[Federal Register Volume 66, Number 183 (Thursday, September 20, 2001)]
[Rules and Regulations]
[Pages 48323-48334]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-23350]



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  Federal Register / Vol. 66, No. 183 / Thursday, September 20, 2001 / 
Rules and Regulations  

[[Page 48323]]



DEPARTMENT OF AGRICULTURE

Food and Nutrition Service

7 CFR Part 245

RIN 0584-AC25


National School Lunch Program and School Breakfast Program: 
Alternatives to Standard Application and Meal Counting Procedures

AGENCY: Food and Nutrition Service, USDA.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: This final rule amends the regulations governing the 
procedures for determining eligibility for free and reduced price meals 
in the National School Lunch Program and the School Breakfast Program. 
Regulations provide school food authorities with two alternatives to 
the standard requirements for the annual determinations of eligibility 
for free and reduced price school meals and daily meal counts by type, 
commonly termed ``Provision 1'' and ``Provision 2''. This final rule 
allows for an extension of Provision 2 procedures and provides a new 
alternative, ``Provision 3''. For schools choosing to participate in 
one of the alternate eligibility determination and meal counting 
procedures, this final rule codifies the alternate counting and 
claiming provisions of Public Law 103-448 which have been implemented, 
and revisions to the counting and claiming provisions authorized by 
Public Laws 104-193 and 105-336. This final rule streamlines program 
operations for program administrators and participants. State agency 
and school food authority recordkeeping burdens are expected to 
decrease because the determinations of eligibility for free and reduced 
price meals will not be made as frequently. In addition, for those 
schools electing to participate, this final rule may increase 
participation in nutritious school meal programs, thereby helping 
students develop lifelong healthy eating habits. A primary reason for 
the expected increase in participation is that schools under Provision 
2 and Provision 3 would be offering meals at no charge to all enrolled 
students.

EFFECTIVE DATE: October 22, 2001.

FOR FURTHER INFORMATION CONTACT: Robert M. Eadie, Chief, Policy and 
Program Development Branch, Child Nutrition Division, Food and 
Nutrition Service, USDA, 3101 Park Center Drive, Alexandria, VA 22302, 
ph. (703) 305-2620.

SUPPLEMENTARY INFORMATION: On February 7, 2000, The U.S. Department of 
Agriculture (the Department or ``we'') published a proposed rule at 65 
FR 5791 to amend 7 CFR part 245 to include changes and additions to the 
alternatives to standard eligibility determination and meal counting 
procedures. The February 7, 2000 rule proposed changes to Provision 2, 
which is codified in 7 CFR part 245, and proposed to codify Provision 
3. These changes were necessitated by Public Law 103-448, Public Law 
104-193 and Public Law 105-336. For further information on these 
statutory changes, refer to the proposed rule referenced above.
    We received 12 comments on the proposed rule during the 60-day 
comment period. The majority of commenters approved of the proposed 
changes, while many also suggested changes or requested clarification 
in the final rule. Comments were received from local school food 
authorities, State agencies, advocacy associations and the general 
public. Several of the commenters addressed issues and concerns that 
affect both Provision 2 and Provision 3. The remainder of this preamble 
discusses the changes and clarifications which are being made in the 
final rule as a result of the comments.
    To the extent that a comment generated revisions to both 
provisions, we address those revisions to the proposed rule under a 
single paragraph. For example, commenters suggested changes to the 
proposed streamlined base year. Therefore, in the preamble we provide 
information regarding changes to the streamlined base year for both 
Provision 2 and Provision 3 and reference the respective paragraph 
citations. Other revisions that affect only one of the provisions will 
be discussed under the heading of the respective provision.
    Readers will note that this preamble addresses changes to Provision 
2 and Provision 3 as they were proposed. To the extent that no changes 
were made to the proposed regulatory text, the final rule adopts the 
provisions as proposed.

Section 245.9  Special Assistance Certification and Reimbursement 
Alternatives

General Comments and Clarifications

    Throughout the proposal, we referenced meal counts at the point of 
service. For both provisions, point of service meal counts were 
referenced during the conduct of the base year and as part of the 
procedures required during non-base years. One commenter questioned 
whether the reference to ``point of service'' throughout the proposed 
rule was intended to preclude approved alternates to meal counts taken 
at the point of service. We did not intend to preclude approved 
alternates to point of service meal counts, therefore when referencing 
meal counts, this final rule clarifies that alternate point of service 
counts as authorized by 7 CFR part 210 are acceptable.
    In accordance with section 11 of the Richard B. Russell National 
School Lunch Act (NSLA) (42 U.S.C. 1759a), the proposed rule set forth 
a Provision 2 and Provision 3 cycle which, while similar, are not 
identical. The cycle is 4 years in duration for both provisions. 
However, the base year for Provision 2 was included as part of the 4-
year cycle while the base year for Provision 3 immediately preceded the 
4-year cycle. Three commenters recommended that the Provision 2 and 
Provision 3 cycles be revised so that the base years are treated in a 
similar manner. Because the basis for the difference between the 
Provision 2 and Provision 3 base years is statutory, the Department is 
unable to make the provisions identical regarding the base year and 
subsequent cycle. Thus, the final rule retains the difference between 
the Provision 2 and Provision 3 base year as it relates to the 4-year 
cycle.

Specific Provisions

    Proposed Sec. 245.9(b) Provision 2, restated the introductory 
language for the Provision 2 requirements in current regulations and 
added a definition of

[[Page 48324]]

