[Federal Register Volume 69, Number 169 (Wednesday, September 1, 2004)]
[Rules and Regulations]
[Pages 53502-53547]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-19628]



[[Page 53501]]

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Part II





Department of Agriculture





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Food and Nutrition Service



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7 CFR Part 226



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

  Federal Register / Vol. 69, No. 169 / Wednesday, September 1, 2004 / 
Rules and Regulations  

[[Page 53502]]


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DEPARTMENT OF AGRICULTURE

Food and Nutrition Service

7 CFR Part 226

RIN 0584-AC24


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

AGENCY: Food and Nutrition Service, USDA.

ACTION: Interim rule.

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SUMMARY: This interim rule incorporates in the Child and Adult Care 
Food Program regulations the changes proposed by the Department in a 
rulemaking published on September 12, 2000. These changes result from 
the findings of State and Federal Program reviews; from audits and 
investigations conducted by the Office of Inspector General; and from 
amendments to the Richard B. Russell National School Act enacted in the 
Healthy Meals for Healthy Americans Act of 1994, the Personal 
Responsibility and Work Opportunities Reconciliation Act of 1996, and 
the William F. Goodling Child Nutrition Reauthorization Act of 1998. 
This rule revises State agency criteria for approving and renewing 
institution applications; certain State- and sponsor-level monitoring 
requirements; and Program training and other operating requirements. 
Additional statutory changes resulting from enactment of the 
Agricultural Risk Protection Act of 2000 and the Grain Standards and 
Warehouse Improvement Act of 2000 were addressed in a separate interim 
rule published on June 27, 2002. The changes in this interim rule are 
primarily designed to improve Program operations and monitoring at the 
State and institution levels and, where possible, to streamline and 
simplify Program requirements for State agencies and institutions.

DATES: This interim rule is effective October 1, 2004. The following 
provisions must be implemented no later than April 1, 2005: Sec. Sec.  
226.6(f)(1)(x), 226.6(m)(5), 226.15(e)(2) and (e)(3), and 226.18(e). 
The following provisions must be implemented no later than October 1, 
2005: Sec. Sec.  226.7(k), 226.10(c), 226.11(b), and 226.13(b). To be 
assured of consideration, comments must be postmarked on or before 
September 1, 2005. Comments will also be accepted via E-Mail submission 
if sent to [email protected] no later than 11:59 p.m. on 
September 1, 2005.

ADDRESSES: The Food and Nutrition Service invites interested persons to 
submit comments on this interim rule. Comments may be submitted by any 
of the following methods:
     E-Mail: Send comments to [email protected]
     Fax: Submit comments by facsimile transmission to: (703) 
305-2879, attention Robert Eadie.
     Mail: Comments should be addressed to Mr. Robert Eadie, 
Chief, Policy and Program Development Branch, Child Nutrition Division, 
Food and Nutrition Service, Department of Agriculture, 3101 Park Center 
Drive, Room 634, Alexandria, Virginia 22302-1594. All written 
submissions will be available for public inspection at this location 
Monday through Friday, 8:30 a.m.-5 p.m.
     Hand Delivery or Courier: Deliver comments to 3101 Park 
Center Drive, Room 634, Alexandria, Virginia 22302-1594, during normal 
business hours of 8:30 a.m.-5 p.m.
     Federal eRulemaking Portal: Go to http://www.regulations.gov. Follow the online instructions for submitting 
comments.

FOR FURTHER INFORMATION CONTACT: Mr. Edward Morawetz or Mr. Keith 
Churchill at the above address or by telephone at (703) 305-2590. A 
regulatory impact analysis was completed as part of the development of 
this interim rule. Copies of this analysis may be requested from Mr. 
Morawetz or Mr. Churchill.

SUPPLEMENTARY INFORMATION:

Background

Why Is This Rule Being Issued as an Interim Rule, Rather Than as a 
Final Rule?

    As noted, USDA published a proposed rulemaking on September 12, 
2000 (65 FR 55101). That proposed rule responded to State and Federal 
Program reviews which found numerous cases of mismanagement and Program 
abuse by child care sponsors and facilities. In addition, audits and 
investigations conducted by the Office of Inspector General (OIG) had 
raised serious concerns regarding the adequacy of financial and 
administrative controls on the Child and Adult Care Food Program 
(CACFP). As originally drafted, the proposed rulemaking presented a 
large number of changes designed to improve Program management and 
integrity in the CACFP.
    In the spring of 2000, shortly before the proposed rule was 
published, the Agricultural Risk Protection Act of 2000 (ARPA) was 
enacted. ARPA included a number of nondiscretionary provisions 
affecting CACFP and requiring implementation. As a result, we published 
the September 2000 proposed rule featuring discretionary changes to 
CACFP, and then subsequently published an interim rule on June 27, 
2002, implementing the nondiscretionary provisions mandated by ARPA (67 
FR 43447). Due to the timing of ARPA's enactment and the subsequent 
publication of the proposed rule, those who commented on the proposed 
rule were largely unaware of the way in which the provisions of ARPA 
would interact with the discretionary regulatory proposals for CACFP 
published in September 2000.
    We are publishing this interim rulemaking in order to provide a 
fuller opportunity for the public to comment on the interactions 
between the provisions of the proposed rule (which are included in this 
interim rule) and the interim rule subsequently published on June 27, 
2002. After receiving public comment, we intend to publish a single 
CACFP final rule.

Why Did OIG Conduct These Audits and Investigations?

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

What Did the First OIG Audit Reveal?

    In 1995, OIG released a report (No. 27600-6-At) that presented the 
results of these five audits. The audits evaluated:
     The adequacy of FNS, State agency, and family day care 
home sponsors' financial and administrative controls over meal claims;
     The accuracy of Program and participation data and claims 
for reimbursement submitted by family day care home sponsors; and
     Whether State agencies and participating sponsors complied 
with applicable laws, regulations, and guidance.
    These audits found serious types of regulatory noncompliance by 
both sponsors and homes, including:
     Meals claimed for absent children;
     Meals claimed for nonexistent homes and children;
     Lack of documentation for meal counts and/or menu records;

[[Page 53503]]

     Failure by sponsors to perform required monitoring visits; 
and
     Sponsors' failure to require providers to attend training.

What Were OIG's Recommendations to FNS in the 1995 Audit?

    Based on its findings, OIG's 1995 audit recommended changes to 
CACFP review requirements and management controls. In total, the 1995 
audit made fifteen recommendations. We have completed action on the 
five OIG recommendations from the national audit that did not require 
regulatory change. The other ten recommendations require regulatory 
changes, most of which are addressed in this preamble.
    The most significant recommendations from the 1995 audit were that 
the CACFP regulations be amended to require that:
     Sponsors and State agencies make unannounced reviews of 
day care homes;
     Parental contacts be made in order to verify children's 
Program participation;
     Sponsor reviews of day care homes include, at a minimum, 
reconciliation of enrollment, attendance, and meal claim data;
     All family day care home providers receive training each 
year; and
     All State agency reviews include certain specified review 
elements.
    Recommendations from the 1995 audit that were included as statutory 
provisions in ARPA (for example, the requirement that sponsoring 
organizations make unannounced reviews of their facilities) were 
addressed in the previously-mentioned interim rule published on June 
27, 2002.

Has OIG Conducted Other Audits As Well?

    OIG conducted additional audits of family day care home and child 
care center sponsors, many of which State or Federal Program 
administrators had suspected of having serious management problems. 
These targeted audits, released in August of 1999 and were referred to 
collectively as ``Operation Kiddie Care'' by OIG, confirmed the 
findings of the 1995 audits and developed additional findings as well.

Is the Department Including in This Rule Any of the Recommendations 
From OIG's 1999 ``Operation Kiddie Care'' Audit?

    Most of the ``Operation Kiddie Care'' audit's recommendations for 
regulatory changes also appear in this rule. As mentioned above, those 
changes that are not addressed here were included in the June 27, 2002, 
interim rule, due to the fact that they were mandated by ARPA.

Is There Any Recommendation From the Operation Kiddie Care Audit Not 
Included in Either Interim Rule?

    Yes. We have not incorporated, either in this or the earlier 
interim rule, the audit's recommendation for a major Program design 
change in the way that sponsoring organizations of family day care home 
sponsors are reimbursed for their administrative expenses.
    The current administrative reimbursement system for family day care 
home sponsors sets a cap on administrative expenses that is based on 
the total number of homes sponsored. Home sponsors are paid the lesser 
of: The number of homes administered times a per home administrative 
rate; actual administrative costs; or the sponsor's approved budget. 
Thus, because operating the Program in a larger number of homes raises 
the ceiling on the sponsor's maximum administrative earnings, some 
observers believe that there is a built-in financial incentive for day 
care home sponsors to administer the Program in more homes, and a 
built-in financial disincentive for sponsors to terminate homes' CACFP 
participation, even if the homes are doing a poor job of administering 
the Program.
    The management improvement training provided to State Program 
administrators in 1999-2000, and the interim rule published in 2002, 
addressed this problem by providing State agencies with the tools to 
perform better and more thorough reviews of institutions' budgets and 
sponsors' management plans. Specifically, the performance standards 
mandated by ARPA should result in more thorough State agency reviews of 
institution applications which, consequently, should also help limit 
sponsors' administrative costs to those expenses that are reasonable 
and necessary for Program administration, regardless of the ceiling 
resulting from the homes times rates calculation.
    However, at the time that the proposed rule was issued, these 
performance standards had not been fully implemented. For that reason, 
we asked readers of the proposed rule to comment on several possible 
alternatives to the current system of administrative reimbursement for 
day care home sponsors. These alternatives had been discussed with 
stakeholders during development of the proposed rule, and included:
     Eliminating homes times rates as a component of the 
administrative cost system, instead paying sponsors the lesser of 
actual costs or approved budget amounts;
     Establishing a fixed percentage of the meal reimbursement 
distributed to providers as the sponsor's administrative payment. In 
other words, if a sponsor disbursed $300,000 per month in meal 
reimbursements to its providers, it would receive, in addition to the 
$300,000 in meal reimbursements for its providers, up to some fraction 
(perhaps 10 to 15 percent) of that amount to cover all of their 
approved and allowable administrative expenses;
     Paying sponsors a fixed administrative fee for each 
reimbursable meal served by their providers;
     Lowering the per home administrative rates for sponsors of 
more than 200 homes, in order to reduce their financial incentive to 
sponsor more homes; and
     Establishing some other system of administrative 
reimbursement for home sponsors that commenters might recommend.

How Did Commenters Respond to These Possible Alternative Systems of 
Administrative Reimbursement for Day Care Home Sponsors?

    A total of 484 commenters responded to our request for comments on 
these alternatives to the current administrative reimbursement system. 
After analyzing these comments, we have determined that no change to 
the current administrative reimbursement structure is warranted.

How Many Comments Did the Department Receive?

    We Received a Total of 548 Comments on the Proposed Rule.

Who Commented on the Rule?

    Of the 548 comments received, 353 were from individuals associated 
with institutions participating in CACFP (either independent centers or 
sponsoring organizations of homes or centers); 67 were from family day 
care home providers participating in the Program; 54 (representing 36 
different States) were from State Program directors and their staffs; 
21 were from State or National CACFP or children's advocacy 
organizations; and 53 were from parents, students, nutritionists, or 
other interested individuals whose institutional affiliation could not 
be determined.

How Is the Remainder of This Preamble Organized?

    The preamble is divided into four parts, and follows the same 
organization used in both the proposed rule and the interim rule 
published on June 27, 2002:


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I. State agency review of institutions' Program applications;
II. State agency and institution monitoring requirements;
III. Training and other operational requirements; and
IV. Other provisions mandated by the Healthy Meals for Healthy 
Americans Act of 1994 (Pub. L. 103-448, hereinafter referred to as 
the Healthy Meals Act); the Personal Responsibility and Work 
Opportunities Reconciliation Act of 1996 (Pub. L. 104-193, 
hereinafter referred to as PRWORA); and the William F. Goodling 
Child Nutrition Reauthorization Act of 1998 (Pub. L. 105-336, 
hereinafter referred to as the Goodling Act). Readers of this 
preamble should note that none of the changes mandated by Public Law 
108-265, the Child Nutrition and WIC Reauthorization Act of 2004, is 
included in this rule. These changes will all be incorporated in one 
or more future rules.

    While many of the changes discussed in parts I-III of this preamble 
are discretionary changes designed to improve Program management and 
streamline Program operations, we also included a number of changes to 
the CACFP regulations required by the Healthy Meals Act, PRWORA, and 
the Goodling Act. Most of the mandatory changes are located in part IV 
of this preamble, though some appear in other parts of the preamble, 
depending on whether the specific statutory change under consideration 
was thematically related to the discretionary changes being discussed 
in another part of the preamble. Non-discretionary provisions (i.e., 
changes based on a statutory mandate) will be identified in the 
preamble discussion.

Part I. State Agency Review of Institutions' Program Applications

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

What does the NSLA Say With Regard to the Duration of an Application?
    Section 204(a)(3) of the Child Nutrition and WIC Reauthorization 
Act of 1989 (Pub. L. 101-147) amended section 17(d) of the Richard B. 
Russell National School Lunch Act (NSLA; 42 U.S.C. 1766(d)) by adding a 
new paragraph (2)(A) which requires the Department to ``develop a 
policy that allows institutions providing child care * * *, at the 
option of the State agency, to reapply for assistance * * * at 2-year 
intervals.'' It also required that State agencies choosing this option 
must ``confirm on an annual basis'' that each participating institution 
is in compliance with the licensing and approval requirements set forth 
at section 17(a)(1) of the NSLA (42 U.S.C. 1766(a)(1)). Later, section 
116(b) the Healthy Meals Act amended section 17(d)(2)(A) (42 U.S.C. 
1766(d)(2)(A)) of the NSLA by extending the two-year CACFP 
reapplication interval to three years.
Were Three-Year and One-Year Applications the Only Options Addressed in 
the Proposed Rule?
    No. Although the NSLA requires reapplication for participation at 
least once every three years, it does not require annual or biennial 
applications to be the only alternatives to the triennial option. 
Therefore, we proposed to remove the references to an annual 
application found in the introductory paragraphs of Sec.  226.6(b) and 
226.6(f), and in Sec.  226.7(g), and to further revise Sec.  226.6(b) 
to require each institution to reapply for participation at a time 
determined by the State agency, as long as not less than one nor more 
than three years have elapsed since its last application approval. This 
gives State agencies the option to consider whether the annual renewal 
of applications represents the most efficient and effective means of 
carrying out their Program responsibilities, and to consider any length 
of application between 12 and 36 months. In addition, we proposed that, 
if an institution submits a renewal application, and the State agency 
has not conducted a review of that institution since the last agreement 
was signed or extended, but has reason to believe that such a review is 
immediately necessary, the State agency has the option of approving the 
institution's application for a period of less than one year, pending 
the completion of such a review.
How Did Commenters' Respond to These Proposals?
    Overall, commenters were in favor of our interpretation of the 
NSLA's intent--that State agencies should have the flexibility to 
require institutions to submit re-applications at any time between one 
and three years after the previous application. In total, 47 
respondents (19 State agencies, 14 sponsors or other institutions, 9 
National or State organizations, 3 providers, and 2 commenters whose 
organizational affiliation was unclear) commented specifically on this 
provision, and all but one (who wanted a 2-year maximum on 
applications, although the NSLA now permits up to three years at State 
agency discretion) were in favor of our interpretation. In addition, we 
received about 350 general comments commending the proposal's increased 
flexibility regarding applications, which in part refers to our 
proposals to lengthen the time between applications and to reduce the 
amount of information required to be re-submitted on renewal 
applications.
    However, although there was consensus that 12 months should 
generally be the minimum amount of time between applications, there was 
some disagreement about the circumstances warranting a State agency's 
occasional use of a less-than-12-month period before requiring a re-
application. As previously mentioned, Sec.  226.6(b)(1)(ii)(C) of the 
proposed rule required State agencies to establish re-application 
periods of between 12 and 36 months for renewing institutions except in 
one instance: When the State agency has not conducted a review of that 
institution since the last application was approved, but has reason to 
believe that such a review is immediately necessary. This might occur, 
for example, when a State agency was reviewing a sponsoring 
organization's re-application, the sponsor had not been reviewed during 
the period of its prior application, and the State agency had concerns 
about the sponsor's management practices.
    Six State agency staff commented on this provision, and five of 
them wanted us to permit State agencies to renew contracts for less 
than 12 months under other circumstances as well. These five commenters 
believed that the CACFP regulations should provide State agencies with 
the flexibility to determine whether there are unusual circumstances 
warranting the use of a less-than-12-month reapplication period. We 
appreciate State agencies' desire for maximum flexibility. We do not 
believe that requiring an institution to re-apply in less than 12 
months should be a frequent occurrence. However, State agencies' 
experience with circumstances warranting more frequent scrutiny of 
institutions' applications indicate a need for greater flexibility. We 
are, therefore, convinced that there may be unusual circumstances in 
which a re-application in less than 12 months could be warranted.
    Accordingly, we have removed reference to the single circumstance 
warranting a reapplication period of less than 12 months, and 
substituted language clarifying that, under unusual circumstances, a 
State agency may require an institution to re-apply in less than 12 
months. As a result of the re-organization of this section of the 
regulations by the interim rule published on June 27, 2002, and the 
further reorganization of Sec.  226.6(b) made in this rule in order to 
combine the application provisions of the two rules, the provision now 
appears in the

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introductory paragraph of Sec.  226.6(b)(2), with regard to renewal 
applications, and at Sec.  226.6(b)(4)(ii)(B), with regard to the 
length of the agreement. Readers should again note that the interim 
rule published on June 27, 2002, specifically requires at Sec.  
226.6(c)(2)(iii)(D) the use of short-term extensions of an agreement 
when the State agency denies a renewal application or discovers a 
serious deficiency during its review of an applicant's renewal 
application.
Did the Department Propose Other Changes Related to the Application 
Process? What Were Commenters' Responses to These Provisions?
    Yes. We proposed six additional changes to the rules governing 
institution applications. Five of these are discussed below, while the 
sixth is addressed in part I(B) of this preamble.
    (1) Reorganization of application requirements at Sec.  226.6(b) 
and 226.6(f).--First, we proposed reorganizing Sec.  226.6(b) and 
226.6(f), so that Sec.  226.6(b) sets forth the broad requirements for 
applications submitted by institutions, and Sec.  226.6(f) specifies 
the frequency at which the institution would be required to update the 
licensing and approval information, as required by law, as well as 
other information contained in its original application. Respondents to 
the proposed rule did not comment on this proposed organizational 
change, and it therefore appears in this interim rule substantially as 
it was presented in the proposed rulemaking (except that Sec.  226.6(b) 
has been further re-organized to accommodate the regulatory distinction 
between new and renewing institutions that is incorporated in this 
rule. See paragraph (3), below).
    (2) Reorganization of other application requirements.--Current 
Program regulations at Sec. Sec.  226.6(b), 226.6(f), 226.7(g), 
226.15(b), 226.16(b) and 226.23(a) all establish various requirements 
for Program applications. Current Sec. Sec.  226.6(f)(1), (f)(2), and 
(f)(3), and current 226.7(g) expand upon the requirements of Sec.  
226.6(b)(1), (b)(5), and (b)(6) by describing the information to be 
included in the Program agreement and the management plan, and by 
establishing requirements pertaining to the State agency's review and 
approval of the sponsoring organization's management plan and the 
institution's budget. Section 226.15(b) reiterates the annual 
institution application requirements set forth in Sec.  226.6(b) and 
requires that nonprofit institutions submit evidence of their tax 
exempt status in accordance with Sec.  226.15(a). Section 226.16(b) 
reiterates the annual application requirements pertaining to sponsoring 
organizations, and Sec.  226.23(a) requires that each institution 
submit, and that State agencies approve, as part of the annual 
application process, a free and reduced-price policy statement to be 
used in all child care and adult day care facilities under the 
institution's supervision.
    We proposed to consolidate more of these requirements in Sec.  
226.6(b) so that State agencies and institutions could more easily 
refer to them during the application process. Respondents to the 
proposed rule did not comment on this proposed organizational change, 
and it therefore appears in this interim rule substantially as it was 
presented in the proposed rulemaking (except that Sec.  226.6(b) has 
been further re-organized to accommodate the regulatory distinction 
between new and renewing institutions that is incorporated in this 
rule. See paragraph (3), below).
    The proposed modifications to the wording of the application 
requirements set forth in current Sec.  226.6(b)(1) through (b)(18) 
were necessitated by the distinctions being drawn between new 
applicants and renewing institutions. In addition, we proposed to 
modify current Sec.  226.6(b)(10) (which requires the institution to 
state on its application whether it wishes to receive a full, partial, 
or no advance payment) due to PRWORA's change to the requirement that 
State agencies make advance payments available to Program institutions 
upon request. Furthermore, under our proposed revision to the 
application process, State agencies would continue to be responsible 
for distributing to, and collecting from, participating institutions 
certain Program information and data, and for ensuring that the CACFP 
is being operated in compliance with all regulatory requirements. In 
the proposed rule, these additional State agency responsibilities for 
information collection or dissemination outside of the application 
process were grouped into three paragraphs within revised and 
reorganized Sec.  226.6(f). Section 226.6(f)(1) would delineate 
responsibilities, including the collection or distribution of certain 
information, which State agencies would be required to perform 
annually; Sec.  226.6(f)(2) would list State agency responsibilities to 
be performed at least once every three years; and Sec.  226.6(f)(3) 
would enumerate those State agency responsibilities that could be 
carried out at intervals established at the State agency's discretion, 
though not more frequently than annually.
    (3) Distinction between application requirements for new and 
renewing institutions.--We also proposed to differentiate between the 
application requirements for ``new'' and ``renewing'' institutions. We 
did so because our experience, and that of our State agencies, 
indicates even greater attention needs to be paid to the applications 
of those institutions applying for the first time and those re-entering 
the Program after a lapse in participation, so that they will 
successfully operate the Program from the start. The need to ensure 
that new applicant institutions are brought into the Program 
successfully is best served by a regulation that establishes specific 
minimum requirements for applications submitted by new institutions, 
but that allows State agencies greater flexibility in dealing with 
renewal applications. To that end, the proposed rule included very 
specific application requirements for new institutions but, for 
renewing institutions, proposed to specify primarily that the 
reapplication be evaluated on the basis of the institution's ability to 
properly operate the Program in accordance with the performance 
standards, as demonstrated in its management plan (if the institution 
is a sponsoring organization), its budget, and its prior record in 
operating the Program.
    All 21 respondents who commented on this provision (17 State 
agencies, 3 sponsors or other institutions, and 1 State organization) 
were in favor of this change. Because it was necessary to create a 
regulatory distinction between new and renewing institutions in order 
to fully implement some of the institution eligibility provisions of 
ARPA, we have already included these definitions at Sec.  226.2 of the 
regulations in the interim rule published on June 27, 2002. As a result 
of this rule's interaction with the 2002 interim rule, this rule also 
requires that the renewal application include information on the past 
performance, criminal conviction, and presence on the National 
Disqualified List of the institution or its principals.
    As a further result of the interaction between the two interim 
rules, and in order to fully incorporate the distinctions between new 
and renewing institutions in the regulatory text on application review, 
the specific application requirements now appear at Sec.  226.6(b)(1) 
and (b)(2) of this interim rule for new and renewing institutions, 
respectively. This means that the annual regulatory requirements for 
all applications that currently appear at Sec.  226.6(b)(2) through 
(b)(18) are reorganized by this rule into requirements for new and 
renewing institutions at Sec.  226.6(b)(1) and (b)(2), respectively; 
the requirements for State

[[Page 53506]]

agency notification of applicants that currently appear in the 
introductory paragraph of Sec.  226.6(b) are relocated by this rule to 
Sec.  226.6(b)(3); and the provisions on agreements that currently 
appear at Sec.  226.6(b)(1) and 226.6(f)(1) are relocated by this rule 
to Sec.  226.6(b)(4). Finally, the basic requirement that State 
agencies establish an application process, and the general requirements 
for that process, are still included in the introductory text of Sec.  
226.6(b).
    The movement of the application and agreement requirements formerly 
located at Sec.  226.6(f) to Sec.  226.6(b) of this rule allows us to 
use the new Sec.  226.6(f) primarily as a place to specify the 
intervals at which a State agency must disseminate information to, or 
collect information from, participating institutions, regardless of the 
interval at which the State agency has opted to require re-
applications. For example, if a State agency chose to require that 
sponsoring organizations reapply every two years, it would still be 
required to collect a budget from each sponsoring organization 
annually, in accordance with Sec.  226.6(f)(1).
    (4) Requirement that State agencies consult the National 
disqualified list.--The results of OIG audits have convinced us that 
State agencies must be explicitly required to consult the National 
disqualified list (previously called the seriously deficient list but 
renamed in the interim rule published on June 27, 2002) when reviewing 
any institution's new or renewal application for participation. In 
several instances, OIG found that an institution or individual 
terminated from CACFP for cause and placed on the National disqualified 
list by one State was subsequently approved to participate by another 
State. Therefore, we proposed regulatory language to require a State 
agency to consult the National disqualified list whenever it reviews 
any institution's new or renewal application, and to deny the 
institution's application if either the institution, or any of its 
principals, is on the National disqualified list. [Please note that the 
June 27, 2002, interim rule requires State agencies to consult the 
National disqualified list when sponsors apply on behalf of facilities 
as well.]
    A total of 15 respondents (14 State agencies and one sponsor/
institution) commented on this proposed change. While all were 
supportive of this provision, nine of the commenters expressed 
reservations about the practicality of using the National disqualified 
list for this purpose. Their primary objection was that the current 
hard-copy (paper) version of the list was lengthy, poorly organized, 
and difficult to use. However, since those comments were submitted, we 
have addressed this issue by developing an electronic version of the 
National disqualified list and making it available to State agencies 
and sponsoring organizations.
    Because the consequence of an institution or individual being on 
the National disqualified list had to be clarified in the first interim 
rule published on June 27, 2002, as part of the full implementation of 
ARPA, that rule required (at Sec.  226.6(b)(12)) a State agency to 
consult the National disqualified list whenever it reviews any 
institution's application to participate and to deny the institution's 
application if either the institution, or any individual associated 
with the institution in a principal capacity, is on the National 
disqualified list. In the proposed rule published on September 12, 
2000, this provision had been placed at Sec.  226.6(b)(1). In this 
interim rule, which further re-organizes Sec.  226.6(b), that provision 
will now appear at Sec.  226.6(b)(1)(xi) and (b)(2)(ii) for new and 
renewing institutions, respectively.
    (5) Length of Program agreements between State agencies and 
institutions.--Under the current regulations at Sec.  226.6(b)(1) and 
226.6(f)(1), renewal of an institution's Program agreement is required 
as part of the annual reapplication process. These provisions were 
established prior to the legislative change to section 17 of the NSLA 
that now gives State agencies the option to take applications from 
participating institutions no less frequently than every three years.
    Prior to the enactment of the Goodling Act, the NSLA did not 
specify the duration of the Program agreement between the State agency 
and the institution. However, section 102(d) of the Goodling Act 
amended section 9(i) of the NSLA (42 U.S.C. 1758(i)) to require a State 
agency that administers any combination of the child nutrition programs 
(i.e., the National School Lunch, School Breakfast, Child and Adult 
Care Food or Summer Food Service Programs) to enter into a single 
permanent agreement with a school food authority that administers more 
than one of these programs. The NSLA does not specify the duration of 
the agreement between the State agency and non-school institutions.
    Consistent with section 17(d)(2) of the NSLA (42 U.S.C. 
1766(d)(2)), which permits State agencies to take applications every 
three years, we proposed that Program agreements for non-school 
institutions should be in effect for the period of the institution's 
application approval (i.e., generally, for a period between one and 
three years). Therefore, the proposed rule continued to link the length 
of the Program application and agreement for non-school institutions, 
while requiring State agencies to enter into permanent agreements with 
institutions that are schools and that, in accordance with the Goodling 
Act, operate more than one child nutrition program administered by the 
same State agency. (Readers should note that the recent legislative 
change requiring permanent agreements between sponsoring organizations 
and family day care homes is not addressed in this interim rule, but 
will be included in a subsequent rulemaking.)
    A total of 369 comments were received on this provision. These 
responses came from 18 State agency commenters, 241 sponsoring 
organizations and other institutions, 10 State and National 
organizations, 57 providers, and 43 commenters whose organizational 
affiliation could not be determined. The vast majority of commenters 
(363 out of 369) believed that we should reconsider the possibility of 
having permanent agreements for all types of institutions participating 
in CACFP. Primarily, these respondents noted that the existence of a 
permanent agreement was a small but meaningful reduction of paperwork 
for State agencies and institutions. In addition, some State agency 
commenters noted the potential difficulty of having as many as three 
different lengths of agreement in effect for different types of 
institutions (e.g., permanent where required by the Goodling Act, one-
year agreements with sponsoring organizations, and three-year 
agreements with independent centers) if this provision were implemented 
as proposed.
    The primary reason that we proposed to have agreements expire at 
the time of application renewal was our belief that not renewing an 
agreement linked to a denied re-application would be less procedurally 
burdensome to State agencies than going through the serious deficiency 
process. However, in drafting the interim rule implementing the CACFP 
changes mandated by ARPA, we determined that section 17 of the NSLA now 
requires State agencies to follow the same procedures for denying 
renewal applications as for terminating a participating program. That 
is, if a re-applying institution were determined to be seriously 
deficient during the review of its application, it would still have the 
opportunity to take corrective action. Then, if corrective action was 
not taken, the State agency would propose to terminate the 
institution's agreement, and the institution would have an

[[Page 53507]]

opportunity for an administrative review prior to the State's formal 
termination of the agreement. During this period, the institution's 
agreement would be temporarily extended for a brief period, until the 
completion of the administrative review. Similarly, if the State agency 
denied the renewal application for reasons unrelated to a serious 
deficiency (e.g., the institution failed to submit all required 
information in its renewal application), the institution's agreement 
would be temporarily extended until the completion of the 
administrative review. Thus, as a result of the changes mandated by 
ARPA, it is no easier to terminate an institution's participation by 
denying their renewal application than by terminating their 
participation in the middle of an agreement. Therefore, there is no 
compelling reason to link the time interval between application and re-
application to the length of the agreement.
    Accordingly, this interim rule modifies Sec.  226.6(b)(4)(ii) 
[proposed Sec.  226.6(b)(2)(ii)] to permit State agencies to enter into 
permanent agreements with any institution, and to require a single 
permanent agreement between the State agency and any school food 
authority that administers more than one child nutrition program. Also, 
the requirements pertaining to the minimum length of the agreement have 
been modified to accommodate the possible need for short-term 
extensions of the agreement during an institution's appeal of an 
application denial or a proposed termination, in cases where the State 
agency chooses not to utilize a permanent agreement.
Did You Receive Comments on Any of Your Proposed Changes to the 
Application or Related Requirements at Current Sec.  226.6(b) and 
226.6(f) for New and Renewing Institutions?
    Yes. The comments on these proposed changes and our responses are 
detailed below.
    Current Sec.  226.6(b)(1): Program agreement [proposed Sec.  
226.6(b)(2)].-- See the previous discussion concerning the length of 
the Program agreement entered into between the State agency and 
institutions.
    Current Sec.  226.6(b)(2): Center requirements pertaining to free 
and reduced-price eligibility [proposed Sec.  226.6(b)(1)(i)(A) and 
226.6(f)(1)].-- The current regulations at Sec.  226.6(b)(2) require 
that centers submit current free and reduced-price eligibility 
information annually. We proposed that new independent centers and new 
sponsors of centers would continue to be required to submit such 
information to the State agency with their initial application. In 
addition, we proposed that collection of this information by the State 
agency would be required annually at proposed Sec.  226.6(f)(1), to 
enable the State agency to use this information to construct an annual 
claiming percentage or blended rate for each participating child care 
center in accordance with Sec.  226.9(b).
    We received two comments on these proposed changes, both from State 
agencies. One favored the change stating that, since the information is 
reported at least annually to enable the calculation of a blended rate 
or claiming percentage, it is not necessary that it be included in a 
renewal application. A second commenter expressed reservations about 
the requirement for new centers to include this information with the 
application, stating that the center would not know its numbers at the 
time it applied. However, we concluded that this information would have 
to be known by the center sometime during the application process, 
prior to the execution of a formal agreement between the center and the 
State agency, so that accurate claims could be submitted.
    Accordingly, we have adopted this regulatory language as proposed 
in this interim rule. The provision will appear at Sec.  226.6(b)(1)(i) 
for new institutions. Although renewing institutions will not be 
specifically required to include this information on their renewal 
applications, the State agency will be required to collect the 
information annually in accordance with Sec.  226.6(f)(1)(v), in order 
to construct a blended rate or claiming percentage for each center.
    Current Sec.  226.6(b)(3) and 226.6(f)(11): Family day care home 
sponsoring organization requirements for submission of enrollment 
information [proposed Sec.  226.6(b)(1)(i)(B)].-- Current Sec.  
226.6(b)(3) requires sponsors of family day care homes to annually 
provide aggregate enrollment information for the homes they sponsor and 
to confirm the eligibility of providers' children for free and reduced-
price meals. We proposed that this requirement would be maintained for 
new sponsoring organizations of family day care homes. New family day 
care home sponsors would be required to provide an estimate of their 
annual aggregate enrollment for planning purposes. Meanwhile, State 
agencies could choose to include or exclude this requirement from 
sponsoring organizations' renewal applications. We proposed to delete 
the annual data reporting requirements pertaining to tier I and tier II 
homes and meals at current Sec.  226.6(f)(11). The fact that this more 
detailed information on home participation (children in tier I, tier 
II, and mixed homes) is now collected monthly, on the FNS-44 form, 
means that sponsoring organizations already fulfill this requirement.
    Again, we received two comments on these proposed changes, both 
from State agencies. One commenter stated that we should follow the 
same approach for centers and homes, which we did (new institutions 
include this information on their initial application, renewing 
institutions do not do so because the information is already being 
captured on monthly reports for homes and annually for centers). The 
other commenter expressed reservations about the requirement for new 
home sponsors to include this information with the application, stating 
that the new home sponsor would not know these numbers at the time it 
applied. However, new family day care home sponsors must have an 
accurate count of homes in order to make administrative budget 
projections and to demonstrate that they will have adequate revenue, 
from administrative reimbursement and any other sources, to be 
financially viable. Although enrollment information on the children 
participating in each of these homes will fluctuate, it will 
nevertheless be available sometime during the application process, 
either at the time the new sponsor submits an application or, at the 
least, prior to the beginning of their actual Program participation. 
The regulation will, therefore, require a new home sponsor to include 
this information as part of its initial application.
    Accordingly, we have adopted this regulatory language as proposed 
in this interim rule. In this interim rule, which further re-organizes 
Sec.  226.6(b), the provision will appear at Sec.  226.6(b)(1)(ii) for 
family day care home sponsors. Renewing home sponsors will not be 
specifically required to include this information on their renewal 
applications. They will, of course, be annually required to estimate 
the number of homes they will sponsor in the coming year in order to 
revise their administrative budget.
    Current Sec. Sec.  226.6(b)(4), 226.15(b)(5), and 226.23(a): 
Nondiscrimination policy statement and media release [proposed 
Sec. Sec.  226.6(b)(1)(i)(C), 226.6(b)(1)(ii)(B), 226.6(f)(1)(vii), 
226.6(f)(3)(iii), and 226.23(a)].-- Current Sec. Sec.  226.6(b)(4), 
226.15(b)(5), and 226.23(a) require the submission of a 
nondiscrimination policy statement, a free and reduced-price policy 
statement, and a media release as part of the annual application. The 
wording of this requirement was altered slightly in the

