned to Program management and monitoring;
    (3) An administrative budget;
    (4) The procedures to be used by the sponsoring organization to 
administer the Program in, and disburse payments to, the child care 
facilities under its sponsorship; and,
    (5) For sponsoring organizations of day care homes, a description 
of the system for making tier I day care home determinations, and a 
description of the system of notifying tier II day care homes of their 
options for reimbursement;
    (E) For all institutions, submission of an administrative budget 
which the State agency shall review in accordance with Sec. 226.7(g);
    (F) Submission of documentation that all independent or sponsored 
child care centers, adult day care centers, and outside-school-hours 
care centers, and all day care homes for which application is made by a 
sponsoring organization, are in compliance with Program licensing/
approval provisions;
    (G) Except for any public organization or any proprietary title XIX 
and title XX

[[Page 55126]]

centers and organizations which solely sponsor proprietary title XIX 
and title XX centers, submission of evidence of tax-exempt status in 
accordance with Sec. 226.15(a);
    (H) For proprietary title XX child care centers, submission of:
    (1) Documentation that they are currently providing nonresidential 
day care services for which they receive compensation under title XX of 
the Social Security Act; and
    (2) Certification that not less than 25 percent of enrolled 
children or 25 percent of the licensed capacity, whichever number is 
less, in each such center during the most recent calendar month were 
title XX beneficiaries.
    (I) For proprietary title XIX or title XX adult day care centers, 
submission of:
    (1) Documentation that they are currently providing nonresidential 
day care services for which they receive compensation under title XIX 
or title XX of the Social Security Act; and
    (2) Certification that not less than 25 percent of enrolled adult 
participants in each such center during the most recent calendar month 
were title XIX or title XX beneficiaries; and
    (J) Submission of a statement of institutional preference to 
receive commodities or cash-in-lieu of commodities.
    (ii) Application procedures for renewing institutions. Each State 
agency shall establish application procedures to determine, under this 
part, the eligibility of renewing institutions.
    (A) At a minimum, such procedures shall include the renewing 
institution's submission of:
    (1) A management plan and administrative budget, in accordance with 
paragraphs (b)(1)(i)(D), (b)(1)(i)(E), and (f)(1)(vi) of this section; 
and
    (2) Such other documentation as the State agency shall determine 
necessary to ensure an institution's ability to manage the Program 
properly, efficiently, and effectively in accordance with this part.
    (B) Renewing institutions shall not be required to submit a free 
and reduced price policy statement unless they make substantive changes 
to that statement.
    (C) The State agency shall require each renewing institution 
participating in the Program to reapply for participation at a time 
determined by the State agency, except that no institution shall be 
allowed to participate for less than 12 or more than 36 calendar months 
under an existing application, except as described in paragraph 
(b)(2)(ii)(B) of this section.
    (iii) State agency notification requirements. Any new or renewing 
institution applying for participation in the Program shall be notified 
in writing of approval or disapproval by the State agency, within 30 
calendar days of the State agency's receipt of a complete application. 
Whenever possible, State agencies should provide assistance to 
institutions which have submitted an incomplete application. Any 
disapproved applicant shall be notified of the reasons for its 
disapproval and its right to appeal under paragraph (k) of this 
section.
    (2) Program agreements. (i) The State agency shall require each 
institution which has been approved for participation in the Program to 
enter into an agreement governing the rights and responsibilities of 
each party. The State agency may allow a renewing institution to amend 
its existing Program agreement in lieu of executing a new agreement. 
The existence of a valid agreement, however, does not eliminate the 
need for an institution to comply with the reapplication provisions of 
paragraphs (b) and (f) of this section.
    (ii) The length of time during which such agreements are in effect 
shall be no less than one nor more than three years, except that:
    (A) The State agency and institutions which are school food 
authorities shall enter into a single permanent agreement for the 
administration of all child nutrition programs for which the State 
agency has responsibility; and
    (B) If the State agency has not conducted a review of a renewing 
institution since the last agreement was signed or extended, and it has 
reason to believe that such a review is immediately necessary, the 
State agency may approve the agreement with the institution for a 
period of less than one year, pending the completion of a review of the 
institution.
    (iii) Any agreement that extends from one fiscal year into the 
following fiscal year shall stipulate that, in subsequent years, the 
agreement shall be in effect contingent upon the availability of 
Program funds. However, this shall not limit the State agency's ability 
to terminate the agreement in accordance with paragraph (c) of this 
section.
    (iv) The Program agreement shall provide that the institution 
accepts final financial and administrative responsibility for 
management of a proper, efficient, and effective food service, and will 
comply with all requirements under this part. In addition, the 
agreement shall provide that the sponsor shall comply with all 
requirements of title VI of the Civil Rights Act of 1964, title IX of 
the Education Amendments of 1972, Section 504 of the Rehabilitation Act 
of 1973, the Age Discrimination Act of 1975 and the Department's 
regulations concerning nondiscrimination (7 CFR parts 15, 15a and 15b), 
including requirements for racial and ethnic participation data 
collection, public notification of the nondiscrimination policy, and 
reviews to assure compliance with such policy, to the end that no 
person shall, on the grounds of race, color, national origin, sex, age, 
or disability, be excluded from participation in, be denied the 
benefits of, or be otherwise subjected to discrimination under, the 
Program.
* * * * *
    (f) Miscellaneous responsibilities. State agencies shall require 
institutions to comply with the applicable provisions of this part and 
shall provide or collect the information specified in this paragraph 
(f).
    (1) Annual responsibilities. In addition to its other 
responsibilities under this part, each State agency shall annually:
    (i) Inform institutions which are pricing programs of their 
responsibility to ensure that free and reduced price meals are served 
to participants unable to pay the full price;
    (ii) Provide to all institutions a copy of the income standards to 
be used by institutions for determining the eligibility of participants 
for free and reduced price meals under the Program;
    (iii) Coordinate with the State agency which administers the 
National School Lunch Program to ensure the receipt of a list of 
elementary schools in the State in which at least one-half of the 
children enrolled are certified eligible to receive free or reduced 
price meals. The State agency shall provide the list to sponsoring 
organizations by February 15 of each year, unless the State agency that 
administers the National School Lunch Program has elected to base data 
for the list on a month other than October, in which case the State 
agency shall provide the list to sponsoring organizations within 15 
calendar days of its receipt from the State agency that administers the 
National School Lunch Program. The State agency shall also provide each 
sponsoring organization with census data, as provided to the State 
agency by FNS upon its availability on a decennial basis, showing areas 
in the State in which at least 50 percent of the children are from 
households meeting the income standards for free or reduced price 
meals. In addition, the State agency shall ensure that the most recent 
available data is used if the determination of a day care home's 
eligibility as a tier I day care home is