``base year'' which did not specify when a school must begin a base 
year. However, proposed paragraph (b)(3)(ii) Annual percentages, would 
have required a base year to be a full school year, or the equivalent 
number of months if a school started the provision at a point in time 
other than the beginning of a school year. Taken together, these two 
sections of the proposed rule would have permitted a base year to be 
initiated at any time during the school year, provided that the base 
year encompassed the equivalent number of months as a full school year. 
The Department originally allowed schools to begin a mid-year 
implementation in order to accommodate statutory changes. This 
flexibility allowed schools time to learn about the changes and 
implement them during the same school year.
    Several commenters objected to a base year covering more than one 
school year and suggested that the option to implement Provision 2 and 
Provision 3 must be exercised at the beginning of the school year.
    In recognition of commenter concerns, this final rule requires the 
base year to begin at the start of the school year. However, in 
recognition of the difficulty in securing completed applications, this 
final rule would permit, at State agency discretion, a delayed 
implementation of the Provision 2 base year not to exceed the first 
claiming period of the school year in which the base year is 
established. Delayed implementation would permit schools to charge 
participating students for reduced price and paid meals in the first 
claiming period of the base year. Such schools would convert the meal 
counts, by type, for the remaining months of operation in the Provision 
2 base year, when all meals were served at no charge, into annual 
claiming percentages. These claiming percentages would be applied to 
the first claiming period for all non-base years of the cycle plus any 
extensions. To accommodate these changes, a new paragraph (b)(6) was 
added and the description of base year proposed in paragraph (b) was 
moved to paragraph (b)(6) of this final rule.
    Section 245.9(b)(1) for Provision 2 and Sec. 245.9(d)(1) for 
Provision 3, Free meals, of the proposed rule stipulated that Provision 
2 and Provision 3 schools must serve reimbursable meals, as determined 
by a point of service observation, to all students at no charge. Two 
commenters expressed concern that using the term ``Free meals'' in the 
heading could cause people to confuse meals served under Provision 2 or 
Provision 3 with free meals served to eligible students and the 
subsequent higher level of Federal reimbursement provided for such 
meals. The Department agrees with commenters that the potential for 
confusion exists, therefore, this final rule adopts paragraph (b)(1) as 
proposed, but the title ``Free meals'' is replaced with the title, 
``Meals at no charge''.
    Proposed Sec. 245.9(b)(3)(i), Monthly percentages and 
Sec. 245.9(b)(3)(ii), Annual percentages, included a description of the 
procedures to calculate monthly claiming percentages and added a 
description of a new option to allow annual claiming percentages for 
Provision 2 schools. Eight commenters supported the option of annual 
claiming percentages for schools operating under Provision 2. One 
commenter suggested clarifying that only reimbursable student meals may 
be included in the calculation. This final rule adopts the monthly and 
optional annual claiming percentages as proposed, with minor editorial 
changes, and clarifies that only reimbursable student meals are 
included in the calculation of monthly and annual claiming percentages.
    Two commenters suggested allowing school food authority-wide 
claiming percentages for Provision 2 when all schools in a school food 
authority operate under the Provision. We fully considered this option. 
However, the blending of data to establish school food authority-wide 
claiming percentages would not properly allocate Federal funds. By 
blending the data from two or more Provision 2 sites, each sites' 
numbers would be weighted for their contribution toward the claiming 
percentages. For example, if two Provision 2 schools were to blend 
their data with one school serving 800 meals a day and one school 
serving 200 meals a day, the data from the school which served 800 
meals a day would be given more weight than the school serving 200 
meals a day. During the non-base years as each of these schools 
experience changes in the enrollment and participation, the weighting 
of the base year data would no longer reflect each schools' 
contribution to the single claiming percentage resulting in an 
inappropriate loss or gain of Federal reimbursement during non-base 
years. Therefore, this final rule does not include a provision for 
school food authority-wide claiming percentages.
    As a result of questions raised by commenters, two new paragraphs 
appear under paragraph (b) Provision 2 and paragraph (d) Provision 3 of 
this final rule. Newly added paragraphs (b)(4) and (d)(6) address the 
claims review process and newly added paragraphs (b)(5) and (d)(7) 
address verification.
    One commenter questioned whether edit checks were required in non-
base years and, further, suggested that edit checks are not relevant 
during non-base years. We believe that a system of internal controls is 
critical to the integrity of the programs. Currently, Sec. 210.8(a)(2) 
requires school food authorities to review lunch count data for each 
school under its jurisdiction to ensure the accuracy of the monthly 
Claim for Reimbursement. Specifically, Sec. 210.8(a)(2) permits any 
school food authority that was found, during its most recent 
administrative review, to have no meal counting and claiming violations 
to develop internal controls that ensure accurate meal counts. School 
food authorities found to have meal count problems are required to 
follow specific edit check procedures. We agree with the commenter to 
the degree that edit checks by type (free, reduced price and paid) are 
not relevant during the non-base years of Provision 2 or Provision 3. 
However, a simplified system of editing total daily meal counts remains 
a prudent management tool critical to the integrity of the programs. 
Therefore, the final rule adds new paragraphs clarifying edit check 
activity under Provision 2 and Provision 3.
    Under new paragraph (b)(4), School food authority claims review 
process, school food authorities are required to review the lunch count 
data for each Provision 2 school under its jurisdiction in accordance 
with Sec. 210.8(a)(2) during the base year. However, during non-base 
years and streamlined base years, school food authorities must conduct 
a simplified edit check of Provision 2 schools' total daily meal counts 
as compared to the school's total enrollment, adjusted by an attendance 
factor.
    A similar requirement for Provision 3 schools is found at new 
paragraph (d)(6), School food authority claims review process. Under 
this paragraph, school food authorities are required to review lunch 
count data for each Provision 3 school under its jurisdiction in 
accordance with Sec. 210.8(a)(2) during the base year. However, during 
the non-base years and streamlined base years, school food authorities 
must conduct their own system of oversight or compare each Provision 3 
school's total daily meal counts to the school's total enrollment, 
adjusted by an attendance factor. Both paragraphs (b)(4) and (d)(6) 
require school food authorities to promptly follow up as specified in 
Sec. 210.8(a)(4) when the claims review process suggests the likelihood 
of lunch count problems.

[[Page 48325]]

    These provisions affect schools that elect to operate Provision 2 
or Provision 3 in the National School Lunch Program. If a school elects 
to operate Provision 2 or Provision 3 only in the School Breakfast 
Program, school food authorities must continue to comply with the 
claims review requirements of Sec. 210.8(a)(2) for the National School 
Lunch Program.
    We are also taking this opportunity to clarify the procedures for 
conducting verification during the base year and non-base years for 
schools operating under Provision 2 and Provision 3. In accordance with 
Sec. 245.6a, schools operating under Provision 2 or Provision 3 are 
subject to the school food authority's verification activity, except as 
otherwise specified in Sec. 245.6a(a)(5). Section 245.6a(a)(5) states 
that school food authorities in which all schools participate in the 
Special Assistance Certification and Reimbursement Alternatives 
specified in Sec. 245.9 shall meet the verification requirement only in 
those years in which applications are taken for all children in 
attendance.
    This final rule further clarifies the verification requirements 
during non-base years as they pertain to Provision 2 in newly added 
paragraph (b)(5), Verification and Provision 3 in newly added paragraph 
(d)(7), Verification. When a school elects to participate under 
Provision 2 or Provision 3 for all of the meal programs in which it 
participates (breakfast and/or lunch), during the non-base years, the 
applications from that school are excluded from the verification 
requirements and are not included when the school food authority 
determines its required verification sample size. However, if a school 
operates the School Breakfast Program under Provision 2 or Provision 3 
and operates the National School Lunch Program under standard 
application, counting and claiming procedures, the applications from 
this school are included in the school food authority's calculation of 
its required sample size and are subject to verification during non-
base years.
    Consistent with sections 11(a)(1)(D) and (E) of the NSLA (42 U.S.C. 
1759a(1)(D) and 1759a(1)(E)), the proposed rule, (Sec. 245.9(c) for 
Provision 2 and Sec. 245.9(e) for Provision 3), would permit extension 
of Provision 2 or Provision 3 if the income level of the school's 
population, as adjusted for inflation, has remained stable, declined or 
has had only negligible improvement since the base year. The proposed 
rule defined ``Negligible improvement'' to mean 5% or less improvement, 
after adjusting for inflation, over the base year in the level of the 
socioeconomic indicator which is used to establish the income level of 
the school's population. Five commenters supported the proposal in 
general. Of the five commenters, one commenter requested that the 
percentage be increased in schools with a high percentage of needy 
students. Another commenter suggested increasing the percentage in 
schools with small populations. We considered these comments and 
determined that a standard criteria for granting extensions provides 
for the most consistent implementation of the provisions. Therefore, 
the final rule retains the definition of negligible improvement as 
proposed.
    Proposed Sec. 245.9(c)(2)(iii) for Provision 2 and 
Sec. 245.9(e)(2)(iii) for Provision 3, Establish a streamlined base 
year, would have allowed an enrollment based streamlined base year for 
those schools that did not receive an extension. Three commenters 
opposed the option of a streamlined base year for schools that do not 
receive an extension. The commenters expressed concerns that current 
data problems with overcertification may be exacerbated through 
statistical determinations of eligibility. The Department does not 
anticipate that the use of statistical sampling methodology will have a 
material effect on the overcertification data problem. However, to 
address commenter concern, this final rule clarifies that school food 
authorities must obtain State agency approval prior to conducting a 
streamlined base year. Two commenters supported the option of 
conducting an enrollment based, streamlined base year but expressed 
concern that the proposed method would establish claiming percentages 
based on enrollment rather than participation. These two commenters 
recommended adding an additional option, i.e., participation based 
claiming percentages. We considered these comments and concluded that 
one of the barriers to a school's participation in Provision 2 or 
Provision 3 has been the requirement to take free and reduced price 
applications at the end of each cycle. To make the provisions more 
accessible, the final rule retains the option to conduct an enrollment 
based streamlined base year as proposed. In addition, as a result of 
the information learned from the Department's Paperwork Reduction Pilot 
Projects and the comments received, paragraph (c)(2)(iii) for Provision 
2 and paragraph (e)(2)(iii) for Provision 3, Establish a streamlined 
base year, has been expanded to allow a participation based streamlined 
base year.
    Under new paragraph (c)(2)(iii)(B) for Provision 2 and paragraph 
(e)(2)(iii)(B) for Provision 3, Participation based percentages, 
participation based claiming percentages are allowed in schools 
operating under Provision 2 or Provision 3 that did not receive an 
extension. To employ participation based claiming percentages, all 
meals must be provided at no charge to all participating children. 
Eligibility for free and reduced price meals is based on household size 
and income information, and direct certification if applicable, for a 
statistically valid proportion of participating children. The sample of 
participating students must be drawn over multiple operating days as 
defined by guidance.
    Proposed Sec. 245.9(d), Provision 3, would have permitted Provision 
3 schools to serve all meals at no charge in the base year or charge 
students eligible for reduced price and paid benefits for their meals. 
The final rule adopts this provision as proposed, although it limits 
this option to those base years which are not conducted as a 
streamlined base year. In schools electing to conduct a streamlined 
base year in accordance with paragraph (c)(2)(iii) for Provision 2 and 
paragraph (e)(2)(iii) for Provision 3, all participating students must 
be provided meals at no charge.
    Proposed Sec. 245.9(d)(3), Meal Counts, would have required 
Provision 3 schools to take daily meal counts of reimbursable meals at 
the point of service during the non-base years of operation. Unlike the 
standard meal counting system and Provision 2, these meal counts would 
not provide the basis for financial assistance under Provision 3. 
Rather, these meal counts would establish whether participation is 
declining significantly and, if so, to allow the school food authority 
or the State agency to intervene and provide technical assistance. We 
received eight comments regarding the proposed meal counts under 
Provision 3. Seven of the commenters supported the collection of meal 
counts. Most commenters agreed that collecting meal counts is a good 
management tool. One commenter opposed meal counts and expressed 
concern that schools may have diverted meal counting staff to other 
duties. The final rule retains the requirement to obtain total daily 
meal counts for schools operating under Provision 3 as proposed.
    The proposal would have permitted State agencies to exempt 
residential child care institutions from obtaining total daily meal 
counts during non-base