[[Page 53508]]

proposed rule to require that each new institution submit its free and 
reduced-price policy statement, its nondiscrimination policy statement, 
and a copy of its media release announcing the Program's availability. 
Because section 722 of PRWORA prohibited institutions from being 
required to re-submit the policy statement unless it was substantively 
changed, proposed Sec.  226.6(b)(1)(ii)(B) prohibited State agencies 
from requiring resubmission of the free and reduced-price policy 
statement in the renewal application unless the institution made 
substantive changes to the statement. However, we also proposed that 
all institutions would continue to be required at Sec.  
226.6(f)(1)(vii) to annually submit to the State agency documentation 
that they had issued a media release which informed the public of the 
Program's availability, and State agency collection of the 
nondiscrimination statement would be done on an as needed basis (i.e., 
only when the institution made substantive changes) under proposed 
Sec.  226.6(f)(3)(iii). The relocation of these requirements to Sec.  
226.6(f) also allowed us to propose deletion of the current 
requirements at Sec.  226.15(b)(5). Finally, Sec.  226.23(a) proposed 
to eliminate the requirements for the institution to submit a free and 
reduced-price policy statement in its renewal application, in order to 
conform to the requirements of PRWORA.
    We received a total of eight comments on these proposals, seven 
from State agencies and one from a sponsor/institution. All eight 
commenters approved of these proposed changes, but suggested 
modifications to the regulatory wording. Seven of these respondents 
stated that the regulations should explicitly provide State agencies 
with the option to issue a Statewide media release on behalf of all 
institutions in the State. We addressed this issue in guidance dated 
September 18, 1996, but we agree that it also makes sense to include 
reference to this option in the regulatory language. Another commenter 
pointed out that, although our preamble discussion spoke of limiting 
changes to the nondiscrimination statement to times when the 
institution's policy changed, the regulatory language itself permitted 
State agencies to ask for an updated nondiscrimination statement on an 
as-needed basis, which could be as often as annually. We agree with 
this commenter that there is no compelling reason for the State agency 
to require this document to be submitted more frequently than the free 
and reduced-price policy statement (i.e., only when the institution 
makes changes to the nondiscrimination statement). For that reason, we 
have removed reference to the nondiscrimination statement that had 
appeared at proposed Sec.  226.6(f)(3)(iii).
    Accordingly, this interim rule incorporates these modifications as 
described above. In this interim rule, which further re-organizes Sec.  
226.6(b), the application requirements for submission of a 
nondiscrimination statement and a media release by new institutions 
will appear at Sec.  226.6(b)(1)(iii). This section of the rule, as 
well as Sec. Sec.  226.6(f)(1)(vii) and 226.23(d), will also 
specifically acknowledge that State agencies may either require 
institutions to issue an annual media release, or may issue a Statewide 
media release on behalf of all their institutions. State agencies will 
be prohibited (at Sec. Sec.  226.6(b)(2), introductory paragraph, and 
226.23(a)) from requiring an institution to submit, as part of a 
renewal application, an updated nondiscrimination statement or a free 
and reduced-price policy statement, unless the institution makes 
changes to either statement. This would not, of course, prevent a State 
agency from asking for copies of these items during reviews or at other 
appropriate times.
    Current Sec.  226.6(b)(5) and 226.6(f)(2): Sponsoring organization 
management plans [proposed Sec.  226.6(b)(1)(i)(D), 
226.6(b)(1)(ii)(A)(1) and 226.6(f)(2)(ii)].--The current requirement at 
Sec.  226.6(b)(5), under which sponsoring organizations must annually 
submit a complete management plan as part of their application, was 
moved to proposed Sec.  226.6(b)(1)(i)(D), governing the submission of 
applications by new institutions, as was the substance of current Sec.  
226.6(f)(2), which details the specific elements which must be included 
in a sponsor's complete management plan. Because it is such a critical 
document in establishing a sponsoring organization's ability to meet 
the statutorily-mandated eligibility criteria of financial viability, 
administrative capability, and internal controls for accountability, we 
also proposed to specifically require that a complete management plan 
again be submitted as part of sponsoring organizations' renewal 
applications. This requirement was at proposed Sec. Sec.  
226.6(b)(l)(ii)(A)(l) and 226.6(f)(2)(ii).
    Because of this proposal to require submission of a complete 
management plan with the renewal application, we proposed to leave more 
frequent submissions of a partial or complete management plan to the 
State agency's discretion, and to include the requirement to submit the 
complete management plan as part of the renewal application at revised 
Sec. Sec.  226.6(b)(2)(i) and 226.6(f)(2)(ii). This means that each 
State agency would be required to collect a complete management plan 
from sponsors no less frequently than every three years, but could 
require submission of the complete management plan as often as 
annually. The only portion of the management plan that this rule 
requires to be updated annually is the sponsoring organization's 
administrative budget, as discussed below. Of course, justification for 
changes to a sponsoring organization's budget assumptions might also 
require amendments to other portions of the management plan dealing 
with staffing, projected growth or decline in the number of facilities 
sponsored, or other factors.
    We received no specific comment on this reorganization or on the 
requirements pertaining to the periodic submission of management plans. 
Accordingly, this interim rule incorporates the changes proposed with 
regard to State agency review of management plans. Because of the 
further reorganization of Sec.  226.6(b) in this interim rule, these 
provisions now appear at Sec. Sec.  226.6(b)(1)(iv), 226.6(b)(2)(i), 
and 226.6(f)(2)(ii).
    Current Sec. Sec.  226.6(b)(6), 226.6(b)(18)(i)(C), 226.6(f)(3), 
226.7(g), and 226.15(b)(3): Institutions budgets [proposed Sec. Sec.  
226.6(b)(1)(i)(E), 226.6(b)(1)(ii)(A)(1), 226.6(f)(1)(vi), 
226.6(f)(3)(i), and 226.7(g)].--Current Sec. Sec.  226.6(b)(6) and 
226.15(b)(3) require institutions to annually submit budgets with their 
application. Current Sec. Sec.  226.6(b)(18)(i)(C), 226.6(f)(3) and 
226.7(g) require the State agency to review and approve budgets; to 
limit the allowable administrative costs of family day care home 
sponsoring organizations to the administrative costs in their approved 
budgets; to limit center sponsors' administrative costs to 15 percent 
of the meal reimbursement estimated to be earned by its sponsored 
centers; and to establish administrative cost limits for other 
institutions [e.g., independent centers and sponsors of centers] as it 
sees fit.
    We proposed to continue requiring, at proposed Sec.  
226.6(b)(1)(i)(E) and (b)(1)(ii)(A)(1), that both new and renewing 
institutions administrative budgets for State agency approval with 
their applications. In addition, we proposed at Sec.  226.6(f)(1)(vi) 
that revised budgets be submitted for State agency review and approval 
by all sponsoring organizations each year, and at

[[Page 53509]]

proposed Sec.  226.6(f)(3) that the budgets of independent centers be 
submitted as frequently as the State agency deems necessary. [Note: 
routine adjustments to annual budget projections are reviewed by State 
agencies for all CACFP institutions on an ongoing basis, in accordance 
with Sec.  226.7(g)]. Finally, the reference to annual budgets 
currently found in Sec.  226.7(g) would be deleted, since budgets for 
independent centers would no longer be required on an annual basis. 
However, all budgets, whenever submitted, would be required to 
demonstrate the institution's ability to manage Program funds in 
accordance with this part, OMB circulars, FNS Instruction 796-2, and 
the Department's Uniform Financial Management Requirements.
    Finally, to underscore the importance of the State agency's review 
of the institution's budget, we also proposed to specifically state 
that all approved costs in the budget must be necessary, reasonable, 
allowable, and allocable in accordance with Department financial 
management regulations, OMB circulars, and the CACFP Financial 
Management Instruction. The audits conducted by OIG revealed State 
agency review of institution budgets to be a particular weakness in 
some States, and it is important to emphasize the purpose of the budget 
review and the budget amendment process in the regulatory text itself. 
[Note: several references to ``administrative budgets'' in the proposed 
rule have been changed to ``budgets'' in this interim rule, to clarify 
that State agencies must also review the operating cost budgets of 
independent centers, in order to ensure that the center has properly 
planned a food service for the number of children and meals it proposes 
to serve.]
    We received a total of 383 comments on this provision, although 357 
of these were comments that we inferred to be about the budget 
submission and budget review process. These 357 respondents stated, in 
reference to our overall changes to the application process at Sec.  
226.6, that the regulations should clarify that the authority and 
responsibility for managing day-to-day Program operations, including 
internal decision-making such as staff hiring, is retained by the 
sponsoring organization, unless the sponsoring organization is 
operating under a corrective action plan. Many of these commenters 
further stated that, once sponsoring organizations have demonstrated 
their administrative capacity, they should be expected to manage their 
own programs.
    This comment appears to reflect opposition to the requirements for 
submission of information needed to assess an institution's viability, 
capability, and accountability through its management plan and/or 
budget. This raises the concern that, prior to this, the administering 
agency in some States was not adequately overseeing sponsor operations, 
especially in its review of a sponsor's management plan and budget. 
Additionally, we are also concerned with the commenters' apparent 
belief that close State agency oversight of a sponsoring organization 
or any institution participating in CACFP constitutes interference with 
the institution's management prerogatives.
    As subgrantees of a Federal program administered by State agency 
grantees, sponsoring organizations should expect that State agencies 
will closely monitor their expenditure of public funds. Although many 
sponsoring organizations are private entities, their private status 
does not invalidate their responsibility for proper use of Federal 
funds. The State agency has every right, and the clear responsibility, 
to closely oversee the sponsor's use of pass-through Federal funds. How 
the State agency chooses to accomplish its oversight responsibility 
will vary, and will be a function of management style, State resources, 
and other factors, including the State agency's experience with CACFP 
institutions that have not properly managed the CACFP. There is nothing 
in the proposed rule, or in this interim rule's requirements pertaining 
to State agency review of applications, that constitutes interference 
with a sponsor's ability to manage its day-to-day operations. There are 
simply Program requirements that must be implemented at the State and 
local level, in order to ensure the proper delivery of Program meals to 
children and the proper expenditure and management of Federal funds.
    Of the remaining 26 comments on this provision, 21 were from State 
agencies and five were from sponsors or other institutions. Seven 
respondents (5 State agencies and 2 sponsors/institutions) supported 
all of the proposals, while the remainder requested modifications to 
the regulatory language we proposed. These 19 suggested changes 
included: four commenters who believed that sponsors of affiliated 
centers (that is, sponsored centers which share the same legal identity 
as the sponsoring organization) should be required to submit a budget 
every three years, while sponsors of unaffiliated centers should be 
required to submit budgets annually, like sponsors of family day care 
homes; eight commenters who believed that independent centers and 
sponsors of affiliated centers should never be required to submit an 
administrative budget, because they did not receive a specific portion 
of the meal reimbursement to cover their administrative costs; three 
commenters who stated that the references to necessary costs in the 
regulatory language concerning budgets established an arbitrary and 
subjective standard, and were not consistent with Departmental and 
government-wide requirements that budget items be reasonable, 
allowable, and allocable; and four other commenters who requested that 
we require budgets to include projected CACFP earnings and the source 
of funding for Program costs over and above that covered by the CACFP 
reimbursement, and that we establish a percentage threshold below which 
an institution would not be required to file a budget amendment.
    It is inappropriate to establish separate regulations for budgets 
submitted by sponsors of affiliated and unaffiliated centers at this 
time. Therefore, this rule continues to require that all sponsoring 
organizations (whether sponsors of homes or of affiliated or 
unaffiliated centers) annually submit an administrative budget. 
However, we agree that there was some ambiguity with regard to the 
requirement for renewing institutions to submit a budget, since we also 
proposed at Sec.  226.6(f)(3)(i) that State agencies could require 
budgets from renewing independent centers (which are also institutions) 
as often as they saw fit. This interim rule will therefore clarify that 
all renewing sponsors are required to submit budgets with their renewal 
applications, but that State agencies are free to establish less 
frequent requirements for budget submission by independent centers 
(consistent with Sec.  226.6(f)(3)(i)).
    With regard to the reference to necessary costs, several commenters 
incorrectly stated that Office of Management and Budget Circulars 
defining cost principles for governments and nonprofit organizations do 
not mention necessity as a factor to be assessed in determining 
allowability of cost. In fact, Circular A-87, parts (C)(1)(a) and 
(C)(2)(a), and Circular A-122, part (A)(3)(a), both define allowable 
costs as costs that are necessary and reasonable. Therefore, this 
interim rule incorporates the regulatory language proposed at Sec.  
226.6(f)(1)(vi) requiring sponsors' budgets to include enough detailed 
information to allow the State agency to determine the allowability, 
necessity, and reasonableness of all proposed expenses.
    Finally, we agree with the commenters who suggested that the 
requirements for the administrative

[[Page 53510]]

budget should explicitly refer to estimated CACFP earnings, as well as 
proposed expenditures, and the appropriate change has been made to 
Sec. Sec.  226.6(b)(1)(iv)(C) and 226.6(f)(1)(vi) in this interim rule. 
We therefore incorporated language stating that the sponsor's 
administrative budget should include information on revenues derived 
from CACFP administrative reimbursement, as well as other sources, to 
illustrate how projected Program administrative expenses will be 
funded.
    Accordingly, this interim rule incorporates the changes proposed 
with regard to budgets, as discussed above. Because of the further 
reorganization of Sec.  226.6(b) in this interim rule, these provisions 
now appear at Sec.  226.6(b)(1)(iv)(C), (b)(1)(v), and (b)(2)(i).
    Current Sec. Sec.  226.6(b)(7), 226.15(b)(4), and 226.16(b)(3): 
Licensing and Approval Information [proposed Sec.  226.6(b)(1)(i)(F) 
and 226.6(f)(1)(viii)].--The current application requirements at 
Sec. Sec.  226.6(b)(7), 226.15(b)(4), and 226.16(b)(3) require 
documentation of licensing or approval to be submitted each year. As 
previously noted, section 17(d)(2)(B) of the NSLA requires that State 
agencies exercising the option to take applications at other than 
annual intervals are nevertheless required to annually confirm that 
each institution is in compliance with the licensing or approval 
provisions of section 17(a) of the NSLA (42 U.S.C. 1766(d)(2)(B)). 
Therefore, the proposed rule continued to require (at proposed Sec.  
226.6(b)(1)(i)(F)) that new independent centers and facilities 
sponsored by new institutions submit documentation of their licensure 
or approval. The Department also proposed at Sec.  226.6(f)(1)(viii) 
that State agencies be required to annually obtain from institutions or 
facilities the licensure or approval status of any institution or 
facility which is required to be licensed or approved.
    We received two comments (one from a State agency and one from a 
sponsor) on these proposals. One commenter asked that we permit the use 
of exception lists to confirm continued licensing or approval.
    We had specifically mentioned in the preamble to the proposed rule 
that there are a variety of ways that State agencies may comply with 
this requirement. In some States, the State CACFP agency and the State 
licensing agencies compare automated lists to find CACFP providers who 
are no longer licensed. In order to underscore that there are a number 
of acceptable means of confirming licensing or approval, we have 
modified the regulatory language at Sec.  226.6(f)(1)(viii). The other 
commenter stated that licensing should only share information with 
State agencies that was relevant to the institution or facility's 
participation in the CACFP. This is a matter to be resolved at the 
State level between the agencies responsible for licensing and CACFP.
    Accordingly, this interim rule incorporates the changes previously 
proposed at Sec. Sec.  226.6(b)(1)(i)(F) and 226.6(f)(1)(viii), with 
the aforementioned modification to Sec.  226.6(f)(1)(viii). In this 
interim rule, which further re-organizes Sec.  226.6(b), the provision 
will appear at Sec.  226.6(b)(1)(vi) for new institutions.
    Current Sec.  226.15(a) and (b)(1): Tax-exempt status information 
[proposed Sec.  226.6(b)(1)(i)(G) and 226.6(f)(3)(iv)].--The current 
application requirement at Sec.  226.15(b)(1) pertaining to the annual 
demonstration of tax-exempt status simply reiterates the requirement at 
Sec.  226.15(a) that all private nonprofit institutions must annually 
demonstrate their tax-exempt status. As part of our reorganization of 
institution application requirements, we proposed to relocate this 
requirement at new Sec.  226.6(f)(3), meaning that State agencies could 
require this information to be submitted by renewing institutions on an 
as needed basis, but no more frequently than annually. We received no 
comments on this proposed relocation and have incorporated the change 
in this interim rule.
    We also proposed that this requirement would be retained for new 
sponsors at proposed Sec.  226.6(b)(1)(i)(G), and that the periodic 
resubmission of such documentation should be at the State agency's 
discretion (Sec.  226.6(f)(3)(iv)). However, the interim rule published 
on June 27, 2002, inadvertently dropped this requirement from the 
application requirements at Sec.  226.6(b).
    Nine State agency commenters responded favorably to this proposed 
change. We are, therefore, incorporating the changes as proposed. In 
this interim rule, which further re-organizes Sec.  226.6(b), the 
provision concerning the tax-exempt status of new institutions is re-
inserted into the regulations and will appear at Sec.  
226.6(b)(1)(vii).
    Current Sec. Sec.  226.6(b)(8) and 226.15(b)(6): Proprietary center 
requirements [proposed Sec.  226.6(b)(1)(i)(H) and 226.6(f)(3)(v)-
(vi)].--Current regulations at Sec. Sec.  226.6(b)(8) and 226.15(b)(6) 
set forth the application requirements for proprietary centers. Such 
centers are permitted to participate in a given month only if at least 
25 percent of their licensed capacity or enrolled participants receive 
funding under title XX of the Social Security Act (42 U.S.C., 1397, et 
seq.) We proposed to retain the requirement that a new applicant 
proprietary center document its eligibility at proposed Sec.  
226.6(b)(1)(i)(H). However, no similar requirement was included for 
renewing institutions since, as a condition of their eligibility, such 
centers are required to document compliance with the 25 percent 
requirement each month. Therefore, we proposed to place the periodic 
resubmission of such documentation at revised Sec. Sec.  226.6(f)(3)(v) 
and 226.6(f)(3)(vi), since the State agency is already receiving this 
information on a monthly basis as part of the claiming process.
    We received a total of four comments on these proposals, two from 
State agencies and two from sponsors. Two of these commenters supported 
the proposed changes, while the two commenters who opposed the changes 
misunderstood their intent, believing that we had eliminated the 
requirement for monthly documentation of eligibility on the claim. In 
fact, it is because State agencies receive monthly documentation of 
eligibility on the claim that there is no need to address this matter 
in any renewal application materials; however, a State agency that 
wishes to require the periodic resubmission of this information may do 
so in accordance with Sec.  226.6(f)(3).
    Accordingly, this interim rule incorporates the proposed changes. 
In this interim rule, which further re-organizes Sec.  226.6(b), the 
provision will appear at Sec.  226.6(b)(1)(viii) for new institutions.
    Current Sec. Sec.  226.6(b)(9), 226.6(f)(5) and (f)(6), and 
226.6(h): Information on commodities [proposed Sec.  226.6(b)(1)(i)(J), 
226.6(f)(3)(ii), and 226.6(h).--We proposed that the current 
application requirement at Sec.  226.6(b)(9), under which institutions 
are to annually indicate their preference for commodities or cash-in-
lieu of commodities, would be included in the requirements for new 
applicants at proposed Sec.  226.6(b)(1)(i)(J) and in proposed Sec.  
226.6(f)(3)(ii) as information that State agencies could subsequently 
require to be submitted on an application on an as-needed basis. This 
would provide State agencies with the flexibility to allow institutions 
to submit additional information only when their initially-stated 
preference had changed. The requirement for annual submission of this 
information by institutions at current Sec.  226.6(h) would be deleted 
by removing the first sentence and by

[[Page 53511]]

making conforming changes to the remainder of the paragraph. We also 
proposed that the current requirements for State agencies to annually 
inquire about an institution's preference for commodities or cash-in-
lieu of commodities, and to annually notify all institutions of foods 
in plentiful supply, be moved from Sec.  226.6(f)(5) and (f)(6) to 
revised Sec.  226.6(h).
    We received eight comments on these proposed changes from six State 
agencies. Two State agencies (four of the commenters) supported all of 
the proposed changes, while the other four made suggestions for changes 
to the proposed regulatory language. All four of these commenters 
suggested modifications to proposed Sec.  226.6(h), which would require 
State agencies to annually provide information to all institutions on 
foods available in plentiful supply. These commenters either wanted the 
requirement eliminated, in favor of having those institutions 
interested in receiving surplus commodities contact the State agency, 
or making the notification discretionary rather than mandatory. In 
addition, one commenter objected to the requirement that new 
institutions state their preference for commodities or cash-in-lieu of 
commodities in their initial application, because he believed that 
``most organizations are not capable of receiving commodities''.
    However, current law at section 17(h)(1) of the NSLA requires State 
agencies to make annual determinations regarding the amount of 
commodities or cash in lieu of commodities needed by CACFP institutions 
in that State. The State agency's determination of whether to request 
cash in lieu of some or all of their commodity entitlement must, 
according to the law, base that decision on the preferences of 
participating institutions. Participating institutions can only make an 
informed decision about their commodity preferences if they know which 
commodities are in plentiful supply. Therefore, because of these 
statutory requirements, the Department is unable to eliminate the 
requirement for annual notification by the State agency of foods 
available in plentiful supply and will in this interim rule make only 
those changes that were proposed--to require new institutions to make 
an initial statement of their commodity preference in their Program 
application, then to permit State agencies to collect additional 
information from institutions on their commodity preferences on an as 
needed basis, whenever those preferences change.
    Accordingly, this interim rule incorporates the proposed changes at 
Sec.  226.6(h). In this interim rule, which further re-organizes Sec.  
226.6(b), the requirement for new institutions to indicate their 
preference for commodities or cash-in-lieu of commodities appears at 
Sec.  226.6(b)(1)(ix).
    Current Sec.  226.6(b)(10): Advance payment information.--Section 
708(f)(2) of PRWORA amended section 17(f)(4) of the NSLA (42 U.S.C. 
1766(f)(4)) by making payment of advances optional at the State 
agency's discretion. Because a State agency could elect to issue no 
advance payments whatsoever, we proposed to remove all references to 
advances from the application requirements. Instead, we proposed to 
relocate the current requirement at Sec.  226.6(b)(10) governing the 
institution's election to receive advance payments to Sec.  
226.6(f)(3)(vii), meaning that State agencies electing to distribute 
advances could require eligible institutions to state their preferences 
regarding advances on an ``as needed'' basis, but no more often than 
annually.
    We received no comments on our proposal to remove this provision 
from Sec.  226.6(b). Substantive comments on the statutory change are 
addressed in part IV(A) of this preamble, below.
    Current Sec.  226.6(f)(4): Procurement requirements [proposed Sec.  
226.6(j)]. Current Sec.  226.6(f)(4) requires State agencies to 
annually determine that all meal procurements with food service 
management companies are in conformance with bid and contractual 
requirements of Sec.  226.22. Because this requirement has nothing to 
do with the institution application process, we proposed to simply 
relocate the provision from Sec.  226.6(f)(4) to Sec.  226.6(j) and to 
delete the reference to annual determinations.
    We received two comments from State agencies on this proposed 
change. One commenter favored the change, while the other stated that 
there should be greater uniformity in procurement requirements between 
CACFP and the National School Lunch Program. This requirement (to 
ensure that all food service management company contracts are 
competitively procured) is, in fact, uniform in both the CACFP and the 
NSLP, since both Programs are subject to government-wide requirements, 
codified in Departmental regulations at 7 CFR part 3016, that grantees 
and subgrantees promote competition in all procurements to the maximum 
extent practicable. Accordingly, we have incorporated the proposed 
change at Sec.  226.6(j) of this interim rule.
    Current Sec.  226.6(f)(7) through (f)(10): Other State agency 
responsibilities [proposed Sec.  226.6(f)(1)(i) through Sec.  
226.6(f)(1)(iv) and Sec.  226.6(f)(3)(viii)].--We proposed to relocate 
current Sec.  226.6(f)(7) through (f)(10), which deal with State agency 
responsibilities regarding information made available to pricing 
programs, the conduct of verification, and implementation of the two-
tiered reimbursement system for family day care homes. Current Sec.  
226.6(f)(7), (f)(9), and (f)(10) were proposed to be relocated at 
proposed Sec. Sec.  226.6(f)(1)(i) through 226.6(f)(iv), since they 
relate to information which the State agency must provide annually to 
some institutions. Current Sec.  226.6(f)(8), which relates to the 
State agency's collection of verification as part of a review, was 
proposed to be moved to Sec.  226.6(f)(3)(viii), and required that 
verification be conducted as part of State agency reviews of 
institutions mandated at Sec.  226.6(l).
    We received no comments on this proposed reorganization of 
information. Accordingly, this interim rule incorporates these changes 
as proposed. Due to the publication of the earlier interim rule on June 
27, 2002, the latter provision is now located at Sec.  226.6(m)(4).

B. State Agency Notification to Applicant Institutions

    Prior to 1996, there were three requirements pertaining to the 
notification of applicant institutions in section 17(d)(1) of the NSLA. 
State agencies were required to: Notify the institution in writing of 
its approval or disapproval within 30 days; notify the institution in 
writing within 15 days if an incomplete application was submitted; and, 
if an incomplete application was submitted, provide technical 
assistance to help the institution complete its application.
    Section 708(c) of PRWORA amended section 17(d)(1) of the NSLA by 
removing the requirement that State agencies provide an institution 
with technical assistance when the institution submitted an incomplete 
Program application. Then, section 107(d) of the Goodling Act amended 
section 17(d)(1) of the NSLA to require that a State agency notify an 
institution of its approval or denial within thirty days after receipt 
of a complete application. This gave a State agency 30 days from its 
initial receipt of a complete application to either approve or deny the 
application. The Conference Report accompanying the bill (House Report 
105-786, October 6, 1998) encouraged State agencies to inform 
applicants as quickly as possible if an application was incomplete upon 
receipt. The September 12, 2000, rulemaking proposed to incorporate

[[Page 53512]]

these statutory changes at proposed Sec.  226.6(b)(1)(iii).
    We received a total of 22 comments on these provisions (19 from 
State agencies, one from a sponsor/institution, one from a State 
organization, and one from a commenter whose organizational affiliation 
could not be determined), 20 of which supported these changes. The two 
commenters who suggested deadlines for actions that conflicted with the 
NSLA were apparently not aware that we have no discretion to modify 
these statutory provisions. Accordingly, these changes are incorporated 
in this interim rule. Due to the further reorganization of Sec.  
226.6(b) in this interim rule, the provisions have been incorporated 
into the regulations at Sec.  226.6(b)(3).

Part II. State Agency and Institution Review and Oversight Requirements

What Were OIG's Recommendations for Changes to the Monitoring 
Requirements?
    As discussed above, OIG's national audit of the family day care 
home component of CACFP made a number of recommendations for changes to 
State agency and sponsoring organization monitoring requirements. Among 
these were recommendations to require that:
     Some or all sponsor reviews of day care homes and State 
agency monitoring visits to homes be unannounced;
     Routine parental contacts be made as part of State agency 
and sponsor monitoring of day care homes, in order to verify children's 
Program participation;
     Sponsors and day care providers keep more detailed 
information on enrollment forms, including a record of each child's 
normal hours of care and normal places (i.e., at day care, school, or 
home) of receiving meals throughout the day;
     Minimum sponsor review requirements--including 
reconciliation of enrollment, attendance, and meal claim data--be 
established;
     Sponsors routinely perform certain edit checks on all meal 
claims submitted by their facilities; and
     Minimum standards for State agency review coverage be 
established.
    This audit made two additional recommendations for changes to 
general oversight requirements that are not specifically included in 
the regulatory language dealing with monitoring. These include 
recommendations that:
     Program regulations clarify that facilities must not be 
reimbursed for improper claims; and that
     The Department take steps to minimize the possibility of 
State agencies paying claims to day care homes that were based on the 
provider's improper participation in the Food Stamp Program.
    After the release of this national audit, OIG informally 
recommended that the Department:
     Address the matter of placing seriously deficient family 
day care homes on a National list, much as the Department currently 
maintains a list of seriously deficient institutions; and
     Give State agencies explicit regulatory authority to limit 
the transfer of family day care home providers from one sponsoring 
organization to another.
    Finally, the ``Operation Kiddie Care'' audit made an additional 
recommendation related to sponsor monitoring: That the regulations 
prescribe a maximum number of facilities for which each sponsor monitor 
would have responsibility.
What Is FNS's Response to These Recommendations?
    We largely concur with these formal and informal recommendations. 
Implementation of these recommendations will aid our ongoing efforts to 
improve Program management. Those audit and other informal 
recommendations that subsequently were statutorily mandated by ARPA 
have already been addressed in the interim rule published on June 27, 
2002. The remaining seven recommendations are dealt with in this part 
of the preamble, as are several discretionary changes that we proposed 
with regard to sponsor review of facilities.

