[Federal Register Volume 70, Number 184 (Friday, September 23, 2005)]
[Proposed Rules]
[Pages 55776-55796]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-19020]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
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 

  Federal Register / Vol. 70, No. 184 / Friday, September 23, 2005 / 
Proposed Rules  

[[Page 55776]]



DEPARTMENT OF AGRICULTURE

Food and Nutrition Service

7 CFR Parts 271, 273, 275, and 277

RIN 0584-AD37


Food Stamp Program: Discretionary Quality Control Provisions of 
Title IV of Public Law 107-171

AGENCY: Food and Nutrition Service, USDA.

ACTION: Proposed rule.

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

SUMMARY: On May 13, 2002, the President signed the Farm Security and 
Rural Investment Act of 2002. Title IV of that law, the Food Stamp 
Reauthorization Act of 2002, contains provisions substantively revising 
the Quality Control system. This rule proposes to amend the Food Stamp 
Program regulations to implement certain discretionary provisions 
concerning the Quality Control system in Sections 4118 and 4119 of the 
Food Stamp Reauthorization Act of 2002. This rule would establish new 
timeframes for completing individual Quality Control reviews and 
establish procedures for resolving liabilities following appeal 
decisions. This rule proposes to revise the negative case review 
procedures and provides procedures for households that break up while 
subject to the penalty for refusal to cooperate with a Quality Control 
review. This rule also proposes several additional policy changes and 
technical corrections, including deletion of material pertaining to 
enhanced administrative funding for low error rates, which was ended 
beginning in Fiscal Year 2003 by the statute. An interim rule published 
October 16, 2003, addressed certain non-discretionary provisions 
concerning the Quality Control system in Sections 4118 and 4119 of the 
Food Stamp Reauthorization Act. The high performance bonuses that 
replace the administrative enhanced funding are addressed in a separate 
rule published February 7, 2005. This rule would affect State agencies' 
quality control review operations, and it would alter the impact on 
State agencies of assessment and resolution of potential liabilities 
for excessive payment error rates and awarding of bonuses for superior 
performance. Households sampled for quality control review of their 
cases would be minimally affected by this rule.

DATES: Comments on this rulemaking must be received on or before 
December 22, 2005.

ADDRESSES: The Food and Nutrition Service, Department of Agriculture 
invites interested persons to submit comments on this proposed 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) 
305-0928.
     Mail: Send comments to Daniel Wilusz, Quality Control 
Branch, Program Accountability Division, Food and Nutrition Service, 
USDA, 3101 Park Center Drive, Alexandria, Virginia 22302.
     Hand Delivery or Courier: You may also hand-deliver 
comments to us on the 8th floor at the above address.
     Federal eRulemaking Portal: Go to http://www.regulations.gov. Follow the online instructions for submitting 
comments.

FOR FURTHER INFORMATION CONTACT: Questions regarding this rulemaking 
should be addressed to Margaret Werts Batko at the above address, by 
telephone at (703) 305-2516, or via the Internet at 
[email protected].

SUPPLEMENTARY INFORMATION: 

I. Additional Information on Comment Filing/Electronic Access

Electronic Access and Filing Address

    You may view and download an electronic version of this proposed 
rule at http://www.fns.usda.gov/fsp/. You may also comment via the 
Internet at the same address. Please include ``Attention: RIN 0584-
AD37'' and your name and return address in your Internet message. If 
you do not receive a confirmation from the system that we have received 
your message, contact us directly at 703-305-2516.

Written Comments

    Written comments on the proposed rule should be specific, should be 
confined to issues pertinent to the proposed rule, and should explain 
the reason for any change you recommend. Where possible, you should 
reference the specific section or paragraph of the proposed rule you 
are addressing. We may not consider or include in the Administrative 
Record for the final rule comments that we receive after the close of 
the comment period or comments delivered to an address other than those 
listed above.
    We will make all comments, including names, street addresses, and 
other contact information of respondents, available for public 
inspection on the 8th floor, 3101 Park Center Drive, Alexandria, 
Virginia 22302 between 8:30 a.m. and 5 p.m. Eastern time, Monday 
through Friday, excluding Federal holidays.

II. Procedural Matters

Executive Order 12866

    This rule has been determined to be significant under E.O. 12866 
and has, therefore, been reviewed by the Office of Management and 
Budget.

Executive Order 12372

    The Food Stamp Program is listed in the Catalog of Federal Domestic 
Assistance under No. 10.551. For the reasons set forth in the final 
rule in 7 CFR Part 3015, Subpart V and related Notice (48 FR 29115, 
June 24, 1983), this Program is excluded from the scope of Executive 
Order 12372 that requires intergovernmental consultation with State and 
local officials.

Regulatory Flexibility Act

    This 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. State and local welfare agencies 
will be the most affected to the extent that they administer the 
Program.

Public Law 104-4

    Title II of the Unfunded Mandate Reform Act of 1995 (UMRA) 
establishes requirements for Federal agencies to assess the effects of 
their regulatory

[[Page 55777]]

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

Federalism Summary Impact Statement

    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 regulations 
describing the agency's considerations in terms of the three categories 
called for under section (6)(b)(2)(B) of Executive Order 13132. The 
Food and Nutrition Service has considered this rule's impact on State 
and local agencies and has determined that it does not have Federalism 
implications under E.O. 13132.

