[Federal Register Volume 67, Number 35 (Thursday, February 21, 2002)]
[Proposed Rules]
[Pages 7977-7979]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-4174]


 ========================================================================
 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
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  Federal Register / Vol. 67, No. 35 / Thursday, February 21, 2002 / 
Proposed Rules  

[[Page 7977]]



DEPARTMENT OF AGRICULTURE

Food and Nutrition Service

7 CFR Part 250

RIN 0584-AD08


Codification of Poultry Substitution and Modification of 
Commodity Inventory Controls for Recipient Agencies

AGENCY: Food and Nutrition Service, USDA.

ACTION: Proposed rule.

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SUMMARY: This rule concerns the types of foods that may be available 
from the Department of Agriculture for any of the uses authorized under 
the Food and Nutrition Service's Food Distribution Programs and the 
manner in which those foods must be labeled. The first part of the rule 
will allow limited poultry substitution and full fruit, vegetable, and 
egg substitution in the processing program. The second part of the rule 
deals with the reduction of commodity inventory controls for schools to 
allow use of commercial labels.
    The Department has operated a demonstration project program since 
Feb. 1, 1996, which allows commercial poultry to be substituted for 
commodity poultry in processing, in order to expedite and improve that 
program. The data gathered from recipient agencies, Agriculture 
Marketing Service (AMS) graders, and the AMS procurement division has 
been positive. Substitution of commercial fruits, vegetables, and eggs 
for commodity fruits, vegetables, and eggs has been allowed under 7 CFR 
250.30(f)(4) for over ten years.
    During that time, required Certified Public Accountant (CPA) audits 
have not shown any significant problems with fruit, vegetables, or egg 
substitution. There has been no substitution of inferior product 
identified. Therefore, this proposed rule seeks to change the 
regulations to allow limited poultry substitution and full fruit 
substitution, vegetable substitution, and egg substitution on a 
permanent basis.
    Secondly, because of changes in the commercial market and the food 
donation programs, the Department will allow vendors to use their own 
labels in place of USDA donated food labels for school programs. 
Commercial labels have already been introduced in other USDA food 
donation programs with good results, and commercial labels for school 
commodities have been permitted on select commodities going into 
schools. However, commercial labels complicate the inventory procedures 
currently utilized in schools. Therefore, FNS is proposing to modify 
the current inventory requirements for schools in order to accommodate 
the use of commercial labels.

DATES: Comments regarding this proposed rule should be submitted by 
April 22, 2002.

ADDRESSES: Comments should be sent to Suzanne Rigby, Chief, Schools and 
Institutions Branch, Food Distribution Division, Food and Nutrition 
Service, U.S. Department of Agriculture, 3101 Park Center Drive, 
Alexandria, Virginia 22302-1594. Comments in response to this request 
may be inspected at 3101 Park Center Drive, Alexandria, Virginia, 
during normal business hours (8:30 a.m. to 5 p.m., Mondays through 
Fridays).

FOR FURTHER INFORMATION CONTACT: Suzanne Rigby at the above address or 
telephone (703) 305-2644.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

    This proposed rule has been determined to be not significant for 
purposes of Executive Order 12866 and, therefore, has not been reviewed 
by the Office of Management and Budget.

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

Executive Order 12372

    The program addressed in this action is listed in the Catalog of 
Federal Domestic Assistance under No. 10.550, 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 notices published at 48 FR 29114, June 24, 
1983, and 49 FR 22676, May 31, 1984).

Regulatory Flexibility Act

    This rule has been reviewed with regard to the requirements of the 
Regulatory Flexibility Act of 1980 (5 U.S.C. 601-612). The Acting 
Administrator of the Food and Nutrition Service has certified that this 
action will not have a significant impact on a substantial number of 
small entities. State agencies, school food authorities and schools 
choosing to utilize this new method of inventory control will be 
affected. However, the majority of entities participating in the Food 
Distribution Programs will not be affected.

Executive Order 12988

    This proposed rule has been reviewed under Executive Order 12988, 
Civil Justice Reform. The rule is intended to have preemptive effect 
with respect to any State or local laws, regulations or policies which 
conflict with its provisions or which would otherwise impede its full 
implementation. This rule is not intended to have retroactive effect. 
There are no administrative procedures that must be exhausted prior to 
any judicial challenge to the provisions of this rule or the 
applications of its provisions.