[[Page 55127]]

made using school or census data. Determinations of a day care home's 
eligibility as a tier I day care home shall be valid for one year if 
based on a provider's household income, three years if based on school 
data, or until more current data are available if based on census data. 
However, a sponsoring organization, the State agency, or FNS may change 
the determination if information becomes available indicating that a 
home is no longer in a qualified area. The State agency shall not 
routinely require annual redeterminations of the tiering status of tier 
I day care homes based on updated elementary school data;
    (iv) Provide all sponsoring organizations of day care homes in the 
State with a listing of State-funded programs, participation in which 
by a parent or child will qualify a meal served to a child in a tier II 
home for the tier I rate of reimbursement;
    (v) Require child care centers, adult day care centers and outside-
school-hours care centers to submit current eligibility information on 
enrolled participants, in order to calculate a blended rate or claiming 
percentage in accordance with Sec. 226.9(b), and require sponsoring 
organizations of family day care homes to submit the total number of 
tier I and tier II day care homes that it sponsors, as well as a 
breakdown showing the total number of children enrolled in tier I day 
care homes, enrolled in tier II day care homes, and enrolled in tier II 
day care homes but identified as eligible for free and reduced price 
meals;
    (vi) Require each sponsoring organization of child care facilities 
to submit an administrative budget with sufficiently detailed 
information for the State agency to determine the allowability, 
necessity, and reasonableness of all proposed expenditures, and to 
assess the institution's capability to manage Program funds. The 
administrative budget submitted by any sponsoring organization shall 
demonstrate that the sponsor will expend and account for funds in 
accordance with regulatory requirements, FNS Instruction 796-2 
(``Financial Management in the Child and Adult Care Food Program''), 7 
CFR Parts 3015 and 3016, and applicable Office of Management and Budget 
circulars;
    (vii) Require each institution to issue a media release;
    (viii) Require each institution to provide information concerning 
its licensing/approval status and that of its facilities, as 
appropriate;
    (ix) Require each institution to submit verification that all 
facilities under its sponsorship have adhered to the training 
requirements set forth in Program regulations; and
    (x) Require each sponsoring organization of family day care homes 
to submit to the State agency a list of family day care home providers 
receiving tier I benefits on the basis of their participation in the 
Food Stamp Program. Within 30 days of receiving this list, the State 
agency will provide this list to the State agency responsible for the 
administration of the Food Stamp Program.
    (2) Triennial responsibilities. In addition to its other 
responsibilities under this part, each State agency shall, at intervals 
not to exceed 36 months:
    (i) Require participating institutions to re-apply to continue 
their participation; and
    (ii) Require sponsoring organizations of child care facilities to 
submit a management plan with the elements set forth in paragraph 
(b)(1)(i)(D) of this section.
    (3) Other responsibilities. At intervals and in a manner specified 
by the State agency, but not more frequently than annually, the State 
agency may:
    (i) Require independent centers to submit an administrative budget 
with sufficiently detailed information and documentation to enable the 
State agency to make an assessment of the institution's qualifications 
to manage Program funds. Such budget shall demonstrate that the 
institution will expend and account for funds in accordance with 
regulatory requirements, FNS Instruction 796-2 (``Financial Management 
in the Child and Adult Care Food Program''), 7 CFR Parts 3015 and 3016, 
and applicable Office of Management and Budget circulars;
    (ii) Require institutions to report their commodity preference;
    (iii) Require each institution to submit documentation of its non-
discrimination statement;
    (iv) Require an institution (except for any public organization, or 
any proprietary title XIX and title XX centers and sponsoring 
organizations of proprietary title XIX and title XX centers) to submit 
evidence of nonprofit status in accordance with Sec. 226.15(a);
    (v) Require proprietary title XX child care centers to submit 
documentation that they are currently providing nonresidential day care 
services for which they receive compensation under title XX of the 
Social Security Act, and certification that not less than 25 percent of 
enrolled participants or 25 percent of the licensed capacity, whichever 
is less, in each such center during the most recent calendar month were 
title XX beneficiaries;
    (vi) Require proprietary title XIX or title XX adult care centers 
to submit documentation that they are currently providing 
nonresidential day care services for which they receive compensation 
under title XIX or title XX of the Social Security Act, and 
certification that not less than 25 percent of enrolled participants in 
each such center during the most recent calendar month were title XIX 
or title XX beneficiaries;
    (vii) Require each institution to indicate its choice to receive 
all, part or none of advance payments, if the State agency chooses to 
make advance payments available; and
    (viii) Perform verification in accordance with Sec. 226.23(h) and 
paragraph (l)(3) of this section. State agencies verifying the 
information on free and reduced price applications shall ensure that 
verification activities are conducted without regard to the 
participant's race, color, national origin, sex, age, or disability.
    (g) Program expansion. Each State agency shall take action to 
expand the availability of benefits under this Program, and shall 
conduct outreach to potential sponsoring organizations of family day 
care homes which might administer the Program in low-income or rural 
areas.
    (h) Commodity distribution. The State agency shall require new 
applicant institutions to state their preference to receive commodities 
or cash-in-lieu of commodities, and may periodically inquire as to 
participating institutions' preference to receive commodities or cash-
in-lieu of commodities. State agencies shall annually provide 
institutions with information on foods available in plentiful supply, 
based on information provided by the Department. * * *
* * * * *
    (j) Procurement provisions. State agencies shall require 
institutions to adhere to the procurement provisions set forth in 
Sec. 226.22 and shall annually determine that all meal procurements 
with food service management companies are in conformance with bid and 
contractual requirements of Sec. 226.22.
* * * * *
    (l) Program assistance--(1) General. Each State agency shall 
provide technical and supervisory assistance to institutions and 
facilities to facilitate effective Program operations, monitor progress 
toward achieving Program goals, and ensure compliance with the 
Department's nondiscrimination

[[Page 55128]]