Civil Rights Impact Analysis

    FNS has reviewed this proposed rule in accordance with the 
Department Regulation 4300-4, ``Civil Rights Impact Analysis,'' to 
identify and address any major civil rights impacts the rule might have 
on minorities, women, and persons with disabilities. After a careful 
review of the rule's intent and provisions, FNS has determined that 
this rule has no impact on any of the protected classes. These changes 
primarily affect the quality control (QC) review system and not 
individual recipients' eligibility for or participation in the Food 
Stamp Program. The only provision that has any direct impact on 
recipients is the conforming change made in Sec.  273.2(d)(2). This 
section provides that a recipient who refuses to cooperate with a QC 
review of his or her case will be terminated from further participation 
in the Program; that if the household reapplies during the annual 
review period, it cannot be determined eligible until it cooperates 
with the QC review; and if it reapplies following the end of the 
quality control review period, the household is required to provide 
full verification of its eligibility factors before it can be 
certified. The purpose of the requirement is to encourage household 
cooperation with the QC review of its case. In this rule we are 
proposing a conforming amendment to extend the timeframe of the penalty 
consistent with the revised timeframe for completing the QC review 
process established in Section 4119 of the Food Stamp Reauthorization 
Act of 2002 and addressed in this proposed regulation at Sec.  275.23. 
Significant protection exists within the regulations to ensure that a 
household is terminated solely for refusal, and not inability, to 
cooperate. A household so terminated also has the right to request a 
fair hearing. Further, the household has the ability to reverse its 
termination by cooperating with the QC review during the QC review 
period. There were 56,954 active case households subject to a QC 
review, and 2,101 households who refused to cooperate with a QC review 
during Fiscal Year 2002, the last year information on non-cooperating 
households was collected. Information on protected class is not 
available for these households.
    All data available to FNS indicate that protected individuals have 
the same opportunity to participate in the Food Stamp Program as non-
protected individuals. FNS specifically prohibits the State and local 
government agencies that administer the Program from engaging in 
actions that discriminate against any applicant or participant in any 
aspect of program administration, including, but not limited to, the 
certification of households, the issuance of coupons, the conduct of 
fair hearings, or the conduct of any other program service for reasons 
of age, race, color, sex, handicap, religious creed, national origin, 
or political beliefs (Food Stamp Program nondiscrimination policy can 
be found at Sec.  272.6). Discrimination in any aspect of program 
administration is prohibited by these regulations, the Food Stamp Act, 
the Age Discrimination Act of 1975 (Pub. L. 94-135), the Rehabilitation 
Act of 1973 (Pub. L. 93-112, section 504), and title VI of the Civil 
Rights Act of 1964 (42 U.S.C. 2000d). Enforcement action may be brought 
under any applicable Federal law. Title VI complaints shall be 
processed in accord with 7 CFR part 15.''

Paperwork Reduction Act

    This proposed rule contains reporting or recordkeeping requirements 
that have been approved by the Office of Management and Budget (OMB) 
under several separate information collections under the Paperwork 
Reduction Act of 1995. The collections are:
    0584-0034, Negative Quality Control Review Schedule; Status of 
Sample Selection and Completion, Form FNS-245, and FNS-248: This rule 
does not affect the negative review schedule, Form FNS-245. In the most 
recent approval of OMB Number 0584-0034, the form FNS-247 (Statistical 
Summary of Sample Distribution) was eliminated. FNS has stopped 
requesting that this form be completed and the information be 
submitted. This rule removes the requirement to submit the report from 
the regulations. The elimination does not affect the burden, as the 
burden has already been adjusted for removal of this form. In this rule 
we are proposing to eliminate the Form FNS-248. However, the 
information required to be submitted on that form is still required. 
The regulations currently permit that this information be submitted in 
another format. Accordingly, elimination of this form will not affect 
the approved burden for OMB Number 0584-0034.
    0584-0074 (Form FNS-380, Worksheet for Food Stamp Program Quality 
Control Reviews); 0584-0299 (Form FNS-380-1, Quality Control Review 
Schedule); and 0584-0303 (Sampling Plan, Arbitration, and Good Cause): 
This rule does not affect these information collections. This rule does 
not change the requirements for development and submittal of the 
States' sampling plans. This rule does not change the requirements for 
submitting cases for arbitration nor will it impact the number of cases 
anticipated to be submitted. This rule does include the provisions for 
good cause; however, those provisions are unchanged except for 
redesignation. Therefore, this rule will not impact the burden 
currently approved for good cause either.
    OMB Number 0584-0010, Performance Reporting System, Management 
Evaluation, Data Analysis and Corrective Action: Corrective action 
planning is included under this information collection package. 
Regulations prior to passage of the Food Stamp Reauthorization Act of 
2002 required corrective action planning whenever a State agency failed 
to reach the yearly target, whenever a State agency was not entitled to 
enhanced funding, and when its negative case error rate exceeded one 
percent. In an