[[Page 48326]]

years in those cases where enrollment, participation and meal counts do 
not vary and there is an approved mechanism in place to ensure that 
students will receive reimbursable meals. Two commenters supported this 
provision as outlined in the proposed rule, therefore, paragraph (d)(3) 
is finalized as proposed.
    Proposed Sec. 245.9(d)(5) Reporting requirements, would have 
required the State agency to submit to the Department on the monthly 
FNS-10, the Report of School Program Operations, the number of meals, 
by type as an adjustment to enrollment and, if applicable, operating 
days. As an option, States could construct the number of meals, by 
type, to reflect the adjusted level of cash assistance. Four comments 
were received regarding Provision 3 reporting requirements. One of the 
four commenters felt that the proposed wording was confusing and 
requested clarification. One commented that changes to the FNS-10 form 
should be approved by the Education Information Advisory Committee. A 
third commenter felt that any changes to the FNS-10 form would result 
in significant programming changes for their automated data reporting 
system. The fourth commenter noted that adjustments for operating days 
and enrollment would need to be made manually. Based on these comments 
we have clarified the wording and at this time no changes are made to 
the FNS-10 form. In addition, no changes were made to Sec. 210.5(d)(1) 
which requires State agencies to report to FNS the total number of 
children approved for free and reduced price meals, and other data, as 
of the last day of operation in October for all schools, including 
those participating in Provision 2 and Provision 3. In response to the 
comments and to simplify the process, paragraph (d)(5) of the final 
rule includes minor changes intended to clarify the reporting 
procedures.

Section 245.11  Action by State Agencies and FNSROs

    Proposed Sec. 245.11(h)(1), Notification, would have required State 
agencies to provide notification by February 15 of the fourth year to 
those school food authorities of schools operating under Provision 2 or 
Provision 3. The notification would inform school food authorities that 
they must either return to standard eligibility determination and meal 
counting procedures or apply for an extension. One commenter expressed 
concern that February 15 was too early to notify school food 
authorities and requested a change that would allow State agencies to 
determine the dates. As a result, paragraph (h)(1) is modified to allow 
State agencies the option of establishing a date other than February 
15, during the fourth year, to notify school food authorities of the 
requirements.
    Proposed Sec. 245.11(h)(2), Return to standard procedures, would 
have required that schools operating under Provision 2 or Provision 3 
return to standard eligibility determination and meal counting 
procedures if the State agency determined that records were not 
maintained. One commenter suggested that States also have the authority 
to determine and assess fiscal action for overclaims, if applicable. 
Therefore paragraph (h)(2) of this final rule restates the provision as 
proposed and expands the provision to require State agencies to 
determine any fiscal action as authorized under Sec. 210.19(c).
    Under proposed Sec. 245.11(h)(3), Technical assistance, paragraph 
(h)(3)(ii) would have required the State agency to provide technical 
assistance when the State agency determined that, among other things, 
meal quality declined as a result of the implementation of Provision 2 
or Provision 3. Two commenters suggested that criteria should be 
established for determining whether meal quality has declined as a 
result of the provisions. After consideration of these comments, we 
continue to believe that the assessment of meal quality, and the extent 
to which a decline can be attributed to the implementation of a 
provision, is best left to the discretion of the State agency. Because 
an evaluation of meal quality and the factors leading to any decline 
tend to be site-specific, the final rule restates the provision as 
proposed without imposing criteria for determining meal quality.
    Proposed paragraph (h)(3)(iv) would have required the State agency 
to provide technical assistance when the State agency determined that, 
among other things, the school food authority incorrectly conducted 
eligibility determinations. The final rule expands the provision as 
proposed to clarify that, in addition to the eligibility determination 
process, State agencies must provide technical assistance when it is 
determined that the school food authority conducted the verification 
process incorrectly.
    Proposed Sec. 245.11(h)(4), State agency recordkeeping, would have 
required State agencies to maintain records of the types of pre-
approved socioeconomic data used to grant extensions of Provision 2 and 
Provision 3. We received four comments expressing concern with the 
burdens associated with maintaining such records. We acknowledge the 
concerns. However, this level of operational experience and data are 
necessary to establish the efficacy of the changes made in this final 
rule. The Department intends to re-evaluate the recordkeeping burden at 
a future date and make changes, such as reducing recordkeeping, as 
appropriate.
    As a result of inquiries and operational experiences at the State 
agency level, we have taken this opportunity to clarify the State 
agency responsibilities regarding the approval of school food 
authorities wishing to participate under Provision 2 and Provision 3. 
Current program requirements establish that State agencies require 
school food authorities to comply with the applicable provisions of 7 
CFR parts 210 and 220. It has been the Department's position that State 
agencies only approve for participation under Provision 2 or Provision 
3 those schools that are operating the programs in accordance with 
applicable requirements. To clarify State agency responsibilities for 
approving schools to participate under Provision 2 and Provision 3, the 
final rule adds a new paragraph (h)(5), State agency approval, which 
clarifies that prior to approval for participation under Provision 2 or 
Provision 3, State agencies shall ensure school food authority program 
compliance as required under 7 CFR 210.19(a)(4) and 220.13(k).

Technical Amendments

    Subsequent to the publication of the proposed rule, we determined 
that a technical amendment to 7 CFR part 245 is necessary to provide 
clarification regarding the reference to direct certification and the 
Food Distribution Program on Indian Reservations (FDPIR). Currently 
part 245 makes a reference to ``FDPIR case number or other 
identifier''. The Department intended that the ``other identifier'' be 
limited to an FDPIR identifier. For this reason, the words ``FDPIR case 
number or other FDPIR identifier'' replace the words ``FDPIR case 
number or other identifier'' in Sec. 245.5(a)(1)(vi), Sec. 245.6(a), 
Sec. 245.6(a)(1), Sec. 245.6a(a), Sec. 245.6a(a)(2)(i) and 
Sec. 245.6a(a)(3).
    Additionally, this final rule corrects an error in Sec. 245.5(a) 
which occurred in the final rule entitled, School Nutrition Programs: 
Nondiscretionary Technical Amendments (64 FR 50735). That rule intended 
to remove an obsolete reference to Sec. 210.2(o)(2). In so doing, it 
created an unintended error in regulatory text. This final rule 
corrects that error by restating the intent of the original regulatory 
text by clarifying that residential child care institutions, as

[[Page 48327]]

defined under 7 CFR 210.2, are not required to provide a public 
announcement notification requirements under certain conditions.