regulations (part 15 of this title) issued under title VI of the Civil 
Rights Act of 1964. Documentation of supervisory assistance activities, 
including reviews conducted, corrective actions prescribed, and follow-
up efforts, shall be maintained on file by the State agency.
    (2) Review content. As part of its conduct of administrative 
reviews, the State agency shall assess institutional compliance with: 
the provisions of this part; any applicable instructions and handbooks 
issued by FNS and the Department under this part; and any instructions 
and handbooks issued by the State agency which are not inconsistent 
with the provisions of this part. Program reviews shall include State 
agency evaluation of the documentation used by sponsoring organizations 
to classify their day care homes as tier I day care homes. At a 
minimum, State agency reviews shall also include an assessment of:
    (i) The institution's maintenance of required Program documents on 
file;
    (ii) Facility licensing and approval;
    (iii) Meal counts;
    (iv) Administrative costs;
    (v) Sponsor training and monitoring of facilities;
    (vi) Observation of meal service;
    (vii) The sponsoring organization's compliance with the household 
contact requirements set forth at Sec. 226.16(d)(5); and
    (viii) All other Program requirements.
    (3) Review of sponsored facilities. As part of each required review 
of a sponsoring organization, the State agency shall select a sample of 
facilities in order to compare available enrollment and attendance 
records and facility review results to meal counts submitted by those 
facilities. As part of such reviews, the State agency shall conduct 
verification of Program applications in accordance with Sec. 226.23(h).
    (4) Household contacts. When conducting reviews of sponsored 
facilities or institutions, State agencies shall contact the households 
of children in family day care homes or in child care centers (to 
exclude family day care home provider's households when the provider's 
own children are in care) whenever a facility or institution claims the 
same number and type of meals served for ten or more consecutive days, 
or claims an unusually high number of meals for more than one day in a 
claiming period. In such cases, the State agency shall contact at least 
one half of the households of children in care (not counting family day 
care providers' households when their children are in care) for the 
purpose of verifying their children's enrollment and attendance and the 
specific meal service(s) which their children routinely receive while 
in care. Household contacts may be made in writing or by telephone. 
However, if telephone contacts are used, State agencies shall give 
advance notice of the call to the household in writing. Such notice 
shall inform the household of the upcoming call and shall provide the 
name of the employee who will make the call. Such notice shall also 
inform the household that the call is being made to verify their 
child's participation or attendance at a child care facility receiving 
CACFP reimbursement; that all information provided shall be strictly 
confidential; and that the State agency will only use the information 
for Program purposes. If one-quarter or more of the selected households 
with children in a sponsored center, or if any of the households with 
children in a family day care home, cannot be contacted or refuse to 
provide information within 30 days, or if any of the households 
contacted fail to corroborate the facility's meal claim, the State 
agency shall make an unannounced visit to the facility within one week. 
Non-respondent households shall be counted towards meeting the State 
agency's requirement to contact one-half of the households with 
children in a particular facility.
    (5) Frequency and number of required institution reviews. State 
agencies shall annually review 33.3 percent of all institutions. State 
agencies shall also ensure that each institution is reviewed according 
to the following schedule.
    (i) Independent centers, sponsoring organizations of centers, and 
sponsoring organizations of day care homes with 1 to 200 homes shall be 
reviewed at least once every four years. Reviews of sponsoring 
organizations shall include reviews of 15 percent of their child care, 
adult day care, and outside-school-hours care centers and 10 percent of 
their day care homes.
    (ii) Sponsoring organizations with more than 200 homes shall be 
reviewed at least once every two years. Reviews of such sponsoring 
organizations shall include reviews of 5 percent of the first 1,000 
homes and 2.5 percent of all homes in excess of 1,000.
    (iii) Reviews shall be conducted for newly participating sponsoring 
organizations with five or more child care facilities or adult day care 
facilities within the first 90 days of program operations.
* * * * *
    (q) WIC Program Information. State agencies shall provide 
information on the importance and benefits of the Special Supplemental 
Nutrition Program for Women, Infants and Children (WIC), and WIC income 
eligibility guidelines, to participating institutions. In addition, the 
State agency shall ensure that:
    (1) Participating family day care homes and sponsored child care 
centers receive this information, and periodic updates of this 
information, from their sponsoring organizations or the State agency; 
and
    (2) The parents of enrolled children also receive this information.
    6. In Sec. 226.7:
    a. Paragraph (g) is revised.
    b. Paragraph (k) is amended by adding a new sentence after the 
first sentence.
    The revision and addition specified above read as follows:


Sec. 226.7  State agency responsibilities for financial management.

* * * * *
    (g) Administrative budget approval. The State agency shall review 
institution administrative budgets and shall limit allowable 
administrative claims by each sponsoring organization to the 
administrative costs approved in its budget. The administrative budget 
shall demonstrate the institution's ability to manage Program funds in 
accordance with this part, FNS Instruction 796-2 (``Financial 
Management in the Child and Adult Care Food Program''), 7 CFR Parts 
3015 and 3016, and applicable Office of Management and Budget 
circulars. Sponsoring organizations shall submit an administrative 
budget to the State agency annually, and independent centers shall 
submit administrative budgets as frequently as required by the State 
agency. Administrative budget levels may be adjusted to reflect changes 
in Program activities.
* * * * *
    (k) * * * Such procedures shall include State agency edit checks, 
including but not limited to ensuring that payments are made only for 
approved meal types and do not exceed the product of the total 
enrollment times operating days times approved meal types. * * *
* * * * *
    7. In Sec. 226.8:
    a. Paragraphs (a) and (b) are revised.
    b. Paragraph (c) is amended by adding the words ``or agreed-upon 
procedures engagements'' after the words ``administrative reviews'' in 
the second sentence.
    The revisions specified above read as follows:

[[Page 55129]]

Sec. 226.8  Audits.