A. Household Contacts

What Did the OIG Audit Say About Household (Parental) Contacts?
    OIG's audit of family day care home sponsoring organizations 
revealed that fewer than one in six sponsors sampled made parental 
contacts a part of their normal provider reviews. They recommended that 
household contacts be made a routine part of a sponsoring organization 
and/or State agency's review protocols in order to confirm their 
child's enrollment and attendance, and the specific meals routinely 
received by the child, at the family day care home being reviewed.
Did USDA Propose To Require That Sponsoring Organizations or State 
Agencies Make Household Contacts?
    We believe that it would be inappropriate to mandate that household 
contacts be made routinely. However, we were (and remain) concerned 
with OIG's finding that block claiming (i.e., claiming the same number 
and type of meals served every day) by child care facilities often goes 
unchallenged by sponsoring organizations. Therefore, we proposed a 
system requiring that both sponsoring organizations and State agencies 
use household contacts under certain circumstances (specifically, when 
either determined that facilities had submitted block claims for 10 or 
more consecutive days, or had claimed an inordinately high number of 
meals for more than one day in a claiming period) in order to detect 
and deter the type of fraud documented in recent audits and 
investigations.
How Did Commenters Respond to These Proposals?
    We received more comments (515) on various aspects of our household 
contact proposals than we did on any other provision in the proposed 
rule. (Note: comments on the related topic of requiring sponsoring 
organizations to identify and review block claims as one type of claims 
edit check are discussed in part II(D), of this preamble, below). Among 
State agencies, institutions, and providers, there was almost universal 
agreement that our proposed system of household contacts was overly 
prescriptive and complex, and that implementation would be 
administratively difficult and costly for both State agencies and 
sponsoring organizations. Generally, most commenters also believed that 
the system, as proposed, would result in the conduct of far too many 
household contacts, requiring large administrative expenditures while 
not efficiently targeting or identifying those providers whose claims 
were most likely to be inaccurate.
    More specifically, the vast majority of these commenters felt that 
it would be more beneficial to permit sponsoring organizations and/or 
State agencies to develop their own systems for making household 
contacts, both in terms of the findings or events that would cause a 
household contact to be conducted, and the procedures to be used in 
making household contacts. Many of these commenters mentioned that a 
trigger, or threshold, of 10 consecutive days of identical claims was 
often not indicative of an inaccurate claim. These commenters stated 
that, for a variety of reasons, providers in some areas regularly 
accept sick children in care, thus making it far more likely 
(especially if the home cares for a small number of children) to have 
identical claims for extended periods of time.
    While stressing that their preference was to have sponsoring 
organizations or State agencies develop a household

[[Page 53513]]

contact policy appropriate to their particular circumstances, 349 
commenters also offered specific ideas for possible modifications to 
the household contact system that we had proposed. Many of these 
comments suggested using a longer period of block claiming (generally 
60 days, though a few suggested 30 or 90 days) to trigger a required 
household contact. Commenters also suggested changes to the 
requirements for the number of households to be contacted; the timing 
of, and the requirements for, unannounced visits when parents failed to 
respond or failed to corroborate the claim; and the means of notifying 
and contacting the parents of children in care.
    In addition, 29 comments were received from 20 State agencies and 
nine sponsoring organizations on the proposed requirement for State 
agencies to conduct household contacts in the periodic sample of 
facilities reviewed as part of the State agency's review of a sponsor. 
All 29 commenters were opposed to this proposal. Commenters believed 
either that State agencies should never conduct household contacts, or 
that a State agency should only conduct household contacts under 
circumstances defined by the State agency.
    In consideration of these concerns, and consistent with promoting 
greater flexibility for State agencies in their management of the 
Program, we have modified our proposals relating to the conduct of 
household contacts. Household contacts provide a means of confirming 
children's enrollment and attendance in care, which is critical to 
ensuring the integrity of the CACFP meal claim. However, the commenters 
have convinced us that there are many effective ways of establishing a 
household contact system, and that each State agency is in the best 
position to determine when a household contact must be made, either by 
the State agency or by the sponsors in that State, and the procedures 
for conducting household contacts. Because the development of these 
systems by the State agency will take time, we have delayed 
implementation of this provision until April 1, 2005. Therefore, this 
interim rule requires that:
     By April 1, 2005, each State agency develop a system that 
defines the circumstances under which the State agency will make, and 
the procedures it will use for conducting, household contacts as part 
of the oversight of independent centers, or in its sample reviews of 
sponsored facilities (Sec.  226.6(m)(5));
     By April 1, 2005, each State agency develop a system that 
defines the circumstances under which sponsors must make, and the 
procedures sponsors must use in conducting, household contacts as part 
of their review and oversight of participating facilities (Sec.  
226.6(m)(5));
     Sponsors comply with the requirements of the household 
contact system established by the State agency (Sec.  226.16(d)(5)); 
and
     The State agency include in its review of sponsors an 
evaluation of the sponsor's implementation of this requirement (Sec.  
226.6(m)(3)).
    Although we considered the possibility of requiring State agencies 
to submit these household contact systems to us for prior approval, we 
ultimately decided that the best way for us to assess the systems was 
in the context of the total review of State agency operations that 
occurs during a management evaluation. We are taking this approach in 
order to provide State agencies with maximum flexibility in adapting 
their household contact systems to fit the particular needs of sponsors 
and facilities in their State. However, we will require that, by April 
1, 2005, State agencies document these systems in writing and submit 
them to Food and Nutrition Service (FNS) regional offices. Once a State 
agency's household contact system is operational, we will be able to 
determine if it is adequate to help detect the existence of inflated 
facility meal counts. Based on the results of our management 
evaluations, we will, if necessary, provide assistance to State 
agencies to help ensure that their household contact systems achieve 
this important end. In addition, we will analyze the management 
evaluation findings to determine whether they provide an effective 
means of verifying children's attendance and whether the final rule 
should include further requirements related to household contacts.
    As a result of the above changes, this interim rule adds a 
definition of ``household contact'' at Sec.  226.2 that specifies the 
purpose of household contacts conducted in accordance with this broad 
regulatory authority, but does not specify when or how household 
contacts should be made. This will allow State agencies to determine 
when household contacts must be made (whether by the State agency 
itself or by its sponsors), and the procedures to be employed when 
making household contacts.
    For the purpose of implementing the requirement that sponsoring 
organizations use block claiming as a mandatory edit check, we have 
also added a new definition of ``block claim'' to Sec.  226.2 of the 
regulations (see discussion in part II(D) of the preamble, below); 
however, if a block claim is discovered in an edit check, this interim 
rule requires that an unannounced visit, rather than a household 
contact, be conducted.
    Accordingly, this rule amends the definition of ``household 
contact'' at Sec.  226.2; requires State agencies to establish systems 
for making household contacts at the institution and facility levels, 
and to review sponsors' implementation of these systems (at Sec.  
226.6(m)(5) and (m)(3), respectively), as discussed above; and requires 
sponsors (at Sec.  226.16(d)(5)) to comply with the requirements of the 
household contact system established by the State agency.

B. Enrollment Forms

What Are the Current Regulatory Requirements Pertaining to Children's 
Enrollment Forms?
    The CACFP is primarily designed to provide nutritious meals to 
children enrolled for care in licensed or approved child care 
facilities. Parents or guardians of children in care generally fill out 
an enrollment form that gives the child care provider legal permission 
to provide care and often includes explicit permission to obtain 
emergency medical care for the child. Program regulations at Sec.  
226.15(e)(2) and (e)(3) require that each institution keep a record of 
each child's enrollment, as well as copies of income eligibility forms 
used to establish a child's eligibility for free or reduced-price meals 
in child care centers or for tier I reimbursements in mixed tier 2 
family day care homes. Section 226.16(a) specifically extends these 
requirements to sponsoring organizations, while Sec. Sec.  
226.17(b)(7), 226.18(e), 226.19(b)(8), and 226.19a(b)(8) state that 
child care centers, family day care homes, outside-school-hours care 
centers, and adult day care centers, respectively, must maintain 
documentation of enrollment for each Program participant. (Please note 
that there is no requirement for formal enrollment of children served 
in the at-risk or homeless components of CACFP. Further discussion of 
this issue is included in this part of the preamble, below.)
What Did the OIG Audit Find Regarding Enrollment Forms?
    In its audit of family day care homes, OIG noted several serious 
problems related to the information contained on enrollment forms. The 
audit noted that

[[Page 53514]]

there is no current requirement that enrollment forms be updated on a 
regular basis or that they contain an indication that the child's 
parents had seen the form and verified its accuracy. The lack of such 
requirements was identified as a factor contributing to the inflation 
of meal counts by facilities. Without regular updates of enrollment 
forms by parents, providers can more readily claim meals for children 
no longer in care. This makes it much more difficult for sponsors and 
State agencies to identify inflated meal counts. OIG also noted that 
other useful information--such as a record of each child's normal hours 
of care and the place (i.e., at day care, school, or home) where the 
child normally receives each meal service throughout the day--is not 
required to be on the enrollment forms. The audit recommended that 
enrollment forms be updated annually, be signed by parents, and include 
information that would assist reviewers in determining the current 
number of children enrolled and in attendance at the home, and the 
number and type(s) of meals normally received by each child while in 
care.
What Did the Department Propose in Response to These Recommendations?
    We proposed requiring that all enrollment forms capture certain 
information in order to facilitate sponsoring organization reviewers' 
comparison of current enrollment against attendance records and meal 
claims. Specifically, we proposed to require that the enrollment form 
include the child's normal hours in care and the meals usually received 
in care by that child, and that the form be updated annually and signed 
by a parent at each update. We did not propose any changes to Sec.  
226.19a(b)(8) concerning enrollment forms for participants in adult day 
care centers.
What Comments Did the Department Receive on These Proposed 
Requirements?
    We received a total of 63 comments on our proposed changes to the 
requirements for enrollment forms: 31 from State agency commenters in 
24 different States; 23 from sponsoring organizations or other 
institutions; one from a national organization; one from a family day 
care home provider; and seven from commenters whose affiliation could 
not be determined.
    Twenty-two (22) commenters expressed complete support for the 
proposed changes (eight State agency commenters from seven States, six 
commenters from sponsoring organizations or other institutions, one 
from a provider, and seven from individuals whose institutional 
affiliation could not be determined). In addition to expressing general 
support for our proposals, a number of these commenters noted that 
these requirements were already in place in their States or 
organizations, and that they constituted an important part of their 
system of claim reconciliation. Several sponsor commenters suggested 
that semi-annual enrollment updates might be even more beneficial.
    Twenty-five (25) commenters were completely opposed to these 
proposals, including 10 State agency commenters from seven States and 
15 sponsoring organization commenters. Generally, those who completely 
opposed these proposals did so because they felt that annual updating 
would entail too much cost or administrative burden for sponsoring 
organizations, and/or that the information on the children's normal 
days in care and meals received would be of little or no use. Many of 
these commenters feared that providers would simply instruct parents to 
state that their child might receive any meal service on any day so 
that a reviewer would have no idea as to the child's normal hours of 
care. Commenters also stated that parents' schedules were far too 
variable to be meaningfully described in terms of a normal routine.
    The other 16 commenters (13 State agency commenters from 11 States, 
one national organization, and two sponsoring organizations) uniformly 
supported annual updates to the enrollment form signed by a parent, and 
believed that this process was important to Program integrity. However, 
these commenters all believed that the specification of normal days and 
meals received in care would not be useful, and usually cited as 
reasons for this belief the same arguments (variability in parent 
schedules or providers instructing parents to fill out the form in a 
particular manner) as those who opposed all of the changes. Three of 
the State agency commenters also stated that they believed the proposed 
requirements to be potentially burdensome and unnecessary for the child 
care center-based component of CACFP
    Among the 63 comments received, seven (7) State agency commenters 
from four States also mentioned that their States' licensing 
authorities already required that certain information be captured on 
enrollment forms. These commenters stated that they were unable or 
unwilling to request that the licensing authority modify its form to 
capture the additional information that we had proposed on normal days 
in care and meals received.
What Was the Department's Intent With Respect to the Use of Enrollment 
Information To Reconcile Claims?
    Some commenters who opposed these proposed changes seemed to 
believe that, because we mentioned the usefulness of this information 
for sponsor reviewers when conducting the newly-required 5-day claim 
reconciliation, we intended the reviewer to assess an overclaim 
whenever a meal was claimed outside of a child's normal hours of care, 
or to require that sponsoring organizations establish an automated 
system to check meal claims against enrollments on a daily basis for 
each child. In addition, some commenters seemed to believe that we were 
proposing to require a parent to modify the form every time their 
schedule changed.
    In fact, we intended only to require that the enrollment form be 
updated on an annual basis, or more frequently at the discretion of the 
sponsor or, with Food and Nutrition Service Regional Office approval in 
accordance with Sec.  226.25(b)), the State agency. We did not intend 
or expect this information to be reconciled perfectly on each review, 
nor did we intend to establish a Federal requirement that sponsoring 
organizations make daily comparisons between enrollment information and 
meals claimed. Rather, we envisioned that the expanded information on 
the enrollment form would primarily serve as a means of indicating 
potential concerns (what we have referred to in training as a ``red 
flag'') for sponsor reviewers during on-site reviews. If the 5-day 
reconciliation conducted as part of a facility review revealed that 
meals were regularly being claimed for children who were not enrolled 
and/or in attendance, sound Program management would require the 
reviewer to take additional steps to verify the claim's accuracy (e.g., 
expanding the claim reconciliation beyond five days, scheduling the 
provider for an additional unannounced visit, and/or initiating 
household contacts). Similarly, the claiming of meals for children no 
longer enrolled will be far easier to detect in a facility review if 
both the sponsoring organization and the facility are required to have 
annually updated enrollment information on file for each child.
What Proposals Will You Implement in This Interim Rule?
    Based on the above clarification, we believe it is prudent to 
require both annual updating of the enrollment form with parental 
signature and the inclusion of additional information

[[Page 53515]]

(normal days in care and meals received) on the enrollment form. In 
order to take into account the potential paperwork burden of processing 
large numbers of additional enrollment forms (this burden could occur 
for larger sponsoring organizations that currently have no system for 
annual updates), and to provide State agencies with time, where 
necessary, to coordinate with licensing authorities regarding changes 
to the enrollment form, we will delay full implementation of this 
provision until April 1, 2005. Between now and April 1, 2005, 
sponsoring organizations can phase in the requirement so that 
enrollment forms on file for all children as of April 1, 2005, are no 
more than 12 months old.
Given the Amount of Time That Will be Required for Sponsors To Gather 
This Information on an Annual Basis, Will the Department Consider This 
Function to be Part of the Monitoring Function for Purposes of 
Establishing a Monitor-Facility Ratio in Accordance With Sec.  
226.16(b)(1)?
    Yes. Because the primary purpose of our proposed changes is to 
improve facility monitoring, and to offset some of the administrative 
impact of updating of the enrollment form, we will permit sponsoring 
organizations to include the time spent on the annual updating of 
enrollment forms as part of the monitoring function, for the purpose of 
establishing a ratio of full-time staff to sponsored facilities, as 
required by Sec.  226.16(b)(1). This modifies guidance previously 
issued on February 21, 2003, by permitting annual renewal enrollment 
activities to be counted towards the sponsoring organization's 
monitoring hours.
Will These Requirements be Extended to Independent Child Care Centers 
and Adult Day Care Centers?
    With regard to enrollment requirements for child care centers, both 
sponsored and independent child care centers are also required to 
implement these changes. As is the case in day care homes, annual 
updating of the enrollment form for children enrolled in independent 
centers should reduce the possibility of a center continuing to claim 
reimbursement for children no longer in care. Since all participants in 
child care centers must already have on file a current-year income 
eligibility form (IEF), we recommend that State agencies or sponsoring 
organizations consider amending the IEF to include this additional 
enrollment information and to ensure its annual collection. As 
previously mentioned, we do not believe that these new requirements 
need to be extended to adult day care centers, though State agencies 
may do so if they believe that it is appropriate.
Will These Requirements Apply to Outside-School-Hours Care Centers, At-
Risk Snack Programs, or Emergency Shelters?
    No. When we published the proposal, we included these changes for 
outside-school-hours care centers, but did not mention at-risk snack 
programs since they were being addressed in a separate proposed 
rulemaking (65 FR 60501, October 11, 2000). However, the comments we 
received on the proposal have convinced us that the enrollment 
requirement for outside-school-hours care centers is no longer 
appropriate, because of the drop-in nature of many of these outside-
school-hours programs. A total of 49 commenters suggested that outside-
school-hours care centers and/or at-risk sites be exempted from these 
enrollment requirements. These respondents included 31 sponsors or 
other institutions, one State agency, nine State or National 
organizations, two providers, and six commenters whose institutional 
affiliation could not be determined.
    Similarly, given the drop-in nature of many at-risk snack programs, 
we have already issued guidance (January 14, 1999) that advises State 
agencies that there is no enrollment requirement in the at-risk 
component of CACFP. Please be aware that this will be addressed in a 
final rulemaking that will implement the at-risk snack provisions that 
were added to the NSLA by the Goodling Act. With regard to outside-
school-hours care centers, the existing regulatory definition of 
outside-school-hours care center at Sec.  226.2 and the regulations at 
Sec.  226.19 have always required enrollment documentation for each 
child in outside-school-hours care. However, these requirements predate 
the enactment of the Goodling Act, which stated that at-risk programs 
and outside-school-hours care centers that are exempt from Federal, 
State, or local licensing or approval requirements could participate in 
CACFP based on compliance with State or local health or safety 
standards. Implicitly, we believe that this statutory language 
recognizes that both at-risk programs and outside-school-hours care 
centers are similar in nature, insofar as they are more likely to serve 
a drop-in population, as opposed to the type of regularly-attending, 
enrolled population normally served in day care homes and child and 
adult care centers. Therefore, in response to commenters' observations 
regarding the need for relief from enrollment requirements in these 
types of participating facilities, this interim rule removes references 
to ``enrollment'' previously found in the definition of an outside-
school-hours care center at Sec.  226.2 and in the regulations 
throughout Sec.  226.19(b). Furthermore, emergency shelters 
participating in CACFP are also exempt from enrollment requirements 
(i.e., there is no mention of enrollment requirements in the definition 
of emergency shelter at Sec.  226.2).
What if an Outside-School-Hours Care Facility is Required by State 
Licensing Rules To Maintain Enrollments on File?
    The rule does not exempt any institution or facility from complying 
with State licensing requirements. Furthermore, if State licensing 
rules require an outside-school-hours care center to be licensed and to 
regularly enroll the children in attendance, a State agency would 
probably wish to include a review of enrollment records in its review 
of the centers. This will enable a comparison of enrollment to 
attendance and meal claims, as further discussed in part II(C), below. 
However, in accordance with this rule, there is no Federal requirement 
that children in outside-school-hours care centers be enrolled, as 
there is for children in other centers or in family day care homes.
    Accordingly, this rule amends Sec.  226.15(e)(2) and (e)(3) to 
require that all enrollment forms be signed by a parent, be updated 
annually, and include information on each child's normal days and hours 
of care and the meals normally received in care. The rule also makes 
the same change in those sections of the regulations dealing with child 
care center and family day care home requirements at Sec. Sec.  
226.17(b)(7) and 226.18(e). It also adds wording to Sec.  226.16(b)(1) 
to clarify that the time spent in implementing these requirements may 
be counted as monitoring-related time for the purpose of calculating a 
sponsoring organization's full-time staff devoted to monitoring. In 
addition, it removes references to ``enrollment'' previously found in 
the definition of an outside-school-hours care center at Sec.  226.2 
and in the regulations at Sec. Sec.  226.15(e)(2), 226.19(b)(1), 
226.19(b)(3)(i), 226.19(b)(4), 226.19(b)(5), 226.19(b)(7)(i), 
226.19(b)(8)(i), 226.19(b)(8)(iv), and 226.19(b)(8)(v).

[[Page 53516]]

C. Standard Review Elements Required for Sponsor Review of Facilities

What Did OIG Suggest Regarding Sponsoring Organization Monitoring 
Requirements?
    Current regulations at Sec.  226.16(d)(4) require sponsoring 
organizations to review their facilities at least three times per year, 
but do not specify the areas to be covered during the review. OIG 
suggested requiring that each sponsoring organization review of a 
family day care home cover certain basic elements of Program management 
(such as recordkeeping, attendance at training, and menus) and also 
include a reconciliation of enrollment and attendance records with 
provider meal claim data. Although FNS Instruction 786-5, Rev. 1 
(``Provider Claim Documentation and Reconciliation'', November 8, 
1991), recommends that sponsoring organizations reconcile meal claims 
submitted by family day care home providers with enrollment and 
attendance records, it does not require that they be part of the normal 
review process, nor does it state that they should be utilized in 
reviews conducted by sponsors of centers.
What Did USDA Propose in Response to the Recommendation Concerning 
Standard Review Elements?
    We developed separate optional prototype forms for use by 
sponsoring organizations in monitoring their family day care homes and 
sponsored child care centers, but the proposed rule did not require the 
use of these prototypes. However, we did propose to require that, if 
State agencies or sponsoring organizations developed their own review 
forms, the forms include, at a minimum, a review of compliance with 
Program requirements pertaining to licensing or approval; health, 
safety and sanitation; attendance at training; meal counts; meal 
pattern requirements; menu and meal records; and the annual updating 
and content of enrollment forms (if the facility is required to have 
enrollment forms on file, as set forth in Sec.  226.15(e)(2) and 
(e)(3)).
    In addition, we proposed to further amend reorganized Sec.  
226.16(d)(4)(i) to require that each review of a facility include an 
assessment of whether the facility has corrected problems noted on the 
previous review(s).
    With regard to the OIG recommendation for reconciliation of meal 
claims with attendance and enrollment records, we proposed to amend 
reorganized Sec.  226.16(d)(4)(ii) to require that each review include 
a thorough examination of the meal claims recorded by the facility for 
at least five days of operation during the current or previous claiming 
period. For each day examined, we proposed to require that reviewers 
use enrollment and attendance records (except for outside-school-hour 
and at-risk programs, where enrollment records are not required, as set 
forth in Sec.  226.15(e)(2) and (e)(3)) to determine the number of 
children in care during each meal service and to compare these numbers 
to the numbers of breakfasts, lunches, suppers, and/or snacks claimed 
for that day. Based on that comparison, the reviewers would determine 
whether the claims were accurate. If there was a discrepancy between 
the number of children enrolled or in attendance on the day of review 
and prior claiming patterns, we proposed to require that the reviewer 
attempt to reconcile the difference and determine whether the 
establishment of an overclaim is necessary.
    Finally, we also proposed two additional changes to the minimum 
requirements for sponsoring organizations' reviews of facilities. The 
first was that at least one of the sponsor's annual visits include the 
observation of a meal service, and the second clarified that the 
current minimum Federal requirement for family day care homes was that 
day care home providers record meal counts on a daily basis. The former 
proposal was discussed in the preamble but inadvertently left out of 
the proposed regulatory language at Sec.  226.16(d)(4)(iii); the latter 
involved a minor change to the regulatory language at Sec.  
226.15(e)(4).
How Did Commenters' Respond to These Proposals?
    State agency and sponsoring organization commenters were generally 
favorable toward most of these changes. All 19 respondents (17 State 
agencies and two sponsoring organizations or other instituions) who 
commented on the concept of including minimum review elements for 
sponsoring organizations in the regulations favored the idea. Ten (10) 
respondents made positive comments on the proposal to require the 
observation of a meal service at least once a year. In fact, as part of 
the interim rule published on June 27, 2002, current Sec.  
226.16(d)(4)(i)(B) now requires that one of the sponsor's required 
unannounced reviews must include an observation of a meal service.
    However, three aspects of the proposed sponsor review elements 
received at least some negative comment: The inclusion of a health and 
safety element in the standard review; the clarification of the 
requirement for a daily meal count in family day care homes; and the 
proposal to include a five-day reconciliation of meal claims in each 
review. Each of these three areas is discussed separately below.
    Review of health and safety.--A total of 397 respondents commented 
on the proposed inclusion of a health and safety element in the review 
requirements for sponsoring organizations. All but four of these 
commenters stated that the health and safety element should not be 
included in the standard sponsoring organization review requirements. 
Those opposed argued that health and safety issues were addressed by 
State or local licensing authorities; that sponsors already contacted 
the appropriate authorities when a health or safety problem was noted; 
and that any attempt by a sponsoring organization to remove a provider 
from CACFP, or to take other action against a provider, based on a 
health or safety violation, would exceed the organization's authority 
and open them to possible legal liability.
    Section 243(c) of ARPA amended section 17(d) of the NSLA by 
authorizing the Department to establish standards that provide for the 
suspension of day care home providers' CACFP participation when there 
is an imminent threat to children's health or safety, or the public's 
health or safety. Although sponsoring organizations are not licensors 
and do not possess the authority to prevent a home from providing child 
care, they do possess the authority to determine whether the home meets 
the requirements for Program participation. Because of ARPA's wording, 
the interim rule published on June 27, 2002, required sponsoring 
organizations to suspend a day care home's participation when it is 
determined that the home has been cited by the health or licensing 
authority for serious violations that pose an imminent threat to 
children or the public (see Sec.  226.16(l)(4)). Section 226.16(l)(4) 
also required that, if the sponsoring organization determines that 
there is an imminent threat to health or safety, it must immediately 
notify the appropriate State or local licensing and health authorities 
and take action that is consistent with these authorities' 
recommendations and requirements. This meets ARPA's intent to require 
sponsoring organizations to make common-sense determinations concerning 
the health and safety of children in family day care, and the 
provider's continued eligibility to participate in the Program, while 
recognizing the authority of State or local licensing or approval 
bodies to

[[Page 53517]]

determine whether the day care home will still be allowed to provide 
child care in that jurisdiction. In addition, the interim rule 
published on June 27, 2002, added to the regulations Sec.  
226.16(l)(2), which is a list of serious deficiencies for facilities, 
one of which is the existence of conduct or conditions that pose an 
imminent threat to the health or safety of children in care or the 
public.
    Given ARPA's language concerning suspension of a day care home's 
participation based on an imminent threat to health or safety, and 
given the language at Sec.  226.16(l)(2) and (l)(4), it is 
inappropriate to withdraw all reference to health and safety from this 
rule. However, we are also cognizant of the complex issues that could 
arise when a sponsoring organization takes action to remove a provider 
from CACFP on the basis of health or safety issues. Therefore, this 
rule removes the health and safety element from the list of required 
review elements but adds a new paragraph, Sec.  226.16(d)(4)(viii), 
that requires a sponsoring organization of family day care homes to 
immediately contact the appropriate licensing authority when the 
sponsor detects conduct or conditions that pose an imminent threat to 
the health or safety of children in care or to the health or safety of 
the public. This is consistent with the regulatory language already 
added at Sec.  226.16(l)(2). Since many sponsoring organizations 
commenting on the regulatory proposal stated that this was already 
their current practice, the requirement should not mark a change from 
current practice. Rather, the regulatory provision affirms sponsoring 
organizations' authority to make an assessment and clarifies sponsoring 
organizations' regulatory responsibility to consult with appropriate 
licensing officials when they find conditions or conduct that pose an 
imminent threat to health or safety.
    Accordingly, this interim rule removes the language from Sec.  
226.16(d)(4)(i) that identified health, safety, and sanitation as a 
standard part of a sponsoring organization's facility review. Instead, 
a new paragraph, Sec.  226.16(d)(4)(viii), has been added that 
describes the actions a sponsoring organization must take when it 
discovers conduct or conditions in a day care home that pose an 
imminent threat to children's health or safety, or to public health or 
safety.
    Daily meal counts in family day care homes.--A total of 382 
positive comments and 11 negative comments were received on this 
provision of the proposed rule. The greatest division of opinion 
occurred among State agency commenters, where 14 commenters agreed and 
9 disagreed with the proposal. Several of these commenters (and the two 
sponsoring organization commenters who opposed the provision) 
recommended alternative language that would require day care homes to 
take meal counts at or near the meal service, or prior to the next meal 
service. Those opposed to the provision believed that meal counts 
needed to be taken more frequently than daily in order to ensure 
Program integrity and to address the type of block claiming described 
elsewhere in the rule. In particular, State agency opponents of the 
proposed language noted that group day care homes, homes providing 
shift care, and homes located in States with licensing standards that 
allow large numbers of children in family day care were examples that 
warranted a requirement for homes to record meal counts more frequently 
than daily.
    We are impressed by these concerns, and are concerned that many of 
the commenters favoring this clarification characterized it as a 
prohibition on requiring homes to take meal counts more frequently than 
daily. While we know that large family and group day care homes and 
homes providing shift care are not the norm, they nevertheless exist, 
and our proposal was not intended to prevent a State agency from 
establishing additional State rules to govern these situations. 
Therefore, although we do not intend to modify the language pertaining 
to daily meal counts in family day care homes, we have added language 
expressly recognizing State agencies' authority to establish State 
requirements for more frequent meal counts in large family or group day 
care homes with a total of more than 12 children enrolled for care, or 
in day care homes that have had serious deficiency findings related to 
meal counts and claims. We have chosen to use this threshold primarily 
because we believe it reasonable to expect a provider to be able to 
mentally keep track of, and accurately record at the end of the day, up 
to that number of children in attendance on a single day. In addition, 
since facilities with more than 12 children in care at one time are 
classified as centers or group homes in most States, it seems logical 
to apply the requirement for time-of-service meal counts to those homes 
that serve more than 12 children in a single day. State agencies must 
not establish such requirements for homes with 12 or fewer children 
enrolled for care unless the home has had a serious deficiency relating 
to its meal counting and claiming practices. We also wish to re-
emphasize, as we did in the preamble to the proposed rule, that claims 
for reimbursement for meals served on the day prior to the review that 
have not been recorded at the time of the review must not be paid.
    Accordingly, this rule amends Sec.  226.15(e)(4) to require that 
family day care homes take daily meal counts, but also provides State 
agencies with authority to establish requirements for the recording of 
time-of-service meal counts in family or group day care homes with a 
total of more than 12 children enrolled for care, or in day care homes 
of any size that have had serious deficiency findings related to meal 
counts and claims. The rule also incorporates the proposed language 
concerning time-of-service meal counts in centers at Sec. Sec.  
226.11(c)(1), 226.15(e)(4), and 226.17(b)(8).
    Five-day reconciliation of claims.--As previously mentioned, we 
proposed to require that part of each facility review include a five-
day reconciliation of meal counts against enrollment and attendance. 
This means that, as part of each facility review, a sponsoring 
organization reviewer must compare five days of meal counts from the 
current or previous claiming period against the facility's enrollment 
records and any separate daily attendance records. A total of 16 
commenters responded to this provision, with 14 in favor and 2 
sponsoring organizations opposed. Those who opposed the proposal 
believed that the addition of this requirement would be burdensome.
    After the determination of a facility's compliance with meal 
pattern requirements, we consider the five-day reconciliation to be 
among the most important aspects of a facility review. Although it was 
not previously required, FNS Instruction 786-5, Rev. 1, had long 
recommended such practices. Based on abundant OIG and other review and 
audit findings, the September 12, 2000, rulemaking proposed to elevate 
the recommendation to a requirement.
    Based on our conviction that on-site reconciliation during a review 
is a vital aspect of assuring Program integrity, this interim rule 
incorporates into the regulations the requirement for a five-day 
reconciliation as a part of all facility reviews. However, we did add 
regulatory language making clear that reconciliation of claims to 
enrollment records was not required in those types of facilities not 
required to keep enrollment records (i.e., at-risk snack programs, 
outside-school-hours care centers, and emergency shelters). State 
agencies should also note that, to effectively instruct sponsors on how 
to

[[Page 53518]]

resolve discrepancies between enrollment/attendance and meal count/
claim data, it will be necessary to develop Statewide policies and 
procedures that all sponsors are required to use. This will ensure 
consistent treatment of discrepancies across sponsors. We strongly 
recommend that State agencies address this issue by amending the 
policies and procedures they have already established and disseminated 
to sponsors regarding how to determine when a provider error rises to 
the level of a serious deficiency.
    Accordingly, Sec.  226.16(d)(4)(ii) is amended to include this 
requirement.