[[Page 55778]]

interim rule entitled ``Non-Discretionary Quality Control Provisions of 
Title IV of Public Law 107-171'' published on October 16, 2003 at 68 FR 
59519, the regulations were changed to reflect the provision in Section 
4118 of the Food Stamp Reauthorization Act of 2002 that requires 
corrective action planning whenever a State agency's payment error rate 
equals or exceeds six percent. This requirement replaced the 
requirement for corrective action planning whenever a State agency 
failed to reach the yearly target. In the regulations as modified by 
the interim rule, State agencies continued to be required to do 
corrective action whenever they were not entitled to enhanced funding 
or when the negative case error rate exceeded one percent. A State 
agency was entitled to enhanced funding when its payment error rate was 
less than or equal to 5.90 percent and its negative case error rate was 
less than the national weighted mean negative case error rate for the 
prior fiscal year. This rule proposes to eliminate the requirement that 
State agencies conduct corrective action planning whenever a State 
agency is not entitled to enhanced funding because enhanced funding has 
been eliminated by Section 4118 of the Food Stamp Reauthorization Act 
of 2002. Elimination of this requirement will not have a significant 
impact on States' requirements to do corrective action planning because 
of the requirement in the regulation to do corrective action planning 
whenever the State's error rate exceeds six percent. The change from 
5.9 percent to six is minimal. In Fiscal Year 2002, no State below six 
percent did not get enhanced funding. Further, in this rule we are 
proposing to continue to require that State agencies do corrective 
action planning whenever a State's negative case error rate exceeds one 
percent. Therefore, there is essentially no impact resulting from 
removing the requirement to do corrective action planning whenever a 
State agency is not entitled to enhanced funding.

Government Paperwork Elimination Act

    In compliance with the Government Paperwork Elimination Act, the 
Food and Nutrition Service is committed to providing electronic 
submission as an alternative for information collections associated 
with this rule. The Food and Nutrition Service has made every effort to 
streamline and automate these processes. However, we are not able to 
make the entire process electronic at this time.
    Part of the process allows electronic submission. The Quality 
Control review schedule (approved under OMB 0584-0299) serves 
as both the data summary entry form that the reviewer completes during 
each review, and subsequently, as the data input document for direct 
data entry into the automated national Food Stamp Quality Control 
System (FSQCS) at the Kansas City Computer Center. While the data are 
manually collected on a paper form from information extracted from a 
case file, it is electronically submitted to the FSQCS for tabulation 
and analysis. Some States have developed and begun to use computerized 
versions of the worksheet (OMB number 0584-0074), which provides 
information collected on the review schedule. In addition, FNS has 
developed a computerized version of the worksheet. States are being 
given the option to continue to use their own systems, the new 
computerized version provided by FNS or the paper version. When FNS 
computerized versions of the worksheet are used, the information is 
linked to and creates the review schedule.
    Under OMB number 0584-0034, the burden for collecting and reporting 
information related to the review of negative cases and the status of 
sample selection and completion is approved. The FNS-245 serves as both 
the data summary entry form that the reviewer completes during each 
negative case review, and subsequently as the data input document for 
direct data entry into the FSQCS. Therefore, while data is manually 
collected, it is electronically submitted to the FSQCS for tabulation 
and analysis. The FNS-248 (Status of Sample Selection and Completion) 
collects information on the status of State reviews. The FNS-248 
contains necessary information not produced by the automated system. 
However, much of the form contains information that can be obtained in 
other ways. The regulations already provide that the information can be 
submitted in another format than the Form FNS-248. In this rule, we are 
proposing to eliminate the form and to require the States to submit the 
necessary information as requested by the appropriate regional offices. 
States may submit this data electronically.
    The burden under OMB number 0584-0303 encompasses the sampling 
plan, arbitration, and good cause. At this time, these areas are not 
substantively electronic submittals. To the extent possible, States may 
submit documents or portions of documents electronically.

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 that 
conflict with its provisions or that would otherwise impede its full 
implementation. This rule is not intended to have retroactive effect 
unless so specified in the ``Effective Date'' paragraph of the final 
rule. Prior to any judicial challenge to the provisions of this rule or 
the application of its provisions, all applicable administrative 
procedures must be exhausted. In the Food Stamp Program the 
administrative procedures are as follows: (1) For Program benefit 
recipients--State administrative procedures issued pursuant to 7 U.S.C. 
2020(e)(10) and Sec.  273.15; (2) for State agencies--administrative 
procedures issued pursuant to 7 U.S.C. 2023 set out at Sec.  276.7 (for 
rules related to non-quality control (QC) liabilities) or Part 283 (for 
rules related to QC liabilities); (3) for retailers and wholesalers--
administrative procedures issued pursuant to 7 U.S.C. 2023 set out at 7 
CFR Part 279.

Regulatory Impact Analysis

Need for Action

    This action is needed to implement certain provisions of Sections 
4118 and 4119 of Title IV, the Food Stamp Reauthorization Act of 2002, 
Public Law 107-171, which was enacted on May 13, 2002. This rule 
proposes to amend the Food Stamp Program regulations concerning the 
Quality Control (QC) system to eliminate enhanced funding, to address 
the impact of appeals decisions on the resolution of QC liabilities for 
high payment error rates, to revise the timeframes for completing 
individual case reviews and the timeframes for penalties for households 
that refuse to cooperate with a QC review, and to make a number of 
technical policy changes and corrections. This analysis addresses the 
elimination of enhanced funding, the impact of appeals decisions on the 
resolution of QC liabilities for high payment error rates, the revised 
timeframes for completing individual case reviews, the timeframes for 
penalties for households that refuse to cooperate with a QC review, 
validation of the negative case error rate, and corrective action 
planning. An interim rule, published October 16, 2003, at 68 FR 59519, 
addressed the new liability system established by Section 4118 of the 
Food Stamp Reauthorization Act of 2002. The impact of the new liability 
system was addressed in the impact analysis for that rule. For greater 
understanding of the impact of the