Executive Order 12866

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

Executive Order 13132

    Executive Order 13132 requires Federal agencies to consider the 
impact of their regulatory actions on State and local governments. 
Where such actions have ``federalism implications,'' agencies are 
directed to provide a statement for inclusion in the preamble to the 
regulation describing the agency's considerations in terms of the three 
categories called for under section (6)(a)(B) of Executive Order 13132:

Prior Consultation With State Officials

    Prior to drafting this final rule, we received input from State and 
local agencies at various times. Since the Child Nutrition Programs are 
State administered, federally funded programs, our regional offices 
have informal and formal discussions with State and local officials on 
an ongoing basis regarding program implementation and performance. This 
arrangement allows State and local agencies to provide feedback that 
forms the basis for any discretionary decisions in this and other Child 
Nutrition Program rules. Additionally, the Department issued a proposed 
rule, found at 65 FR 5791, which solicited public comment. The 
Department has also discussed the provisions of the proposal in 
numerous forums. Discussions with State agencies took place at the 
Biennial State Directors' Meeting held in 1999 and at multiple State 
agency meetings held at various times throughout 1999 and 2000. 
Discussions with school food service personnel took place at a meeting 
sponsored by the American School Food Service Association and in a 
variety of other small group meetings.

Nature of Concerns and the Need To Issue This Rule

    State and local agencies were generally supportive of the 
provisions in the proposed rule. There were no overwhelming concerns; 
rather, concerns were expressed about numerous operational issues 
related to the administrative ease and program integrity. The issuance 
of a regulation is required to implement statutory changes brought 
about by Public Laws 103-448, 104-193 and 105-336.

Extent to Which We Meet These Concerns

    We have considered all comments received on the proposed rule. 
Since commenters addressed numerous operational issues, we made every 
effort to incorporate commenter concerns, particularly those related to 
administrative ease, within the constraints of statutory authority and 
concerns for program integrity.

Public Law 104-4

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

Regulatory Flexibility Act

    This final rule has been reviewed with regard to the requirements 
of the Regulatory Flexibility Act of 1980 (5 U.S.C. 601-612). Eric M. 
Bost, 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. This final rule reduces school 
food authority administrative burdens, streamlines program operations 
and enhances access to the programs by needy children. The Department 
does not anticipate any significant fiscal impact would result from 
implementation of this final rulemaking.

Executive Order 12372

    The National School Lunch Program and the School Breakfast Program, 
which are listed in the Catalog of Federal Domestic Assistance under 
Nos. 10.555 and 10.556, respectively, are subject to the provisions of 
Executive Order 12372, which requires intergovernmental consultation 
with State and local officials. (See 7 CFR part 3015, subpart V, and 
final rule related notice published at 48 FR 29114, June 24, 1983.)

Executive Order 12988

    This final rule has been reviewed under Executive Order 12988, 
Civil Justice Reform. This final rule, is intended to have a preemptive 
effect with respect to any State or local laws, regulations or policies 
which conflict with its provisions or which otherwise impede its full 
implementation. This final rule does not have retroactive effect unless 
so specified in the EFFECTIVE DATE section of this preamble. Prior to 
any judicial challenge to the provisions of this final rule or the 
application of the provisions, all applicable administrative procedures 
must be exhausted. In the National School Lunch Program and the School 
Breakfast Program, the administrative procedures are set forth under 
the following regulations (1) School food authority appeals of State 
agency findings as a result of an administrative review must follow 
State agency hearing procedures as established pursuant to 7 CFR 
210.18(q) and 220.14(e); (2) School food authority appeals of FNS 
findings as a result of an administrative review must follow FNS 
hearing procedures as established pursuant to 7 CFR 210.30(d)(3) and 
220.14(g); and (3) State agency appeals of State Administrative Expense 
fund sanctions (7 CFR 235.11(b)) must follow the FNS administrative 
review process as established pursuant to 7 CFR 235.11(f).

Regulatory Impact Analysis

    A regulatory impact analysis of the rule identified that it would 
offer significant benefits for households and school food authorities. 
The analysis indicates households will benefit from Provision 2 and 3 
since they no longer submit applications to their children's schools. 
In addition, households with reduced price and paid students will no 
longer have to purchase school lunches for their children (saving them 
between $40 and $280 per year per student). Students will benefit from 
the availability of meals at no charge: more students will likely 
participate in the meal programs and receive well-balanced lunches and 
breakfasts.
    During non-base years, school food authorities of schools operating 
under Provisions 2 and 3 would experience a significant reduction of 
administrative

[[Page 48328]]

burdens. For example, a hypothetical school food authority with 5 
schools offering the School Breakfast Program and National School Lunch 
Program, and operating only the School Breakfast Program as Provision 
2, could realize savings of between $350,000 and $440,000 over ten 
years compared to standard National School Lunch Program and School 
Breakfast Program operations. As another example, a hypothetical school 
food authority with 5 schools offering the National School Lunch 
Program and School Breakfast Program and using Provision 3 in its 
National School Lunch Program and School Breakfast Program operations 
could save between $1.1 million and $1.2 million over ten years 
compared to standard National School Lunch Program and School Breakfast 
Program operations. These savings would be realized by no longer 
counting school meals by reimbursement category (free, reduced-price, 
and paid) and eliminating the associated student classification records 
system and by no longer collecting applications from households 
annually. The analysis also indicates that a hypothetical 5-school 
school food authority using Provision 2 only in its School Breakfast 
Program operations would need to obtain about $10,800 of non-federal 
funds a year to make up for the loss experienced under Provision 2.
    The analysis also finds that State agencies would experience some 
additional burden through this rule due to the responsibility of making 
extension determinations and reporting information on usage of 
Provision 2 and Provision 3 and possibly having to report information 
on extension determinations. The analysis asserts that once State 
agencies and school food authorities are accustomed with Provisions 2 
and 3, the extension determination burden on State agencies would be 
minimal and the reporting burdens would be noticeable, but not 
significant. However, the significant reduction in burdens by 
eliminating eligibility determinations, meal counts by type, 
verification and a payment system for reduced price and full price 
meals offsets the insignificant increase in burdens associated with 
extension determinations.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507), the information reporting and recordkeeping requirements 
included in Secs. 245.9(f), 245.9(g), 245.9(h) and 245.11(h) of this 
final rule were reviewed by OMB. OMB approved these requirements for 7 
CFR part 245 under control number 0584-0026. This final rule codifies 
Provision 2 and Provision 3 as outlined in the proposed rule. There are 
no changes in the annual burden hours (ABH) from those identified in 
the proposed rule. The rule makes nine changes that affect the 
recordkeeping burden hours as follows: Eliminates the need for school 
food authorities to develop a notice to parents containing eligibility 
criteria and maintain documentation (-125 ABH); Requires school food 
authority recordkeeping of eligibility and meal count documentation 
(+2,000 ABH); requires updates to policy statements (+238 ABH); 
eliminates the need for school food authorities to develop and 
distribute a public release similar to parent letter (-125 ABH); 
eliminates the need for school food authorities to develop and 
distribute forms to households (-500 ABH); requires State agencies to 
keep records of Provision 2 and 3 (+648 ABH); requires State agencies 
to maintain information on schools participating and extensions (+162 
ABH); eliminates schools' need to distribute applications (-1,000 ABH); 
eliminates schools' review of applications and the process of making 
eligibility determinations (-8,528 ABH). The rule makes two changes 
that affect the reporting burden hours as follows: requires school food 
authorities to submit extension data and documentation to State 
agencies (+125 ABH); requires State agencies submit extension data and 
documentation to FNS (+216 ABH). These changes result in a reduction of 
7,230 hours in the annual recordkeeping burden and an increase of 341 
hours in the reporting burden.

List of Subjects in 7 CFR Part 245

    Food assistance programs, Grant programs-education, Civil rights, 
Food and Nutrition Service, Grant Programs-health, Infants and 
children, Milk, Reporting and recordkeeping requirements, School 
breakfast and lunch programs.


    Accordingly, 7 CFR part 245 is amended as follows:

PART 245--DETERMINING ELIGIBILITY FOR FREE AND REDUCED PRICE MEALS 
AND FREE MILK IN SCHOOLS

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

    Authority: 42 U.S.C. 1752, 1758, 1759a, 1772, 1773, and 1779.


    2. In part 245, the words ``FDPIR case number or other identifier'' 
are removed wherever they appear and the words ``FDPIR case number or 
other FDPIR identifier'' are added in their place in the following 
places:
    a. Sec. 245.5(a)(1)(vi);
    b. Sec. 245.6(a);
    c. Sec. 245.6a(a);
    d. Sec. 245.6a(a)(2)(i).