D. Meal Claim Edit Checks

What Are Edit Checks?
    Edit checks are methods of comparing the information that appears 
on a claim for reimbursement with other information (e.g., enrollment, 
approved meal types) about the claiming facility's normal operations in 
order to help determine the claim's validity. An edit check by itself 
may identify erroneous claims, but more often will identify claiming 
patterns that serve as an indication of a possible error (i.e., the 
claiming pattern will be a red flag) to those reviewing the claim. 
These indicators should lead a reviewer to make a closer examination of 
the facility's claims to determine if the claims are accurate. For 
example, one common edit check would be to compare the total number of 
meals claimed by a facility to the product of the number of children 
enrolled at the facility, times the number of serving days in the 
month, times that facility's number of approved meal services. If the 
total number of meals exceeds the product of enrollment times serving 
days times approved meal services, it could be an indication that the 
facility has overclaimed meals in that month.
What Regulatory Requirements Now Exist To Help Ensure That the Claims 
Being Submitted by Facilities Accurately Reflect Their Actual Meal 
Service?
    Section 226.10(c) of the current regulations requires all 
institutions to report claims information in accordance with the State 
agency's financial management system and in sufficient detail to 
justify the amount of reimbursement claimed. However, these regulations 
establish no specific edit check procedures that all sponsors must 
utilize to determine the validity of facility claims, or that all State 
agencies must utilize to determine the validity of institutions' 
claims.
What Did the Department Propose To Require With Regard to Specific 
Sponsoring Organization Edit Checks?
    The Department proposed to amend Sec.  226.10(c) to specify minimum 
requirements for the edit check process performed by sponsoring 
organizations, including: (1) Verifying that facilities are approved to 
claim the types of meals (breakfast, lunch, supper, snack) being 
claimed; (2) ensuring that facilities do not claim meals in excess of 
the maximum number they may serve in a claiming period (the common edit 
check mentioned in the second preceding paragraph); and (3) a means of 
detecting block claims (which the proposed rule defined as no daily 
variation in the number of meals claimed for 10 or more days). The 
proposal also stated that edit checks must be performed for every day 
meals are claimed by a facility. In addition, we proposed to 
incorporate similar language at Sec. Sec.  226.11(b) and 226.13(b) 
governing consolidated claims submitted by sponsors of centers and 
homes, respectively.
How Did Commenters Respond to These Proposed Changes?
    We received a total of 427 comments on the proposal to add specific 
edit checks to the CACFP regulations. In general, commenters agreed 
with the need for edit checks. Thirty-four (34) commenters explicitly 
stated their support for edit checks, while only one commenter opposed 
edit checks. Twelve commenters (six State agency commenters and six 
sponsoring organizations) explicitly endorsed the sponsor-level edit 
checks that we had proposed. In addition, 318 commenters stated that 
sponsoring organizations should be permitted to develop their own 
systems of edit checks, meaning that they, too, agreed with the need 
for some form of monthly claim system edit checks.
    However, commenters overwhelmingly disagreed with the linkage in 
the proposed rule between the block claiming edit check and the 
requirement for a sponsoring organization to conduct household 
contacts. A total of 333 commenters wanted the block claiming edit 
check to be optional.
    In addition, the vast majority of commenters stated that, if the 
Department adopted the edit checks that were proposed, they should be 
defined differently. A total of 345 commenters stated that the proposed 
rule could lead to the impression that the purpose of the edit check 
was a precise daily reconciliation between the claim and meals consumed 
by individual children. To remedy this, the commenters suggested what 
they referred to as a ``reasonable person standard'', and requested 
that the Department add explicit language clarifying that sponsoring 
organizations were to use such a reasonable person standard in 
evaluating edit checks. Most commenters specifically suggested that we 
add wording to clarify that the edit check was to be performed on the 
facility's total monthly meal claim, not on a child-by-child basis and 
not on a daily basis. A total of 151 commenters believed that, if the 
block claiming edit check were retained, it should be modified 
(generally by lengthening the period of time used to define a block 
claim from 10 days to 60 days).
What Changes Will Be Made in This Interim Rule to the Edit Check 
Requirements at Sec. Sec.  226.10(c), 226.11(b) and 226.13(b)?
    There are several. As discussed in part II(A) of this preamble, 
above, we have withdrawn the proposal to require sponsoring 
organizations to conduct household contacts as a result of the proposed 
block claiming edit check. In addition, we have made several changes to 
the wording of the regulatory language to clarify our intent that edit 
checks serve as a means for sponsoring organizations to assess a 
monthly claim's overall validity, and are not intended as a means of 
reconciling meals served to individual children, or to provide the more 
precise reconciliation of enrollment, attendance, and meal counts/
claims that can be accomplished when conducting an on-site 5-day 
reconciliation as part of a facility review. Finally, in recognition of 
the time that some sponsors will need to bring their automated edit 
check system into compliance with these requirements, we have delayed 
implementation of these provisions until October 1, 2005.
Did You Retain the Block Claiming Edit Check?
    Yes, although, as previously stated, it is no longer linked to a 
household contact. Rather, we have redefined a block claim and linked 
it with a different required follow-up action by the sponsoring 
organization.
What Is Your Revised Definition of a ``Block Claim'' in This Interim 
Rule, and What Consequence Now Occurs After a Block Claim Is Detected 
Through the Edit Check Procedure?
    Although, as noted in part II(A) above, most commenters believed 
that children's attendance was often very regular and that 60 days of 
identical

[[Page 53519]]

claiming should constitute a block claim, we noted that other 
regulatory proposals (e.g., the proposal to have parents list regular 
hours and meals received in care on the enrollment form) elicited the 
response that children's attendance was far too variable to be 
characterized in terms of a regular schedule. We still believe that 
claiming the same number of meals served every day for an extended 
period of time is an indicator of possible claiming improprieties, that 
sponsoring organizations must establish edit checks to detect block 
claims and that, once detected, they must be investigated further.
    We have, therefore, added a definition to Sec.  226.2 that defines 
a ``block claim'' as one in which the same number of meals is claimed 
for one meal type (i.e., breakfast, lunch, snack, or supper) by a 
facility for 15 consecutive days within the claiming period (generally, 
one month). If a facility is providing care on weekdays only, that 
means the block claim trigger would be reached with three weeks of 
identical claims. If the facility is open on weekends as well, this 
will mean that the block claim trigger will be reached after just over 
two weeks of identical claims. Even in a small family day care home, or 
a home that predominantly serves children of low-income working 
parents, it seems quite likely that, typically, at least one child 
would miss a meal service at some point during a 15-day period.
    This interim rule also requires a different action by a sponsoring 
organization when its edit check system detects a block claim. Instead 
of requiring the sponsoring organization to make a household contact, 
this rule requires the sponsor to conduct an unannounced review of the 
facility within 60 days of receiving the block claim from the facility. 
The 60-day period for conducting the follow-up unannounced review will 
permit sponsors of geographically dispersed rural facilities to more 
efficiently plan their reviews and, thus, to reduce travel costs. 
Furthermore, as discussed below, State agencies will be allowed to 
provide additional time to such sponsors on a case-by-case basis.
    This interim rule also prohibits a sponsoring organization from 
conducting fewer than three reviews of a facility in a year in which a 
block claim is detected. This prohibition is discussed in greater 
detail in part II(F) of this preamble, below, as part of implementing 
the provision that permits sponsoring organizations to average the 
number of reviews conducted over the course of a year.
Won't the Triggering of an Unannounced Review Still Require a Great 
Expenditure of Effort by Sponsoring Organizations, Even in Instances in 
Which the Provider's Block Claim Is Repeatedly Found To Be Legitimate?
    We are cognizant of the fact that the submission of identical 
claims by a very small family day care home provider could repeatedly 
trigger an unannounced visit, even though the provider's claim is 
totally legitimate. Therefore, this interim rule also states that, if 
an unannounced review is triggered by a block claim, and the review 
demonstrates that there is a logical explanation for the facility to 
regularly submit a claim that is identical for every day of a claiming 
period, the sponsor must document that explanation in its files, and 
any subsequent block claims detected during the remainder of the 
current fiscal year would not require the conduct of an additional 
unannounced visit.
    That is, a sponsoring organization whose edit check system detected 
block claims by a provider or sponsored center would not be required to 
conduct more than one unannounced review of the facility that was 
triggered by a block claim, provided that the sponsor had documented a 
compelling and logical reason for the regular submission of a block 
claim by that facility earlier in the fiscal year, and that the 
documented reason for the block claim was still relevant. This 
provision will place an upper limit on the administrative burden on a 
sponsoring organization in cases where a small day care home provider 
is repeatedly, but legitimately, submitting a ``block claim'' as 
defined at Sec.  226.2 of this rule.
    This rule also allows State agencies to provide additional relief 
to sponsoring organizations for which the 60-day unannounced review 
requirement could create an inordinate administrative burden. We 
appreciate that a variety of factors could make it difficult, if not 
impossible, for a particular sponsor to conduct all of the required 
unannounced visits within the 60-day timeframe. In such cases, State 
agencies are authorized to provide a sponsor with up to 30 additional 
days to complete the unannounced reviews triggered by the block claim 
edit check.
Could This Rule Ever Lead to a Sponsor Having To Conduct More Than 
Three Reviews of a Facility in a Year?
    Yes, but only under very rare circumstances. For example, let us 
say that a block claim was detected on an edit check early in the 
fiscal/review year, and the subsequent unannounced review led to a 
finding of serious deficiency (i.e., the facility had no persuasive 
explanation for the block claim). However, if the facility successfully 
corrected the serious deficiency and was not terminated, a second block 
claim detected later in the fiscal/review year, after three reviews had 
been conducted, would require the conduct of a followup, unannounced 
review that could be the fourth total review of the facility in that 
year.
    However, we wish to emphasize that we expect such circumstances to 
occur rarely. If the sponsor records a logical explanation for the 
block claim after an unannounced visit early in the fiscal year (e.g., 
that a facility provides drop-in care and always fills to capacity on 
each day that it is open) there would be no need to conduct another 
(i.e., a fourth) review of that facility if a block claim was detected 
again late in the fiscal/review year. If the sponsor had not found a 
logical explanation for the block claim, and believes that the facility 
has intentionally submitted a false claim, the sponsor must declare the 
provider seriously deficient, which would make moot the number of 
reviews to be conducted that year. Alternatively, if the sponsor is 
unsure that the first unjustified block claim was intentional, but a 
second unjustified block claim occurred during the year, it would lead 
to a declaration of serious deficiency and, if corrective action was 
not taken, termination, again rendering moot the total number of 
reviews to be conducted in the year.
What Other Changes to the Proposed Regulatory Language Regarding Edit 
Checks Are Included in This Interim Rule?
    First, the language in the introductory text at Sec.  226.10(c) was 
modified in several ways. The sentence in the proposed rule that 
referred to performing edit checks for every day meals are claimed has 
been removed. That sentence led some commenters to believe that we were 
going to require sponsors to reconcile claims against enrollment and 
attendance (see Sec.  226.10(c)(2)) on a daily, rather than a monthly, 
basis. In fact, the sentence was only intended to convey that the edit 
checks must take into account the number of days a facility is approved 
to serve Program meals (e.g., some facilities are approved to serve 
meals on weekends, while others operate on holidays). The sentence's 
removal from the introductory text does not alter the specific 
requirements set out in Sec.  226.10(c)(1) through (c)(3).

[[Page 53520]]

    Second, one sentence that was in the introductory text of proposed 
Sec.  226.10(c), which refers to reviewing discrepancies to determine 
if the claim is accurate, more properly belonged in Sec.  226.10(c)(2), 
because it referred specifically to the process of reconciling the 
number of meals claimed with enrollment and serving days. The sentence 
has therefore been moved to Sec.  226.10(c)(2) in this interim rule.
    Third, we have edited the regulatory text at Sec. Sec.  226.11(b) 
and 226.13(b), which refer to the edit check responsibilities of 
sponsors of centers and sponsoring organizations of family day care 
homes, respectively. Rather than detailing the edit check 
responsibilities of such sponsors in each paragraph, this rule merely 
cross-references Sec.  226.10(c)(1) through (c)(3), which set forth the 
edit check requirements that apply to all types of sponsoring 
organizations.
    Fourth, 18 commenters specifically believed that our proposed 
language referring to attendance patterns promoted confusion about the 
purpose of the edit checks. Of course, in many cases, sponsor's would 
not have immediate access to their facilities' attendance records, 
which would limit the sponsor's ability to build information on 
children's attendance into a monthly edit check system. To reiterate, 
our intent is to require that sponsoring organizations have in place a 
monthly edit check system capable of detecting if a facility submits a 
claim that exceeds the maximum number of meals that should have been 
served during the claiming period (i.e., claims a number of meals that 
exceeds the product of enrolled children times approved meal services 
times days of operation). We have, therefore, removed references to 
attendance patterns from the regulatory language in this interim rule.
    Finally, this interim rule includes specific language (see DATES 
section of this preamble, above) delaying implementation of this 
provision until October 1, 2005, that was mentioned in the preamble to 
the proposed rule, but not adequately specified. As noted above, this 
will provide sponsoring organizations with time to update their 
computerized claims processing system to implement these required 
changes to the edit check process.
    Accordingly, this rule amends Sec. Sec.  226.10(c), 226.11(b), and 
226.13(b) to require that, prior to submitting their consolidated 
monthly claim to the State agency, sponsoring organizations conduct at 
least three edit checks of facilities' meal claims for that period. It 
also amends Sec. Sec.  226.10(c)(3) and 226.16(d)(4) to include the 
changes to unannounced review requirements for facilities that have 
submitted block claims in any year, as discussed above. The rule 
further requires that these edit checks be implemented no later than 
October 1, 2005.
What Did You Propose With Regard to State Agency Edit Checks of 
Institutions' Claims?
    Management evaluations discussed earlier in the preamble revealed 
several instances in which State agencies did not employ edit checks 
when processing institutions' monthly claims. For that reason, we 
believe it is also necessary for State agencies to employ edit checks 
when processing institutions' claims. We proposed at Sec.  226.7(k) 
that, at a minimum, State-level edit checks ensure that payments are 
made only for authorized meal types, and that the total number of meals 
claimed does not exceed the number of facilities claiming meals, times 
total enrollment, total approved meal types, and the number of approved 
serving days during the claiming period.
How Did Commenters Respond to These Proposals?
    We received a total of 15 comments, all of which were from State 
agencies and their staffs. Of these, seven commenters approved of the 
proposed changes; two approved of them if they were monthly rather than 
daily requirements; two opposed them; and four opposed them while 
stating that other State-level edit check requirements would be 
acceptable.
    At least some of the opposition to the proposal seemed to stem from 
confusion over what edit checks we were proposing to require at the 
State level, and how the checks were to be implemented. The two monthly 
claims edit checks that we proposed at Sec.  226.7(k) were designed to 
ensure that: payments to institutions were made only for approved meal 
types; and that the number of meals reimbursed did not exceed the 
product of enrollment times operating days times approved meal types. 
We also proposed at Sec.  226.6(l)(3) [Sec.  226.6(m)(4) in this 
interim rule] that, in the facility reviews required as part of a 
larger review of a sponsoring organization, State agencies conduct a 
reconciliation of the facilities' meal counts against enrollment and 
attendance, just as sponsoring organizations are required to do. We 
encourage State agencies to test and implement additional edit checks 
that would increase their ability to detect inaccurate claims during 
the claim review process.
    We did not propose, as several commenters seemed to believe, that 
State-level edit checks include a day-by-day comparison of attendance, 
enrollment, and meal counts by type, nor did we propose that monthly 
edit checks done at the State level take attendance patterns into 
account (Note: as previously discussed, although we did propose that 
sponsoring organizations' claims edit check systems include attendance 
patterns as a point of comparison to meal counts, this interim rule has 
eliminated any reference to attendance factors or attendance patterns). 
The only time that we envision State agency reviewers examining daily 
facility records is when they are actually reviewing a facility as part 
of a larger review of a sponsoring organization, or when they are 
examining meal count records in their onsite review of an independent 
center.
    Another commenter stated that their State agency would never have 
any record of the meal types (e.g., breakfast, lunch, snack, supper) 
that sponsored facilities had been approved to serve. This comment was 
puzzling, insofar as the regulations at Sec.  226.16(b) require that 
facilities' applications be approved by the State agency prior to 
participation. As part of this review of facility applications, it was 
our assumption that State agencies would note the meal types that 
facilities are approved to serve, and build into their edit check 
system an approximate indication of the maximum number of meals, by 
type, that a sponsoring organization would be expected to submit in any 
month. This indicator would be designed only to identify egregious 
errors (e.g., 5 percent of the sponsor's homes are approved to serve 
suppers, but 20 percent of the meals on the claim are suppers). Thus, 
while we recognize that not all family day care homes claim Program 
meals each month, and that there will therefore be a normal monthly 
fluctuation in the number of meals being claimed by a sponsor, it 
should still be possible for State agencies to establish certain red 
flags, or indicators, in their claims processing systems that will 
alert them to the possibility of erroneous claims and trigger further 
efforts by the State agency to establish the claim's accuracy.
    Accordingly, this interim rule incorporates at Sec.  226.7(k) the 
monthly State agency edit checks that we had previously proposed. 
However, this interim rule provides State agencies with time to modify 
their current claims processing systems by requiring that these edit 
checks be implemented no later than October 1, 2005.

[[Page 53521]]

E. Minimum State Agency Review Requirements

What Are the Current Regulatory Requirements Pertaining to State Agency 
Reviews of Institutions?
    The current regulations governing State agency reviews of 
institutions are located at Sec.  226.6(m). This section addresses the 
frequency of State agency reviews and requires that they assess the 
institution's compliance with these regulations and with any applicable 
FNS or Department instructions. However, current regulations do not 
specify the subject areas to be examined in these reviews, nor do they 
mandate any specific tests to determine the validity of meal claims.
What Were OIG's Findings and Recommendations Regarding State Agency 
Monitoring Requirements?
    OIG found that State agencies' reviews of family day care home 
sponsoring organizations and family day care home providers ``generally 
did not include sufficient tests to identify recordkeeping deficiencies 
and inflated meal claims, and to assess the adequacy of sponsor 
monitoring of [day care homes].'' We believe it is necessary to propose 
changes to existing review requirements in order to ensure a 
consistent, minimum National standard for State-level review of 
institutions.
What Has USDA Done in Response to These Recommendations?
    We proposed that every State agency review of an institution 
include an assessment of certain aspects of the institution's program. 
In addition, we proposed that each time a State agency reviews a 
facility as part of its review of a sponsoring organization, the 
facility review must include a comparison of the facility's available 
enrollment and attendance records to the meal counts submitted by the 
facility to its sponsor. We also developed new prototype forms for 
State agency review of child care institutions. These forms include 
sections covering required Program documents on file, facility 
licensing or approval, meal counts, administrative costs, sponsor 
training and monitoring of facilities, observation of meal service, and 
other Program requirements. The September 2000 rule did not propose 
requiring State agencies to utilize these prototype forms in conducting 
reviews of institutions. However, we did propose to require that State 
agencies cover all of these areas in their reviews, and that they make 
any changes necessary to their State-developed review forms to ensure 
that the new minimum review requirements are captured on their review 
forms.
How Did Commenters Respond to These Proposals?
    Overall, these proposals generated very little response. A total of 
20 comments were received: 15 from State agencies; three from 
sponsoring organizations or other institutions; one from a National 
organization; and one from a person whose affiliation could not be 
determined. Of these, 17 comments were uniformly positive regarding the 
proposed changes, while three (3) recommended modifications and another 
raised a question concerning the rule's applicability to reviews of 
sponsors with affiliated centers.
    One commenter stated that more mandatory review elements were 
needed. This respondent felt that reviews of sponsoring organizations 
should always include a review of the sponsor's disbursement of food 
payments to facilities and a sponsor's reconciliation of claims 
submitted by its sponsored facilities. These are important aspects of a 
State agency's oversight of a sponsoring organization, but they are 
already addressed in sections IX (B)(3) and IX(E)(2) of FNS Instruction 
796-2, revision 3, ``Financial Management--Child and Adult Care Food 
Program''. State agencies may certainly choose to include these aspects 
of sponsor operations in their standard review protocols for 
institutions if they wish.
    Another commenter stated that we should add to former Sec.  
226.6(l)(3) the percentage of facilities to be reviewed as part of a 
State agency's review of a sponsoring organization. However, the 
percentage of facilities to be reviewed was specified at former Sec.  
226.6(l)(5) of the proposed rule, not Sec.  226.6(l)(3). Since 
publication of the proposed rule, the interim rule published on June 
27, 2002, reorganized and redesignated the State agency review 
requirements as Sec.  226.6(m), and although the requirements 
pertaining to a State agency's review of facilities--including the 
percentage of facilities to be reviewed--are already discussed in Sec.  
226.6(m)(6), this rule adds to Sec.  226.6(m)(4) a cross-reference to 
Sec.  226.6(m)(6) in an effort to ensure that the requirement for a 
specific percentage sample is underscored.
    A third commenter expressed the opinion that it was not always 
possible to include the observation of a meal service in a State agency 
review. It was not clear whether the commenter believed that the review 
elements listed at Sec.  226.6(l)(2) of the proposed rule (now at Sec.  
226.6(m)(3) in this interim rule) applied to facility reviews conducted 
by a State agency. Our intent was to specify the minimum requirements 
for a State agency's review of an institution, which may occur as 
infrequently as once every three years for an independent center. To 
that end, we have clarified the language of the review elements to 
specify that the observation of a meal service must be part of a review 
of an independent center. Neither the proposed rule nor this rule 
specify review elements for State agency reviews of sponsored 
facilities, except that, as previously mentioned, they must include 
verification of Program applications and a comparison of enrollment and 
attendance to meal counts submitted by facilities over a five-day 
period.
    The final question about these provisions was how they applied to a 
State agency's review of a Head Start sponsor or a sponsoring 
organization's affiliated centers (i.e., sponsored centers that are 
part of the same legal entity as the sponsoring organization that 
enters into an agreement with the State agency). We believe that this 
question may also have been based on the assumption that Sec.  
226.6(m)(3) sets forth required elements for a State agency's review of 
sponsored facilities when, in fact, only Sec.  226.6(m)(4) applies to 
the reviews of institutions conducted by a State agency.
    Accordingly, this interim rule amends Sec.  226.6(m)(3) to require 
that each State agency review of an institution include a review of 
specified review elements; amends Sec.  226.6(m)(4) to require that 
each State agency review of a sponsoring organization include reviews 
of a sample of sponsored facilities in order to compare enrollment 
records, attendance records, and day-of-review meal counts observed 
during sponsor reviews to meal counts submitted by the facility on its 
monthly claim; and further amends Sec.  226.6(m)(4) to cross-reference 
the verification requirements at Sec. Sec.  226.23(h) and 226.23(h)(1).

F. Review Cycle for Sponsored Facilities

What Are the Current Requirements for Sponsoring Organization Review of 
Facilities?
    The regulations at Sec.  226.16(d)(4) establish the requirements 
for sponsoring organizations' reviews of their facilities, and 
establish different minimum requirements for facility reviews by 
sponsors of centers and sponsors of family day care homes.
    The requirements for monitoring sponsored centers and family day 
care homes are similar in most respects. Both

[[Page 53522]]

require that: the sponsored facility be reviewed three times per year; 
no more than six months elapse between reviews; and new facilities be 
reviewed during the early stages of their operation. However, there are 
some differences in the current requirements for reviewing different 
types of sponsored facilities:
     New homes are currently required to be reviewed in their 
first four weeks of operation, whereas new sponsored centers are to be 
reviewed during their first six weeks of operation; and
     With State agency approval, sponsoring organizations of 
family day care homes are currently permitted to review each home an 
average of three times per year, meaning that they may devote a greater 
share of their review resources to the review of new or problem day 
care home providers, provided that the average number of annual visits 
per home is at least three. This allows family day care home sponsors 
more flexibility than sponsors of centers.
What Changes did USDA Propose?
    We proposed to make all types of facilities subject to the same 
general review requirements (three reviews per year; allow no more than 
six calendar months between reviews; and review each new facility 
within its first four weeks of Program operation). We also proposed 
giving all sponsoring organizations (not just sponsors of family day 
care homes) greater flexibility in their conduct of reviews.
    Specifically, we proposed that, without State agency approval, 
sponsoring organizations could average their facility reviews. This 
means that, if a sponsor administered CACFP in 300 facilities, it would 
still be required to conduct at least 900 reviews. Each sponsored 
facility would not necessarily have to be reviewed three times, but all 
facilities would have to have at least two unannounced reviews each 
year. Under our proposal, if the sponsoring organization's first two 
reviews in a review cycle revealed no serious problems, the sponsoring 
organization would have the option of not conducting a third review of 
that facility and instead conducting an extra review at another 
facility. This proposed change was intended to permit sponsoring 
organizations the flexibility to target their reviews to newer 
facilities or facilities with a history of operational problems, as 
they see fit, while ensuring that there is no reduction in the 
sponsor's overall monitoring efforts.
How Did Commenters Respond to These Proposals?
    Commenters were somewhat divided in their response to this section 
of the proposed rule. Altogether, 430 comments were received on this 
portion of the proposal, with 393 expressing support for one or both of 
the primary proposals (uniformity in review requirements for different 
types of sponsored facilities and the provision of the flexibility for 
sponsoring organizations to conduct an average of three reviews without 
State agency permission). However, although sponsoring organizations 
were more likely than State agencies to support the averaging of 
reviews, a significant number of State agencies strongly supported this 
proposal while a small but significant number of sponsoring 
organizations opposed it.
    Uniformity in review requirements for different types of 
facilities.--No negative comments were received in response to the 
proposal to make the review requirements identical for all types of 
facilities. Accordingly, that aspect of the proposed rule is 
incorporated in this interim rule at reorganized Sec.  
226.16(d)(4)(iii), which also includes the requirements (added to the 
regulation by the interim rule published on June 27, 2002) that two of 
the three reviews conducted be unannounced, and that one unannounced 
review include the observation of a meal service. In addition, readers 
should note that, although the requirements for facility reviews are 
still located at Sec.  226.16(d)(4), the paragraphs within that section 
have been re-numbered to accommodate some of the changes being 
incorporated in this interim rule.
    Averaging of reviews.--Twenty-six (26) commenters opposed the 
proposal to permit sponsoring organizations to conduct an average of 
three reviews per facility per year. Some of these commenters 
specifically objected to the elimination of the requirement that 
sponsoring organizations obtain permission for this flexibility from 
the State agency; other commenters (mostly sponsoring organizations) 
objected because they believed that providers who received their second 
review and knew they would not receive another review during the review 
cycle were more likely to become lax in their adherence to critical 
Program requirements.
    Since publication of the proposed rule, the publication of the 
first interim rule on June 27, 2002, included the requirement that two 
reviews per facility per year be unannounced. We believe that this 
change will go far toward responding to the comment about providers' 
possible tendency to become lax after a second review. This interim 
rule states that a provider or sponsored center must receive two 
unannounced reviews during a review/fiscal year and be found to operate 
a compliant program (i.e., the sponsor detected no serious 
deficiencies, as defined in Sec.  226.16(l)(2)) before the averaging 
provision can be used for that facility (i.e., before the facility is 
eligible to be reviewed only twice in that year). In addition, the 
changes made by this interim rule discussed in part II(D), above, mean 
that this flexibility would be unavailable to a sponsor if a particular 
facility submitted a block claim. Any facility that submits a block 
claim for any reason is not eligible to receive fewer than three 
reviews (at least two of which must be unannounced) in a given year. 
This restriction will help to ensure that those providers most in need 
of three or more reviews in a year will continue to receive three or 
more reviews. Furthermore, in accordance with the definition of an 
unannounced review at Sec.  226.2, we expect that sponsoring 
organization monitors will not reveal anything about review schedules 
or review protocols to providers, meaning that providers should not 
know whether they are scheduled for more reviews during the remainder 
of the fiscal year. Finally, sponsoring organizations that are not in 
favor of this change are not required to implement it (i.e., they could 
continue to conduct three reviews of each facility each year).
    Accordingly, this rule retains the proposed language on the 
averaging of reviews by sponsoring organizations, without State agency 
permission, at reorganized Sec.  226.16(d)(4)(iv). Furthermore, in 
accordance with the requirements for unannounced reviews promulgated in 
the interim rule published on June 27, 2002, this interim rule requires 
that any facility reviewed only twice in a year must have had two 
unannounced reviews in that year without any findings of serious 
deficiency.
    Wording of provision for averaging of reviews.--We proposed that 
the third review could be dropped for a particular facility when 
sponsoring organizations had completed two of the three required 
reviews without discovering serious problems. Twelve (12) commenters 
objected to the proposed wording and stated that it was too 
restrictive. Several commented, for example, that no provider would be 
able to meet the meal pattern standard, since minor problems

[[Page 53523]]

of compliance were often discovered during reviews.
    Since publication of the proposed rule, the interim rule published 
on June 27, 2002, added language at Sec.  226.16(l)(2) of the 
regulations that defines ``serious deficiencies'' for a provider or 
other sponsored facility. It was necessary to add this provision to the 
regulations in order to implement ARPA, and the list of serious 
deficiencies for facilities includes problems that are substantially 
the same as the serious problems listed in the proposed rule. However, 
we would hope that labeling these as serious deficiencies that could 
lead to a provider's termination for cause clarifies that we are not 
referring to minor instances of non-compliance with the meal pattern or 
other Program requirements. As we stressed in our training on the 2002 
interim rule, we expect that, in determining what rises to the level of 
a serious deficiency, sponsoring organizations will exercise sound 
management judgment, just as we would expect State agencies to do in 
assessing whether an institution is seriously deficient. To underscore 
this point, the language describing sponsoring organizations' 
flexibility in this area now refers specifically to serious 
deficiencies as defined in Sec.  226.16(l)(2).
If a Facility Receives On-Site Training Rather Than a Third Review, Can 
the Training Be Counted Towards the Sponsoring Organization's Required 
Number of Facility Reviews To Be Conducted for the Year?
    No. This flexibility in conducting reviews was added to the 
regulations so that sponsoring organizations could better target 
reviews to those facilities most in need of them. It was not designed 
to allow training visits to substitute for on-site reviews.
    Accordingly, this interim rule further amends Sec.  226.16(d)(4) 
to:
     Make uniform the general requirements for sponsors' review 
of all of their child and adult care facilities, regardless of whether 
the facility is a home or a sponsored center;
     Permit sponsoring organizations of day care homes or 
centers to waive a third review at a facility if the sponsor has 
conducted two unannounced reviews of the facility during the review 
cycle without discovering a serious deficiency, as described in Sec.  
226.6(l)(2); and
     Allow sponsoring organizations of day care homes or 
centers to conduct an average of three reviews per facility per year 
across their sponsorship (i.e., the third review at one facility could 
be deferred so that additional reviews could be conducted at a new 
facility or at a facility experiencing Program problems).

G. Disallowing Payment to Facilities

What Were OIG's Recommendations With Regard to Disallowing Payments to 
Facilities?
    The OIG audit of the family day care home component of CACFP (No. 
27600-6-At) found that, in some instances where a provider had 
submitted claims for reimbursement for meals served to absent or 
nonexistent children, they still received Program payment for these 
meals. The audit stated that, due to the wording of the current 
regulations at Sec.  226.10(f), ``State agencies and sponsors may be 
reluctant to disallow payments and/or request repayment of total meal 
claims made during a period when it was determined that a [day care 
home] * * * claimed meals [fraudulently] for absent and/or nonexistent 
children.'' According to OIG, the failure of Sec.  226.10(f) to 
specifically mention child and adult care facilities may have 
discouraged some State agencies and sponsors from withholding or 
recovering funds improperly paid to facilities, and OIG recommended the 
addition of language to Sec.  226.10(f) to rectify this. [Please note 
that the OIG report erroneously identified Sec.  226.10(f) as affecting 
sponsors when, in fact, it applies only to State agencies' decision not 
to pay all or a portion of a claim].
What Did the Department Propose?
    We proposed to amend Sec.  226.10(f) to require State agencies to 
deny payment of that portion of a claim identifiable with one or more 
facilities when audits, investigations, or other reviews reveal that 
the facility or facilities claimed meals for absent or nonexistent 
children or in other unlawful acts with respect to Program operations.
How Did Commenters Respond to These Proposals?
    Altogether, 18 commenters responded to this proposal (14 State 
agencies, 3 sponsoring organizations, and one National organization), 
and all were in favor of adding facilities to Sec.  226.10(f). Eight 
commenters, however, added qualifications to their support or asked 
that we add clarifying language to this interim rule, and some of these 
additional comments or concerns indicated confusion regarding the 
regulations' treatment of denied claims and withheld payments.
    For example, four commenters stated that, in these cases, an 
overclaim should be assessed. However, overclaims are assessed only 
after a claim has been paid; this portion of the regulations deals 
instead with the circumstances under which it is permissible to deny 
payment of a claim, or a portion of a claim. Another commenter believed 
that the proposal compromised a State agency or sponsoring 
organization's ability to deny payment of a fraudulent claim, while 
another believed that the regulation needed to state clearly that 
termination for cause should be the result of the submission of false 
claims. We hope that the addition to the regulations of Sec.  226.16(l) 
by the interim rule published on June 27, 2002, made absolutely clear 
that a sponsoring organization must declare seriously deficient any day 
care home that submits a false claim, that this is the first step in 
the process of terminating that provider's participation for cause, and 
that a sponsor must only pay the valid portion of any claim submitted 
by a facility. Our proposed revision of this section (Sec.  226.10(f)) 
merely clarifies a State agency's ability to disallow that portion of a 
sponsor's claim that is identifiable with facilities where 
investigations, audits, or reviews have revealed that the facility 
claimed meals for absent or nonexistent children or otherwise engaged 
in unlawful acts with respect to Program operations.
    Two other comments merit special attention. These commenters stated 
that the language of Sec.  226.10(f) is incomplete because it does not 
state that a State agency may withhold an institution's claim while it 
is being investigated for possible fraud, or that a sponsoring 
organization may do the same when handling a possibly fraudulent claim 
submitted by a facility. One of these commenters--apparently in 
reference to ARPA's prohibition on suspension of payments except under 
specified circumstances--stated that our proposed regulatory language 
would not be effective if an institution or home that submitted a 
fraudulent claim must continue to be paid. It is critical for us to 
distinguish between suspension of payments, which in all but two 
situations is prohibited under the NSLA, and a State agency or 
sponsoring organization's obligation to refuse to pay an invalid claim.
    Although section 243 of ARPA and section 307 of the Grain Standards 
and Warehouse Improvement Act of 2000 (Pub. L. 106-472) prohibit the 
suspension of an institution's Program participation, including Program 
payments, except under certain specified conditions (the institution or 
home's conduct or environment poses an imminent threat to participants' 
health or safety or public health or

[[Page 53524]]

safety, or the institution knowingly submits a false or fraudulent 
claim), these laws did not affect the State agency's right and 
responsibility to deny payments to an institution when an invalid claim 
is submitted, or a sponsoring organization's right and responsibility 
to deny payments to a facility when an invalid claim is submitted. 
Rather, ARPA simply stated this requirement in another way: That, to 
the extent reasonably possible, a State agency must refuse to pay that 
portion of an institution's claim that is invalid, rather than 
suspending or withholding payment of the entire claim. Section 
226.10(f) simply makes explicit that one source of information on which 
a State agency's decision to deny payment of a claim could be based is 
evidence found in audits, investigations, or reviews. The amendment to 
Sec.  226.10(f) that we proposed at OIG's recommendation was intended 
to remove any possible perception that the State agency lacked this 
ability to deny payment of that portion of an institution's claim that 
was identified with one or more facilities where an audit or review led 
the State agency to conclude that the payment would be improper.
    In other words, the NSLA requires that, in these cases, the State 
agency do more than simply freeze payments to the sponsor. Rather, it 
requires the continued payment of the valid portion of the claim, and 
the non-payment of the invalid portion of the claim. In essence, the 
NSLA requires that the State agency not over-react by stopping the 
payment of the valid portion of a claim, but also requires that it not 
under-react by failing to determine the reason for the erroneous claim 
and whether initiation of the serious deficiency process is warranted.
    Accordingly, this interim rule amends Sec.  226.10(f) as proposed.