[[Page 55779]]

changes to the liability system, the reader is referred to the interim 
rule.
Cost Impact
    This action does not directly impact benefit levels or eligibility, 
so we do not anticipate any impact on food stamp benefit costs. The 
provision extending the timeframes for verification of households 
reapplying for benefits is not expected to have a measurable impact on 
benefit costs. Elimination of enhanced funding will result in a savings 
of administrative matching funds. In 2002, the Agency paid $77.3 
million in enhanced funding incentives to 13 States. Over the five 
years between 1998 and 2002, the Agency paid $250 million in enhanced 
funding, for an annual average of $50 million during this period.
    If State payment error rates remained at their 1998-2002 levels, 
the annual savings to the Food Stamp Program would be $50 million and 
the five-year savings would be $250 million. However, this savings will 
be largely offset by the establishment of the high performance bonuses 
(addressed in the final rule ``High Performance Bonuses'' published 
February 7, 2005, at 70 FR 6313). See Table below.
Benefit Impact
    Elimination of enhanced funding based on payment accuracy would not 
have a benefit impact on State administrating agencies or on program 
operations if considered in isolation. However, when this provision is 
combined with the new performance bonus system in another rulemaking 
that proposes to change performance criteria from a narrow focus on 
payment accuracy to a broader measure that incorporates client service 
criteria in addition to payment accuracy, the new performance bonus 
system is expected to encourage States to assess and improve overall 
performance. Since the new bonus system is capped at $48 million 
annually the impact of the two rules will offset each other.

    Cost Impact of Certain Quality Control Provisions of the Food Stamp Reauthorization Act of 2002 (Federal
                                                    Outlays)
                                            [In millions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                              2005     2006     2007     2008     2009    5-year
----------------------------------------------------------------------------------------------------------------
Elimination of Enhanced Funding...........................      -50      -50      -50      -50      -50     -250
----------------------------------------------------------------------------------------------------------------

    The provisions affecting the timeframes for completing individual 
case reviews, procedures for appeals for the resolution of QC 
liabilities, and the procedures for treating households that refuse to 
cooperate with QC reviews are not expected to have any measurable 
impact on program costs.

III. Background

    On May 13, 2002, the President signed Public Law 107-171, the Farm 
Security and Rural Investment Act of 2002. Title IV of Public Law 107-
171, the Food Stamp Reauthorization Act of 2002 (FSRA), significantly 
revised the sanction, liability, and enhanced funding provisions of the 
Quality Control (QC) system. An interim rule entitled ``Non-
Discretionary Quality Control Provisions of Title IV of Public Law 107-
171'' was published October 16, 2003, at 68 FR 59519 that addressed 
certain provisions of Sections 4118 and 4119. A final rule entitled 
``High Performance Bonuses'' was published February 7, 2005, at 70 FR 
6313 that implemented Section 4120 of the Food Stamp Reauthorization 
Act. This rulemaking addresses the remaining provisions of Sections 
4118 and 4119 of the Food Stamp Reauthorization Act. In addition, it 
includes several discretionary policy changes and numerous technical 
corrections.

A. Enhanced Funding

    The current regulations at Sec.  275.1(b) provide that the 
Department shall pay a State agency enhanced administrative funding if 
its payment error rate is less than or equal to 5.90 percent and the 
negative case error rate is less than the national weighted mean 
negative case error rate for the prior fiscal year. Section 4118 of 
FSRA removed the provision in the Food Stamp Act of 1977 for giving 
enhanced funding to State agencies with low payment and negative case 
error rates, effective fiscal year (FY) 2003, effectively ending 
enhanced payments. As a technical detail, we are proposing to eliminate 
Sec.  275.1(b)(1) and (b)(2) and to revise Sec.  275.1(a) into a 
general introductory paragraph, removing the ``(a)'' paragraph 
designation. Section 4120 of the FSRA replaces these enhanced funding 
provisions with high performance bonuses. Regulations addressing high 
performance bonuses have been published separately (proposed rule 
published December 17, 2003, at 68 FR 70193; final rule published 
February 7, 2005, at 70 FR 6313).
    Section 275.23(d) establishes procedures for providing enhanced 
funding. In accordance with the elimination of enhanced funding, this 
section is no longer necessary. Therefore, we are proposing to remove 
Sec.  275.23(d).
    Section 275.3(c) requires that FNS validate the negative case error 
rate when a State agency's payment error rate for an annual review 
period appears to entitle it to an increased share of Federal 
administrative funding and its reported negative case error rate for 
that period is less than two percentage points above the national 
weighted mean negative case error rate for the prior fiscal year. That 
section also provides that FNS may review any negative case for other 
reasons. Validation of the negative case error rate is no longer 
necessary for purposes of establishing eligibility for enhanced 
funding. However, we are proposing in Sec.  275.3(c) to require that 
all States' negative case error rates be validated by FNS. We are 
proposing to require universal validation of negatives for two reasons. 
First, we believe that fair and equitable treatment in terms of denying 
households needs to be ensured. Second, the negative error rate is one 
of the measurements of high performance. We believe that it is 
necessary to ensure the accuracy of those error rates if awards will be 
driven by these rates.
    In addition, we are proposing to make technical changes throughout 
Part 275 to remove references to enhanced funding. These deletions are 
not discussed in this preamble.
    Part 277, Payments of Certain Administrative Costs of State 
Agencies, establishes the rules for paying State agency administrative 
costs for operating the Food Stamp Program. In Sec.  277.4, paragraphs 
(b)(1), (b)(4), (b)(5), and (b)(6) describe the procedures for 
increasing State administrative funding when State agency quality 
control error rates meet certain standards. Each paragraph provides the 
authority for different fiscal year periods beginning with Fiscal Year 
1980. Sections 277.4(b)(1)(i), (b)(4), (b)(5), and (b)(6) cover fiscal 
year periods beginning October 1, 1980, through September 30, 1988. 
Section 277.4(b)(1)(ii) provides