[[Page 7978]]

Paperwork Reduction Act

    Information collection requirements associated with the commodity 
processing program are approved under 0584-0293. This rule deletes the 
requirement for schools to maintain a dual inventory control system. 
Although the current inventory control requirements represent a burden 
on schools, estimated at 1.8 million hours annually for recipient 
agencies, this burden was not identified to or approved by the Office 
of Management and Budget. Therefore, deleting the burden requires no 
change to 0584-0293.
    Allowing the limited substitution of donated poultry with 
commercial poultry significantly streamlines the manufacturing process 
for processors and allows recipients to receive end products on a 
timely basis. However, this rule does not relieve the processor from 
any of the current reporting or record keeping requirements contained 
in the regulations. Therefore, no changes are required to the current 
burden hours shown in 0584-0293.

Background

Substitution Issues

    In February of 1996, the Department of Agriculture announced a 
demonstration project to study the effects of allowing the substitution 
of commercial chicken for USDA donated chicken in the State processing 
program (61 FR 5373, Feb. 12, 1996). In the State processing program, 
pursuant to regulations in 7 CFR part 250, surplus commodities are made 
available by the Federal government to processors. Under State 
processing and inspection requirements at least comparable to those 
mandated by Federal agencies responsible for food purity and safety, 
the commodities are processed into food products intended for sale to 
school food authorities for consumption by students in the various 
school meal programs administered by the Food and Nutrition Service. 
The State processing program is authorized under section 14 of the 
Richard B. Russell National School Lunch Act, 42 U.S.C. 1762a.
    In May of 1997 the project was expanded to include turkey as well 
as chicken. (62 FR 25885, May 12, 1997.) Only bulk pack poultry and 
poultry parts could be substituted under the project because the 
processing of these items could be more readily evaluated. The 
Department has determined from this demonstration project that current 
regulations regarding the non-substitution, non-diversion of poultry 
products has created onerous tracking and segregation requirements for 
both processors and recipients. Allowing the substitution of donated 
poultry on this limited basis has resulted in more flexibility to 
processors to manage inventory and production schedules and has allowed 
processors to better service their customers, recipient agencies. 
Processors are now able to deliver end products in smaller quantities, 
as the customers prefer. This results in a substantial saving for the 
recipient agencies in storage and handling costs of the finished end 
product. The Department has determined that this substitution 
demonstration project has resulted in increased processor participation 
and provided a greater variety of processed end products to recipient 
agencies.
    Therefore, the Department is proposing to change the regulations at 
7 CFR 250.30(f) (hereinafter all references to regulations in this 
rulemaking are to regulations in Title 7 of the Code of Federal 
Regulations) to allow the substitution of commercial bulk pack poultry 
and poultry parts for USDA donated bulk pack poultry and poultry parts 
on a permanent basis. The ability for the processor to substitute is an 
option, not a requirement. Any substitution of poultry or poultry parts 
must be consistent with the ``Buy American'' provisions of Section 
104(d) of Public Law 105-336 (The William F. Goodling Child Nutrition 
Reauthorization Act of 1998), which amended section 12 of the NSLA, 42 
U.S.C. 1760(n). The ``Buy American'' provisions are in Program 
regulations at 7 CFR 210.21(d) for the National School Lunch Program 
and 7 CFR 220.16(d) for the School Breakfast Program and are discussed 
fully in a final rule titled ``School Nutrition Programs: 
Nondiscretionary Technical Amendments'' published on September 20, 1999 
in the Federal Register at Volume 64 beginning on page 50735.
    Currently, the substitution demonstration requires a processor to 
submit a substitution plan to the Department annually. Processors will 
still need to submit a final substitution plan to USDA for approval. 
Once approved, the plan will be permanent. However, any changes to the 
plan would require resubmission of the plan and approval by USDA before 
implementation. The prohibition against substituting backhauled poultry 
products will continue.
    Substitution of donated fruits, vegetables, or eggs with commercial 
fruits, vegetables, or eggs is allowed under Sec. 250.30(f)(4) of the 
current regulations with the written approval of FNS. Independent CPA 
audits of the processors who have received the approval to substitute 
have identified no substitution of inferior product. Therefore, FNS is 
proposing to amend the regulations to allow full substitution in the 
further processing of fruits, vegetables, and eggs. Any substitution of 
fruits, vegetables, or eggs must be consistent with the ``Buy 
American'' provisions discussed above and subject to a 100% yield 
requirement. The Department believes that by making the substitution 
option permanent, processors will have more flexibility to properly 
service their customers. Substitution of donated commodity with 
commercial product of equal or better quality to the donated commodity 
will remain an option for processors.