H. Change To Audit Requirements

What Changes Did the Department Propose?
    We proposed changes to the language of Sec.  226.8(a) of the 
regulations, in large part to reflect changes to government-wide 
auditing rules.
    The regulations state that, unless exempt, State- and institution-
level audits must be carried out in accordance with Office of 
Management and Budget (OMB) Circulars A-128 and A-110 and with 7 CFR 
part 3015, the Department's Uniform Federal Assistance Regulations. 
However, audit requirements for States, local governments, and 
nonprofit organizations can now be found in OMB Circular A-133, 
``Audits of States, Local Governments, and Non-Profit Organizations'', 
and the Departmental regulations at 7 CFR part 3052. These requirements 
apply to audits of State agencies and institutions for fiscal years 
beginning on or after July 1, 1996. Therefore, we proposed updating 
these regulatory references.
    The two substantive changes to these requirements involved a change 
in the government-wide threshold for the conduct of audits, which was 
raised from $25,000 to $300,000, and the express prohibition on using 
Federal funds for audits not required by 7 CFR part 3052. That means 
that, if an institution expended less than $300,000 in total Federal 
resources (which includes CACFP reimbursements, the value of USDA 
commodities, and any other Federal funds received by the institution), 
it is now exempt from the Federal requirement to have an organization-
wide audit or, in some cases, a program-specific audit. To address 
these changes to the audit requirements, we proposed two changes to 
Sec. Sec.  226.8(b) and 226.8(c). Specifically, we proposed to revise 
the language at Sec.  226.8(b), which describes the circumstances under 
which a State agency may make a portion of audit funding available to 
institutions for the conduct of organization-wide audits, to reference 
the new Departmental regulations governing such funds use. Also, we 
proposed revising the language at Sec.  226.8(c), which describes the 
circumstances under which the State agency may use audit funds for 
program-specific audits, to clarify that the funds may also be used for 
agreed-upon procedures engagements (limited-scope reviews conducted by 
auditors), as described at 7 CFR 3052.230(b)(2).
What Rules Govern Audits for Proprietary Institutions?
    The current regulations at Sec.  226.8(a) state that proprietary 
(for-profit) institutions not subject to organization-wide audit 
requirements must be audited by the State agency at least once every 
two years. However, we issued guidance (dated January 18, 1991) that 
exempted proprietary institutions from this requirement if they 
received less than $25,000 per year in Federal Child Nutrition Program 
funds, and later issued additional guidance (dated August 13, 1998) 
informing State agencies that Departmental regulations at 7 CFR 
3052.210(e) provide State agencies with the authority and 
responsibility to establish audit policy for proprietary institutions. 
The 1998 guidance further recommended that ``the threshold for these 
[proprietary] audits previously established at $25,000 should be 
raised, given the cost of the audits relative to the benefits''. 
Institutions were (and still are) also required to comply with the 
audit requirements of all other Federal departments or agencies from 
which they receive funds or other resources.
How Did Commenters Respond to These Proposals?
    We received only 10 comments on these changes, seven of which were 
in favor. Two commenters objected to the government-wide change to the 
audit threshold, and believed that smaller organizations were as much 
in need of audits as larger ones. However, we cannot require the 
conduct of audits when they are not required under government-wide 
auditing rules. States may, of course, engage in such additional audits 
as they deem necessary under their own State authorities.
    Two other commenters who supported the rule, plus two who did not, 
opposed the change in the amount of audit funding available to State 
agencies. Since the reduction in audit funding was mandated by the 
Goodling Act, it is dealt with in part IV of this preamble, below.
    Accordingly, this interim rule adopts the changes to Sec.  226.8 as 
proposed.

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

What Did the Operation Kiddie Care Audit Reveal Regarding Family Day 
Care Home Providers Claiming Income Eligibility on the Basis of Food 
Stamp Participation?
    The Operation Kiddie Care audit uncovered problems regarding the 
CACFP participation of some family day care home providers whose income 
eligibility is based on participation in the Food Stamp Program. OIG 
sampled 24 providers in two States who claimed reimbursement for meals 
served to their own children based on their household food stamp 
participation. Of these providers, OIG determined that, in applying for 
Food Stamp benefits, 14 had not revealed, or had understated, their 
self-employment income from providing child care. In these cases, the 
provider either should have received a lower food stamp allotment, or 
would have been ineligible to receive food stamps at all. In some 
cases, this would also have prevented them from claiming Program 
reimbursement for meals served to their own children.
    These findings were developed by OIG prior to the July 1, 1997, 
implementation of the two-tiered

[[Page 53525]]

reimbursement system for family day care home providers. Since the 
implementation of tiering, the fiscal consequences of underreporting 
child care income are potentially far greater. Providers qualify to 
receive Tier I rates for reimbursable meals served to all children in 
their care if they live in an eligible, low-income area, or if their 
household income is at or below 185 percent of the Federal income 
poverty guidelines. Providers claiming income eligibility on the basis 
of food stamp participation are only required to provide their name and 
food stamp case number to their sponsor in order to receive the higher, 
Tier I benefit for all children in their care. Furthermore, although 
sponsoring organizations are required to verify the information 
submitted by providers claiming Tier I eligibility based on income, 
there are no verification requirements, per se, for a provider claiming 
eligibility on the basis of food stamp participation. Therefore, if 
providers are improperly receiving food stamps, and if their actual 
household income exceeds 185 percent of the Federal income poverty 
guidelines, they would not be eligible to receive tier I reimbursement 
for CACFP meals served to all of the children in their care.
What Did FNS Propose To Address This Potential Problem?
    We proposed to add, effective 6 months after issuance of an interim 
or final rule, a requirement that sponsoring organizations of family 
day care homes provide to the State agency a list of all of their 
sponsored providers who qualify for tier I eligibility on the basis of 
food stamp participation, and that they continue to supply this list to 
the State agency on an annual basis. Within 30 days of receipt, the 
State agency would be required to provide this information to the State 
agency responsible for the administration of the Food Stamp Program. In 
this way, food stamp eligibility workers would know that a specific 
food stamp recipient was self-employed as a CACFP day care home 
provider, and would be better able to discern the household's actual 
income. Once this information was provided to the State Food Stamp 
agency, they would be required, under Sec.  273.12(c), to use the 
information in determining the household's food stamp eligibility.
How Did Commenters Respond to This Proposal?
    Comments concerning this provision were largely negative. Of 455 
comments received, 448 disapproved of our proposal, six favored it, and 
one commenter raised a question (``What will the Food Stamp Program do 
with this information?'') without stating an opinion about the 
proposal. Opposition came from State agencies (33 opposed, three in 
favor, one uncertain); sponsoring organizations and other institutions 
(285 opposed, two in favor); State, regional, and National groups (20 
opposed, one in favor); providers (60 opposed); and those whose 
affiliation could not be determined (50 opposed). Of those opposed, 173 
commenters cited one or more specific reasons for their opposition. The 
most frequent objection (mentioned by 114 commenters) was that the 
proposal might serve as a barrier or disincentive to participation in 
CACFP or the Food Stamp Program by low-income providers most in need of 
these programs' benefits. Many of these respondents stated that the 
provision of this list to food stamp eligibility workers would identify 
these providers as likely to be ineligible, expose their food stamp 
cases to exceptional scrutiny, and discourage them from applying to 
either program. In addition, 50 commenters believed that the proposal 
would impose an unwarranted burden on State agencies and sponsoring 
organizations, while 22 stated that this was a issue that should be 
addressed by the Food Stamp Program and not the CACFP. Twenty-two 
commenters believed that the proposed provision of information from 
providers' income eligibility applications violated statutorily-
mandated confidentiality requirements, while 18 others cited other 
reasons, including a reluctance to implement a Program change on the 
basis of the small number of cases examined by OIG.
What Is the Department's Response to These Comments?
    We regret the perception that the provision of this list may 
discourage legitimate participation in either the Food Stamp Program or 
CACFP. As a Department, we make every effort to encourage participation 
by eligible individuals in both programs. At the same time, we are also 
responsible for ensuring that those individuals receiving benefits meet 
the statutory requirements for eligibility.
    Clearly, as the Federal department charged with administering both 
the CACFP and the Food Stamp Program, we have an obligation to ensure 
that those claiming categorical eligibility for tier I benefits in 
CACFP based on their food stamp participation have been accurately 
determined to be food stamp eligible, and that those receiving food 
stamps have accurately reported their household income. Self-employment 
income of any kind poses difficulties for those charged with making 
food stamp eligibility determinations and, since we are in a unique 
position to improve the accuracy of these determinations by sharing 
information across programs, we would be derelict in our responsibility 
as Federal administrators of both programs were we to ignore this 
issue.
    To address this issue without referring a list of providers to the 
Food Stamp Program would have required that we establish separate 
verification procedures for providers claiming tier I eligibility based 
on food stamp participation. However, these procedures would likely be 
more burdensome to sponsoring organizations and/or State agencies, and 
could conflict with the NSLA's provision of tier I categorical 
eligibility for providers receiving food stamps. Sharing this list 
(which is based on information already in sponsoring organizations' 
possession, since they must know the basis for each home provider's 
tier I determination) will involve a marginal amount of added effort 
for sponsoring organizations and the CACFP State agency, with most of 
the responsibility for follow-up falling on local food stamp offices. 
In no way would an individual's presence on the list imply that the 
household's eligibility for tier I status or food stamp benefits was 
erroneous; however, if their food stamp case worker determined that 
they had failed to report income from child care when they completed 
their food stamp application, then the case worker would conduct a more 
detailed examination of the case to determine whether the provider was, 
in fact, eligible for food stamps. Thus, the only providers discouraged 
from CACFP or Food Stamp Program participation will be those who were 
not eligible to receive the level of benefits they had previously 
received.
    Five commenters (including two who supported the provision) stated 
that the Food Stamp Program should also be required to share 
information with CACFP when they have utilized the information made 
available under this provision and re-determined a household's actual 
income. We will work to ensure that this sharing of information takes 
place whenever a provider qualifying for tier I benefits on the basis 
of food stamp participation is determined to have household income 
above 185 percent of poverty (i.e., when the provider's income is 
determined to be ineligible for tier I benefits).
    Finally, with regard to confidentiality issues, we must note that 
the presumption of ``confidentiality'' does not in any way protect any 
recipient of

[[Page 53526]]

Federal benefits from having their income eligibility statements 
subjected to closer scrutiny by appropriate State or Federal officials 
to review the accuracy of the program eligibility determination.
    Accordingly, this rule amends Sec.  226.6(f)(1) by adding new 
paragraph (f)(1)(x), requiring that State agencies annually collect 
from each sponsoring organization of family day care homes a list of 
day care home providers qualifying to receive tier I benefits on the 
basis of their participation in the Food Stamp Program. This new 
paragraph will also require State agencies to share this information 
with the State agency administering the food stamp program within 30 
days of receipt. This provision will be effective no later than April 
1, 2005.

Part III. Training and Other Operational Requirements

    As discussed in the Background section of this preamble, OIG's 
national audit of family day care homes made recommendations for 
changes to the current requirements for the training of day care 
providers by sponsoring organizations. Specifically, OIG recommended 
that the CACFP regulations be strengthened to require that all 
participating child care providers attend a minimum number of hours in 
Program and child care training each year, and that minimum content 
requirements be established for such training. Current Sec.  226.18 
requires that the agreement between a sponsoring organization and a 
family day care home provider include a statement of the sponsor's 
responsibility to train the day care home provider; however, this 
provision has, in some cases, been interpreted to mean that training 
must be offered to day care home providers, and not that providers are 
actually required to attend the training. OIG also recommended that 
sponsor monitors receive, at a minimum, training on the same content 
areas provided to providers.
What Changes To Training Requirements did FNS Propose?
    To address these issues, we proposed to reemphasize more strongly 
that the intent of the regulatory language is to require that providers 
attend or otherwise participate in the training that sponsors are 
annually required to offer. In addition, we proposed extending the 
requirement for mandatory attendance to all sponsored facilities, not 
just family day care homes. We also stated in the preamble to the 
proposed rule that sponsoring organizations could fulfill this 
regulatory requirement in a variety of ways (e.g., group training, 
training in the provider's home, and on-line training).
What Other Operational Changes Are Addressed in This Part of the 
Preamble?
    In addition, we proposed a number of other operational changes that 
had been suggested by Program administrators in recent years. These 
included:
     Giving State agencies the authority to place restrictions 
on meal service times;
     Providing State agencies with greater flexibility on 
payment procedures for new child care and outside-school-hours care 
centers;
     Stating expressly that State agencies are required to 
issue and enforce the provisions of all Program guidance issued by FNS;
     Stating expressly that sponsoring organizations of family 
day care homes may neither use temporarily nor retain any portion of 
providers' food reimbursement, except as specified in Sec.  226.13(c); 
and
     Eliminating obsolete language with regard to the 
participation of adult day care centers.
    Commenters' responses to these proposed changes are addressed in 
the preamble discussion that follows.

A. Training Requirements for Sponsored Facilities and Sponsor Monitors

What Are the Current Regulatory Requirements for Sponsor Training of 
Facility Staff?
    The current regulations at Sec.  226.15(e)(13) require institutions 
to maintain records that document:
     The date(s) and location(s) of all training sessions 
conducted;
     The topics covered at the session(s); and
     The names of attendees at each training session.
    In addition, Sec.  226.16(d)(2) and (d)(3) require sponsors to 
provide training to all sponsored child and adult care facilities in 
Program duties and responsibilities prior to beginning Program 
operations, and to provide additional training sessions not less 
frequently than annually afterwards. These requirements are designed to 
ensure that facility staff are familiar with Program requirements prior 
to beginning their work with CACFP, and that the facility staff 
participating in CACFP continue to receive additional training on a 
regular basis.
What Were OIG's Findings and Recommendations With Regard to Facility 
Training?
    OIG found that compliance with these training requirements is not 
uniformly monitored and enforced by State agencies and institutions. 
Some CACFP administrators have interpreted current regulations to 
require that sponsoring organizations offer training to day care home 
providers, rather than requiring that the providers actually attend the 
training. In fact, Sec.  226.18 is not entirely clear on this point; 
currently, the agreement between providers and sponsors must simply 
include a statement of the sponsor's responsibility to train the day 
care home's staff. OIG recommended that all participating family day 
care home providers receive a minimum number of hours in Program and 
child care training each year, and that sponsors and State agencies 
verify that providers receive training at least annually.
What Did the Department Propose?
    We proposed at Sec.  226.16(d)(2) to clarify that key staff (as 
defined by the sponsor) from all sponsored facilities are required to 
attend training prior to participation in the CACFP. We also proposed 
(at Sec. Sec.  226.16(d)(3), 226.18(b)(2), 226.19(b)(7) and 
226.19a(b)(11)) that key staff (as defined by the State agency) from 
all sponsored facilities must attend Program training at least annually 
thereafter. We did not believe that it was appropriate for us to 
establish a required annual curriculum for providers and key staff at 
sponsored centers, or a minimum number of annual training hours. 
However, we did propose that certain content on basic Program 
requirements be covered in the training of all sponsored child care 
facilities: serving meals which meet the CACFP meal patterns; 
explaining the Program's reimbursement system; taking accurate meal 
counts; submitting accurate meal claims, including an explanation of 
how the sponsor will review the facility's claims; and complying with 
recordkeeping requirements. We also proposed at Sec.  226.15(e)(15) 
that sponsor monitors receive training in the same content areas as 
providers.
    Finally, we proposed that sponsor reviews of all child care 
facilities include an assessment of compliance with training 
requirements; and that State agency reviews of sponsors always include 
a review of the sponsor's training (see proposed Sec. Sec.  
226.16(d)(4)(i)(D) and 226.6(1)(2)(v), respectively).
How Did Commenters Respond to the Proposal for Annual Mandatory 
Training and Related Proposals?
    Overall, we received 49 comments dealing with one or more aspects 
of our training-related proposals. All 30

[[Page 53527]]

comments (17 from State agencies and 13 from sponsoring organizations/
other institutions) that addressed the general proposal were in favor 
of requiring training of key facility staff and sponsor monitors. 
Accordingly, we have included those requirements in this interim rule 
at Sec. Sec.  226.15(e)(14) (formerly proposed Sec.  226.15(e)(15)), 
226.16(d)(2) and (d)(3), 226.17(b)(9), 226.18(b)(2), 226.19(b)(7), and 
226.19a(b)(11). A number of these commenters also stated that they 
supported the requirement for sponsoring organizations and State 
agencies to monitor compliance with this requirement as part of their 
reviews, and no commenters opposed the inclusion of this requirement. 
Therefore, these requirements were included in this interim rule at 
Sec.  226.6(m)(3)(viii) [Sec.  226.6(l)(2)(v) in the proposed rule] for 
State agencies and at Sec.  226.16(d)(4)(i)(C) for sponsoring 
organizations [Sec.  226.16(d)(4)(i)(D) in the proposed rule].
    Commenters did express concern regarding the minimum content of the 
training, the logistics of delivering the training, and to whom the 
rules apply, as follows.
    In-home and other forms of training.--Nineteen commenters (14 
sponsors and 5 State agencies) were concerned that our use of the word 
``attend'' appeared to prohibit training day care home providers in 
their homes. Several of these commenters suggested viable training 
delivery methods and settings that would meet the intent of mandatory 
participation, including home study, in-home training, and self-paced 
training. It was not our intent to limit training delivery methods or 
settings. We believe that effective and valuable training can be 
provided in a number of different settings, and in a number of 
different ways. Therefore, we have modified the language describing 
this regulatory requirement at Sec. Sec.  226.15(e)(14), 226.16(d)(2) 
and (d)(3), 226.17(b)(9), 226.18(b)(2), 226.19(b)(7), and 
226.19a(b)(11) to clarify that, while participation in training by day 
care home providers and key staff at sponsored centers is required, 
State agencies may allow institutions to develop and deliver training 
in the manner most responsive to the needs of their staff and 
facilities.
    Training content.--Fourteen commenters (9 State agencies and 5 
sponsors/other institutions) addressed our proposal to require that the 
training provided prior to Program operations, and annually thereafter, 
include information on basic Program information including meal 
patterns, meal counts, claims submission, recordkeeping, and the 
Program's reimbursement system. Four State agency commenters supported 
the proposal as worded, while nine other commenters (4 State agencies 
and 5 sponsors) questioned the benefit to be derived from presenting 
the same basic training to the same staff each year. Several of these 
comments stated that training appropriate for experienced staff and 
providers would not necessarily be appropriate for new staff and 
providers. One State agency commenter requested that we require a 
specific number of training hours per year, and another questioned how 
staff at affiliated centers could be meaningfully trained when they are 
employed by the same legal entity as the sponsor.
    We anticipate that training requirements established by State 
agencies and the Program training provided to sponsor staff and 
facilities would vary according to the needs of the audience, while 
still meeting the minimum content requirements that we proposed. For 
example, training delivered to a group of experienced staff in a small 
child care center where all staff share duties would be different than 
that delivered to experienced staff in a large facility where there is 
division of duties, or that delivered to day care home providers. We 
did not intend that experienced staff (whether providers, sponsored 
center staff, or sponsor monitors) would have to receive the same 
training year after year. To clarify this point, we have retained the 
specific content requirements for the training of new facility staff 
and sponsor monitors, but have modified the wording at Sec. Sec.  
226.15(e)(14), 226.16(d)(2) and (d)(3), and 226.16(e)(3) by stating 
that the content of the training must be appropriate to the experience 
level and duties of the staff being trained.
    With regard to specifying a minimum number of hours of annual 
training, we still believe that, as stated in the preamble to the 
proposed rule, State agencies are in the best position to develop these 
types of rules as appropriate. Furthermore, with respect to training 
the key staff at affiliated centers, we continue to believe that the 
general requirement for training of all key staff--whether in family or 
group day care homes, or in affiliated or unaffiliated sponsored 
centers--is a critical aspect of improving Program performance. 
Sponsors of affiliated centers must ensure that the staff responsible 
for operating their sponsored facilities is fully aware of Program 
requirements, since the parent (sponsoring) organization will bear the 
responsibility for errors committed by staff at those facilities.
    Consequences of failure to participate in mandatory training.--Nine 
commenters (five State agencies and four sponsors/other institutions) 
stated that we needed to clarify the consequences to facilities that 
failed to participate in mandatory training, or to sponsoring 
organizations that failed to ensure the training of their monitors. Six 
of these commenters (two State agencies and four sponsors/other 
institutions) stated that we should clarify that sponsors are permitted 
to withhold all Program payments to facilities when key staff fail to 
participate in training. In fact, however, the use of withholding 
procedures (often referred to as ``stop payments'') was never 
advisable, and is now specifically prohibited by section 17(f)(1) of 
the NSLA, as explained in Program guidance issued on March 1, 2002 
(``Use of ``stop payments'' in the * * * CACFP'').
    The remaining three State agency commenters asked that we describe 
the consequences for not attending mandatory training and that we 
specifically address whether such facility staff or sponsors could be 
declared ``seriously deficient''. In fact, the interim rule issued on 
June 27, 2002, states at Sec. Sec.  226.6(c)(2)(ii)(F) and 
226.6(c)(3)(ii)(O) that sponsors that fail to train their facilities in 
accordance with Sec.  226.16(d) are seriously deficient. Since a 
sponsor will be declared seriously deficient for failure to train 
facilities, it is clear that a facility that failed to participate in 
required training was also seriously deficient, in accordance with 
Sec.  226.16(l)(2)(viii). However, to further clarify this, we have 
added failure to attend training as a specific serious deficiency at 
Sec.  226.16(l)(2)(viii), and redesignated former Sec.  
226.16(l)(2)(viii) as Sec.  226.16(l)(2)(ix). In addition, we have 
added to the sponsor-home agreement requirements at Sec.  226.18(b)(2) 
specific wording that requires the home to participate in the training 
offered by the sponsor. This will provide notice in the agreement that, 
should the home fail to attend training, it would be out of compliance 
with the sponsor-home agreement.
    Key staff.--Two commenters (one State agency and one sponsor/other 
institution) stated that our use of the term ``key staff'' was unclear. 
The sponsor commenter believed that sponsoring organizations should 
define key staff, while the State agency commenter believed that FNS 
should make this determination.

[[Page 53528]]

    In fact, the proposed rule was inconsistent on this point. Section 
226.16(d)(2), referring to training of key facility staff prior to 
Program operations, stated that the key staff would be defined by the 
sponsoring organization; Sec.  226.16(d)(3), referring to annual 
training of key facility staff, said that the State agency would define 
key staff, as did Sec. Sec.  226.17(b)(9), 226.18(b)(2), 226.19(b)(7), 
and 226.19a(b)(11). It was our intent that all day care home providers 
be trained prior to participation and annually thereafter, and that the 
key staff of sponsored child and adult care centers receive similar 
training. State agencies, not sponsors, will be most objective in 
determining which sponsored facility staff are required to attend 
training, and we have changed the wording of Sec.  226.16(d)(2) 
accordingly.

B. Times of Meal Service

What Are the Current Restrictions on the Time of Meal Service?
    Except for outside-school-hours care centers, current regulations 
do not place any limitations on the time of meal service. For outside-
school-hours care centers, the regulations at Sec.  226.19(b)(6) 
require that three hours elapse between the beginning of one meal 
service and the beginning of another, except that 4 hours must elapse 
between the beginning of the lunch and supper meal services when no 
snack is served between lunch and supper. In addition, this section of 
the regulations prohibits outside-school-hours care centers from 
beginning a supper service after 7 p.m. or ending the supper service 
after 8 p.m. This section of the rule also limits the duration of meal 
services in outside-school-hours care centers to a maximum of two hours 
for lunch and supper and one hour for other meal services.
Who Has Asked for Changes to These Requirements?
    Some State Program administrators have periodically requested that 
we establish restrictions akin to those in outside-school-hours centers 
to meals served in other types of facilities. In the past, we were not 
prescriptive in other settings, having established the outside-school-
hours limits due to such facilities' potential overlap and duplication 
of meal services already received by children in other types of child 
nutrition settings (primarily, child care centers or schools). However, 
we are concerned with recent audit and review findings that some child 
care facilities have abused the Program in various ways because of the 
lack of such meal service restrictions. In some cases, different meal 
services were provided with little time between them, in an attempt to 
maximize reimbursement; in other cases, suppers have regularly been 
claimed at facilities where, when reviewers are present, no children 
are in attendance. Some State agencies attempting to address this issue 
have felt hampered by the absence of Federal regulatory authority for 
them to establish such time limits for meal services.
What Did the Department Propose?
    We proposed to give State agencies broad regulatory authority, at 
proposed Sec.  226.20(k), to impose limits on the duration of meal 
services and the time between meal services. In States where Program 
reviews have uncovered patterns of abuse such as claiming of multiple 
meals to children in care for a brief amount of time, we believed that 
State agencies should have appropriate tools for eliminating such 
mismanagement. In these circumstances, it is appropriate for State 
agencies to have regulatory authority to support their attempts to 
limit this type of abuse.
What Comments Did the Department Receive on This Proposal?
    We received 474 comments on this proposed provision. Of these, 14 
were in total agreement with the proposal as written (12 State agencies 
and two sponsors/other institutions) while 14 sponsors or other 
institutions opposed it, with eight of the sponsors stating that they 
should be able to establish any time limits themselves, with State 
agency approval. Of the remaining 446 comments, all expressed partial 
support for the provision, but asked for modifications as follows:
     Three commenters (two State agencies and one sponsor/other 
institution) agreed with the provision, but asked for specific National 
standards on the times and duration of meal services, and the times 
between meal services.
     Two State agency commenters agreed with the provision, but 
believed that the language granting them specific authority to 
establish time of meal service limits should reference cultural and 
economic factors that should be taken into consideration.
     One sponsor commenter agreed with the provision, but 
believed that it should specifically refer to a prohibition on serving 
the same child multiple meals in a short period of time.
     A total of 191 commenters (sponsors, independent centers, 
providers, State and National groups, and others) agreed with the 
provision, but asked that the regulatory language require State 
agencies using this authority to establish a waiver system that 
referenced relevant factors that must be taken into account by the 
State agency.
     A total of 249 commenters (sponsors, independent centers, 
providers, State and National groups, and others) agreed with the 
provision, but asked that it include waiver language and that it 
specifically exempt outside-school-hours care centers from time of 
service requirements.
    Clearly, these commenters have cited a number of reasons that a 
single uniform approach to times of meal service may not work. That is 
why, as stated in the preamble to the proposed rule, we are reluctant 
to establish fixed National limits. The CACFP needs to be flexible 
enough to accommodate children's varying needs, depending on their age, 
cultural traditions, socioeconomic status, participation in the Head 
Start Program, and even the distance that school-age children travel 
between child care and school. We strongly encourage State agencies to 
work with participating institutions to ensure that they are fully 
aware of the variety of factors that need to be considered in 
establishing time of meal service limitations in each State. However, 
we believe that State agencies will approach meal service limits 
mindful of the same concerns expressed by sponsors. It is up to each 
State agency to determine the necessity for waivers or another system 
to accommodate exceptions to a general rule. It should also be noted 
that nothing in this interim rule mandates that State agencies 
implement a specific schedule, or that they elect to establish one at 
all.
    With regard to outside-school-hours care centers, since this rule 
will provide State agencies with the clear authority to establish any 
time of meal service requirements they believe are necessary, there is 
no longer a need for separate Federal restrictions on the time of meal 
service in outside-school-hours care centers. Therefore, this rule will 
eliminate the long-standing time restrictions on outside-school-hours 
care center meal service at Sec.  226.19(b)(6). This change is 
consistent with the statutory recognition, discussed above, that both 
at-risk and outside-school-hours facilities often provide drop-in 
services that differ substantially from more structured forms of child 
care, and will leave to State agencies the determination as to what 
type of time restrictions, if any, are appropriate for the various 
types of facilities participating in CACFP.

[[Page 53529]]

    Therefore, this interim rule incorporates into the regulation Sec.  
226.20(k) the same language as proposed, which clarified State 
agencies' authority to establish limits on the duration of meal service 
periods and the time between meal services. It also eliminates the time 
restrictions placed on meal services at outside-school-hours care 
centers at Sec.  226.19(b)(6).

C. Reimbursement to Centers When Approved for Participation

What Are the Current Rules Pertaining to Reimbursement of New Centers?
    Current Sec.  226.11(a) states that State agencies provide 
reimbursement for meals served in centers (whether independent centers 
or sponsored centers) only when the institution (the independent center 
or the sponsor of centers) is operating under an agreement with the 
State agency for meal types specified in the agreement. However, Sec.  
226.11(a) also gives State agencies the option to reimburse centers for 
meals served in the calendar month preceding the calendar month in 
which the agreement is executed, provided that the center has records 
to document participant eligibility, the number of meals served, and 
that the meals met Program requirements.
Why Did the Department Propose a Change to This Provision?
    State agencies have expressed concern that the current regulation's 
wording limits their flexibility by:
     Establishing an expectation that centers will always be 
paid for meals served in the calendar month preceding execution of the 
agreement; and
     Not specifically citing the State agency's authority to 
make payments only after the execution of an agreement with an 
institution.
    We agreed with the first concern and disagreed with the second. 
Therefore, we proposed language that was intended to clarify that State 
agencies are required to begin reimbursing centers for meals when a 
Program agreement is signed, and when all Program requirements are 
being met. This was not intended to eliminate a State agency's option 
to reimburse a center for meals served in accordance with all Program 
requirements in the month prior to executing an agreement with the 
center. Rather, it was intended to clarify that State agencies could 
choose either approach--either to reimburse all centers only for meals 
served in accordance with all requirements after an agreement is 
executed, or to reimburse all centers for meals served in accordance 
with all requirements in the month prior to the month in which an 
agreement is executed.
How Did Commenters Respond to This Proposal?
    We received a total of 15 comments on this provision, all from 
State agency staff in 10 different States. Although 11 commenters 
supported the proposal, several of those who supported the proposal, 
and all of those who disagreed with the proposal, mistakenly believed 
that the option to reimburse centers for meals served in the month 
prior to executing an agreement had been removed. In fact, our intent, 
as stated above, was to clarify that the State agency develop a policy 
based on either of these two approaches. To better clarify our intent, 
this interim rule modifies the last sentence of Sec.  226.11(a).
    This revised language should clarify that the State agency has two 
options: (1) To develop a policy that allows centers to earn 
reimbursement for meals served in the month preceding the month in 
which the agreement is executed, and to reimburse centers for those 
meals after an agreement has been executed; or (2) to develop a policy 
that permits centers to earn reimbursement only for eligible meals 
served on or after the date an agreement is executed. Please note that 
we issued guidance on May 14, 2001, that extends similar options to the 
reimbursement of day care homes for meals.
    Accordingly, this interim rule modifies the language at Sec.  
226.11(a) pertaining to the reimbursement of meals served in centers.

D. Regulations and Guidance

What Did the Department Propose?
    Section 226.6(l) makes State agencies responsible for monitoring 
institutions' compliance with Program regulations ``and with any 
applicable instructions of FNS and the Department.'' These instructions 
interpret existing rules by clarification or explanation and do not 
impose new substantive requirements. Although this requirement and case 
law have demonstrated that State agencies have the authority and the 
responsibility to apply Federal guidance that interprets the 
regulations and the law, we proposed regulatory language at Sec. Sec.  
226.6(l) and 226.15(m) that underscored this fact. Comparable 
regulatory language already exists in other programs, such as the 
Summer Food Service Program (see 7 CFR 225.15(a)). The governing 
statute for CACFP may be found at http://www.fns.usda.gov/cnd/Governance/nslp-legislation.htm; Program regulations may be found at 
http://www.fns.usda.gov/cnd/Care/Regs-Policy/new226.pdf and Program 
guidance may be found at http://www.fns.usda.gov/cnd/Care/Regs-Policy/policy.htm or by contacting the State agency or the Food and Nutrition 
Service.
How Did Commenters Respond to This Proposal?
    A total of 21 commenters responded, with 17 in support of the 
proposal and four in opposition. Of the 17 commenters in favor (15 
State agencies and two sponsors/other institutions), three requested 
that we add language clarifying that State agencies have authority to 
impose additional requirements, provided that they are not in conflict 
with the Federal regulations. This wording is unnecessary, however, 
since the proposed changes referred to the State's authority to monitor 
compliance with regulations, instructions, and handbooks issued by the 
State agency which are consistent with the CACFP regulations. In 
addition, existing Sec.  226.25(b) permits State agencies to add 
requirements for participation, provided that they are consistent with 
the Federal regulations and are approved by the FNS regional office.
    The four commenters who disagreed (two State agencies and two 
sponsors/other institutions) stated that any form of guidance not 
promulgated through the rulemaking process was not enforceable. This is 
precisely the misconception that our proposed regulatory language was 
meant to address. In fact, the Administrative Procedures Act (5 U.S.C. 
553) specifically exempts ``interpretative rules'' and ``general 
statements of policy'' from publication in the Federal Register. State 
agencies issuing handbooks and other guidance must ensure that they 
comply with both Federal and State law governing such publications, and 
that they do not conflict with the intent of any Federal Program or 
other requirement. Furthermore, the State's procedural rules must not 
diminish, contradict, or impose additional eligibility requirements for 
institutions that would otherwise be eligible under Federal 
requirements. For example, based on identified problems, a State agency 
could impose additional monitoring requirements, but could not require 
a new independent center to post a performance bond as a condition of 
eligibility.
    By stipulating that institutions must comply with instructions, 
guidance, and handbooks issued in accordance with

[[Page 53530]]

regulations, we are emphasizing the authority of the Department and 
State agencies to issue such rules and statements of policy through the 
publication of handbooks and other forms of instruction. We have 
changed the language of the proposed rules to clarify this point.
    Accordingly, this interim rule implements the changes as proposed. 
As a result of changes promulgated in the interim rule published on 
June 27, 2002, these provisions appear at Sec. Sec.  226.6(m)(3)(iv) 
[formerly the introductory paragraph of proposed Sec.  226.6(l)(2)] and 
226.15(m).