[[Page 55780]]

the authority for the period beginning October 1988 and forward. The 
authority in the Food Stamp Act for Sec.  277.4(b)(1)(i) was removed by 
the Hunger Prevention Act of 1988 (Public Law 100-435). The authority 
for Sec.  277.4(b)(4), (b)(5), and (b)(6) was removed by the Omnibus 
Budget Reconciliation Act of 1982 (Public Law 97-253). Section 4118 of 
the FSRA eliminated enhanced funding based on quality control error 
rates for fiscal years beginning October 2002 and beyond, thus making 
Sec.  277.4(b)(1)(ii) obsolete for FY2003 and beyond. All enhanced 
funding for Fiscal Years 1980 through 2002 paid under any of these 
authorities has already been made. Therefore, these paragraphs are no 
longer necessary. Accordingly, we are proposing to remove Sec.  
277.4(b)(1), (b)(4), (b)(5), and (b)(6). Sections 277.4(b)(2), (b)(3), 
(b)(7), and (b)(8) are proposed to be redesignated as Sec.  
277.4(b)(1), (b)(2), (b)(3), and (b)(4), respectively. In addition, we 
are proposing to correct the references in redesignated Sec.  
277.4(b)(3) to reflect these changes.

B. Disposition of Cases Where the Household Refuses To Cooperate

    Section 275.12(g) establishes procedures for disposition of active 
quality control cases. Section 275.12(g)(1)(ii) provides procedures for 
handling cases when the household refuses to cooperate in the review. 
Under these procedures, the State agency is required to notify the 
household of the penalties for refusing to cooperate with the review. 
In Sec.  275.12(g)(1)(ii), regulations currently provide that a 
reviewer may attempt to complete the case if this notice has been sent. 
This policy was revised by memorandum on September 1, 1998, in ``Change 
1 to the September 1997 version of FNS Handbook 310,'' to require the 
State agency reviewer to attempt to complete the review. The change was 
effective October 1, 1998. The revised policy has been retained in 
subsequent revisions of FNS Handbook 310. The Department requires such 
completion because incomplete reviews introduce bias into the system. 
Consistent with this change in policy, we are proposing to revise Sec.  
275.12(g)(1)(ii) to say that the reviewer must attempt to complete the 
case. As provided for in the FNS Handbook 310, the reviewer will 
attempt to determine all of the necessary information to the point 
where either ineligibility or the appropriate benefit allotment is 
determined, verified, and documented.

C. Negative Case Reviews

    In order to understand the parameters of the changes being proposed 
in this rulemaking for the review of negative cases, the readers need 
to understand the basic framework of the negative case review process. 
A negative case is a case where a household's application for food 
stamp benefits was denied or where a household's food stamp benefits 
were suspended or terminated. The negative universe includes all 
negative actions that occur during the review period. Under current 
rules, State agencies may randomly select negative cases for review by 
either ``action'' or by ``effective date.'' ``Action'' is a specific 
decision to deny, suspend, or terminate a case. Each action results in 
a notice to the household advising the household of the action. 
``Effective date'' measures the result of a negative action, that is, 
that following the negative action, the household does not receive 
benefits. It measures the non-receipt of benefits against the prior 
receipt of benefits. In order for a case to be subject to review as a 
negative case under the current rules, there has to be a break in 
participation, that is, a household cannot receive uninterrupted 
benefits for two full consecutive months. Between the negative action 
and the next date of participation, there must be at least one day for 
which no benefits are received. A negative case review consists of a 
case file review. An expanded review of items addressed in the case is 
permitted if the case file does not support the negative action under 
review. Contact with the household and/or collateral contacts should 
occur only to clarify information in the case record if the case record 
does not support the negative action under review. Contact with the 
household and/or collateral contacts should occur only to clarify 
information in the case record if the case record does not support the 
negative action under review. This proposal would significantly modify 
the process described above in order to make the process uniform among 
the States and to eliminate inappropriate, excessive, and unnecessary 
household contacts.
    Although not currently required, the Department has validated all 
State agencies' negative case error rates for the past several years. 
As discussed elsewhere in this rule, we are proposing that the 
Department will validate all State agencies' negative case error rates 
annually. In the process of performing these validations, it has become 
apparent that various State agencies have interpreted the regulatory 
provisions and Handbook review provisions differently. Further, it has 
become apparent that allowing the use of two different measuring 
points, by ``action'' or by ``effective'' date, has contributed to the 
differences among State agencies. Secondarily, use of ``effective 
date'' has resulted in confusion when multiple negative actions have 
occurred within the sample month. This is particularly important in 
determining the awarding of the high performance bonus awards for low 
negative case error rates. Finally, the Department has become concerned 
that some State QC workers, when they find that the basis of a negative 
case action is invalid, in an effort to find any reason that the 
negative action might have been valid, continue to review a household's 
case until any reason can be found to support the negative action 
result. This can result in multiple household and/or collateral 
contacts. The Department considers such contacts potentially 
intimidating and believes it is necessary to curtail their use. The 
Department believes that it is important that all States conduct 
negative reviews interpreting the regulatory and Handbook provisions 
the same way to ensure that review results are comparable.
    First, the Department is proposing that the negative universe be 
based on ``action,'' eliminating the option to use ``effective date.'' 
Use of the two different selection criteria, ``action'' and ``effective 
date,'' has resulted in differences in the sampling universes among the 
States and inconsistent reviews. These sampling differences are of 
statistical concern in calculating a national negative case error rate. 
Further, because multiple actions can occur within a sampling period, 
but only resulting in one denial, suspension, or termination, States 
using ``effective date'' have to decide which of the several actions to 
review. This selection process can introduce bias into the system. 
Focusing on ``action'' means that each negative action would have an 
equal opportunity to be sampled and reviewed. Finally, negative reviews 
are not measuring program losses, but service to clients. Using 
``action'' means the review is based on the reason given the household 
for the negative action. We are proposing to revise Sec.  
275.11(e)(2)(i) and (e)(2)(ii) accordingly.
    Further, we are proposing to delete the requirement that there be a 
break in participation in order for a case to be subject to review. 
Section 275.11(f)(2)(vi) provides that a negative action would not be 
subject to review if there were no break in participation.