    3. In part 245, the words ``FDPIR case numbers or other 
identifiers'' are removed wherever they appear in Sec. 245.6a(a)(3) and 
the words ``FDPIR case numbers or other FDPIR identifiers'' are added 
in their place.

    4. In Sec. 245.2:
    a. Paragraph (f-3) is added; and
    b. Paragraph (j) is amended by removing the word ``two'' and 
adding, in its place, the word ``three''.
    The addition reads as follows:


Sec. 245.2  Definitions.

* * * * *
    (f-3) Operating day means a day that reimbursable meals are offered 
to eligible students under the National School Lunch Program or School 
Breakfast Program.
* * * * *

    5. In Sec. 245.5 revise the first sentence of paragraph (a) to read 
as follows:


Sec. 245.5  Public announcement of the eligibility criteria.

    (a) After the State agency, or FNSRO where applicable, notifies the 
school food authority that its criteria for determining the eligibility 
of children for free and reduced price meals and for free milk have 
been approved, the school food authority shall publicly announce such 
criteria: Provided however, that no such public announcement shall be 
required for boarding schools, residential child care institutions (see 
Sec. 210.2 of this chapter, definition of Schools), or a school which 
includes food service fees in its tuition, where all attending children 
are provided the same meals or milk. * * *
* * * * *
    6. In Sec. 245.9:
    a. A heading is added to paragraph (a) to read ``Provision 1.'', 
and
    b. Paragraphs (b) through (g) are removed and paragraphs (b) 
through (k) are added in their place.
    The additions read as follows:


Sec. 245.9  Special assistance certification and reimbursement 
alternatives.

    (a) Provision 1. * * *
    (b) Provision 2. A school food authority may certify children for 
free and reduced price meals for up to 4 consecutive school years in 
the schools which serve meals at no charge to all enrolled children; 
provided that public notification and eligibility

[[Page 48329]]

determinations are in accordance with Sec. 245.5 and Sec. 245.3, 
respectively, during the base year as defined in paragraph (b)(6) of 
this section. The Provision 2 base year is the first year, and is 
included in the 4-year cycle. The following requirements apply:
    (1) Meals at no charge. Participating schools must serve 
reimbursable meals, as determined by a point of service observation, or 
as otherwise approved under part 210 of this chapter, to all 
participating children at no charge.
    (2) Cost differential. The school food authority of a school 
participating in Provision 2 must pay, with funds from non-Federal 
sources, the difference between the cost of serving lunches and/or 
breakfasts at no charge to all participating children and Federal 
reimbursement.
    (3) Meal counts. During the base year, even though meals are served 
to participating students at no charge, schools must take daily meal 
counts of reimbursable student meals by type (free, reduced price, and 
paid) at the point of service, or as otherwise approved under part 210 
of this chapter. During the non-base years, participating Provision 2 
schools must take total daily meal counts (not by type) of reimbursable 
student meals at the point of service, or as otherwise approved under 
part 210 of this chapter. For the purpose of calculating reimbursement 
claims in the non-base years, school food authorities must establish 
school specific monthly or annual claiming percentages, as follows:
    (i) Monthly percentages. In any given Provision 2 school, the 
monthly meal counts of the actual number of meals served by type (free, 
reduced price, and paid) during the base year must be converted to 
monthly percentages for each meal type. For example, the free lunch 
percentage is derived by dividing the monthly total number of 
reimbursable free lunches served by the total number of reimbursable 
lunches served in the same month (free, reduced price and paid). The 
percentages for the reduced price and paid lunches are calculated using 
the same method as the above example for free lunches. These three 
percentages, calculated at the end of each month of the first school 
year, are multiplied by the corresponding monthly lunch count total of 
all reimbursable lunches served in the second, third and fourth 
consecutive school years, and applicable extensions, in order to 
calculate reimbursement claims for free, reduced price and paid lunches 
each month. The free, reduced price and paid percentages for breakfasts 
and, as applicable, snacks, are calculated using the same method; or
    (ii) Annual percentages. In any given Provision 2 school, the 
actual number of all reimbursable meals served by type (free, reduced 
price, and paid) during the base year must be converted to an annual 
percentage for each meal type. For example, the free lunch percentage 
is derived by dividing the annual total number of reimbursable free 
lunches served by the annual total number of reimbursable lunches 
served for all meal types (free, reduced price and paid). The 
percentages for the reduced price and paid lunches are calculated using 
the same method as the above example for free lunches. These three 
percentages, calculated at the end of the base year, are multiplied by 
the total monthly lunch count of all reimbursable lunches served in 
each month of the second, third and fourth consecutive school years, 
and applicable extensions, in order to calculate reimbursement claims 
for free, reduced price and paid lunches each month. The free, reduced 
price and paid percentages for breakfasts and, as applicable, snacks, 
are calculated using the same method for each type of meal service.
    (4) School food authority claims review process. During the 
Provision 2 base year (not including a streamlined base year under 
paragraph (c)(2)(iii) of this section), school food authorities are 
required to review the lunch count data for each school under its 
jurisdiction to ensure the accuracy of the monthly Claim for 
Reimbursement in accordance with Sec. 210.8(a)(2) of this chapter. 
During non-base years and streamlined base years, school food 
authorities must compare each Provision 2 school's total daily meal 
counts to the school's total enrollment, adjusted by an attendance 
factor. The school food authority must promptly follow-up as specified 
in Sec. 210.8(a)(4) of this chapter when the claims review suggests the 
likelihood of lunch count problems. When a school elects to operate 
Provision 2 only in the School Breakfast Program, school food 
authorities must continue to comply with the claims review requirements 
of Sec. 210.8(a)(2) of this chapter for the National School Lunch 
Program.
    (5) Verification. Except as otherwise specified in 
Sec. 245.6a(a)(5), school food authorities are required to conduct 
verification in accordance with Sec. 245.6a. When a school elects to 
participate under Provision 2 or for all of the meal programs in which 
it participates (breakfast 7 CFR part 220 and/or lunch 7 CFR part 210), 
the applications from that school are excluded from the school food 
authority's required verification sample size and are exempt from 
verification during non-base years.
    (6) Base year. For purposes of this paragraph (b), the term base 
year means the last school year for which eligibility determinations 
were made and meal counts by type were taken or the school year in 
which a school conducted a streamlined base year as authorized under 
paragraph (c)(2)(iii) of this section. Schools shall offer reimbursable 
meals to all students at no charge during the Provision 2 base year 
except as otherwise specified in paragraph (b)(6)(ii) of this section.
    (i) Duration of the base year. The base year must begin at the 
start of the school year or as otherwise specified in paragraph 
(b)(6)(ii) of this section.
    (ii) Delayed implementation. At State agency discretion, schools 
may delay implementation of Provision 2 for a period of time not to 
exceed the first claiming period of the school year in which the base 
year is established. Schools implementing this option may conduct 
standard meal counting and claiming procedures, including charging 
students eligible for reduced price and paid meals, during the first 
claiming period of the school year. Such schools must submit claims 
reflecting the actual number of meals served by type. In subsequent 
years, such schools shall convert the actual number of reimbursable 
meals served by type (free, reduced price and paid) during the 
remaining claiming periods of the base year, in which meals were served 
at no charge to all participating students, to an annual percentage for 
each type of meal. The annual claiming percentages must be applied to 
the total number of reimbursable meals served during the first claiming 
period in all non-base years of operation for that cycle and any 
extensions.
    (c) Extension of Provision 2. At the end of the initial cycle, and 
each subsequent 4-year cycle, the State agency may allow a school to 
continue under Provision 2 for another 4 years using the claiming 
percentages calculated during the most recent base year if the school 
food authority can establish, through available and approved 
socioeconomic data, that the income level of the school's population, 
as adjusted for inflation, has remained stable, declined or has had 
only negligible improvement since the base year.
    (1) Extension criteria. School food authorities must submit to the 
State agency available and approved socioeconomic data to establish 
whether the income level of a school's population, as adjusted for 
inflation, remained constant with the income level of the most recent 
base year.