E. Sponsor Disbursement of Food Payments to Providers

What Are the Rules Governing Sponsors' Disbursement of Meal Service 
Payments to Family Day Care Homes?
    The regulations at Sec. Sec.  226.13(c) and 226.18(b)(7) state that 
sponsoring organizations of family day care homes must disburse the 
full amount of meal service earnings to providers except that, with the 
day care home provider's prior written consent, Sec.  226.18(b)(7) 
stipulates that the sponsor may deduct the costs of providing meals or 
foodstuffs to the provider. In recent years, we have been asked whether 
the regulations would permit sponsors:
     To temporarily retain some portion of the providers' meal 
service payments; or
     With or without prior written consent, to subtract the 
costs of other goods or services (e.g., liability insurance premiums, 
toys, or educational materials) provided to the family day care 
provider; or
     To withhold part or all of a provider's reimbursement if 
the provider fails to attend training, or otherwise violates regulatory 
provisions.
    The intent of the current regulations is to prohibit any retention 
of meal service payments received by the family day care home 
sponsoring organization from the State agency, except in the single 
specific instance described in the regulations (there is a written 
agreement for the provision of meals or foodstuffs by the sponsor to 
the provider) or in the more general circumstance of a provider having 
submitted a claim that is erroneous or invalid. All of these 
circumstances are also set forth in FNS Instruction 796-2, revision 3, 
section IX(B)(3)(c).
    We are well aware that sponsors often sell other goods or services 
to family day care home providers, including providers they do not 
sponsor. However, there is no reason for the government to facilitate 
transactions through the retention of food service payments provided 
under the CACFP. Such practices are not intended by section 17 of the 
NSLA, and we intend there to be no exceptions save that mentioned in 
the current rule. Therefore, we proposed to amend Sec.  226.18(b)(7) to 
further clarify the limitations on sponsoring organizations' temporary 
or permanent retention of meal service payments, except when it is 
expressly permitted by the regulation.
What Comments Did You Receive on These Proposed Changes?
    We received a total of 73 comments on this proposed change, 11 from 
State agencies and 62 from sponsoring organizations or other 
institutions. All commenters supported the change, though many of the 
sponsor/institution comments requested that we add language permitting 
sponsors to withhold claims without State agency permission, either due 
to other violations of regulations, such as failure to attend required 
training, or due to the day care home's submission of an invalid claim.
    As discussed above (see part II(G) of this preamble, above), as a 
result of ARPA, suspension of payments (i.e., cutting off all payments 
to a provider) is not permitted except when the provider is found to 
have created an imminent threat to public health or safety. 
Furthermore, the NSLA does not permit the withholding of payments to a 
provider based on the provider's failure to attend training. Instead, 
the sponsor's recourse in such a case is to give the provider time to 
come into compliance, then to declare the provider seriously deficient 
if the provider remains in noncompliance.
    However, we did not intend to limit the sponsor's ability to deny 
payments to a provider who has submitted an invalid claim. We agree 
with commenters that our proposed language stating that the denial of 
invalid claims could only occur with the State agency's prior consent 
presents an unnecessary impediment to sponsors' effective management of 
the Program, and that language has been removed from this interim rule.
    Accordingly, this interim rule incorporates the language proposed 
at Sec.  226.18(b)(7), with the change discussed above.

F. Technical Changes

    We received no negative comments regarding our proposal to 
eliminate obsolete adult day care provisions at Sec.  226.25(g), nor 
did we receive any recommendations for clarification. Therefore, we 
will adopt our proposed regulatory language in this interim rule.
    We also added a second technical change to this interim rule. 
Section 226.6(o) was amended to reflect the changes to serious 
deficiency and suspension procedures mandated by the Agricultural Risk 
Protection Act of 2000.

Part IV. Non-Discretionary Changes Required by PRWORA, the Healthy 
Meals Act, and the Goodling Act

    In addition to the discretionary changes discussed in parts I-III 
of this preamble, the proposed rule also included a number of non-
discretionary changes as well. Non-discretionary changes are those that 
are specifically mandated by law, and the Department, therefore, must 
include these provisions in the Program regulations. Although the 
Department could have issued these non-discretionary changes in an 
interim or a final rule, without first soliciting public comment, we 
included these provisions in the proposal, both as a matter of 
convenience and as a means of gathering comment on the manner in which 
we were proposing to implement several of these provisions.

A. Issuance of Advances to Institutions Participating in CACFP

What Did You Propose With Respect to Advances?
    As discussed in part I(A) of the preamble, above, we proposed to 
implement a statutory change relating to advances that was promulgated 
in section 708(f)(2) of PRWORA. Prior to the PRWORA's passage, State 
agencies were required to issue advance payments for CACFP to 
institutions that requested them. However, due to findings that 
advances were being abused in some cases, the NSLA was amended by 
PRWORA to make the issuance of advances optional. As we explained in 
the preamble to the proposed rule, State agencies may elect to issue 
advances to all institutions, no institutions, specific types of 
institutions, or institutions with records of adequate Program 
administration. Only when a State agency denies an advance to an 
institution based on the institution's Program performance would it be 
necessary to offer an appeal of the State agency's decision.
How Did Commenters Respond to the Proposal?
    We received 12 comments on this provision, 11 of which were 
favorable. The commenter who objected believed that State agencies 
should not be provided with this latitude, and that

[[Page 53531]]

institutions with successful Program performance should be guaranteed 
an advance if they apply for one. However, as previously noted, the 
NSLA now makes advances optional at the State agency's discretion.
    Of the commenters who agreed with the proposal (six State agencies, 
four sponsors, and one State organization), seven requested that 
additional language be included in the regulations. Five commenters 
asked that the regulations state that State agencies could also elect 
only to make available operating advances or administrative advances. 
Another commenter suggested that the regulations state specifically 
that the State agency may refuse to issue any advances whatsoever. We 
have already issued guidance (dated January 27, 1997) that clarified 
that State agencies had a variety of options in implementing this 
provision. It would certainly be possible for a State agency to issue 
operating advances only, administrative advances only, or no advances 
at all. Any of these options would prevent a State agency from having 
to offer an appeal to an institution requesting an advance that was not 
available to similar institutions. We also have issued periodic 
guidance on the matter of collecting advances.
    What is at issue is whether it would be advantageous for any or all 
of this information to be codified in the Program regulations. In 
general, we prefer to address detailed procedural aspects of 
implementation in interpretive guidance, rather than in the 
regulations, as previously discussed. FNS also has training and 
regional office dialogue with State agencies as methods for addressing 
such inquiries and issues. For that reason, we are implementing this 
regulatory change as proposed at Sec.  226.10(a).

B. Change to Method of Rounding Meal Rates in Centers

What Did the Department Propose?
    Section 704(b)(1) of PRWORA amended section 11(a)(3)(B) of the NSLA 
by changing the method to be used by the Department in making annual 
adjustments to the national average payment rate for paid meals served 
in the NSLP and SBP. This change also affected the method of rounding 
used to calculate the annual adjustment to the rate for paid meals 
served in child care centers and adult day care centers participating 
in the CACFP because, under sections 17(c)(1) through (c)(3) and 
17(o)(3) of the NSLA, these rates are linked to the rates and rounding 
methods established in section 11(a)(3)(B). Later, section 103(b) of 
the Goodling Act extended the same rounding procedure to the free and 
reduced-price meal rates in NSLP, SBP, and the center-based component 
of CACFP, effective July 1, 1999. Therefore, we proposed to modify the 
language at Sec.  226.4(g)(2) of the regulations to reflect this 
change. In addition, we proposed to change the word ``supplements'' to 
``meals'' at Sec.  226.4(g)(2) of the regulations since this paragraph 
is clearly intended to describe the method of adjusting and rounding 
the rates for all meals (not just snacks/supplements) served in child 
and adult day care centers.
How Did Commenters Respond?
    We received a total of three comments on this provision, all from 
State agencies. All approved of the change, but one commenter 
questioned why we were not making a similar change to the method of 
rounding meals served in day care homes. In fact, we have made this 
change at Sec.  226.4(g)(1) as a statutorily-mandated part of the 
implementation of the two-tiered system of reimbursement for family day 
care homes (62 FR 889, January 7, 1997). Therefore, we will adopt in 
the provision as proposed in this interim rule at Sec.  226.4(g)(2).

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

What Did You Propose, and How Did Commenters Respond?
    As a result of PRWORA, the Federal AFDC Program was block granted 
and its name was changed to Temporary Assistance for Needy Families 
(TANF). This change requires us to change all references to ``AFDC'' 
and ``AFDC assistance units'' in the rule and to replace them with 
``TANF'' and ``TANF recipient.''
    We received three comments in favor of this mandatory change, and 
this interim rule will make this change to our regulatory language as 
proposed.

D. State Agency Outreach Requirements

What Did the Department Propose?
    Section 708(a) of PRWORA amended the statutory purpose statement 
for CACFP by amending section 17(a) of the NSLA. Previously, the law 
stated that the purpose of CACFP was to assist States to initiate, 
maintain, and expand nonprofit food service programs for children in 
child care. Section 708(a) deleted the words ``and expand'' from this 
sentence. In addition, section 708(h) of PRWORA revised section 17(k) 
of the NSLA in its entirety. Previously, this section of the NSLA had 
required State agencies to facilitate expansion and to annually notify 
each nonparticipating institution of the Program's availability, the 
requirements for participation, and the procedures for application. As 
a result of this change, the NSLA now requires State agencies to 
provide sufficient training, technical assistance, and monitoring of 
the CACFP.
Did This Change Eliminate Outreach From the CACFP?
    No. State agency outreach is still an allowable and desirable 
Program activity. Although PRWORA removed two specific requirements for 
State agency outreach, it also underscored the State agency's 
responsibility to promote Program expansion in low-income and rural 
areas. Prior to PRWORA, the NSLA had been amended to make additional 
funds available to sponsoring organizations of day care homes for 
expansion into rural or low-income areas. A later amendment permitted 
day care home sponsors to use their administrative funds to defray the 
licensing-related costs of non-participating low-income day care home 
providers. The PRWORA underscored Congress' commitment to these 
provisions by mandating that we publish interim regulations 
implementing these changes and giving them the force of law, which was 
done in 1998 (63 FR 9721, February 26, 1998). Thus, although the 
specific requirement for State agencies to notify non-participating 
institutions was removed, the law continues to promote program 
expansion among rural and low-income family day care home providers.
    Based on these congressional actions, we proposed to modify two 
paragraphs within Sec.  226.6, which sets forth State agency 
responsibilities. We proposed to amend Sec.  226.6(a) to require that 
State agencies continue to commit sufficient resources to facilitate 
Program expansion in low-income and rural areas, and proposed to amend 
Sec.  226.6(g) to eliminate the language requiring that State agencies 
take specific actions to facilitate expansion, while retaining the 
broader requirement that State agencies take action to expand the 
availability of Program benefits Statewide, and especially in low-
income and rural areas. We believe that these changes meet 
congressional intent to eliminate the broad requirement that State 
agencies expand the Program, and to substitute a requirement for 
targeted expansion in low-income and rural areas.
How Did Commenters Respond to These Proposals?
    We received seven comments on this provision--four from sponsors or 
other

[[Page 53532]]

institutions, two from State agencies, and one from a State 
organization. All commenters favored this change, but five of the seven 
commenters believed that we should also include outreach to Tier II 
homes as a State agency requirement. These commenters stated that the 
recruitment and retention of Tier II homes had become much more 
difficult after the introduction of the two-tiered reimbursement system 
in family day care homes.
    Although we are aware that many sponsors have expanded their 
efforts to recruit and retain Tier II homes in recent years, we do not 
believe that the wording of the NSLA would support our requiring State 
agencies to engage in these efforts. Because of the NSLA's continued 
emphasis on Program expansion in low-income and rural areas, a 
requirement for State agency action to facilitate growth in Tier II 
areas is not warranted. State agencies could elect to use State 
administrative resources in support of other expansion efforts; 
however, they are only required to make such efforts in low-income and 
rural areas. Therefore, we will adopt in this interim rule the language 
we proposed at Sec. Sec.  226.6(a) and 226.6(g).

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

Why Did USDA Propose this Change?
    Section 708(b) of PRWORA amended section 17(a)(6)(D) of the NSLA by 
prohibiting any family day care home sponsoring organization which 
employs more than one person from basing payment to employees on the 
number of family day care homes recruited. These terms were not defined 
by Congress, permitting us to broadly construe the terms ``employee'' 
and ``payment''. For example, sponsoring organizations often pay 
individuals (including family day care home providers whom they sponsor 
for CACFP) to perform specific program functions, such as training, 
monitoring, or recruitment through a contractual arrangement. Although 
that person is not a full-time employee of the family day care home 
sponsoring organization, we nevertheless believe that they are covered 
by this prohibition. We are also aware that sponsor employees can be 
paid in a variety of ways (e.g., salaries, hourly wages, or on a piece-
work basis). It is our position that Congress intended to prohibit any 
type of payments (including bonuses, contract incentives, free trips, 
or any other perquisite or gratuity) under any compensation system if 
the payment is based on recruitment activities performed by any full-
time or part-time employee, contractor, or family day care home 
provider.
Can Sponsors Still Use Administrative Funds for Recruitment?
    Yes. The recruitment of family day care home providers to 
participate in CACFP is still an allowable expense, as long as (as 
noted in the preamble to the interim rule published on June 27, 2002) 
the provider is not currently participating in CACFP. In fact, as noted 
in the previous part of this preamble, the NSLA continues to encourage 
recruitment of non-participating providers in low-income and rural 
areas. This means that family day care home sponsors are permitted to 
pay employees or contractors to perform recruitment functions. However, 
the person being paid cannot be reimbursed solely on the basis of the 
number of homes recruited. Similarly, including the number of homes 
recruited as an evaluation factor when measuring an employee or 
contractor's performance is permissible, whereas providing a bonus or 
award for recruiting a certain number of homes would not be 
permissible. Therefore, we proposed to amend the regulations at Sec.  
226.15 by adding a new paragraph, (g), which prohibits sponsoring 
organizations of family day care homes from making payments to 
employees or contractors solely on the basis of the number of family 
day care homes recruited.
What Comments Did You Receive on This Proposal?
    We received a total of eight comments (six from sponsors or other 
institutions, two from State agencies) on this provision. Seven were 
positive and one was opposed to the change; however, the commenter who 
opposed the change was a sponsor who mistakenly believed that the 
proposal would prevent her from paying employees based on the number of 
homes they monitor. In fact, all systems of compensation are allowable 
unless they are based on the number of homes recruited. Another 
commenter asked whether this provision would prohibit a sponsor from 
paying a provider a bonus for recruiting other providers. If the sole 
condition for receiving the bonus was the number of day care homes that 
began participating with the sponsor, the bonus would not be permitted.
    Accordingly, this interim rule adopts the language at Sec.  
226.15(g) as proposed, and redesignates Sec.  226.15(g) through (k) as 
Sec.  226.15(h) through (l), respectively.

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

What Did You Propose to Change Regarding State Agency Pre-Approval 
Visits to New Institutions?
    Section 107(c) of the Goodling Act amended section 17(d) of the 
NSLA (42 U.S.C. 1766(d)) to require State agencies to visit private 
institutions (both non-profit and for-profit) applying for the first 
time prior to their approval to participate in CACFP.
    We believe that the change made to Sec.  226.6(m)(2) (formerly 
Sec.  226.6(l)(2) in the interim rule published on June 27, 2002) which 
requires State agencies to target for more frequent reviews those 
institutions whose prior review included a finding of serious 
deficiency, goes far towards fulfilling the second statutory 
requirement. With regard to the requirement for pre-approval visits to 
private institutions, we believe that Congress intended to exclude from 
this requirement both public institutions and institutions which are 
adult day care centers, and to focus additional State agency oversight 
on child care institutions, and especially on sponsors. The Conference 
Report language (Conf. Report 105-786, October 6, 1998) focuses 
throughout on the Program management problems documented in OIG audits. 
These audits have been confined to family child care homes and/or child 
care centers because these organizations account for such a large share 
of Program reimbursements.
    We recognized that requiring State agencies to conduct a pre-
approval visit of each new independent center, especially in 
geographically large and rural States, could result in delays in 
approving such centers. Therefore, we addressed this issue in Program 
guidance issued on July 14, 1999. That guidance set forth various ways 
in which the pre-approval requirement might be met for independent 
centers (including obtaining information gathered by the State 
licensing agency in its previous visit(s) to the center), and described 
certain circumstances under which we would be willing to entertain 
State agency requests to waive the pre-approval requirement for one or 
more independent centers. Thus, the guidance provides State agencies 
with options for meeting the legal requirement with respect to 
independent centers, but ensures that a pre-approval visit to 
sponsoring organizations by the State agency will always occur.

[[Page 53533]]

What Comments Did You Receive on This Provision?
    We received four comments on this provision, all from State 
agencies. One commenter suggested that we consider modifying the rule 
to require visits to institutions that are adult day care centers, and 
another suggested the addition of both adult day care institutions and 
publicly-administered child care institutions. A third commenter noted 
the administrative burden on State agencies in implementing this 
provision.
    While there could be some benefit to extending the scope of this 
requirement, the Goodling Act clearly stated that the requirement 
applies to private child care institutions. State agencies may, of 
course, choose to conduct pre-approval visits to adult day care or 
public child care institutions, provided that approval or denial is not 
delayed due to the State agency's inability to perform the pre-approval 
visit in a timely fashion. Therefore, this interim rule implements our 
regulatory language as proposed. Due to the further re-organization of 
Sec.  226.6(b) in this interim rule, the provision will appear in the 
introductory paragraph of Sec.  226.6(b)(1).

G. Provision of Information on the WIC Program

Why Did You Propose To Require the Distribution of Information on the 
WIC Program?
    Section 107(i) of the Goodling Act required us to provide State 
agencies with information concerning the Special Supplemental Nutrition 
Program for Women, Infants and Children (WIC) Program. The Goodling Act 
also required State agencies to ensure that each participating facility 
and independent child care center (other than outside-school-hours care 
centers) receive materials that explain WIC's importance, its income 
eligibility guidelines, and how to obtain benefits. In addition, State 
agencies were required to provide these facilities and institutions 
with periodic updates of this information and to ensure that the 
parents of enrolled children receive this information.
    On April 14, 1999, we provided the required information on WIC to 
each State agency administering the CACFP. We proposed to amend Sec.  
226.6(q) to require that State agencies distribute this information to 
each child care institution participating in the Program, and Sec.  
226.15(n) to require that the institution make this information 
available to each sponsored facility (except sponsored outside-school-
hours care centers), and to ensure that institutions and/or facilities 
make this information available to the households of participating 
children.
How Did Commenters Respond to These Proposals?
    We received four comments on these proposals, three from State 
agencies and one from a sponsor. Two comments (one from a State agency 
and the sponsor comment) were favorable, and two expressed opposition 
to the provision. One of these opposed the administrative cost of 
distributing the information, and felt that it should be borne by the 
WIC Program; another stated that parents eligible for WIC were already 
well aware of the Program. However, distribution of this information is 
required by the NSLA; therefore, we will adopt our regulatory language 
as proposed, at Sec. Sec.  226.6(q) and 226.15(n).

H. Audit Funding for State Agencies

What Change Did You Propose To Audit Funding for State Agencies?
    Section 107(e) of the Goodling Act amended section 17(i) of the 
NSLA (42 U.S.C. 1766(i)) by reducing the amount of audit funding made 
available to State agencies. Prior to this change, State agencies could 
receive up to two percent of Program expenditures during the preceding 
fiscal year to conduct Program audits. This was changed to one and one-
half percent of Program expenditures in the previous fiscal year, 
beginning in fiscal year 1999. In addition, in order to meet mandatory 
ten-year budget targets, the Goodling Act also mandated a further 
reduction (to one percent) in fiscal years 2005 through 2007, but it 
was unclear whether the reduction for fiscal years 2005-2007 would 
occur. Therefore, we proposed to amend Sec.  226.4(h) by removing the 
words ``2 percent'' and substituting in their place the words ``1.5 
percent'.
    However, it now appears that the reduction to 1 percent funding 
will occur in fiscal years 2005-2007. Therefore, this interim rule 
incorporates language at Sec.  226.4(h) that refers to the 1 percent 
funding level for fiscal years 2005-2007.
How Did Commenters Respond?
    We received only one comment, from a State agency, on this 
provision. That commenter observed that every effort must be made to 
safeguard 1.5 percent audit funds during fiscal years 2005-2007. 
However, because the reduction to 1 percent is likely to occur, as 
noted above, the language of Sec.  226.4(h) has been amended to reflect 
the lower levels of funding for fiscal years 2005-2007.

I. Elimination of Fourth Meal in Child Care Centers

    Section 708(d) of PRWORA amended section 17(f)(2)(B) of the NSLA by 
eliminating child care centers' ability to claim reimbursement for four 
meals (either two meals and two snacks or three meals and one snack) 
served to a single child in a day. Prior to this change, child care 
centers and outside-school-hours care centers had been permitted to 
claim reimbursement for a fourth meal served to a child who had been 
maintained in care for eight or more hours on that day.
    We neglected to include this change in our proposed rule. However, 
since it is non-discretionary, we have included it in this interim rule 
for implementation in keeping with the congressional mandate.
    Accordingly, this rule amends Sec. Sec.  226.15(e)(5), 
226.17(b)(3), and 226.19(b)(5) to eliminate outdated references to a 
fourth meal.

Part V. Procedural Matters

Executive Order 12866

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

Regulatory Flexibility Act

    This interim rule has been reviewed with regard to the requirements 
of the Regulatory Flexibility Act (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.
    The CACFP is administered by State agencies and by over 18,000 
institutions (sponsoring organizations and independent centers) in over 
210,000 facilities. The vast majority of institutions and facilities 
participating in CACFP are small in size. Nevertheless, the changes 
implemented in this interim rule will not have a significant economic 
impact, except where improved monitoring procedures lead State agencies 
to terminate institutions' agreements or sponsoring organizations 
terminate their facilities' agreements. In short, there will be little 
or no adverse impact on those entities administering the CACFP in 
accordance with Program requirements, since most of these changes were 
proposed in order to improve compliance with existing regulations and 
in accordance with statutory changes to Program operations.
    This rule will primarily affect the procedures used by State 
agencies in reviewing institutions' applications to

[[Page 53534]]

participate in CACFP and in monitoring participating institutions' 
performance. This rule will also affect participating institutions' 
operation of the CACFP. These changes will not, in the aggregate, have 
a significant economic impact on small entities.

Regulatory Impact Analysis

    This rule implements a number of changes to existing Program 
regulations, as proposed in our rulemaking of September 12, 2000 (65 FR 
55101), and as modified in this rule as a result of public comment. 
These changes will affect all entities involved in administering the 
CACFP; those most affected will be State agencies, institutions, and 
facilities.
    Despite the conduct of numerous OIG audits and State and FNS 
reviews, there is no statistically representative information available 
on CACFP integrity. OIG reports have focused on purposely-selected 
institutions and facilities, and reviews conducted by State agencies 
and management evaluations conducted by FNS are not designed to capture 
information for the purpose of developing Nationally-valid estimates of 
fraud or mismanagement. While the OIG and other reports clearly 
indicate that there are weaknesses in parts of the Program regulations, 
and that there have been significant weaknesses in oversight by some 
State agencies and sponsoring organizations, none of these reports 
estimate the prevalence or magnitude of USDA fraud, abuse, or 
mismanagement.
    This lack of information makes it difficult for us to estimate the 
amount of CACFP reimbursement lost due to fraud, abuse, or 
mismanagement. For that reason, the fiscal impact of these provisions 
cannot be estimated.

Executive Order 12372

    This Program is listed in the Catalog of Federal Domestic 
Assistance under No. 10.558 and is subject to the provisions of 
Executive Order 12372, which requires intergovernmental consultation 
with State and local officials (part 3015, Subpart V, of this title, 
and final rule related notice published in 48 FR 29114, June 24, 1983, 
and 49 FR 22676, May 31, 1984).

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 enumerated in Sec.  6(a)(B) of Executive Order 13132:

Prior Consultation With State Officials

    Prior to drafting this interim rule, we received input from State 
and local agencies at various times. Since the CACFP is a State 
administered, Federally funded program, our regional offices regularly 
have formal and informal discussions with State and local officials 
regarding Program implementation and performance. This allows State and 
local agencies to contribute input that helps to influence our 
discretionary rulemaking proposals, the implementation of statutory 
provisions, and even our own Departmental legislative proposals. In 
addition, over the past nine years, our headquarters staff informally 
consulted with State administering agencies, Program sponsors, and 
CACFP advocates on ways to improve Program management and integrity in 
the CACFP. Discussions with State agencies took place in the joint 
Management Improvement Task Force meetings held between 1995 and 2000; 
in four biennial National meetings of State and Federal Program 
administrators (Seattle in 1996, New Orleans in 1998, Chicago in 2000, 
and New York in 2002); at the December 1999 meeting of the State Child 
Nutrition Program administrators in New Orleans, and in a variety of 
other small- and large-group meetings. Discussions with Program 
advocates and sponsors occurred in the Management Improvement Task 
Force meetings held in 1999-2000; in annual National meetings of the 
Sponsors Association, the CACFP Sponsors Forum, and the Western 
Regional Office-California Sponsors Roundtable from 1995 to the 
present; and in a variety of other small- and large-group meetings.

Nature of Concerns and Need To Issue This Rule

    The issuance of a regulation is necessary to improve Program 
management and, more specifically, to respond to management problems 
identified by State and local Program administrators and by OIG. Many 
of the individual provisions were discussed in the meetings with State 
and local cooperators mentioned above. Although comments on the 
proposed rule indicated that State agencies and local sponsoring 
organizations had some concerns about some of our proposals, we have 
made appropriate adjustments to those proposals and have addressed 
these concerns in this interim rule.

Extent to Which We Meet Those Concerns

    FNS has considered the impact of these changes on State and local 
administering agencies, and has attempted to balance Program integrity 
concerns with the need to maintain Program access for capable 
institutions and family day care homes, and to ensure that improvements 
in accountability do not place undue burdens on State and local Program 
administrators. The preamble above contains a more detailed discussion 
of our attempt to balance integrity and access concerns, while 
implementing these provisions in a manner consistent with both the 
letter and the intent of the NSLA. Major adjustments made by this 
interim rule in response to public comment are discussed at length, 
especially in part II of the preamble.

Public Law 104-4

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

Executive Order 12988

    This rule has been reviewed under Executive Order 12988, Civil 
Justice Reform. This 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 
unless so specified in the ``Dates'' section of the preamble of the 
final rule. All available administrative procedures must be exhausted 
prior to any judicial challenge to the provisions of this rule

[[Page 53535]]

or the application of its provisions. This includes any administrative 
procedures provided by State or local governments. In the CACFP, the 
administrative procedures are set forth at: (1) Sections 226.6(k), 
226.6(l), and 226.16(l) which establish administrative review 
procedures for institutions, individuals, and day care homes; and (2) 
Sec.  226.22 and 7 CFR part 3015, which address administrative review 
procedures for disputes involving procurement by State agencies and 
institutions.

Paperwork Reduction Act

    In accordance with section 3507(j) of the Paperwork Reduction Act 
of 1995 (44 U.S.C. 3507 et seq.), the information collection and 
recordkeeping requirements included in this interim rule have been 
submitted to the Office of Management and Budget (OMB) for approval. 
Written comments on the information collection requirements in this 
rule must be received on or before (insert 60 days after publication of 
this interim rule) by the Office of Information and Regulatory Affairs, 
Office of Management and Budget (OMB), 3208 New Executive Office 
Building, Washington, DC 20503, Attention: Ms. Katherine Astrich, Desk 
Officer for the Food and Nutrition Service. A copy of these comments 
may also be sent to Mr. Robert Eadie at the address listed in the 
ADDRESSES section of this preamble. Commenters are asked to separate 
their remarks on information collection requirements from their 
comments on the remainder of the interim rule.
    OMB is required to make a decision concerning the collection of 
information in this rule between 30 to 60 days after its publication in 
the Federal Register. Therefore, a comment to OMB is most likely to be 
considered if OMB receives it within 30 days of the publication of this 
interim rule. This does not affect the 180-day deadline for the public 
to comment to the Department on the substance of the interim rule.
    Comments are invited on: (a) Whether the collection of information 
is necessary for the Agency to perform its functions of the agency and 
will have practical utility; (b) the accuracy of the Agency's estimate 
of the burden of collecting the information, including whether its 
methodology and assumptions are valid; (c) ways to enhance the quality, 
utility, and clarity of the information to be collected; and (d) ways 
to minimize the burden of the information collection, including the use 
of appropriate automated, electronic, mechanical, or other 
technological collection techniques or other forms of information 
technology. The title and description of the information collections 
are shown below with an estimate of the annual reporting and 
recordkeeping burdens. Included in the estimate is the time for 
reviewing instructions, searching existing data sources, gathering and 
maintaining the data needed, and completing and reviewing the 
collection of information.
    Title: 7 CFR part 226, Child and Adult Care Food Program.
    OMB Number: 0584-0055.
    Expiration Date: January 31, 2007.
    Type of request: Revision of existing collections.
    Abstract: This rule revises: State agency criteria for approving 
and renewing institution applications; State- and institution-level 
monitoring requirements; Program training and other operating 
requirements for child care institutions and facilities; and other 
provisions which we are required to change as a result of the Healthy 
Meals Act, the PRWORA, and the Goodling Act. The changes are intended 
to improve Program operations and monitoring at the State and 
institution levels and, where possible, to streamline and simplify 
Program requirements for State agencies and institutions.
    Estimated Total Annual Burden on Respondents:

    Total Existing Burden Hours: 107,844.
    Total Proposed Burden Hours: 111,398.
    Total Difference: 3,654 hours.

Government Paperwork Elimination Act Compliance

    FNS is committed to compliance with the Government Paperwork 
Elimination Act, which requires Government agencies to provide the 
public the option of submitting information or transacting business 
electronically to the maximum extent possible.

List of Subjects in 7 CFR Part 226

    Accounting, Aged, Day care, Food and Nutrition Service, Food 
assistance programs, Grant programs, Grant programs--health, Indians, 
Individuals with disabilities, Infants and children, Intergovernmental 
relations, Loan programs, Reporting and recordkeeping requirements, 
Surplus agricultural commodities.

0
Accordingly, 7 CFR part 226 is amended as follows:

PART 226--CHILD AND ADULT CARE FOOD PROGRAM

0
1. The authority citation for part 226 continues to read as follows:

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


0
2. In part 226:
0
a. Remove the words ``AFDC case number'' wherever they appear and add, 
in their place, the words ``TANF case number''.
0
b. Remove the words ``AFDC recipiency'' wherever they appear and add, 
in their place, the words ``TANF recipiency''.
0
c. Remove the words ``AFDC Program'' wherever they appear and add, in 
their place, the words TANF Program''.

0
3. In Sec.  226.2:
0
a. The definition of AFDC assistance unit is removed.
0
b. The word ``enrolled'' is removed from the definition of Outside-
school-hours care center.
0
c. New definitions of Block claim and Household contact are added in 
alphabetical order.
0
d. The definition of ``Documentation'' is amended in paragraph (b) by 
removing the words ``an AFDC assistance unit'' and adding in their 
place the words ``who is a TANF recipient''.
0
e. The definition of TANF recipient is added in alphabetical order.
0
f. The definition of ``verification'' is amended by removing the words 
``AFDC assistance unit'' and adding in their place the words ``is a 
TANF recipient''.
    The revision and additions specified above read as follows:


Sec.  226.2  Definitions.

* * * * *
    Block claim means a claim for reimbursement submitted by a facility 
on which the number of meals claimed for one or more meal type 
(breakfast, lunch, snack, or supper) is identical for 15 consecutive 
days within a claiming period.
* * * * *
    Household contact means a contact made by a sponsoring organization 
or a State agency to an adult member of a household with a child in a 
family day care home or a child care center in order to verify the 
attendance and enrollment of the child and the specific meal service(s) 
which the child routinely receives while in care.
* * * * *
    TANF recipient means an individual or household receiving 
assistance (as defined in 45 CFR 260.31) under a State-administered 
Temporary Assistance to Needy Families program.
* * * * *

0
4. In Sec.  226.4:
0
a. Paragraph (g)(2) is amended by removing the word ``supplements'' and 
adding in its place the word ``meals'', and by removing the second 
sentence and adding two new sentences in its place.

[[Page 53536]]

0
b. Paragraph (h) is revised.
    The addition and revision specified above read as follows:


Sec.  226.4  Payments to States and use of funds.