[[Page 55781]]

Changing the focus to the action eliminates a need for measuring 
whether there was a break in participation. The break in participation 
measures the effectiveness of the negative action, the denial or end of 
a households receipt of benefits. Elimination of ``break in 
participation'' is consistent with the change in focus to ``action'' 
only reviews. A conforming change is also being made to the definition 
``Negative case'' in Sec.  271.2.
    Finally, the Department is proposing to eliminate the expanded 
review in Sec.  275.13(b). As described above, the expanded review 
allows the QC reviewer to look beyond the reason given for action taken 
by the EW to deny, terminate, or suspend a household. The QC reviewer 
may examine the case file for additional reasons to support the denial, 
suspension, or termination. It also permits contacting the household or 
a collateral contact to clarify a reason for the denial, suspension, or 
termination. During the validation process, it has become apparent that 
the expanded review has become an opportunity to search for information 
to eliminate an invalid negative decision, making the decision correct, 
rather than determining the validity of the action the EW took. The 
Department considers this an inappropriate use of the review process 
that needs to be curtailed. Elimination of the expanded review is also 
consistent with a review of ``action.'' The QC review would be focused 
solely on the action taken, not on other possible negative actions that 
could have been taken. Under this proposal, an action could only be 
determined ``valid'' if the case record supported the negative action, 
as it was presented to the household. If documentation is missing in 
the case file to support and verify the reason for the specific denial 
action, the Department is proposing to continue to allow the QC 
reviewer to contact the household or a collateral contact to verify the 
validity of the specific negative action. The Department believes that 
this is necessary to curtail reviews that are focused on eliminating 
the error, rather than on determining the validity of the action, and 
result in excessive collateral contacts, negatively impacting customer 
service. A conforming change is also being made to Sec.  275.13(c)(1).
    We recognize that by evolving State interpretations of the 
regulatory and Handbook provisions to be the same, these proposed 
revisions may change the proportion of valid determinations. However, 
the Department believes that the consistent interpretations among the 
States will yield information that more accurately reflects actual 
negative actions, and represents a better balance between accuracy and 
customer service.

D. Corrective Action Planning

    Section 4118 of the FSRA requires a State agency to do corrective 
action planning whenever its payment error rate is six percent or 
greater. In the interim rule published October 16, 2003 at 68 FR 59519, 
Sec.  275.16(b)(1) was revised to require corrective action planning 
whenever a State agencys error rate equals or exceeds six percent. 
Current regulations provide that corrective action planning shall also 
be done by a State agency when the State agency is not entitled to 
enhanced funding (Sec.  275.16(b)(2)) or when the State agencys 
negative case error rate exceeds one percent (Sec.  275.16(b)(3)). We 
are proposing to remove Sec.  275.16(b)(2) as no longer necessary 
because enhanced funding has been eliminated. In practical terms, this 
change will have little impact on the number of State agencies required 
to do corrective action planning. In FY 2002, the last year of enhanced 
funding, no State that had a payment error rate of less than six 
percent failed to qualify for enhanced funding. We are proposing to 
continue to require State agencies to conduct corrective action 
planning whenever the negative case error rate exceeds one percent 
(Sec.  275.16(b)(3)), but are proposing to redesignate Sec.  
275.16(b)(3) as Sec.  275.16(b)(2) to reflect the deletion of Sec.  
275.16(b)(2). We believe that retaining the requirement to do 
corrective action planning when the negative error rate exceeds one 
percent is necessary to ensure that households are not being 
inappropriately denied or terminated in an effort to reduce payment 
error rates. Also, this is consistent with the High Performance Bonuses 
final rule that provides criteria for rewarding States with very low 
negative case error rates. Finally, we are proposing to redesignate 
Sec.  275.16(b)(4), (b)(5), and (b)(6) as Sec.  275.16(b)(3), (b)(4), 
and (b)(5), respectively, to reflect the deletion of Sec.  275.16(b)(2) 
and redesignation of Sec.  275.16(b)(3) as Sec.  275.16(b)(2).
    Section 275.13 requires State agencies to review suspended cases as 
part of the negative case sample. Suspended cases were added to the 
negative universe in a rule published July 16, 1999, at 64 FR 38287. 
That rule did not add suspended cases to those deficiencies requiring 
corrective action at Sec.  275.16(b)(6) (redesignated in this rule as 
Sec.  275.16(b)(5)). To correct this oversight, we are proposing to 
revise redesignated Sec.  275.16(b)(5) to include deficiencies which 
result in improper suspensions.