[[Page 48330]]

    (i) Available and approved sources of socioeconomic data. Pre-
approved sources of socioeconomic data which may be used by school food 
authorities to establish the income level of the school's population 
are: local data collected by the city or county zoning and economic 
planning office; unemployment data; local Food Stamp Program 
certification data including direct certification; Food Distribution 
Program on Indian Reservations data; statistical sampling of the 
school's population using the application or equivalent income 
measurement process; and, Temporary Assistance for Needy Families data 
(provided that the eligibility standards were the same or more 
restrictive in the base year as the current year with allowance for 
inflation). To grant an extension using pre-approved socioeconomic data 
sources, State agencies must review and evaluate the socioeconomic data 
submitted by the school food authority to ensure that it is reflective 
of the school's population, provides equivalent data for both the base 
year and the last year of the current cycle, and demonstrates that the 
income level of the school's population, as adjusted for inflation, has 
remained stable, declined or had only negligible improvement. If the 
school food authority wants to establish the income level of the 
school's population using alternate sources of socioeconomic data, the 
use of such data must be approved by the Food and Nutrition Service. 
Data from alternate sources must be reflective of the school's 
population, be equivalent data for both the base year and the last year 
of the current cycle, and effectively measure whether the income level 
of the school's population, as adjusted for inflation, has remained 
stable, declined or had only negligible improvement.
    (ii) Negligible improvement. The change in the income level of the 
school's population shall be considered negligible if there is a 5 
percent or less improvement, after adjusting for inflation, over the 
base year in the level of the socioeconomic indicator which is used to 
establish the income level of the school's population.
    (2) Extension not approved. The State agency shall not approve an 
extension of Provision 2 procedures in those schools for which the 
available and approved socioeconomic data does not reflect the school's 
population, is not equivalent data for the base year and the last year 
of the current cycle, or shows over 5 percent improvement, after 
adjusting for inflation, in the income level of the school's 
population. Such schools shall:
    (i) Return to standard meal counting and claiming. Return to 
standard meal counting and claiming procedures;
    (ii) Establish a new base year. Establish a new Provision 2 base 
year by taking new free and reduced price applications, making new free 
and reduced price eligibility determinations, and taking point of 
service counts of free, reduced price and paid meals for the first year 
of the new cycle. For these schools, the new Provision 2 cycle will be 
4 years. Schools electing to establish a Provision 2 base year shall 
follow procedures contained in paragraph (b) of this section;
    (iii) Establish a streamlined base year. With prior approval by the 
State agency, establish a streamlined base year by providing 
reimbursable meals to all participating students at no charge and 
developing either enrollment based or participation based claiming 
percentages.
    (A) Enrollment based percentages. In accordance with guidance 
established by the Food and Nutrition Service, establish a new 
Provision 2 base year by determining program eligibility on the basis 
of household size and income, and direct certification if applicable, 
for a statistically valid proportion of the school's enrollment as of 
October 31, or other date approved by the State agency. The 
statistically valid measurement of the school's enrollment must be 
obtained during the first year of the new cycle and meet the 
requirements of paragraph (k) of this section. Using the data obtained, 
enrollment based claiming percentages representing a proportion of the 
school's population eligible for free, reduced price and paid benefits 
shall be developed and applied to total daily meal counts of 
reimbursable meals at the point of service, or as otherwise approved 
under part 210 of this chapter. For schools electing to participate in 
Provision 2, these percentages shall be used for claiming reimbursement 
for each year of the new cycle and any extensions; or
    (B) Participation based percentages. In accordance with guidance 
established by the Food and Nutrition Service, establish a new 
Provision 2 base year by determining program eligibility on the basis 
of household size and income, and direct certification if applicable, 
for a statistically valid proportion of participating students 
established over multiple operating days. The statistically valid 
measurement of the school's student participation must be obtained 
during the first year of the new cycle and meet the requirements of 
paragraph (k) of this section. Using the data obtained, participation 
based claiming percentages representing a proportion of the school's 
participating students which are eligible for free, reduced price and 
paid benefits shall be developed and applied to total daily meal counts 
of reimbursable meals at the point of service or as otherwise approved 
under part 210 of this chapter. These percentages shall be used for 
claiming reimbursement for each year of the new cycle and any 
extensions; or
    (iv) Establish a Provision 3 base year. Schools may convert to 
Provision 3 using the procedures contained in paragraphs (e)(2)(ii) or 
(e)(2)(iii) of this section.
    (d) Provision 3. A school food authority of a school which serves 
all enrolled children in that school reimbursable meals at no charge 
during any period for up to 4 consecutive school years may elect to 
receive Federal cash reimbursement and commodity assistance at the same 
level as the total Federal cash and commodity assistance received by 
the school during the last year that eligibility determinations for 
free and reduced price meals were made and meals were counted by type 
(free, reduced price and paid) at the point of service, or as otherwise 
authorized under part 210 of this chapter. Such cash reimbursement and 
commodity assistance will be adjusted for each of the 4 consecutive 
school years pursuant to paragraph (d)(4) of this section. For purposes 
of this paragraph (d), the term base year means the last complete 
school year for which eligibility determinations were made and meal 
counts by type were taken or the school year in which a school 
conducted a streamlined base year as authorized under paragraph 
(e)(2)(iii) of this section. The base year must begin at the start of a 
school year. Reimbursable meals may be offered to all students at no 
charge or students eligible for reduced price and paid meal benefits 
may be charged for meals during a Provision 3 base, except that schools 
conducting a Provision 3 streamlined base year must provide 
reimbursable meals to all participating students at no charge in 
accordance with paragraph (e)(2)(iii) of this section. The Provision 3 
base year immediately precedes, and is not included in, the 4-year 
cycle. This alternative shall be known as Provision 3, and the 
following requirements shall apply:
    (1) Meals at no charge. Participating schools must serve 
reimbursable meals, as determined by a point of service observation, or 
as otherwise authorized under part 210 of this chapter, to all 
participating children at no charge during non-base years of operation 
or as specified in paragraph (e)(2)(iii) of this section, if 
applicable.

[[Page 48331]]