    (a) Unless otherwise exempt, audits at the State and institution 
levels shall be conducted in accordance with Office of Management and 
Budget circular A-133 and the Department's implementing regulations at 
7 CFR part 3052. State agencies shall establish audit policy for title 
XIX and title XX proprietary institutions. However, the audit policy 
established by the State agency shall not conflict with the authority 
of the State agency or the Department to perform, or cause to be 
performed, audits, reviews, agree-upon procedures, or other monitoring 
activities.
    (b) The funds provided to the State agency under Sec. 226.4(h) may 
be made available to institutions to fund a portion of organization-
wide audits made in accordance with 7 CFR part 3052. The funds provided 
to an institution for an organization-wide audit shall be determined in 
accordance with 7 CFR 3052.230(a).
* * * * *
    8. In Sec. 226.10:
    a. The first sentence of paragraph (a) is revised.
    b. Paragraph (c) is amended by adding three new sentences at the 
end of the introductory text and by adding paragraphs (c)(1), (c)(2), 
and (c)(3).
    c. Paragraph (f) is revised.
    The addition and revisions specified above read as follows:


Sec. 226.10  Program payment procedures.

    (a) If a State agency decides to issue advance payments to all or 
some of the participating institutions in the State, it shall provide 
such advances no later than the first day of each month to those 
institutions electing to receive advances in accordance with Sec. 226.6 
(f)(3)(vii). * * *
* * * * *
    (c) * * * Prior to submitting its consolidated monthly claim to the 
State agency, each sponsoring organization shall perform edit checks on 
its facilities' meal claims. Edit checks must be performed for every 
day meals are claimed by a facility. Discrepancies between the 
facility's meal claim and its enrollment (as adjusted for absences, 
shift care, and other factors) must be subjected to more thorough 
review to determine if the claim is accurate. At a minimum, these edit 
checks must:
    (1) Verify that the facility has been approved to serve the types 
of meals claimed;
    (2) Compare the number of children enrolled for care (taking an 
expected rate of absences into account) to the number of meals claimed; 
and
    (3) Detect block claiming (i.e., no daily variation in the number 
of meals claimed).
* * * * *
    (f) If, based on the results of audits, investigations, or other 
reviews, a State agency has reason to believe that an institution, 
child or adult care facility, or food service management company has 
engaged in unlawful acts with respect to Program operations, the 
evidence found in audits, investigations, or other reviews shall be a 
basis for non-payment of claims for reimbursement.
    9. In Sec. 226.11:
    a. Paragraph (a) is amended by adding a new sentence to the end of 
the paragraph.
    b. Paragraph (b) is amended by adding a new sentence to the end of 
the paragraph.
    c. Paragraph (c)(1) is revised.
    The additions and revision specified above read as follows:


Sec. 226.11  Program payments for child care centers, adult day care 
centers and outside-school-hours care centers.

    (a) * * * However, State agencies may defer payment for meals 
served in approved centers until the day on which the State agency and 
center enter into a Program agreement.
    (b) * * * Prior to submitting its consolidated monthly claim to the 
State agency, each sponsoring organization shall compare sponsored 
child care and outside-school-hour care centers' meal claims against 
the most recent information on enrollment, licensed capacity, total 
days of operation, attendance patterns, and authorized meal services, 
for each meal type being claimed on each day of operation.
    (c) * * *
    (1) Base reimbursement to child care centers and adult day care 
centers on actual time of service meal counts, and multiply the number 
of meals, by type, served to participants eligible to receive free 
meals, served to participants eligible to receive reduced-price meals, 
and served to participants from families not meeting such standards by 
the applicable national average payment rate; or
* * * * *
    10. In Sec. 226.13:
    a. Paragraph (b) is amended by adding a new sentence to the end of 
the paragraph; and
    b. Paragraph (c) is amended by adding the words ``based on daily 
meal counts taken in the home'' after the words ``as applicable,''.
    The addition specified above reads as follows:


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

* * * * *
    (b) * * * Prior to submitting its consolidated monthly claim to the 
State agency, each sponsoring organization shall compare day care 
homes' meal claims against the most recent information on enrollment, 
licensed capacity, total days of operation, attendance patterns, and 
authorized meal services at each home, for each meal type being claimed 
on each day of operation, and shall not include in its consolidated 
claim any meal(s) which are not properly supported by appropriate 
documentation.
* * * * *
    11. In Sec. 226.15:
    a. Paragraph (b) is revised.
    b. Paragraphs (e)(2) and (e)(3) are amended by adding a new 
sentence to the end of each paragraph.
    c. Paragraph (e)(4) is revised.
    d. New paragraph (e)(15) is added.
    e. Paragraphs (g)-(k) are redesignated as paragraphs (h)-(l), and a 
new paragraph (g) is added.
    f. Redesignated paragraph (i) is amended by removing the reference 
``Sec. 226.6(f)(1)'' and adding in its place the reference 
``Sec. 226.6(b)(2)''.
    g. New paragraphs (m) and (n) are added.
    The additions and revisions specified above read as follows:


Sec. 226.15  Institution provisions.