E. Timeframes for Announcing the National Performance Measure and for 
Completing Quality Control Reviews and Resolving State/Federal 
Differences

    The interim rule published October 16, 2003, at 68 FR 59519 revised 
the regulations at Sec.  275.23(e)(7) to establish the following 
timeframes for completing quality control reviews and resolving State/
Federal differences and for announcing the national performance 
measure. The deadline for completing quality control reviews and 
resolving State/Federal differences is May 31 of the following year. 
The deadline for announcing the national performance measure is June 30 
following the end of the fiscal year review period. These new 
timeframes provide approximately two additional months to complete the 
case review and arbitration process and to develop and announce the 
national performance measure. In this rule, we are proposing to use 
this additional time in the following way.
    Currently, as provided for in Sec.  275.21(b)(2), State agencies 
are required to complete and transmit to FNS 90 percent of all cases 
selected for a sample month within 75 days of the end of that sample 
month. State agencies are required to complete and transmit to FNS 100 
percent of all cases selected for a sample month within 95 days of the 
end of the month. Section 273.21(d) requires that all cases sampled for 
the annual review period be completed or otherwise accounted for and 
reported to FNS no later than 105 days from the end of the review 
period.
    In order to fully understand this proposal, it is helpful to 
understand the background of the current timeframes. Section 13951 of 
the Mickey Leland Childhood Hunger Relief Act of 1993, Public Law 103-
66, required that all case reviews and arbitration be completed within 
180 days of the end of the review period. On June 23, 1995, the 
Department proposed changes to the regulations to implement the 180-day 
requirement to complete all case reviews and arbitration (60 FR 32615). 
In that rule, we proposed to reduce the amount of time to complete each 
monthly sample by requiring that 100 percent of the cases selected for 
review be completed within 90 days of the end of the sample month. 
However, in the final rule published June 2, 1997 (62 FR 29652), we 
left the timeframes as they were originally, i.e., that 90 percent of 
all cases be completed within 75 days and all cases be disposed of 
within 95 days of the end of the sample month. In that final rule, we 
reduced the amount

[[Page 55782]]