* * * * *
    (g) * * *
    (2) * * * Such adjustment must be rounded to the nearest lower 
cent, based on changes measured over the most recent twelve-month 
period for which data are available. The adjustment to the rates must 
be computed using the unrounded rate in effect for the preceding year.
* * * * *
    (h) Audit funds. For the expense of conducting audits and reviews 
under Sec.  226.8, funds shall be made available to each State agency 
in an amount equal to one and one-half percent of the Program 
reimbursement provided to institutions within the State during the 
second fiscal year preceding the fiscal year for which these funds are 
to be made available. In fiscal years 2005-2007, for the expense of 
conducting audits and reviews under Sec.  226.8, funds shall be made 
available to each State agency in an amount equal to one percent of the 
Program reimbursement provided to institutions within the State during 
the second fiscal year preceding the fiscal year for which these funds 
are to be made available. The amount of assistance provided to a State 
under this paragraph in any fiscal year may not exceed the State's 
expenditures under Sec.  226.8 during such fiscal year.
* * * * *

0
5. In Sec.  226.6:
0
a. Paragraphs (a) and (b) are revised.
0
b. Paragraphs (c)(2)(ii)(B) and (c)(3)(ii)(C) are amended by removing 
the reference ``paragraph (b)(18) of this section'' wherever it appears 
and adding, in its place, the reference ``paragraphs (b)(1)(xvii) and 
(b)(2)(vii) of this section''.
0
c. Paragraphs (c)(7)(ii), (c)(7)(iii), (c)(7)(iv)(A), (c)(7)(iv)(B), 
and (c)(7)(iv)(C) are amended by removing the reference ``paragraph 
(b)(12) of this section'' wherever it appears and adding, in its place, 
the reference ``paragraphs (b)(1)(xi) and (b)(2)(ii) of this section''.
0
d. Paragraphs (f) and (g) are revised.
0
e. Paragraph (h) is amended by revising the first sentence and by 
adding a new sentence after the first sentence.
0
f. Paragraphs (j) and (m) are revised.
0
g. The second and third sentences of paragraph (o) are revised.
0
h. A new paragraph (r) is added.
    The additions and revisions specified above read as follows:


Sec.  226.6  State agency administrative responsibilities.

    (a) State agency personnel. Each State agency must provide 
sufficient consultative, technical, and managerial personnel to:
    (1) Administer the Program;
    (2) Provide sufficient training and technical assistance to 
institutions;
    (3) Monitor Program performance;
    (4) Facilitate expansion of the Program in low-income and rural 
areas; and
    (5) Ensure effective operation of the Program by participating 
institutions.
    (b) Program applications and agreements. Each State agency must 
establish application review procedures, in accordance with paragraphs 
(b)(1) through (b)(3) of this section, to determine the eligibility of 
new institutions, renewing institutions, and facilities for which 
applications are submitted by sponsoring organizations. The State 
agency must enter into written agreements with institutions in 
accordance with paragraph (b)(4) of this section.
    (1) Application procedures for new institutions. Each State agency 
must establish application procedures to determine the eligibility of 
new institutions under this part. At a minimum, such procedures must 
require that institutions submit information to the State agency in 
accordance with paragraph (f) of this section. For new private 
nonprofit and proprietary child care institutions, such procedures must 
also include a pre-approval visit by the State agency to confirm the 
information in the institution's application and to further assess its 
ability to manage the Program. The State agency must establish factors, 
consistent with Sec.  226.16(b)(1), that it will consider in 
determining whether a new sponsoring organization has sufficient staff 
to perform required monitoring responsibilities at all of its sponsored 
facilities. As part of the review of the sponsoring organization's 
management plan, the State agency must determine the appropriate level 
of staffing for each sponsoring organization, consistent with the 
staffing range of monitors set forth at Sec.  226.16(b)(1) and the 
factors it has established. The State agency must ensure that each new 
sponsoring organization applying for participation after July 29, 2002 
meets this requirement. In addition, the State agency's application 
review procedures must ensure that the following information is 
included in a new institution's application:
    (i) Participant eligibility information. Centers must submit 
current information on the number of enrolled participants who are 
eligible for free, reduced-price and paid meals;
    (ii) Enrollment information. Sponsoring organizations of day care 
homes must submit current information on:
    (A) The total number of children enrolled in all homes in the 
sponsorship;
    (B) An assurance that day care home providers' own children whose 
meals are claimed for reimbursement in the Program are eligible for 
free or reduced-price meals;
    (C) The total number of tier I and tier II day care homes that it 
sponsors;
    (D) The total number of children enrolled in tier I day care homes;
    (E) The total number of children enrolled in tier II day care 
homes; and
    (F) The total number of children in tier II day care homes that 
have been identified as eligible for free or reduced-price meals;
    (iii) Nondiscrimination statement. Institutions must submit their 
nondiscrimination policy statement and a media release, unless the 
State agency has issued a Statewide media release on behalf of all 
institutions;
    (iv) Management plan. Sponsoring organizations must submit a 
complete management plan that includes:
    (A) Detailed information on the organization's management and 
administrative structure;
    (B) A list or description of the staff assigned to Program 
monitoring, in accordance with the requirements set forth at Sec.  
226.16(b)(1);
    (C) An administrative budget that includes projected CACFP 
administrative earnings and expenses;
    (D) The procedures to be used by the organization to administer the 
Program in, and disburse payments to, the child care facilities under 
its sponsorship; and
    (E) For sponsoring organizations of family day care homes, a 
description of the system for making tier I day care home 
determinations, and a description of the system of notifying tier II 
day care homes of their options for reimbursement;
    (v) Budget. An institution must submit a budget that the State 
agency must review in accordance with Sec.  226.7(g);
    (vi) Documentation of licensing/approval. All centers and family 
day care homes must document that they meet Program licensing/approval 
requirements;
    (vii) Documentation of tax-exempt status. All private nonprofit 
institutions must document their tax-exempt status;
    (viii) Documentation of proprietary center eligibility. 
Institutions must

[[Page 53537]]

document that each proprietary center for which application is made 
meets the definition of a title XIX center or a proprietary title XX 
center, as applicable and as set forth at Sec.  226.2;
    (ix) Preference for commodities/cash-in-lieu of commodities. 
Institutions must state their preference to receive commodities or 
cash-in-lieu of commodities;
    (x) Providing benefits to unserved facilities or participants.
    (A) Criteria. The State agency must develop criteria for 
determining whether a new sponsoring organization's participation will 
help ensure the delivery of benefits to otherwise unserved facilities 
or participants, and must disseminate these criteria to new sponsoring 
organizations when they request information about applying to the 
Program; and
    (B) Documentation. The new sponsoring organization must submit 
documentation that its participation will help ensure the delivery of 
benefits to otherwise unserved facilities or participants in accordance 
with the State agency's criteria;
    (xi) Presence on National disqualified list. If an institution or 
one of its principals is on the National disqualified list and submits 
an application, the State agency must deny the application. If a 
sponsoring organization submits an application on behalf of a facility, 
and either the facility or any of its principals is on the National 
disqualified list, the State agency must deny the application;
    (xii) Ineligibility for other publicly funded programs.
    (A) General. A State agency is prohibited from approving an 
institution's application if, during the past seven years, the 
institution or any of its principals have been declared ineligible for 
any other publicly funded program by reason of violating that program's 
requirements. However, this prohibition does not apply if the 
institution or the principal has been fully reinstated in, or 
determined eligible for, that program, including the payment of any 
debts owed;
    (B) Certification. Institutions must submit:
    (1) A statement listing the publicly funded programs in which the 
institution and its principals have participated in the past seven 
years; and
    (2) A certification that, during the past seven years, neither the 
institution nor any of its principals have been declared ineligible to 
participate in any other publicly funded program by reason of violating 
that program's requirements; or
    (3) In lieu of the certification, documentation that the 
institution or the principal previously declared ineligible was later 
fully reinstated in, or determined eligible for, the program, including 
the payment of any debts owed; and
    (C) Follow-up. If the State agency has reason to believe that the 
institution or its principals were determined ineligible to participate 
in another publicly funded program by reason of violating that 
program's requirements, the State agency must follow up with the entity 
administering the publicly funded program to gather sufficient evidence 
to determine whether the institution or its principals were, in fact, 
determined ineligible;
    (xiii) Information on criminal convictions.
    (A) A State agency is prohibited from approving an institution's 
application if the institution or any of its principals has been 
convicted of any activity that occurred during the past seven years and 
that indicated a lack of business integrity. A lack of business 
integrity includes fraud, antitrust violations, embezzlement, theft, 
forgery, bribery, falsification or destruction of records, making false 
statements, receiving stolen property, making false claims, obstruction 
of justice, or any other activity indicating a lack of business 
integrity as defined by the State agency; and
    (B) Institutions must submit a certification that neither the 
institution nor any of its principals has been convicted of any 
activity that occurred during the past seven years and that indicated a 
lack of business integrity. A lack of business integrity includes 
fraud, antitrust violations, embezzlement, theft, forgery, bribery, 
falsification or destruction of records, making false statements, 
receiving stolen property, making false claims, obstruction of justice, 
or any other activity indicating a lack of business integrity as 
defined by the State agency;
    (xiv) Certification of truth of applications and submission of 
names and addresses. Institutions must submit a certification that all 
information on the application is true and correct, along with the 
name, mailing address, and date of birth of the institution's executive 
director and chairman of the board of directors;
    (xv) Outside employment policy. Sponsoring organizations must 
submit an outside employment policy. The policy must restrict other 
employment by employees that interferes with an employee's performance 
of Program-related duties and responsibilities, including outside 
employment that constitutes a real or apparent conflict of interest. 
Sponsoring organizations that are participating on July 29, 2002, must 
submit an outside employment policy not later than September 27, 2002. 
The policy will be effective unless disapproved by the State agency;
    (xvi) Bond. Sponsoring organizations applying for initial 
participation on or after June 20, 2000, must submit a bond, if such 
bond is required by State law, regulation, or policy. If the State 
agency requires a bond for sponsoring organizations pursuant to State 
law, regulation, or policy, the State agency must submit a copy of that 
requirement and a list of sponsoring organizations posting a bond to 
the appropriate FNSRO on an annual basis; and
    (xvii) Compliance with performance standards. Each new institution 
must submit information sufficient to document that it is financially 
viable, is administratively capable of operating the Program in 
accordance with this part, and has internal controls in effect to 
ensure accountability. To document this, any new institution must 
demonstrate in its application that it is capable of operating in 
conformance with the following performance standards. The State agency 
must only approve the applications of those new institutions that meet 
these performance standards, and must deny the applications of those 
new institutions that do not meet the standards.
    (A) Performance Standard 1--Financial viability and financial 
management. The new institution must be financially viable. Program 
funds must be expended and accounted for in accordance with the 
requirements of this part, FNS Instruction 796-2 (``Financial 
Management in the Child and Adult Care Food Program''), and parts 3015, 
3016, and 3019 of this title. To demonstrate financial viability, the 
new institution must document that it meets the following criteria:
    (1) Description of need/recruitment. A new sponsoring organization 
must demonstrate in its management plan that its participation will 
help ensure the delivery of Program benefits to otherwise unserved 
facilities or participants, in accordance with criteria developed by 
the State agency pursuant to paragraph (b)(1)(x) of this section. A new 
sponsoring organization must demonstrate that it will use appropriate 
practices for recruiting facilities, consistent with paragraph (p) of 
this section and any State agency requirements;
    (2) Fiscal resources and financial history. A new institution must 
demonstrate that it has adequate financial resources to operate the

[[Page 53538]]

CACFP on a daily basis, has adequate sources of funds to withstand 
temporary interruptions in Program payments and/or fiscal claims 
against the institution, and can document financial viability (for 
example, through audits, financial statements, etc.); and
    (3) Budgets. Costs in the institution's budget must be necessary, 
reasonable, allowable, and appropriately documented;
    (B) Performance Standard 2--Administrative capability. The new 
institution must be administratively capable. Appropriate and effective 
management practices must be in effect to ensure that the Program 
operates in accordance with this part. To demonstrate administrative 
capability, the new institution must document that it meets the 
following criteria:
    (1) Has an adequate number and type of qualified staff to ensure 
the operation of the Program in accordance with this part;
    (2) If a sponsoring organization, documents in its management plan 
that it employs staff sufficient to meet the ratio of monitors to 
facilities, taking into account the factors that the State agency will 
consider in determining a sponsoring organization's staffing needs, as 
set forth in Sec.  226.16(b)(1); and
    (3) If a sponsoring organization, has Program policies and 
procedures in writing that assign Program responsibilities and duties, 
and ensure compliance with civil rights requirements; and
    (C) Performance Standard 3--Program accountability. The new 
institution must have internal controls and other management systems in 
effect to ensure fiscal accountability and to ensure that the Program 
will operate in accordance with the requirements of this part. To 
demonstrate Program accountability, the new institution must document 
that it meets the following criteria:
    (1) Board of directors. Has adequate oversight of the Program by 
its governing board of directors;
    (2) Fiscal accountability. Has a financial system with management 
controls specified in writing. For new sponsoring organizations, these 
written operational policies must assure:
    (i) Fiscal integrity and accountability for all funds and property 
received, held, and disbursed;
    (ii) The integrity and accountability of all expenses incurred;
    (iii) That claims will be processed accurately, and in a timely 
manner;
    (iv) That funds and property are properly safeguarded and used, and 
expenses incurred, for authorized Program purposes; and
    (v) That a system of safeguards and controls is in place to prevent 
and detect improper financial activities by employees;
    (3) Recordkeeping. Maintains appropriate records to document 
compliance with Program requirements, including budgets, accounting 
records, approved budget amendments, and, if a sponsoring organization, 
management plans and appropriate records on facility operations;
    (4) Sponsoring organization operations. If a new sponsoring 
organization, documents in its management plan that it will:
    (i) Provide adequate and regular training of sponsoring 
organization staff and sponsored facilities in accordance with Sec.  
226.15(e)(12) and (e)(14) and Sec.  226.16(d)(2) and (d)(3);
    (ii) Perform monitoring in accordance with Sec.  226.16(d)(4), to 
ensure that sponsored facilities accountably and appropriately operate 
the Program;
    (iii) If a sponsor of family day care homes, accurately classify 
day care homes as tier I or tier II in accordance with Sec.  226.15(f); 
and
    (iv) Have a system in place to ensure that administrative costs 
funded from Program reimbursements do not exceed regulatory limits set 
forth at Sec. Sec.  226.12(a) and 226.16(b)(1); and
    (5) Meal service and other operational requirements. Independent 
centers and facilities will follow practices that result in the 
operation of the Program in accordance with the meal service, 
recordkeeping, and other operational requirements of this part. These 
practices must be documented in the independent center's application or 
in the sponsoring organization's management plan and must demonstrate 
that independent centers or sponsored facilities will:
    (i) Provide meals that meet the meal patterns set forth in Sec.  
226.20;
    (ii) Comply with licensure or approval requirements set forth in 
paragraph (d) of this section;
    (iii) Have a food service that complies with applicable State and 
local health and sanitation requirements;
    (iv) Comply with civil rights requirements;
    (v) Maintain complete and appropriate records on file; and
    (vi) Claim reimbursement only for eligible meals.
    (2) Application procedures for renewing institutions. Each State 
agency must establish application procedures to determine the 
eligibility of renewing institutions under this part. Renewing 
institutions must not be required to submit a free and reduced-price 
policy statement or a nondiscrimination statement unless they make 
substantive changes to either statement. The State agency must require 
each renewing institution participating in the Program to reapply for 
participation at a time determined by the State agency, except that no 
institution may be allowed to participate for less than 12 or more than 
36 calendar months under an existing application, except when the State 
agency determines that unusual circumstances warrant reapplication in 
less than 12 months. The State agency must establish factors, 
consistent with Sec.  226.16(b)(1), that it will consider in 
determining whether a renewing sponsoring organization has sufficient 
staff to perform required monitoring responsibilities at all of its 
sponsored facilities. As part of the review of the renewing sponsoring 
organization's management plan, the State agency must determine the 
appropriate level of staffing for the sponsoring organization, 
consistent with the staffing range of monitors set forth at Sec.  
226.16(b)(1) and the factors it has established. The State agency must 
ensure that each currently participating sponsoring organization meets 
this requirement no later than July 29, 2003. At a minimum, the 
application review procedures established by the State agency must 
require that renewing institutions submit information to the State 
agency in accordance with paragraph (f) of this section. In addition, 
the State agency's application review procedures must ensure that the 
following information is included in a renewing institution's 
application:
    (i) Management plan. For renewing sponsoring organizations, a 
complete management plan that meets the requirements of paragraphs 
(b)(1)(iv), (b)(1)(v), (f)(1)(vi), and (f)(3)(i) of this section and 
Sec.  226.7(g);
    (ii) Presence on National disqualified list. A renewing institution 
is prohibited from submitting a renewal application if it or any of its 
principals is currently on the National disqualified list. If such an 
institution submits an application, the State agency must deny the 
application. A renewing sponsoring organization is also prohibited from 
submitting a renewal application on behalf of a facility if the 
facility or any of its principals is on the National disqualified list. 
If a renewing sponsoring organization submits an application on behalf 
of such a facility, the State agency must deny the facility's 
application;
    (iii) Ineligibility for other publicly funded programs.
    (A) General. A State agency is prohibited from approving a renewing 
institution's application if, during the

[[Page 53539]]

past seven years, the institution or any of its principals have been 
declared ineligible for any other publicly funded program by reason of 
violating that program's requirements. However, this prohibition does 
not apply if the institution or the principal has been fully reinstated 
in, or determined eligible for, that program, including the payment of 
any debts owed;
    (B) Certification. Renewing institutions must submit:
    (1) A statement listing the publicly funded programs in which the 
institution and its principals have participated in the past seven 
years; and
    (2) A certification that, during the past seven years, neither the 
institution nor any of its principals have been declared ineligible to 
participate in any other publicly funded program by reason of violating 
that program's requirements; or
    (3) In lieu of the certification, documentation that the 
institution or the principal previously declared ineligible was later 
fully reinstated in, or determined eligible for, the program, including 
the payment of any debts owed; and
    (C) Follow-up. If the State agency has reason to believe that the 
renewing institution or any of its principals were determined 
ineligible to participate in another publicly funded program by reason 
of violating that program's requirements, the State agency must follow 
up with the entity administering the publicly funded program to gather 
sufficient evidence to determine whether the institution or its 
principals were, in fact, determined ineligible;
    (iv) Information on criminal convictions.
    (A) A State agency is prohibited from approving a renewing 
institution's application if the institution or any of its principals 
have been convicted of any activity that occurred during the past seven 
years and that indicated a lack of business integrity. A lack of 
business integrity includes fraud, antitrust violations, embezzlement, 
theft, forgery, bribery, falsification or destruction of records, 
making false statements, receiving stolen property, making false 
claims, obstruction of justice, or any other activity indicating a lack 
of business integrity as defined by the State agency; and
    (B) Renewing institutions must submit a certification that neither 
the institution nor any of its principals have been convicted of any 
activity that occurred during the past seven years and that indicated a 
lack of business integrity. A lack of business integrity includes 
fraud, antitrust violations, embezzlement, theft, forgery, bribery, 
falsification or destruction of records, making false statements, 
receiving stolen property, making false claims, obstruction of justice, 
or any other activity indicating a lack of business integrity as 
defined by the State agency;
    (v) Certification of truth of applications and submission of names 
and addresses. Renewing institutions must submit a certification that 
all information on the application is true and correct, along with the 
name, mailing address, and date of birth of the institution's executive 
director and chairman of the board of directors;
    (vi) Outside employment policy. Renewing sponsoring organizations 
must submit an outside employment policy. The policy must restrict 
other employment by employees that interferes with an employee's 
performance of Program-related duties and responsibilities, including 
outside employment that constitutes a real or apparent conflict of 
interest. Sponsoring organizations that are participating on July 29, 
2002, must submit an outside employment policy not later than September 
27, 2002. The policy will be effective unless disapproved by the State 
agency;
    (vii) Compliance with performance standards. Each renewing 
institution must submit information sufficient to document that it is 
financially viable, is administratively capable of operating the 
Program in accordance with this part, and has internal controls in 
effect to ensure accountability. To document this, any renewing 
institution must demonstrate in its application that it is capable of 
operating in conformance with the following performance standards. The 
State agency must only approve the applications of those renewing 
institutions that meet these performance standards, and must deny the 
applications of those that do not meet the standards.
    (A) Performance Standard 1--Financial viability and financial 
management. The renewing institution must be financially viable. 
Program funds must be expended and accounted for in accordance with the 
requirements of this part, FNS Instruction 796-2 (``Financial 
Management in the Child and Adult Care Food Program''), and parts 3015, 
3016 and 3019 of this title. To demonstrate financial viability, the 
renewing institution must document that it meets the following 
criteria:
    (1) Description of need/recruitment. A renewing sponsoring 
organization must demonstrate that it will use appropriate practices 
for recruiting facilities, consistent with paragraph (p) of this 
section and any State agency requirements;
    (2) Fiscal resources and financial history. A renewing institution 
must demonstrate that it has adequate financial resources to operate 
the CACFP on a daily basis, has adequate sources of funds to withstand 
temporary interruptions in Program payments and/or fiscal claims 
against the institution, and can document financial viability (for 
example, through audits, financial statements, etc.); and
    (3) Budgets. Costs in the renewing institution's budget must be 
necessary, reasonable, allowable, and appropriately documented;
    (B) Performance Standard 2--Administrative capability. The renewing 
institution must be administratively capable. Appropriate and effective 
management practices must be in effect to ensure that the Program 
operates in accordance with this part. To demonstrate administrative 
capability, the renewing institution must document that it meets the 
following criteria:
    (1) Has an adequate number and type of qualified staff to ensure 
the operation of the Program in accordance with this part;
    (2) If a sponsoring organization, documents in its management plan 
that it employs staff sufficient to meet the ratio of monitors to 
facilities, taking into account the factors that the State agency will 
consider in determining a sponsoring organization's staffing needs, as 
set forth in Sec.  226.16(b)(1); and
    (3) If a sponsoring organization, has Program policies and 
procedures in writing that assign Program responsibilities and duties, 
and ensure compliance with civil rights requirements; and
    (C) Performance Standard 3--Program accountability. The renewing 
institution must have internal controls and other management systems in 
effect to ensure fiscal accountability and to ensure that the Program 
operates in accordance with the requirements of this part. To 
demonstrate Program accountability, the renewing institution must 
document that it meets the following criteria:
    (1) Board of directors. Has adequate oversight of the Program by 
its governing board of directors;
    (2) Fiscal accountability. Has a financial system with management 
controls specified in writing. For sponsoring organizations, these 
written operational policies must assure:
    (i) Fiscal integrity and accountability for all funds and property 
received, held, and disbursed;
    (ii) The integrity and accountability of all expenses incurred;
    (iii) That claims are processed accurately, and in a timely manner;

[[Page 53540]]

    (iv) That funds and property are properly safeguarded and used, and 
expenses incurred, for authorized Program purposes; and
    (v) That a system of safeguards and controls is in place to prevent 
and detect improper financial activities by employees;
    (3) Recordkeeping. Maintains appropriate records to document 
compliance with Program requirements, including budgets, accounting 
records, approved budget amendments, and, if a sponsoring organization, 
management plans and appropriate records on facility operations;
    (4) Sponsoring organization operations. A renewing sponsoring 
organization must document in its management plan that it will:
    (i) Provide adequate and regular training of sponsoring 
organization staff and sponsored facilities in accordance with Sec.  
226.15(e)(12) and (e)(14) and Sec.  226.16(d)(2) and (d)(3);
    (ii) Perform monitoring in accordance with Sec.  226.16(d)(4), to 
ensure that sponsored facilities accountably and appropriately operate 
the Program;
    (iii) If a sponsor of family day care homes, accurately classify 
day care homes as tier I or tier II in accordance with Sec.  226.15(f); 
and
    (iv) Have a system in place to ensure that administrative costs 
funded from Program reimbursements do not exceed regulatory limits set 
forth at Sec. Sec.  226.12(a) and 226.16(b)(1); and
    (5) Meal service and other operational requirements. All 
independent centers and facilities must follow practices that result in 
the operation of the Program in accordance with the meal service, 
recordkeeping, and other operational requirements of this part. These 
practices must be documented in the independent center's application or 
in the sponsoring organization's management plan and must demonstrate 
that independent centers or sponsored facilities:
    (i) Provide meals that meet the meal patterns set forth in Sec.  
226.20;
    (ii) Comply with licensure or approval requirements set forth in 
paragraph (d) of this section;
    (iii) Have a food service that complies with applicable State and 
local health and sanitation requirements;
    (iv) Comply with civil rights requirements;
    (v) Maintain complete and appropriate records on file; and
    (vi) Claim reimbursement only for eligible meals.
    (3) State agency notification requirements. Any new or renewing 
institution applying for participation in the Program must be notified 
in writing of approval or disapproval by the State agency, within 30 
calendar days of the State agency's receipt of a complete application. 
Whenever possible, State agencies should provide assistance to 
institutions that have submitted an incomplete application. Any 
disapproved applicant institution or family day care home must be 
notified of the reasons for its disapproval and its right to appeal 
under paragraph (k) or (l), respectively, of this section.
    (4) Program agreements. (i) The State agency must require each 
institution that has been approved for participation in the Program to 
enter into an agreement governing the rights and responsibilities of 
each party. The State agency may allow a renewing institution to amend 
its existing Program agreement in lieu of executing a new agreement. 
The existence of a valid agreement, however, does not eliminate the 
need for an institution to comply with the reapplication and related 
provisions at paragraphs (b) and (f) of this section.
    (ii) State agencies may elect to enter into permanent agreements 
with institutions. However, if they elect not to enter into permanent 
agreements with institutions, the length of time during which such 
agreements are in effect must be no less than one and no more than 
three years, except that:
    (A) The State agency and an institution that is a school food 
authority must enter into a single permanent agreement for all child 
nutrition programs administered by the school food authority and the 
State agency;
    (B) If a State agency denies the application of a renewing 
institution, it must temporarily extend its agreement with that 
institution in accordance with paragraph (c)(2)(iii)(D) of this 
section;
    (C) If the State agency determines that unusual circumstances 
warrant reapplication in less than 12 months, the State agency may 
approve the agreement with the institution for a period of less than 
one year.
    (iii) Any agreement that extends from one fiscal year into the 
following fiscal year must stipulate that, in subsequent years, the 
agreement is in effect contingent upon the availability of Program 
funds. However, this does not limit the State agency's ability to 
terminate the agreement in accordance with paragraph (c) of this 
section.
    (iv) The Program agreement must provide that the institution 
accepts final financial and administrative responsibility for 
management of a proper, efficient, and effective food service, and will 
comply with all requirements under this part. In addition, the 
agreement must state that the sponsor must comply with all requirements 
of title VI of the Civil Rights Act of 1964, title IX of the Education 
Amendments of 1972, section 504 of the Rehabilitation Act of 1973, the 
Age Discrimination Act of 1975 and the Department's regulations 
concerning nondiscrimination (parts 15, 15a and 15b of this title), 
including requirements for racial and ethnic participation data 
collection, public notification of the nondiscrimination policy, and 
reviews to assure compliance with such policy, to the end that no 
person may, on the grounds of race, color, national origin, sex, age, 
or disability, be excluded from participation in, be denied the 
benefits of, or be otherwise subjected to discrimination under, the 
Program.
    (v) The Program agreement must also notify the institution of the 
right of the State agency, the Department, and other State or Federal 
officials to make announced or unannounced reviews of their operations 
during the institution's normal hours of child or adult care 
operations, and that anyone making such reviews must show photo 
identification that demonstrates that they are employees of one of 
these entities.
* * * * *
    (f) Miscellaneous responsibilities. State agencies must require 
institutions to comply with the applicable provisions of this part and 
must provide or collect the information specified in this paragraph 
(f).
    (1) Annual responsibilities. In addition to its other 
responsibilities under this part, each State agency must annually:
    (i) Inform institutions that are pricing programs of their 
responsibility to ensure that free and reduced-price meals are served 
to participants unable to pay the full price;
    (ii) Provide to all institutions a copy of the income standards to 
be used by institutions for determining the eligibility of participants 
for free and reduced-price meals under the Program;
    (iii) Coordinate with the State agency that administers the 
National School Lunch Program to ensure the receipt of a list of 
elementary schools in the State in which at least one-half of the 
children enrolled are certified eligible to receive free or reduced-
price meals. The State agency must provide the list to sponsoring 
organizations of day care homes by February 15 of each year, unless the 
State agency that administers the National School Lunch Program has 
elected to base data for the list on a month other than October, in 
which case the State agency must provide the list to such sponsoring 
organizations

[[Page 53541]]

within 15 calendar days of its receipt from the State agency that 
administers the National School Lunch Program. The State agency must 
also provide each sponsoring organization of day care homes with census 
data, as provided to the State agency by FNS upon its availability on a 
decennial basis, showing areas in the State in which at least 50 
percent of the children are from households meeting the income 
standards for free or reduced-price meals. In addition, the State 
agency must ensure that the most recent available data is used if the 
determination of a day care home's eligibility as a tier I day care 
home is made using school or census data. Determinations of a day care 
home's eligibility as a tier I day care home must be valid for one year 
if based on a provider's household income, three years if based on 
school data, or until more current data are available if based on 
census data. However, a sponsoring organization, the State agency, or 
FNS may change the determination if information becomes available 
indicating that a day care home is no longer in a qualified area. The 
State agency must not routinely require annual redeterminations of the 
tiering status of tier I day care homes based on updated elementary 
school data;
    (iv) Provide all sponsoring organizations of day care homes in the 
State with a listing of State-funded programs, participation in which 
by a parent or child will qualify a meal served to a child in a tier II 
home for the tier I rate of reimbursement;
    (v) Require centers to submit current eligibility information on 
enrolled participants, in order to calculate a blended rate or claiming 
percentage in accordance with Sec.  226.9(b);
    (vi) Require each sponsoring organization to submit an 
administrative budget with sufficiently detailed information concerning 
projected CACFP administrative earnings and expenses, as well as other 
non-Program funds to be used in Program administration, for the State 
agency to determine the allowability, necessity, and reasonableness of 
all proposed expenditures, and to assess the sponsoring organization's 
capability to manage Program funds. The administrative budget must 
demonstrate that the sponsoring organization will expend and account 
for funds in accordance with regulatory requirements, FNS Instruction 
796-2 (``Financial Management in the Child and Adult Care Food 
Program''), parts 3015, 3016, and 3019 of this title, and applicable 
Office of Management and Budget circulars. In addition, the 
administrative budget submitted by a sponsor of centers must 
demonstrate that the administrative costs to be charged to the Program 
do not exceed 15 percent of the meal reimbursements estimated or 
actually earned during the budget year, unless the State agency grants 
a waiver in accordance with Sec.  226.7(g);
    (vii) Require each institution to issue a media release, unless the 
State agency has issued a Statewide media release on behalf of all its 
institutions;
    (viii) Require each independent center to provide information 
concerning its licensing/approval status, and require each sponsoring 
organization to provide information concerning the licensing/approval 
status of its facilities, unless the State agency has other means of 
confirming the licensing/approval status of any independent center or 
facility providing care;
    (ix) Require each sponsoring organization to submit verification 
that all facilities under its sponsorship have adhered to the training 
requirements set forth in Program regulations; and
    (x) Require each sponsoring organization of family day care homes 
to submit to the State agency a list of family day care home providers 
receiving tier I benefits on the basis of their participation in the 
Food Stamp Program. Within 30 days of receiving this list, the State 
agency will provide this list to the State agency responsible for the 
administration of the Food Stamp Program.
    (2) Triennial responsibilities. In addition to its other 
responsibilities under this part, each State agency must, at intervals 
not to exceed 36 months:
    (i) Require participating institutions to re-apply to continue 
their participation; and
    (ii) Require sponsoring organizations to submit a management plan 
with the elements set forth in paragraph (b)(1)(iv) of this section.
    (3) Other responsibilities. At intervals and in a manner specified 
by the State agency, but not more frequently than annually, the State 
agency may:
    (i) Require independent centers to submit a budget with 
sufficiently detailed information and documentation to enable the State 
agency to make an assessment of the independent center's qualifications 
to manage Program funds. Such budget must demonstrate that the 
independent center will expend and account for funds in accordance with 
regulatory requirements, FNS Instruction 796-2 (``Financial Management 
in the Child and Adult Care Food Program''), parts 3015, 3016 and 3019 
of this title and applicable Office of Management and Budget circulars;
    (ii) Request institutions to report their commodity preference;
    (iii) Require a private nonprofit institution to submit evidence of 
tax exempt status in accordance with Sec.  226.15(a);
    (iv) Require proprietary title XX child care centers to submit 
documentation that they are currently providing nonresidential day care 
services for which they receive compensation under title XX of the 
Social Security Act, and certification that not less than 25 percent of 
enrolled participants or 25 percent of the licensed capacity, whichever 
is less, in each such center during the most recent calendar month were 
title XX beneficiaries;
    (v) Require proprietary title XIX or title XX adult care centers to 
submit documentation that they are currently providing nonresidential 
day care services for which they receive compensation under title XIX 
or title XX of the Social Security Act, and certification that not less 
than 25 percent of enrolled participants in each such center during the 
most recent calendar month were title XIX or title XX beneficiaries;
    (vi) Request each institution to indicate its choice to receive 
all, part or none of advance payments, if the State agency chooses to 
make advance payments available; and
    (vii) Perform verification in accordance with Sec.  226.23(h) and 
paragraph (m)(4) of this section. State agencies verifying the 
information on free and reduced-price applications must ensure that 
verification activities are conducted without regard to the 
participant's race, color, national origin, sex, age, or disability.
    (g) Program expansion. Each State agency must take action to expand 
the availability of benefits under this Program, and must conduct 
outreach to potential sponsoring organizations of family day care homes 
that might administer the Program in low-income or rural areas.
    (h) * * * The State agency must require new institutions to state 
their preference to receive commodities or cash-in-lieu of commodities 
when they apply, and may periodically inquire as to participating 
institutions' preference to receive commodities or cash-in-lieu of 
commodities. State agencies must annually provide institutions with 
information on foods available in plentiful supply, based on 
information provided by the Department. * * *
* * * * *
    (j) Procurement provisions. State agencies must require 
institutions to