* * * * *
    (b) New applications and renewals. Each institution shall submit to 
the State agency with its application all information required for its 
approval as set forth in Sec. Sec. 226.6(b) and (f). Such information 
shall demonstrate that the institution has the administrative and 
financial capability to operate the Program properly, efficiently, and 
effectively.
* * * * *
    (e) * * *
    (2) * * * For child care centers and outside-school-hours care 
centers, such documentation of enrollment shall be updated annually, 
signed by a parent or legal guardian, and include information on each 
child's normal days and hours of care and the meals normally received 
while in care.
    (3) * * * Such documentation of enrollment shall be updated 
annually, signed by a parent or legal guardian, and include information 
on each child's normal days and hours of care and the meals normally 
received while in care.
    (4) Daily records indicating the number of participants in 
attendance and the daily meal counts, by type

[[Page 55130]]

(breakfast, lunch, supper, and supplements), served to family day care 
home participants, or the time of service meal counts, by type, 
(breakfast, lunch, supper, and supplements), served to child care 
center and adult day care center participants.
* * * * *
    (15) For sponsoring organizations, records documenting the 
attendance of each staff member with monitoring responsibilities at 
training which includes instruction on the Program's meal patterns, 
meal counts, claims submission and review procedures, recordkeeping 
requirements, and an explanation of the Program's reimbursement system.
* * * * *
    (g) No institution which is a sponsoring organization of family day 
care homes which employs more than one person is permitted to base 
payment (including bonuses or gratuities) to its employees, 
contractors, or family day care home providers solely on the number of 
new family day care homes recruited for the sponsoring organization's 
Program.
* * * * *
    (m) Each institution shall comply with all regulations, 
instructions and handbooks issued by FNS and the Department and all 
regulations, instructions and handbooks issued by the State agency 
which are not inconsistent with the provisions established in Program 
regulations.
    (n) Each institution shall ensure that parents of enrolled children 
are provided with current information on the benefits and importance of 
the Special Supplemental Nutrition Program for Women, Infants and 
Children (WIC), and the eligibility requirements for WIC participation.
    12. In Sec. 226.16:
    a. The introductory text of paragraph (b) and paragraph (b)(1) are 
revised.
    b. Paragraphs (d)(2), (d)(3) and (d)(4) are revised.
    c. New paragraph (d)(5) is added.
    d. New paragraph (l) is added.
    The additions and revisions specified above read as follows:


Sec. 226.16  Sponsoring organization provisions.