    (2) Cost differential. The school food authority of a school 
participating in Provision 3 must pay, with funds from non-Federal 
sources, the difference between the cost of serving lunches and/or 
breakfasts at no charge to all participating children and Federal 
reimbursement.
    (3) Meal counts. Participating schools must take total daily meal 
counts of reimbursable meals served to participating children at the 
point of service, or as otherwise authorized under part 210 of this 
chapter, during the non-base years. Such meal counts must be retained 
at the local level in accordance with paragraph (g) of this section. 
State agencies may require the submission of the meal counts on the 
school food authority's monthly Claim for Reimbursement or through 
other means. In addition, school food authorities must establish a 
system of oversight using the daily meal counts to ensure that 
participation has not declined significantly from the base year. If 
participation declines significantly, the school food authority must 
provide the school with technical assistance, adjust the level of 
financial assistance received through the State agency or return the 
school to standard eligibility determination and meal counting 
procedures, as appropriate. In residential child care institutions, the 
State agency may approve implementation of Provision 3 without the 
requirement to obtain daily meal counts of reimbursable meals at the 
point of service if:
    (i) The State agency determines that enrollment, participation and 
meal counts do not vary; and
    (ii) There is an approved mechanism in place to ensure that 
students will receive reimbursable meals.
    (4) Annual adjustments. The State agency or school food authority 
shall make annual adjustments for enrollment and inflation to the total 
Federal cash and commodity assistance received by a Provision 3 school 
in the base year. The adjustments shall be made for increases and 
decreases in enrollment of children with access to the program(s). The 
annual adjustment for enrollment shall be based on the school's base 
year enrollment as of October 31 compared to the school's current year 
enrollment as of October 31. Another date within the base year may be 
used if it is approved by the State agency, and provides a more 
accurate reflection of the school's enrollment or accommodates the 
reporting system in effect in that State. If another date is used for 
the base year, the current year date must correspond to the base year 
date of comparison. State agencies may, at their discretion, make 
additional adjustments to a participating school's enrollment more 
frequently than once per school year. If more frequent enrollment is 
calculated, it must be applied for both upward and downward 
adjustments. The annual adjustment for inflation shall be effected 
through the application of the current year rates of reimbursement. To 
the extent that the number of operating days in the current school year 
differs from the number of operating days in the base year, and the 
difference affects the number of meals, a prorata adjustment shall also 
be made to the base year level of assistance, as adjusted by enrollment 
and inflation. Upward and downward adjustments to the number of 
operating days shall be made. Such adjustment shall be effected by 
either:
    (i) Multiplying the average daily meal count by type (free, reduced 
price and paid) by the difference in the number of operating days 
between the base year and the current year and adding/subtracting that 
number of meals from the Claim for Reimbursement, as appropriate. In 
developing the average daily meal count by type for the current school 
year, schools shall use the base year data adjusted by enrollment; or
    (ii) Multiplying the dollar amount otherwise payable (i.e., the 
base year level of assistance, as adjusted by enrollment and inflation) 
by the ratio of the number of operating days in the current year to the 
number of operating days in the base year.
    (5) Reporting requirements. The State agency shall submit to the 
Department on the monthly FNS-10, Report of School Programs Operations, 
the number of meals, by type (i.e., monthly meal counts by type for the 
base year, as adjusted); or the number of meals, by type, constructed 
to reflect the adjusted levels of cash assistance. State agencies may 
employ either method to effect payment of reimbursement for Provision 3 
schools.
    (6) School food authority claims review process. During the 
Provision 3 base year (not including a streamlined base year under 
paragraph (e)(2)(iii) of this section), school food authorities are 
required to review the lunch count data for each school under its 
jurisdiction to ensure the accuracy of the monthly Claim for 
Reimbursement in accordance with Sec. 210.8(a)(2) of this chapter. 
During non-base years and streamlined base years, school food 
authorities must conduct their own system of oversight or compare each 
Provision 3 school's total daily meal counts to the school's total 
enrollment, adjusted by an attendance factor. The school food authority 
must promptly follow-up as specified in Sec. 210.8(a)(4) of this 
chapter when the claims review suggests the likelihood of lunch count 
problems. When a school elects to operate Provision 3 only in the 
School Breakfast Program, school food authorities must continue to 
comply with the claims review requirements of Sec. 210.8(a)(2) of this 
chapter for the National School Lunch Program.
    (7) Verification. Except as otherwise specified in 
Sec. 245.6a(a)(5), school food authorities are required to conduct 
verification in accordance with Sec. 245.6a. When a school elects to 
participate under Provision 3 for all of the meal programs in which it 
participates (breakfast 7 CFR part 220 and/or lunch 7 CFR part 210), 
the applications from that school are excluded from the school food 
authority's required verification sample size and are exempt from 
verification during non-base years.
    (e) Extension of Provision 3. At the end of the initial cycle, and 
each subsequent 4-year cycle, the State agency may allow a school to 
continue under Provision 3 for another 4 years without taking new free 
and reduced price applications and meal counts by type. State agencies 
may grant an extension of Provision 3 if the school food authority can 
establish, through available and approved socioeconomic data, that the 
income level of the school's population, as adjusted for inflation, has 
remained stable, declined, or has had only negligible improvement since 
the most recent base year.
    (1) Extension criteria. School food authorities must submit to the 
State agency available and approved socioeconomic data to establish 
whether the income level of the school's population, as adjusted for 
inflation, remained constant with the income level of the most recent 
base year.
    (i) Available and approved sources of socioeconomic data. Pre-
approved sources of socioeconomic data which may be used by school food 
authorities to establish the income level of the school's population 
are: local data collected by the city or county zoning and economic 
planning office; unemployment data; local Food Stamp Program 
certification data including direct certification; Food Distribution 
Program on Indian Reservations data; statistical sampling of the 
school's population using the application process; and Temporary 
Assistance for Needy Families data (provided that the eligibility 
standards were the same or more restrictive in the base year as the 
current year with allowance for inflation). To grant an extension using 
pre-approved socioeconomic data sources, State agencies must review and

[[Page 48332]]

evaluate the socioeconomic data submitted by the school food authority 
to ensure that it is reflective of the school's population, provides 
equivalent data for both the base year and the last year of the current 
cycle, and demonstrates that the income level of the school's 
population, as adjusted for inflation, has remained stable, declined or 
had only negligible improvement. If the school food authority wants to 
establish the income level of the school's population using alternate 
sources of data, the use of such data must be approved by the Food and 
Nutrition Service. Data from alternate sources must be reflective of 
the school's population, be equivalent data for both the base year and 
the last year of the current cycle, and effectively measure whether the 
income level of the school's population, as adjusted for inflation, has 
remained stable, declined or had only negligible improvement.
    (ii) Negligible improvement. The change in the income level of the 
school population shall be considered negligible if there is a 5 
percent or less improvement, after adjusting for inflation, over the 
base year in the level of the socioeconomic indicator which is used to 
establish the income level of the school's population.
    (2) Extension not approved. Schools for which the available and 
approved socioeconomic data does not reflect the school's population, 
is not equivalent data for the base year and the last year of the 
current cycle, or shows over 5 percent improvement after adjusting for 
inflation, shall not be approved for an extension. Such schools must 
elect one of the following options:
    (i) Return to standard meal counting and claiming. Return to 
standard meal counting and claiming procedures;
    (ii) Establish a new base year. Establish a new Provision 3 base 
year by taking new free and reduced price applications, making new free 
and reduced price eligibility determinations, and taking point of 
service counts of free, reduced price and paid meals for the first year 
of the new cycle. Schools electing to establish a Provision 3 base year 
shall follow procedures contained in paragraph (d) of this section;
    (iii) Establish a streamlined base year. With prior approval by the 
State agency, establish a streamlined base year by providing 
reimbursable meals to all participating students at no charge and 
developing either enrollment based or participation based claiming 
percentages.
    (A) Enrollment based percentages. In accordance with guidance 
established by the Food and Nutrition Service, establish a new 
Provision 3 base year by determining program eligibility on the basis 
of household size and income, and direct certification if applicable, 
for a statistically valid proportion of the school's enrollment as of 
October 31, or other date approved by the State agency. The 
statistically valid measurement of the school's enrollment must be 
obtained during the first year of the new cycle and meet the 
requirements of paragraph (k) of this section. Using the data obtained, 
enrollment based claiming percentages representing a proportion of the 
school's population eligible for free, reduced price and paid benefits 
shall be developed and applied to total daily meal counts of 
reimbursable meals at the point of service, or as otherwise approved 
under part 210 of this chapter. For schools electing to participate in 
Provision 3, the streamlined base year level of assistance will be 
adjusted for enrollment, inflation and, if applicable, operating days, 
for each subsequent year of the new cycle and any extensions; or
    (B) Participation based percentages. In accordance with guidance 
established by the Food and Nutrition Service, establish a new 
Provision 3 base year by determining program eligibility on the basis 
of household size and income, and direct certification if applicable, 
for a statistically valid proportion of participating students 
established over multiple operating days. The statistically valid 
measurement of the school's student participation must be obtained 
during the first year of the new cycle and meet the requirements of 
paragraph (k) of this section. Using the data obtained, participation 
based claiming percentages representing a proportion of the school's 
participating students which are eligible for free, reduced price and 
paid benefits shall be developed and applied to total daily meal counts 
of reimbursable meals at the point of service or as otherwise approved 
under part 210 of this chapter. For schools electing to participate in 
Provision 3, the streamlined base year level of assistance as described 
in this paragraph (e)(2)(iii)(B) will be adjusted for enrollment, 
inflation and, if applicable, operating days, for each subsequent year 
of the new cycle and any extensions; or
    (iv) Establish a Provision 2 base year. Schools may convert to 
Provision 2 using the procedures contained in paragraphs (c)(2)(ii) or 
(c)(2)(iii) of this section.
    (f) Policy statement requirement. A school food authority of a 
Provision 1, 2, or 3 school shall:
    (1) Amend its Free and Reduced Price Policy Statement, specified in 
Sec. 245.10, to include a list of all schools participating in 
Provision 1, 2, or 3, and for each school:
    (i) The initial year of implementing the provision;
    (ii) The years the cycle is expected to remain in effect;
    (iii) The year the provision must be reconsidered; and
    (iv) The available and approved socioeconomic data that will be 
used in the reconsideration, if applicable.
    (2) Certify that the school(s) meet the criteria for participating 
in the special assistance provisions, as specified in paragraphs (a), 
(b), (c), (d) or (e) of this section, as appropriate.
    (g) Recordkeeping. School food authorities of schools implementing 
Provision 1, 2 or 3 shall retain records related to the implementation 
of the provision. Failure to maintain sufficient records shall result 
in the State agency requiring the school to return to standard meal 
counting and claiming procedures and/or fiscal action. Recordkeeping 
requirements specific to Provision 2 and Provision 3 include:
    (1) Base year records. A school food authority shall ensure that 
records as specified in Sec. 210.15(b) and Sec. 220.7(e) of this 
chapter which support subsequent year earnings are retained for the 
base year for schools under Provision 2 and Provision 3. In addition, 
records of enrollment data for the base year must be retained for 
schools under Provision 3. Such base year records must be retained 
during the period the provision is in effect, including all extensions, 
plus 3 fiscal years after the submission of the last Claim for 
Reimbursement which employed the base year data. School food 
authorities that conduct a streamlined base year must retain all 
records related to the statistical methodology and the determination of 
claiming percentages. Such records shall be retained during the period 
the provision is in effect, including all extensions, plus 3 fiscal 
years after the submission of the last Claim for Reimbursement which 
employed the streamlined base year data. In either case, if audit 
findings have not been resolved, base year records must be retained 
beyond the 3-year period as long as required for the resolution of the 
issues raised by the audit.
    (2) Non-base year records. School food authorities that are granted 
an extension of a provision must retain records of the available and 
approved socioeconomic data which is used to determine the income level 
of the school's population for the base year and year(s) in which 
extension(s) are made. In addition, State agencies must also retain 
records of the available and approved socioeconomic data which is