Commercial Labeling Issues

    Over the last year, USDA has conducted a demonstration project that 
allows vendors to use commercial labels rather than requiring USDA 
labels on foods made with or of USDA donated commodities used in the 
school meal programs. This project has demonstrated excellent benefits 
for recipient agencies including reduced delivery delays, increased 
competition, and reduced program costs. In addition, the project has 
helped eliminate a perceived stigma implied by the ``generic'' USDA 
labels.
    However, using commercial labels has made it difficult for schools 
to distinguish between donated commodities and commercially purchased 
items in order to comply with current regulations to store and 
inventory donated commodities separately. These Federal requirements 
for storage and inventory of donated commodities have always been more 
stringent than the Federal requirements for foods that have been 
purchased using Federal reimbursement dollars from the National School 
Lunch Program. Schools currently must use generally accepted inventory 
and business management practices in order to safeguard commercially 
purchased products and maintain the financial integrity of their child 
nutrition program. For these reasons, the Department has determined 
that separate requirements for storage and inventory of commodities in 
the general food distribution regulations are redundant and more 
onerous than necessary to safeguard the value of commodities received 
at the school level. Therefore, the Department is proposing to amend 
the regulations at Sec. 250.13(a) to define commodity value for the 
purpose of OMB Circular A-133, and at Sec. 250.14(b), Sec. 250.14(e), 
and Sec. 250.14(f)(1) and (f)(2) to remove the requirement that 
``recipient agencies''

[[Page 7979]]

store and inventory USDA donated food separately. A technical amendment 
will be made in Sec. 250.14(c) to correct sentence structure. Section 
250.14(e) will be revised to reduce physical inventory requirements for 
schools in this section. To satisfy the requirements of OMB Circular A-
133 for the purpose of valuing the commodities, both received and used 
by a recipient agency, guidance will be provided by the Food 
Distribution Division after publication of the final rule. State and 
commercial warehouses, and sub-distributing agencies continue to be 
required to store and inventory donated commodities separately.

List of Subjects in 7 CFR Part 250

    Administrative practice and procedure, Food assistance programs, 
Grant programs, Social programs, Indians, Reporting and record keeping 
requirements, Surplus agricultural commodities.

    Accordingly, 7 CFR Part 250 is amended as follows:

PART 250--DONATION OF FOODS FOR USE IN THE UNITED STATES, ITS 
TERRITORIES AND POSSESSIONS AND AREAS UNDER ITS JURISDICTION

    1. The authority citation for Part 250 continues to read as 
follows:

    Authority: 5 U.S.C. 301; 7 U.S.C. 612c, 612c note, 1431, 1431b, 
1431e, 1431 note, 1446a-1, 1859, 2014, 2025; 15 U.S.C. 713c; 22 
U.S.C. 1922; 42 U.S.C. 1751, 1755, 1758, 1760, 1761, 1762a, 1766, 
3030a, 5179, 5180.

    2. In Sec. 250.13 add a new sentence at the end of paragraph (a)(5) 
to read as follows:


Sec. 250.13  Distribution and control of donated foods.