* * * * *
    (b) Each sponsoring organization shall submit to the State agency 
with its application all information required for its approval, and the 
approval of the child care and adult day care facilities under its 
jurisdiction, as set forth in Sec. Sec. 226.6(b) and (f). The 
application shall demonstrate that the institution has the 
administrative and financial capability to operate the Program 
properly, efficiently, and effectively in accordance with the Program 
regulations. In addition to the information required in 
Sec. Sec. 226.6(b) and (f), the application shall include:
    (1) A sponsoring organization management plan and budget, in 
accordance with Sec. Sec. 226.6(b)(1)(i)(D), 226.6(f)(1)(vi), and 
226.7(g);
* * * * *
    (d) * * *
    (2) Providing, prior to the beginning of Program operations, 
training on Program duties and responsibilities to key staff from all 
sponsored child care and adult day care facilities. At a minimum, such 
training shall include instruction on the Program's meal patterns, meal 
counts, claims submission and review, recordkeeping requirements, and 
an explanation of the Program's reimbursement system. Attendance by key 
staff, as defined by the sponsoring organization, shall be mandatory;
    (3) Providing, not less frequently than annually, additional 
mandatory training sessions for key staff from all sponsored child care 
and adult day care facilities. At a minimum, such training shall 
include instruction on the Program's meal patterns, meal counts, claims 
submission and review, recordkeeping requirements, and an explanation 
of the Program's reimbursement system. Attendance by key staff, as 
defined by the State agency, shall be mandatory;
    (4)(i) Review elements. All reviews shall include a reconciliation 
of the facility's meal claims with enrollment and attendance records, 
an assessment of whether the facility has corrected problems noted on 
the previous review(s), and an assessment of the facility's compliance 
with the Program requirements pertaining to:
    (A) The meal pattern;
    (B) Licensing or approval;
    (C) Health, safety and sanitation;
    (D) Attendance at training;
    (E) Meal counts;
    (F) Menu and meal records; and
    (G) The annual updating and content of enrollment forms.
    (ii) Such reviews shall include a thorough examination of the meal 
claims recorded by the facility for five consecutive days during the 
current and/or prior claiming period. For each day examined, reviewers 
shall use enrollment and attendance records to determine the number of 
children in care during each meal service and to compare those numbers 
to the numbers of breakfasts, lunches, suppers, and/or supplements 
claimed for that day. Based on that comparison, reviewers shall 
determine whether the claims were accurate. If there is a discrepancy 
between the number of children enrolled or in attendance on the day of 
review and prior claiming patterns, the reviewer shall attempt to 
reconcile the difference and determine whether the establishment of an 
overclaim is necessary. In addition, after the on-site review has been 
conducted, the sponsoring organization shall analyze the review 
findings to determine whether household contacts, as defined in 
Sec. 226.2, must be initiated to determine the validity of the 
providers' previous meal claims.
    (iii) Frequency and type of required reviews of sponsored child 
care and adult day care facilities. Such reviews shall be made not less 
frequently than three times per year at each child care facility and 
adult day care facility. At least one review shall be made during each 
child care or adult day care facility's first four weeks of Program 
operations and not more than six months shall elapse between reviews. 
However, sponsors may conduct reviews on average of three times each 
year per child care or adult day care facility, provided that each 
facility receives at least two visits per year, at least one review is 
made during each facility's first four weeks of Program operations, and 
no more than twelve months elapse between reviews. Sponsoring 
organizations which have completed two of the three required facility 
reviews without discovering serious problems (e.g., non-compliance with 
the meal pattern, missing or inaccurate meal claims, submission of 
inaccurate claims, failure to keep required records, or the provider's 
unexplained absence) may choose either to not conduct a third review of 