[[Page 48333]]

used to determine the income level of the school's population for the 
base year and year(s) in which extensions are made. Such records must 
be retained at both the school food authority level and at the State 
agency during the period the provision is in effect, including all 
extensions, plus 3 fiscal years after the submission of the last 
monthly Claim for Reimbursement which employed base year data. If audit 
findings have not been resolved, records must be retained beyond the 3-
year period as long as required for the resolution of the issues raised 
by the audit. In addition, for schools operating under Provision 2, a 
school food authority must retain non-base year records pertaining to 
total daily meal count information, edit checks and on-site review 
documentation. For schools operating under Provision 3, a school food 
authority must retain non-base year records pertaining to total daily 
meal count information, the system of oversight or edit checks, on-site 
review documentation, annual enrollment data and the number of 
operating days, which are used to adjust the level of assistance. Such 
records shall be retained for three years after submission of the final 
monthly Claim for Reimbursement for the fiscal year.
    (h) Availability of documentation. Upon request, the school food 
authority shall make documentation including enrollment data, 
participation data, available and approved socioeconomic data that was 
used to grant the extension, if applicable, or other data available at 
any reasonable time for monitoring and audit purposes. In addition, 
upon request from the Food and Nutrition Service, school food 
authorities under Provision 2 or Provision 3, or State agencies shall 
submit to the Food and Nutrition Service all data and documentation 
used in granting extensions including documentation as specified in 
paragraphs (g) and (h) of this section.
    (i) Return to standard meal counting and claiming. A school food 
authority may return a school to standard notification, certification 
and counting procedures at any time if standard procedures better suit 
the school's program needs. The school food authority will then notify 
the State agency.
    (j) Puerto Rico and Virgin Islands. Puerto Rico and the Virgin 
Islands, where a statistical survey procedure is permitted in lieu of 
eligibility determinations for each child, may either maintain their 
standard procedures in accordance with Sec. 245.4 or may opt for 
Provision 2 or Provision 3 provided the eligibility requirements as set 
forth in paragraphs (a), (b), (c), (d) and (e) of this section are met, 
as applicable.
    (k) Statistical income measurements. Statistical income 
measurements that are used under this section to establish enrollment 
or participation base claiming percentages must comply with the 
standards outlined as follows:
    (1) For enrollment based claiming percentages, statistical income 
measurements must meet the following standards:
    (i) The sample frame shall be limited to enrolled students who have 
access to the school meals program;
    (ii) A sample of enrolled students shall be randomly selected from 
the sample frame;
    (iii) The response rate to the survey shall be at least 80 percent;
    (iv) The number of households that complete the survey shall be 
sufficiently large so that it can be asserted with 95 percent 
confidence that the true percentage of students who are enrolled in the 
school, have access to the school meals program, and are eligible for 
free meals is within plus or minus 2.5 percentage points of the point 
estimate determined from the sample; and
    (v) To minimize statistical bias, data from all households that 
complete the survey must be used when calculating the enrollment based 
claiming percentages for paragraphs (c)(2)(iii)(A) and (e)(2)(iii)(A) 
of this section.
    (2) For participation based claiming percentages, statistical 
income measurements must meet the following standards:
    (i) The sample frame must be limited to students participating in 
the meal program for which the participation based claiming percentages 
are being developed;
    (ii) The sample frame must represent multiple operating days, as 
established through guidance, in the meal program for which the 
participation based claiming percentages are being developed;
    (iii) A sample of participating students shall be randomly selected 
from the sample frame;
    (iv) The response rate to the survey shall be at least 80 percent;
    (v) The number of households that complete the survey shall be 
sufficiently large so that it can be asserted with 95 percent 
confidence that the true percentage of participating students who are 
eligible for free meals is within plus or minus 2.5 percentage points 
of the point estimate determined from the sample; and,
    (vi) To minimize statistical bias, data from all households that 
complete the survey must be used when calculating the participation 
based claiming percentages for paragraphs (c)(2)(iii)(B) and 
(e)(2)(iii)(B) of this section.
    7. In Sec. 245.11, a new paragraph (h) is added to read as follows:


Sec. 245.11  Action by State agencies and FNSROs.

* * * * *
    (h) The State agency shall take action to ensure the proper 
implementation of Provisions 1, 2, and 3. Such action shall include:
    (1) Notification. Notifying school food authorities of schools 
implementing Provision 2 and/or 3 that each Provision 2 or Provision 3 
school must return to standard eligibility determination and meal 
counting procedures or apply for an extension under Provision 2 or 3. 
Such notification must be in writing, and be sent no later than 
February 15, or other date established by the State agency, of the 
fourth year of a school's current cycle;
    (2) Return to standard procedures. Returning the school to standard 
eligibility determination and meal counting procedures and fiscal 
action as required under Sec. 210.19(c) of this chapter if the State 
agency determines that records were not maintained; and
    (3) Technical assistance. Providing technical assistance, 
adjustments to the level of financial assistance for the current school 
year, and returning the school to standard eligibility determination 
and meal counting procedures, as appropriate, if a State agency 
determines at any time that:
    (i) The school or school food authority has not correctly 
implemented Provision 1, Provision 2 or Provision 3;
    (ii) Meal quality has declined because of the implementation of the 
provision;
    (iii) Participation in the program has declined over time;
    (iv) Eligibility determinations or the verification procedures were 
incorrectly conducted; or
    (v) Meal counts were incorrectly taken or incorrectly applied.
    (4) State agency recordkeeping. State agencies shall retain the 
following information annually for the month of October and, upon 
request, submit to FNS:
    (i) The number of schools using Provision 1, Provision 2 and 
Provision 3 for NSLP;
    (ii) The number of schools using Provision 2 and Provision 3 for 
SBP only;
    (iii) The number of extensions granted to schools using Provision 2 
and Provision 3 during the previous school year;
    (iv) The number of extensions granted during the previous year on 
the basis of Food Stamp/FDPIR data;

[[Page 48334]]

    (v) The number of extensions granted during the previous year on 
the basis of Temporary Assistance for Needy Families (TANF) data;
    (vi) The number of extensions granted during the previous year on 
the basis of local data collected by a city or county zoning and/or 
economic planning office;
    (vii) The number of extensions granted during the previous year on 
the basis of applications collected from enrolled students;
    (viii) The number of extensions granted during the previous year on 
the basis of statistically valid surveys of enrolled students; and
    (ix) The number of extensions granted during the previous year on 
the basis of alternate data as approved by the State agency's 
respective FNS Regional Office.
    (5) State agency approval. Prior to approval for participation 
under Provision 2 or Provision 3, State agencies shall ensure school 
and/or school food authority program compliance as required under 
Secs. 210.19(a)(4) and 220.13(k) of this chapter.

    Dated: September 11, 2001.
Eric M. Bost,
Under Secretary, Food, Nutrition, and Consumer Services.
[FR Doc. 01-23350 Filed 9-19-01; 8:45 am]
BILLING CODE 3410-30-P