    (a) * * *
    (5) * * * To satisfy the requirement of OMB Circular Number A-133 
for the purposes of valuing commodities, both received and used by a 
recipient agency, guidance will be provided as needed by the Food 
Distribution Division. (For availability for OMB Circulars referenced 
in the paragraph, see 5 CFR 1310.3.)
    3. In Sec. 250.14:
    a. Remove the word ``Stock'' at the beginning of paragraph (b)(4) 
and add in its place the words ``Excepting recipient agencies, stock'' 
;
    b. Remove the word ``Conduct'' from the beginning of the third 
sentence in paragraph (c) and add in its place the word ``conduct'' and 
remove the period at the end of the second sentence;
    c. Revise paragraph (e);
    d. Remove the words ``or recipient agency's'' in paragraph (f)(1) 
introductory text and add in its place the word ``agency's; and
    e. Remove the words ``and recipient agencies'' in the second 
sentence of paragraph (f)(2).
    The revision reads as follows:


Sec. 250.14  Warehousing, distributing, and storage of donated foods.

* * * * *
    (e) Physical inventory. During the annual review required by 
paragraph (c) of this section, distributing agencies and 
subdistributing agencies shall take a physical inventory of their 
storage facilities. The physical inventory shall be reconciled with 
each storage facility's book inventory. The reconciliation records 
shall be maintained by the agency that contracted for or maintained the 
storage facility. Food items, which have been lost, stolen, or found to 
be out of condition, shall be identified and recorded. Potential 
excessive inventory, as described in paragraph (f) of this section, 
shall be reported by the subdistributing agency to the distributing 
agency. Corrective action on each deficiency noted during these 
inventories shall be initiated immediately and a written report of 
those corrective actions shall be forwarded to the distributing agency. 
Where applicable, the distributing agency shall pursue claims in 
accordance with Sec. 250.15(c).
* * * * *
    4. In Sec. 250.16, revise paragraph (a)(2) to read as follows:


Sec. 250.16  Maintenance of records.

    (a) * * *
    (2) Distributing agencies shall require all subdistributing 
agencies to maintain accurate and complete records with respect to the 
receipt, distribution/disposal, and inventory of donated foods, 
including end products processed from donated foods. Subdistributing 
agencies and recipient agencies must document any funds that arise from 
the operation of the distribution program, including refunds made to 
recipient agencies by a processor in accordance with Sec. 250.30(k). 
Further, these documents should allow an independent determination of 
the specific accounts that benefit from these funds.
* * * * *
    5. In Sec. 250.23, add a new paragraph (a)(3) to read as follows:


Sec. 250.23  Buy American.

    (a) * * *
    (3) All food purchases must be consistent with the ``Buy American'' 
provision of Public Law 105-336 (The William F. Goodling Child 
Nutrition Reauthorization Act of 1998).
* * * * *
    6. In Sec. 250.30:
    a. Revise paragraph (f)(1) introductory text;
    b. Remove paragraph (f)(1)(i) and redesignate paragraphs (f)(1)(ii) 
and (f)(1)(iii) as paragraphs (f)(1)(i) and (f)(1)(ii);
    c. Revise newly redesignated paragraph (f)(1)(i);
    d. Remove the words ``specifically listed in paragraph (f)(1)(i) of 
this section'' in the second sentence of paragraph (f)(2);
    e. Remove paragraph (f)(4) and redesignate paragraph (f)(5) as 
paragraph (f)(4); and
    f. Amend paragraph (g) by adding a sentence after the second 
sentence.
    The revisions and additions read as follows:


Sec. 250.30  State processing of donated foods.

* * * * *
    (f) * * *
    (1) The processing contract may provide for substitution of donated 
foods as defined in Sec. 250.3 except that donated beef and donated 
pork may not be substitutable. Any poultry processors that wish to 
substitute poultry must have a plan approved by USDA. No backhauled 
poultry product may be substitutable.
    (i) All components of commercial foods substituted for any donated 
food must be identical or superior in every particular of the donated 
food specification. Records must be maintained to allow independent 
verification that the substituted food met the above condition.
* * * * *
    (g) * * * As with the processing of donated poultry into end 
products, AMS graders must monitor the processing of any substituted 
commercial poultry to ensure that program integrity is maintained. * * 
*
* * * * *

    Dated: February 14, 2002.
George A. Braley,
Acting Administrator, Food and Nutrition Service.
[FR Doc. 02-4174 Filed 2-20-02; 8:45 am]
BILLING CODE 3410-30-U