that facility or to use the third review as an opportunity to conduct 
training at that facility;
    (5) Household contacts. (i) Sponsoring organizations shall contact 
households of children in family day care homes and child care centers 
(to exclude family day care home provider's households when the 
provider's own children are in care) whenever a facility claims the 
same number and type of meals served for ten or more consecutive days, 
or claims an unusually high number of meals for more than one day in a 
claiming period. In such cases, sponsoring organizations shall contact 
at least one half of the households of children in care at that 
facility (not counting family day care providers' households when their 
children are in care) for the purpose of verifying their children's 
enrollment and attendance and the specific meal

[[Page 55131]]

service(s) which their children routinely receive while in care. 
Sponsoring organizations are also encouraged to make household contacts 
whenever they detect unusual or suspicious patterns in the meal claims 
submitted by their sponsored facilities.
    (ii) Household contacts may be made in writing or by telephone. 
However, if telephone contacts are used, sponsoring organizations shall 
give advance notice of the call to the household in writing. Such 
notice shall inform the household of the upcoming call and shall 
provide the name of the employee who will make the call. Such notice 
shall also inform the household that the call is being made to verify 
their child's participation or attendance at a child care facilities 
receiving CACFP reimbursement; that all information provided shall be 
strictly confidential; and that the sponsor will only use the 
information for Program purposes.
    (iii) If one-quarter or more of the selected households with 
children in a sponsored center, or if any of the households with 
children in a family day care home, cannot be contacted or refuse to 
provide information within 30 days, or if any of the households 
contacted fail to corroborate the facility's meal claim, the sponsoring 
organization shall make an unannounced visit to the facility within one 
week. Non-respondent households shall be counted towards meeting the 
sponsoring organization's requirement to contact one-half of the 
households with children in a particular facility. Sponsoring 
organizations may make additional household contacts as they may deem 
necessary, provided that the procedures set forth in this paragraph are 
followed.
* * * * *
    (l) Sponsoring organizations of family day care homes shall not 
make payments to employees or contractors solely on the basis of the 
number of homes recruited. However, such employees or contractors may 
be paid or evaluated on the basis of recruitment activities 
accomplished.
    13. In Sec. 226.17:
    a. Paragraph (b)(7) is amended by adding a new sentence at the end 
of the paragraph.
    b. Paragraph (b)(8) is revised.
    c. A new paragraph (b)(9) is added.
    The additions and revision specified above read as follows:


Sec. 226.17  Child care center provisions.

* * * * *
    (b) * * *
    (7) * * * Such documentation of enrollment shall be updated 
annually, signed by a parent or legal guardian, and include information 
on each child's normal days and hours of care and the meals normally 
received while in care.
    (8) Each child care center shall maintain daily records of time of 
service meal counts by type (breakfast, lunch, supper, and supplements) 
served to enrolled children, and to adults performing labor necessary 
to the food service.
    (9) Each child care center shall require key staff, as defined by 
the State agency, to attend Program training prior to the facility's 
participation in the Program, and at least annually thereafter, on 
content areas established by the State agency.
    14. In Sec. 226.18:
    a. Paragraph (b)(2) is revised.
    b. Paragraph (b)(7) is amended by removing the semicolon, adding a 
period after the word ``agreement'' and by adding a new sentence at the 
end of the paragraph.
    c. Paragraph (e) is amended by adding the words, ``shall maintain 
on file documentation of each child's enrollment and'' after the words 
``Each day care home'' in the first sentence, and by adding a new 
sentence after the first sentence.
    The revisions and additions specified above read as follows:


Sec. 226.18  Day care home provisions.