[[Page 53542]]

adhere to the procurement provisions set forth in Sec.  226.22 and must 
determine that all meal procurements with food service management 
companies are in conformance with bid and contractual requirements of 
Sec.  226.22.
* * * * *
    (m) Program assistance. (1) General. The State agency must provide 
technical and supervisory assistance to institutions and facilities to 
facilitate effective Program operations, monitor progress toward 
achieving Program goals, and ensure compliance with all requirements of 
title VI of the Civil Rights Act of 1964, title IX of the Education 
amendments of 1972, section 504 of the Rehabilitation Act of 1973, the 
Age Discrimination Act of 1975, and the Department's regulations 
concerning nondiscrimination (parts 15, 15a, and 15b of this title). 
The State agency must maintain documentation of supervisory assistance 
activities, including reviews conducted, corrective actions prescribed, 
and follow-up efforts.
    (2) Review priorities. In choosing institutions for review, in 
accordance with paragraph (m)(6) of this section, the State agency must 
target for more frequent review institutions whose prior review 
included a finding of serious deficiency.
    (3) Review content. As part of its conduct of reviews, the State 
agency must assess each institution's compliance with the requirements 
of this part pertaining to:
    (i) Recordkeeping;
    (ii) Meal counts;
    (iii) Administrative costs;
    (iv) Any applicable instructions and handbooks issued by FNS and 
the Department to clarify or explain this part, and any instructions 
and handbooks issued by the State agency which are not inconsistent 
with the provisions of this part;
    (v) Facility licensing and approval;
    (vi) Compliance with the requirements for annual updating of 
enrollment forms;
    (vii) If an independent center, observation of a meal service;
    (viii) If a sponsoring organization, training and monitoring of 
facilities;
    (ix) If a sponsoring organization of day care homes, implementation 
of the serious deficiency and termination procedures for day care homes 
and, if such procedures have been delegated to sponsoring organizations 
in accordance with paragraph (l)(1) of this section, the administrative 
review procedures for day care homes;
    (x) If a sponsoring organization, implementation of the household 
contact system established by the State agency pursuant to paragraph 
(m)(5) of this section;
    (xi) If a sponsoring organization of day care homes, the 
requirements for classification of tier I and tier II day care homes; 
and
    (xii) All other Program requirements.
    (4) Review of sponsored facilities. As part of each required review 
of a sponsoring organization, the State agency must select a sample of 
facilities, in accordance with paragraph (m)(6) of this section. As 
part of such reviews, the State agency must conduct verification of 
Program applications in accordance with Sec.  226.23(h) and must 
compare available enrollment and attendance records and the sponsoring 
organization's review results for that facility to meal counts 
submitted by those facilities for five days.
    (5) Household contacts. As part of their monitoring of 
institutions, State agencies must establish systems for making 
household contacts to verify the enrollment and attendance of 
participating children. Such systems must specify the circumstances 
under which household contacts will be made, as well as the procedures 
for conducting household contacts. In addition, State agencies must 
establish a system for sponsoring organizations to use in making 
household contacts as part of their review and oversight of 
participating facilities. Such systems must specify the circumstances 
under which household contacts will be made, as well as the procedures 
for conducting household contacts. State agencies must submit to 
FNSROs, no later than April 1, 2005, the policies and procedures they 
have developed governing household contacts conducted by both the State 
agency, as part of institution and facility reviews conducted in 
accordance with this paragraph (m), and by sponsoring organizations as 
part of the facility review process described in Sec.  226.16(d)(5).
    (6) Frequency and number of required institution reviews. The State 
agency must annually review at least 33.3 percent of all institutions. 
At least 15 percent of the total number of facility reviews required 
must be unannounced. The State agency must review institutions 
according to the following schedule:
    (i) Independent centers and sponsoring organizations of 1 to 100 
facilities must be reviewed at least once every three years. A review 
of such a sponsoring organization must include reviews of 10 percent of 
the sponsoring organization's facilities;
    (ii) Sponsoring organizations with more than 100 facilities must be 
reviewed at least once every two years. These reviews must include 
reviews of 5 percent of the first 1,000 facilities and 2.5 percent of 
the facilities in excess of 1,000; and
    (iii) New institutions that are sponsoring organizations of five or 
more facilities must be reviewed within the first 90 days of Program 
operations.
* * * * *
    (o) * * * If violations are not corrected within the specified 
timeframe for corrective action, the State agency must issue a notice 
of serious deficiency in accordance with paragraph (c) of this section 
or Sec.  226.16(l), as appropriate. However, if the health or safety of 
the children is imminently threatened, the State agency or sponsoring 
organization must follow the procedures set forth at paragraph 
(c)(5)(i) of this section, or Sec.  226.16(l)(4), as appropriate. * * *
* * * * *
    (r) WIC program information. State agencies must provide 
information on the importance and benefits of the Special Supplemental 
Nutrition Program for Women, Infants, and Children (WIC) and WIC income 
eligibility guidelines, to participating institutions. In addition, the 
State agency must ensure that:
    (1) Participating family day care homes and sponsored child care 
centers receive this information, and periodic updates of this 
information, from their sponsoring organizations or the State agency; 
and
    (2) The parents of enrolled children also receive this information.

0
6. In Sec.  226.7:
0
a. Paragraph (g) is revised.
0
b. Paragraph (k) is amended by adding a new sentence after the first 
sentence.
    The revision and addition specified above read as follows:


Sec.  226.7  State agency responsibilities for financial management.

* * * * *
    (g) Budget approval. The State agency must review institution 
budgets and must limit allowable administrative claims by each 
sponsoring organization to the administrative costs approved in its 
budget. The budget must demonstrate the institution's ability to manage 
Program funds in accordance with this part, FNS Instruction 796-2 
(``Financial Management in the Child and Adult Care Food Program''), 
parts 3015, 3016, and 3019 of this title, and applicable Office of 
Management and Budget circulars. Sponsoring organizations must submit 
an administrative budget to the State agency annually, and independent 
centers must submit budgets as

[[Page 53543]]

frequently as required by the State agency. Budget levels may be 
adjusted to reflect changes in Program activities. For sponsoring 
organizations of centers, the State agency is prohibited from approving 
the sponsoring organization's administrative budget, or any amendments 
to the budget, if the administrative budget shows the Program will be 
charged for administrative costs in excess of 15 percent of the meal 
reimbursements estimated to be earned during the budget year. However, 
the State agency may waive this limit if the sponsoring organization 
provides justification that it requires Program funds in excess of 15 
percent to pay its administrative costs and if the State agency is 
convinced that the institution will have adequate funding to provide 
meals meeting the requirements of Sec.  226.20. The State agency must 
document all waiver approvals and denials in writing, and must provide 
a copy of all such letters to the appropriate FNSRO.
* * * * *
    (k) * * * Such procedures must include State agency edit checks, 
including but not limited to ensuring that payments are made only for 
approved meal types and that the number of meals for which 
reimbursement is provided does not exceed the product of the total 
enrollment times operating days times approved meal types. * * *
* * * * *

0
7. In Sec.  226.8:
0
a. Paragraphs (a) and (b) are revised.
0
b. Paragraph (c) is amended by adding the words ``or agreed-upon 
procedures engagements' after the words ``administrative reviews'' in 
the second sentence.
    The revisions specified above read as follows:


Sec.  226.8  Audits.

    (a) Unless otherwise exempt, audits at the State and institution 
levels must be conducted in accordance with Office of Management and 
Budget circular A-133 and the Department's implementing regulations at 
part 3052 of this title. State agencies must establish audit policy for 
title XIX and title XX proprietary institutions. However, the audit 
policy established by the State agency must not conflict with the 
authority of the State agency or the Department to perform, or cause to 
be performed, audits, reviews, agreed-upon procedures engagements, or 
other monitoring activities.
    (b) The funds provided to the State agency under Sec.  226.4(h) may 
be made available to institutions to fund a portion of organization-
wide audits made in accordance with part 3052 of this title. The funds 
provided to an institution for an organization-wide audit must be 
determined in accordance with Sec.  3052.230(a) of this title.
* * * * *

0
8. In Sec.  226.10:
0
a. The first sentence of paragraph (a) is revised.
0
b. Paragraph (c) is amended by adding two new sentences at the end of 
the introductory text and by adding new paragraphs (c)(1), (c)(2), and 
(c)(3).
0
c. Paragraph (f) is revised.
    The addition and revisions specified above read as follows:


Sec.  226.10  Program payment procedures.

    (a) If a State agency elects to issue advance payments to all or 
some of the participating institutions in the State, it must provide 
such advances no later than the first day of each month to those 
eligible institutions electing to receive advances in accordance with 
Sec.  226.6 (f)(3)(vi). * * *
* * * * *
    (c) * * * Prior to submitting its consolidated monthly claim to the 
State agency, each sponsoring organization must perform edit checks on 
each facility's meal claim. At a minimum, the sponsoring organization's 
edit checks must:
    (1) Verify that each facility has been approved to serve the types 
of meals claimed;
    (2) Compare the number of children enrolled for care at each 
facility, multiplied by the number of days on which the facility is 
approved to serve meals, to the total number of meals claimed by the 
facility for that month. Discrepancies between the facility's meal 
claim and its enrollment must be subjected to more thorough review to 
determine if the claim is accurate; and
    (3) Detect block claiming (as defined in Sec.  226.2) by any 
facility. If block claiming is detected, the sponsoring organization 
must not include that facility among those facilities receiving less 
than three reviews during the current year, in accordance with Sec.  
226.16(d)(4), and must ensure that any facility submitting a block 
claim receives an unannounced review within 60 days of the discovery of 
the block claim. If, in the course of conducting this review, the 
sponsoring organization determines that there is a logical explanation 
for the facility to regularly submit a block claim, the sponsoring 
organization must note this in the facility's review file and is not 
required to conduct an unannounced visit after other block claims 
detected during the current year. In addition, if a State agency 
determines that the conduct of all required unannounced reviews within 
60 days will impose unwarranted burdens on a particular sponsoring 
organization, the State agency may provide that sponsoring organization 
with up to 30 additional days to complete the required unannounced 
reviews.
* * * * *
    (f) If, based on the results of audits, investigations, or other 
reviews, a State agency has reason to believe that an institution, 
child or adult care facility, or food service management company has 
engaged in unlawful acts with respect to Program operations, the 
evidence found in audits, investigations, or other reviews is a basis 
for non-payment of claims for reimbursement.

0
9. In Sec.  226.11:
0
a. The section heading is revised.
0
b. Paragraph (a) is amended by removing the second sentence and adding 
two new sentences in its place.
0
c. Paragraph (b) is amended by adding a new sentence to the end of the 
paragraph.
0
d. Paragraph (c)(1) is revised.
    The additions and revision specified above read as follows:


Sec.  226.11  Program payments for centers.

    (a) * * * A State agency may develop a policy under which centers 
are reimbursed for meals served in accordance with provisions of the 
Program in the calendar month preceding the calendar month in which the 
agreement is executed, or the State agency may develop a policy under 
which centers earn reimbursement only for meals served in approved 
centers on or after the effective date of the Program agreement. If the 
State agency's policy permits centers to earn reimbursement for meals 
served prior to the execution of a Program agreement, Program 
reimbursement must not be received by the center until the agreement is 
executed.
    (b) * * * Prior to submitting its consolidated monthly claim to the 
State agency, each sponsoring organization must conduct reasonable edit 
checks on the sponsored centers' meal claims which, at a minimum, 
include those edit checks specified at Sec.  226.10(c).
    (c) * * *
    (1) Base reimbursement to child care centers and adult day care 
centers on actual time of service meal counts, and multiply the number 
of meals, by type, served to participants eligible to receive free 
meals, served to participants eligible to receive reduced-price meals, 
and served to participants from families

[[Page 53544]]

not meeting such standards by the applicable national average payment 
rate; or
* * * * *

0
10. In Sec.  226.13:
0
a. Paragraph (b) is amended by adding a new sentence to the end of the 
paragraph; and
0
b. Paragraph (c) is amended by adding the words ``based on daily meal 
counts taken in the home'' after the words ``as applicable,''.
    The addition specified above reads as follows:


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

* * * * *
    (b) * * * Prior to submitting its consolidated monthly claim to the 
State agency, each sponsoring organization must conduct reasonable edit 
checks on the day care homes' meal claims which, at a minimum, include 
those edit checks specified at Sec.  226.10(c).
* * * * *


Sec.  226.14  [Amended]

0
11. In Sec.  226.14(a), the reference ``Sec.  226.6(f)(3)'' is removed 
and the reference Sec.  226.7(g)'' is added in its place.

0
12. In Sec.  226.15:
0
a. Paragraph (b) is revised.
0
b. Paragraph (e)(2) is revised.
0
c. Paragraph (e)(3) is amended by adding a new sentence to the end of 
the paragraph.
0
d. Paragraph (e)(4) is revised.
0
e. Paragraph (e)(5) is removed and paragraphs (e)(6) through (e)(14) 
are redesignated as paragraphs (e)(5) through (e)(13), respectively.
0
f. New paragraph (e)(14) is added.
0
g. Paragraphs (g) through (k) are redesignated as paragraphs (h) 
through (l), and a new paragraph (g) is added.
0
h. Newly redesignated paragraph (i) is amended by removing the 
reference ``Sec.  226.6(f)(1)'' and adding in its place the reference 
``Sec.  226.6(b)(4)''.
0
i. New paragraphs (m) and (n) are added.
    The additions and revisions specified above read as follows:


Sec.  226.15  Institution provisions.

* * * * *
    (b) New applications and renewals. Each institution must submit to 
the State agency with its application all information required for its 
approval as set forth in Sec.  226.6(b) and 226.6(f). Such information 
must demonstrate that a new institution has the administrative and 
financial capability to operate the Program in accordance with this 
part and with the performance standards set forth in Sec.  
226.6(b)(1)(xvii), and that a renewing institution has the 
administrative and financial capability to operate the Program in 
accordance with this part and with the performance standards set forth 
in Sec.  226.6(b)(2)(vii).
* * * * *
    (e) * * *
    (2) Documentation of the enrollment of each participant at child 
care centers (except for outside-school-hours care centers) and adult 
day care centers. All types of centers must maintain information used 
to determine eligibility for free or reduced-price meals in accordance 
with Sec.  226.23(e)(1). For child care centers, such documentation of 
enrollment must be updated annually, signed by a parent or legal 
guardian, and include information on each child's normal days and hours 
of care and the meals normally received while in care.
    (3) * * * Such documentation of enrollment must be updated 
annually, signed by a parent or legal guardian, and include information 
on each child's normal days and hours of care and the meals normally 
received while in care.
    (4) Daily records indicating the number of participants in 
attendance and the daily meal counts, by type (breakfast, lunch, 
supper, and snacks), served to family day care home participants, or 
the time of service meal counts, by type (breakfast, lunch, supper, and 
snacks), served to center participants. State agencies may require 
family day care homes to record meal counts at the time of meal service 
only in day care homes providing care for more than 12 children in a 
single day, or in day care homes that have been found seriously 
deficient due to problems with their meal counts and claims.
* * * * *
    (14) For sponsoring organizations, records documenting the 
attendance at training of each staff member with monitoring 
responsibilities. Training must include instruction, appropriate to the 
level of staff experience and duties, on the Program's meal patterns, 
meal counts, claims submission and claim review procedures, 
recordkeeping requirements, and an explanation of the Program's 
reimbursement system.
* * * * *
    (g) Payment to employees. No institution that is a sponsoring 
organization of family day care homes and that employs more than one 
person is permitted to base payment (including bonuses or gratuities) 
to its employees, contractors, or family day care home providers solely 
on the number of new family day care homes recruited for the sponsoring 
organization's Program.
* * * * *
    (m) Regulations and guidance. Each institution must comply with all 
regulations issued by FNS and the Department, all instructions and 
handbooks issued by FNS and the Department to clarify or explain 
existing regulations, and all regulations, instructions and handbooks 
issued by the State agency that are consistent with the provisions 
established in Program regulations.
    (n) Information on WIC. Each institution must ensure that parents 
of enrolled children are provided with current information on the 
benefits and importance of the Special Supplemental Nutrition Program 
for Women, Infants, and Children (WIC) and the eligibility requirements 
for WIC participation.

0
13. In Sec.  226.16:
0
a. The introductory text to paragraph (b) and paragraph (b)(1) are 
revised.
0
b. Paragraphs (d)(2), (d)(3) and (d)(4) are revised.
0
c. New paragraph (d)(5) is added.
0
d. Paragraph (l)(2)(vii) is amended by removing the word ``or'' after 
the semicolon.
0
e. Paragraph (l)(2)(viii) is redesignated as (l)(2)(ix) and a new 
paragraph (l)(2)(viii) is added in its place.
0
f. New paragraph (m) is added.
    The additions and revisions specified above read as follows: ?>


Sec.  226.16  Sponsoring organization provisions.

* * * * *
    (b) Each sponsoring organization must submit to the State agency 
with its application all information required for its approval, and the 
approval of the facilities under its jurisdiction, as set forth in 
Sec. Sec.  226.6(b) and 226.6(f). The application must demonstrate that 
the institution has the administrative and financial capability to 
operate the Program in accordance with the Program regulations. In 
addition to the information required in Sec. Sec.  226.6(b) and 
226.6(f), the application must include:
    (1) A sponsoring organization management plan and administrative 
budget, in accordance with Sec. Sec.  226.6(b)(1)(iv), 226.6(b)(1)(v), 
226.6(b)(2)(i), 226.6(f)(2)(ii), and 226.7(g), which includes 
information sufficient to document the sponsoring organization's 
compliance with the performance standards set forth at Sec.  
226.6(b)(1)(xvii) and 226.6(b)(2)(vii). As part of its management plan, 
a sponsoring organization of day care homes must document that, to 
perform monitoring, it will employ the equivalent of one full-time 
staff person

[[Page 53545]]

for each 50 to 150 day care homes it sponsors. As part of its 
management plan, a sponsoring organization of centers must document 
that, to perform monitoring, it will employ the equivalent of one full-
time staff person for each 25 to 150 centers it sponsors. It is the 
State agency's responsibility to determine the appropriate level of 
staffing for monitoring for each sponsoring organization, consistent 
with these specified ranges and factors that the State agency will use 
to determine the appropriate level of monitoring staff for each 
sponsor. The monitoring staff equivalent may include the employee's 
time spent on scheduling, travel time, review time, follow-up activity, 
report writing, and activities related to the annual updating of 
children's enrollment forms. Sponsoring organizations that were 
participating in the Program on July 29, 2002, were to have submitted, 
no later than July 29, 2003, a management plan or plan amendment that 
meets the monitoring staffing requirement. For sponsoring organizations 
of centers, the portion of the administrative costs to be charged to 
the Program may not exceed 15 percent of the meal reimbursements 
estimated or actually earned during the budget year, unless the State 
agency grants a waiver in accordance with Sec.  226.7(g). A sponsoring 
organization of centers must include in the administrative budget all 
administrative costs, whether incurred by the sponsoring organization 
or its sponsored centers. If at any point a sponsoring organization 
determines that the meal reimbursements estimated to be earned during 
the budget year will be lower than that estimated in its administrative 
budget, the sponsoring organization must amend its administrative 
budget to stay within the 15 percent limitation (or any higher limit 
established pursuant to a waiver granted under Sec.  226.7(g)) or seek 
a waiver. Failure to do so will result in appropriate fiscal action in 
accordance with Sec.  226.14(a).
* * * * *
    (d) * * *
    (2) Training on Program duties and responsibilities to key staff 
from all sponsored facilities prior to the beginning of Program 
operations. At a minimum, such training must include instruction, 
appropriate to the level of staff experience and duties, on the 
Program's meal patterns, meal counts, claims submission and review 
procedures, recordkeeping requirements, and reimbursement system. 
Attendance by key staff, as defined by the State agency, is mandatory;
    (3) Additional mandatory training sessions for key staff from all 
sponsored child care and adult day care facilities not less frequently 
than annually. At a minimum, such training must include instruction, 
appropriate to the level of staff experience and duties, on the 
Program's meal patterns, meal counts, claims submission and review 
procedures, recordkeeping requirements, and reimbursement system. 
Attendance by key staff, as defined by the State agency, is mandatory;
    (4)(i) Review elements. Reviews that assess whether the facility 
has corrected problems noted on the previous review(s), a 
reconciliation of the facility's meal counts with enrollment and 
attendance records for a five-day period, as specified in paragraph 
(d)(4)(ii) of this section, and an assessment of the facility's 
compliance with the Program requirements pertaining to:
    (A) The meal pattern;
    (B) Licensing or approval;
    (C) Attendance at training;
    (D) Meal counts;
    (E) Menu and meal records; and
    (F) The annual updating and content of enrollment forms (if the 
facility is required to have enrollment forms on file, as specified in 
Sec.  226.15(e)(2) and 226.15(e)(3)).
    (ii) Reconciliation of meal counts. Reviews must examine the meal 
counts recorded by the facility for five consecutive days during the 
current and/or prior claiming period. For each day examined, reviewers 
must use enrollment and/or attendance records to determine the number 
of children in care during each meal service and attempt to reconcile 
those numbers to the numbers of breakfasts, lunches, suppers, and/or 
snacks recorded in the facility's meal count for that day. Based on 
that comparison, reviewers must determine whether the meal counts were 
accurate. If there is a discrepancy between the number of children 
enrolled or in attendance on the day of review and prior meal counting 
patterns, the reviewer must attempt to reconcile the difference and 
determine whether the establishment of an overclaim is necessary.
    (iii) Frequency and type of required facility reviews. Sponsoring 
organizations must review each facility three times each year, except 
as described in paragraph (d)(4)(iv) of this section. In addition:
    (A) At least two of the three reviews must be unannounced;
    (B) At least one unannounced review must include observation of a 
meal service;
    (C) At least one review must be made during each new facility's 
first four weeks of Program operations; and
    (D) Not more than six months may elapse between reviews.
    (iv) Averaging of required reviews. If a sponsoring organization 
conducts two unannounced reviews of a facility in a year and finds no 
serious deficiencies (as described in paragraph (l)(2) of this section, 
regardless of the type of facility), the sponsoring organization may 
choose not to conduct a third review of the facility that year, 
provided that the sponsoring organization conducts an average of three 
reviews of all of its facilities that year. When the sponsoring 
organization uses this averaging provision, and a specific facility 
receives two reviews in one review year, its first review in the next 
review year must occur no more than nine months after the previous 
review. Sponsoring organizations may not review a sponsored facility 
fewer than three times per year if the facility has submitted a block 
claim during the year.
    (v) Follow-up reviews. If, in conducting a facility review, a 
sponsoring organization detects one or more serious deficiency, the 
next review of that facility must be unannounced. Serious deficiencies 
are those described at paragraph (l)(2) of this section, regardless of 
the type of facility.
    (vi) Notification of unannounced reviews. Sponsoring organizations 
of centers must provide each center with written notification of the 
right of the sponsoring organization, the State agency, the Department, 
and other State and Federal officials to make announced or unannounced 
reviews of its operations during the center's normal hours of 
operation, and must also notify sponsored centers that anyone making 
such reviews must show photo identification that demonstrates that they 
are employees of one of these entities. For sponsored centers 
participating on July 29, 2002, the sponsoring organization was to have 
provided this notice no later than August 29, 2002. For sponsored 
centers that are approved after July 29, 2002, the sponsoring 
organization must provide the notice before meal service under the 
Program begins. Sponsoring organizations must provide day care homes 
notification of unannounced visits in accordance with Sec.  
226.18(b)(1).
    (vii) Other requirements pertaining to unannounced reviews. 
Unannounced reviews must be made only during the facility's normal 
hours of operation, and monitors making such reviews must show photo 
identification that demonstrates that they are employees of the 
sponsoring organization, the State

[[Page 53546]]

agency, the Department, or other State and Federal agencies authorized 
to audit or investigate Program operations.
    ii) Imminent threat to health or safety. Sponsoring organizations 
that discover in a facility conduct or conditions that pose an imminent 
threat to the health or safety of participating children or the public, 
must immediately notify the appropriate State or local licensing or 
health authorities and take action that is consistent with the 
recommendations and requirements of those authorities.
    (5) For sponsoring organizations, as part of their monitoring of 
facilities, compliance with the household contact requirements 
established pursuant to Sec.  226.6(m)(5) of this part.
* * * * *
    (l) * * *
    (2) * * *
    (viii) Failure to participate in training; or
* * * * *
    (m) Sponsoring organizations of family day care homes must not make 
payments to employees or contractors solely on the basis of the number 
of homes recruited. However, such employees or contractors may be paid 
or evaluated on the basis of recruitment activities accomplished.

0
14. In Sec.  226.17:
0
a. Paragraph (b)(3) is amended by removing the words ``, except that 
reimbursement may be claimed for two meals and two snacks or three 
meals and one snack served to a child for each day in which that child 
is maintained in care for eight or more hours''.
0
b. Paragraph (b)(7) is amended by adding a new sentence at the end of 
the paragraph.
0
c. Paragraph (b)(8) is revised. d. A new paragraph (b)(9) is added.
    The additions and revision specified above read as follows:


Sec.  226.17  Child care center provisions.

* * * * *
    (b) * * *
    (7) * * * Such documentation of enrollment must be updated 
annually, signed by a parent or legal guardian, and include information 
on each child's normal days and hours of care and the meals normally 
received while in care.
    (8) Each child care center must maintain daily records of time of 
service meal counts by type (breakfast, lunch, supper, and snacks) 
served to enrolled children, and to adults performing labor necessary 
to the food service.
    (9) Each child care center must require key staff, as defined by 
the State agency, to attend Program training prior to the center's 
participation in the Program, and at least annually thereafter, on 
content areas established by the State agency.
* * * * *

0
15. In Sec.  226.18:
0
a. Paragraph (b)(2) is revised.
0
b. Paragraph (b)(7) is amended by removing the semicolon at the end of 
the paragraph and adding a period in its place, and by adding a new 
sentence at the end of the paragraph.
0
c. Paragraph (e) is amended by removing the first sentence and adding 
two new sentences in its place.
    The revisions and additions specified above read as follows:


Sec.  226.18  Day care home provisions.

* * * * *
    (b) * * *
    (2) The responsibility of the sponsoring organization to require 
key staff, as defined by the State agency, to receive Program training 
prior to the day care home's participation in the Program, and at least 
annually thereafter, on content areas established by the State agency, 
and the responsibility of the day care home to participate in that 
training;
* * * * *
    (7) * * * The sponsoring organization must not withhold Program 
payments to any family day care home for any other reason, except that 
the sponsoring organization may withhold from the provider any amounts 
that the sponsoring organization has reason to believe are invalid, due 
to the provider having submitted a false or erroneous meal count;
* * * * *
    (e) Each day care home must maintain on file documentation of each 
child's enrollment and must maintain daily records of the number of 
children in attendance and the number of meals, by type, served to 
enrolled children. Such documentation of enrollment must be updated 
annually, signed by a parent or legal guardian, and include information 
on each child's normal days and hours of care and the meals normally 
received while in care. * * *
* * * * *

0
16. In Sec.  226.19:
0
a. Paragraph (b)(6) is removed and paragraphs (b)(7) through (b)(9) are 
redesignated as paragraphs (b)(6) through (b)(8), respectively.
0
b. Paragraphs (b)(1) and (b)(4), and newly redesignated paragraphs 
(b)(7)(iv) and (b)(7)(v), are amended by removing the word ``enrolled'' 
wherever it occurs.
0
c. Paragraph (b)(3)(i) is revised.
0
d. Paragraph (b)(5) is amended by removing the words ``, except that 
reimbursement may be claimed for two meals and two snacks or three 
meals and one snack served to a child for each day in which that child 
is maintained in care for eight or more hours''.
0
e. Paragraph (b)(5) is further amended by removing the words ``meals 
served to children who are not enrolled, for'' from the third sentence.
0
f. The introductory text of newly redesignated paragraph (b)(6) is 
revised.
0
g. Newly redesignated paragraph (b)(6)(i) is amended by removing the 
words ``enrolled for care and'' and adding in their place the words 
``and to''.
0
h. Newly redesignated paragraph (b)(6)(iii) is removed and newly 
redesignated paragraphs (b)(6)(iv), (b)(6)(v), and (b)(6)(vi) are 
redesignated as paragraphs (b)(6)(iii), (b)(6)(iv), and (b)(6)(v), 
respectively.
0
i. Newly redesignated paragraph (b)(7)(i) is amended by removing the 
words ``Documentation of enrollment for all children, including 
information'', and adding the word ``Information'' in their place.
    The revisions specified above read as follows:


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

* * * * *
    (b) * * *
    (3) * * *
    (i) Children participate in a regularly scheduled program that 
meets the criteria of paragraph (b)(1) of this section. The program is 
organized for the purpose of providing services to children and is 
distinct from any extracurricular programs organized primarily for 
scholastic, cultural, or athletic purposes; and
* * * * *
    (6) Each outside-school-hours care center must require key 
operational staff, as defined by the State agency, to attend Program 
training prior to the center's participation in the Program, and at 
least annually thereafter, on content areas established by the State 
agency. Each meal service must be supervised by an adequate number of 
operational personnel who have been trained in Program requirements as 
outlined in this section. Operational personnel must ensure that:
* * * * *

0
17. In Sec.  226.19a:
0
a. Paragraph (b)(9) is revised.
0
b. A new paragraph (b)(11) is added.
    The addition and revision specified above read as follows:


Sec.  226.19a  Adult day care center provisions.

* * * * *
    (b) * * *
    (9) Each adult day care center must maintain daily records of time 
of service

[[Page 53547]]

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

0
18. In Sec.  226.20, paragraphs (k) through (p) are redesignated as 
paragraphs (l) through (q), respectively, and a new paragraph (k) is 
added to read as follows:


Sec.  226.20  Requirements for meals.

* * * * *
    (k) Time of meal service. State agencies may require any 
institution or facility to allow a specific amount of time to elapse 
between meal services or require that meal services not exceed a 
specified duration.
* * * * *

0
19. In Sec.  226.23:
0
a. Paragraph (a) is revised.
0
b. Paragraph (c)(2) is amended by removing the words ``members of AFDC 
assistance units or'' and adding in their place the words ``TANF 
recipients or who are members of''.
0
c. The first sentence of paragraph (d) is amended by removing the 
period after the words ``public release'' and adding in its place the 
words ``, unless the State agency has issued a Statewide media release 
on behalf of all institutions.''
0
d. The fifth sentence of paragraph (d) is amended by removing the words 
``members of AFDC assistance units'' and adding in their place the 
words ``TANF recipients''.
0
e. Paragraph (e)(1)(i) is amended by removing the words ``or AFDC 
assistance unit'' and adding in their place the words ``or is a TANF 
recipient''.
0
f. Paragraph (e)(1)(iv) is amended by removing the words ``AFDC 
assistance units'' the first time they appear, and adding in their 
place the words ``who are TANF recipients'', and by removing the words 
``AFDC assistance units'' the second time they appear, and adding in 
their place the words ``children who are TANF recipients''.
0
g. Paragraph (e)(1)(iv)(B) is amended by removing the words ``AFDC 
benefits'' and adding in their place the words ``TANF benefits''.
0
h. Paragraph (h)(2)(i)(A) is amended by removing the words ``AFDC 
assistance unit'' and adding in their place the words ``is a TANF 
recipient''.
0
i. Paragraph (h)(2)(iii)(D) is amended by removing the word ``AFDC'' 
and adding in its place the word ``TANF''.
0
j. Paragraph (h)(2)(v)(C) is amended by removing the words ``food 
stamp/FDPIR/AFDC'' and adding in their place the words ``food stamp/
FDPIR/TANF''.
0
k. Paragraph (h)(2)(vi) is amended by removing the word ``AFDC'' and 
adding in its place the word ``TANF''.
    The revision specified above reads as follows:


Sec.  226.23  Free and reduced-price meals.

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


Sec.  226.25  [Amended]

0
19. In Sec.  226.25, paragraph (g) is removed.

    Dated: August 20, 2004.
Eric M. Bost,
Under Secretary for Food, Nutrition, and Consumer Services.
[FR Doc. 04-19628 Filed 8-31-04; 8:45 am]
BILLING CODE 3410-30-P