* * * * *
    (b) * * *
    (2) The responsibility of the sponsoring organization to require 
key staff, as defined by the State agency, to attend Program training 
prior to the facility's participation in the Program, and at least 
annually thereafter, on content areas established in this Part and by 
the State agency, and the responsibility of the sponsoring organization 
to train the day care home's staff in Program requirements;
* * * * *
    (7) * * * The sponsoring organization shall not withhold Program 
payments to any family day care home for any other reason except that, 
with the prior consent of the State agency, the sponsoring organization 
may withhold from the provider any amounts which the sponsoring 
organization has reason to believe are based on a false or erroneous 
claim submitted by the provider.
* * * * *
    (e) * * * Such documentation of enrollment shall be updated 
annually, signed by a parent or legal guardian, and include information 
on each child's normal days and hours of care and the meals normally 
received while in care. * * *
* * * * *
    15. In Sec. 226.19:
    a. The introductory text of paragraph (b)(7) is revised.
    b. Paragraph (b)(8)(i) is amended by removing the semicolon, adding 
a period after ``Sec. 226.23(e)(1)'' and adding a new sentence at the 
end of the paragraph.
    The addition and revision specified above read as follows:


Sec. 226.19  Outside-school-hours care center provisions.

* * * * *
    (b) * * *
    (7) Each outside-school-hours care center shall require key 
operational staff, as defined by the State agency, to attend Program 
training prior to the facility's participation in the Program, and at 
least annually thereafter, on content areas established by the State 
agency. Each meal service shall be supervised by an adequate number of 
operational personnel who have been trained in Program requirements as 
outlined in this Section. Operational personnel shall ensure that:
* * * * *
    (8) * * *
    (i) * * * Such documentation of enrollment shall be updated 
annually, shall be signed by a parent or legal guardian, and shall 
include information on each child's normal days and hours of care and 
the meals normally received while in care.
* * * * *
    16. In Sec. 226.19a:
    a. Paragraph (b)(9) is revised.
    b. A new paragraph (b)(11) is added.
    The addition and revision specified above read as follows:


Sec. 226.19a  Adult day care center provisions.

* * * * *
    (b) * * *
    (9) Each adult day care center shall maintain daily records of time 
of service meal counts by type (breakfast, lunch, supper, and 
supplements) served to enrolled participants, and to adults performing 
labor necessary to the food service.
* * * * *
    (11) Each adult day care center shall require key operational 
staff, as defined by the State agency, to attend Program training prior 
to the facility's participation in the Program, and at least annually 
thereafter, on content areas established by the State agency. Each meal 
service shall be supervised by an adequate number of operational 
personnel who have been trained in Program requirements as outlined in 
this Section.

[[Page 55132]]

    17. In Sec. 226.20, paragraphs (k)-(p) are redesignated as 
paragraphs (l)-(q), respectively, and a new paragraph (k) is added to 
read as follows:


Sec. 226.20  Requirements for meals.

* * * * *
    (k) Time of meal service. In addition to the requirements for 
outside-school-hours care centers set forth at Sec. 226.19(b)(6), State 
agencies may require any institution or child care facility to allow a 
specific amount of time to elapse between meal services or require that 
meal services not exceed a specified duration.
* * * * *
    18. In Sec. 226.23, paragraph (a) is revised to read as follows:


Sec. 226.23  Free and reduced-price meals.

    (a) The State agency shall not enter into a Program agreement with 
a new institution until the institution has submitted, and the State 
agency has approved, a written policy statement concerning free and 
reduced-price meals to be used in all child and adult day care 
facilities under its jurisdiction, as described in paragraph (b) of 
this Section. The State agency shall not require an institution to 
revise its policy statement unless the institution makes a substantive 
change to its policy. Pending approval of a revision of a policy 
statement, the existing policy shall remain in effect.
* * * * *


Sec. 226.25  [Amended]

    19. In Sec. 226.25, paragraph (g) is removed.

    Dated: August 28, 2000.
Shirley R. Watkins,
Under Secretary for Food, Nutrition, and Consumer Services.
[FR Doc. 00-22901 Filed 9-11-00; 8:45 am]
BILLING CODE 3410-30-P