of time FNS regional offices had to complete validation from 95 days to 
43 days and modified the arbitration system in order to reduce the 
amount of time necessary to complete the case review and arbitration 
process within the allotted 180 days. Thus FNS absorbed all the 
reduction in time for completing the annual QC review process.
    We believe that the best uses of the additional two months of time 
between the end of March and May 30 are to provide States with more 
time to complete the individual case review process, to provide the FNS 
regional offices with more time to complete their reviews of the 
subsample cases, and to provide some additional time at the end of the 
review process for the Department to ensure the accuracy of the error 
rates, liabilities, and any adjustments to the liabilities.
    Accordingly, in Sec.  275.21(b)(2), we are proposing to provide 
State agencies at least 100 days from the end of the sample month to 
complete and transmit to FNS 90 percent of all cases and that State 
agencies shall have at least 113 days from the end of the sample month 
to complete and transmit to FNS 100 percent of all cases selected for 
the sample month. We are proposing that State agencies have at least 
123 days from the end of the annual review period to complete or 
otherwise account for all cases selected for review during the annual 
review period and to report to FNS the results of all the reviews. This 
gives the State agency an additional 25 days to act on 90 percent of 
the cases selected each sample month and an additional 18 days to 
complete all the cases selected each sample month. We are proposing 
that State agencies have at least until January 21 after the end of the 
review year to complete and dispose of all cases. We are also proposing 
that FNS may grant additional time as warranted upon request by a State 
agency for cause shown beyond these dates to complete and dispose of 
all cases. We are also proposing to revise Sec.  275.21(b)(4) by 
replacing ``95'' with ``113''; to revise Sec.  275.21(c) by replacing 
``105'' with ``123''; and to add a sentence to each of these paragraphs 
stating that if FNS extends the timeframes in Sec.  275.21(b)(2), that 
the timeframes in these paragraphs will be extended accordingly.
    On January 22, 2003, we waived the deadlines for State agencies to 
complete processing cases in Sec.  273.21(b) for FY 2003 and provided 
States with 113 days to complete each sample month's cases. This waiver 
was extended on March 4, 2004. In providing comments on this proposal, 
we would be interested in hearing whether this amount of additional 
time was useful and/or sufficient. In addition to the extended 
timeframes for completion of individual cases, that waiver provides 
State agencies an additional 10 days at the end of the review period, 
i.e., January 22 through January 31, to perform checks on the 
individual data transmitted by State agencies (c-trails). That 
additional 10 days is an expansion of current policy allowing 
additional time to check the c-trails during the review period. In this 
rulemaking, we are not proposing to allow this additional 10 days at 
the end of the review year for checking the c-trails. We are not 
proposing to allow the additional 10 days in this rulemaking because we 
feel that States have already received a significant additional amount 
of time to perform and complete all work related to the individual case 
reviews. Delaying completion of the State work until January 31 delays 
the completion of the Federal rereview process which in turn impacts 
FNS?s ability to timely and accurately prepare the payment error rates. 
However, we are interested in receiving comments on this issue.
    Under the timeframes as provided in the January 23, 2003, 
memorandum, FNS regional offices were given until March 31 to complete 
their subsample review process in order for all arbitration to be 
completed timely and to provide some additional time to ensure the 
accuracy of the error rates, liabilities, and adjustments to the 
liabilities. If FNS opts to extend the State agencies? timeframes, FNS 
will adjust the amount of time provided to the regions for validation 
and/or adjust the time provided to the Department to ensure the 
accuracy of the error rates, liabilities, and adjustments to the 
liabilities.
    Section 275.21(c) provides that State agencies report the monthly 
progress of sample selection and completion on the Form FNS-248, Status 
of Sample Selection and Completion or other format specified by FNS. In 
response to a notice published at 68 FR 10437 on March 5, 2003, the 
Department received two comments suggesting elimination of the form. 
Federal statisticians use the information on the FNS-248 to track the 
status of case completions and identify when timely generation of an 
error rate is jeopardized. Most of the information on the FNS-248 is 
available elsewhere. Further, the form itself is not necessary for 
State agencies to provide the necessary information, and the regulation 
currently provides that States may submit this information other than 
on the form. Therefore, we are proposing to revise Sec.  275.21(c) to 
eliminate the form. State agencies will still be required to submit the 
information on a monthly basis as directed by the appropriate regional 
office.
    Section 275.21(d) requires State agencies to submit an FNS-247, 
Statistical Summary of Sample Distribution, annually. Although the 
requirement is still in the regulations, FNS no longer requires State 
agencies to submit this form. Accordingly, we are proposing to remove 
Sec.  275.21(d).
    Currently, there is one level of arbitration. Quality control 
arbitration is the resolution of disagreements between the FNS regional 
office and the State agency concerning individual QC case findings and 
the appropriateness of actions taken to dispose of an individual case. 
The timeframes for conducting arbitration are in Sec.  275.3(c)(4). 
Under these rules, a State agency is required to submit its request for 
arbitration within 20 calendar days of the date of receipt by the State 
agency of the regional office case findings. The FNS arbitrator has 20 
calendar days from receipt of the State agency request to review and 
make a decision on the case. The arbitration timeframes as currently 
established appear to be adequate from our perspective. We believe that 
20 days is an adequate amount of time for a State agency to prepare its 
case for arbitration. This time period is intended primarily for the 
State agency to prepare its letter addressing what issue or issues it 
is appealing, assemble the case file, and transmit the request. This 
time period is not intended for State agencies to conduct additional 
review activities. Our recent experience with the arbitration process 
indicates that, except for a small number of cases where the State 
submitted an incomplete case, 20 days has been sufficient to review and 
reach a decision. Accordingly, we are not proposing to make any changes 
in the timeframes for requesting and conducting arbitration. We are 
seeking comments, however, about whether affected parties and the 
public agree that the timeframes are adequate. If additional time is 
required for arbitration, the amount of time given to State agencies 
for completing individual case reviews may need to be reduced from that 
proposed in this rule.

F. Consequences To Households Who Refuse To Cooperate With Quality 
Control Reviews

    Section 273.2(d)(2) provides procedures for handling the cases of 
food stamp participants who refuse to cooperate with a quality control 
review of their case. Currently, a household is determined ineligible 
if it refuses to

[[Page 55783]]

cooperate with a QC review. Questions have arisen about what happens 
when one or more household members leave a household subject to this 
penalty. Because the regulations do not provide an answer to the 
question, it has been left to State agencies to determine which 
household members continue to be subject to the penalty. We are 
proposing to amend this provision to provide that the ineligibility 
penalty will follow the household member(s) who refused to cooperate.
    In this rule, we are also proposing to make a conforming change to 
Sec.  273.2(d)(2). Current procedures in Sec.  273.2(d)(2) require that 
a household be terminated for refusal to cooperate with a State or 
Federal quality control reviewer. If a household terminated for refusal 
to cooperate with a State QC reviewer reapplies within 95 days of the 
end of the annual review period, the household cannot be determined 
eligible until it cooperates with the State QC reviewer. If the 
household terminated for refusal to cooperate with a State QC reviewer 
reapplies more than 95 days after the end of the review period, the 
household is required to provide verification of all eligibility 
factors before it can be certified. If a household terminated for 
refusal to cooperate with a Federal QC reviewer reapplies within 7 
months of the end of the annual review period, the household cannot be 
determined eligible until it cooperates with the Federal QC reviewer. 
If the household terminated for refusal to cooperate with a Federal 
reviewer reapplies more than seven months after the end of the review 
period, the household is required to provide verification of all 
eligibility factors before it can be certified. We are proposing to 
change the dates in Sec.  273.2(d)(2) to 123 days and nine months to 
conform the dates in Sec.  273.2(d)(2) to the proposed changes in the 
dates for completion of the State review process in Sec.  275.21(b) and 
the end of the Federal QC review process in Sec.  275.23(e)(7) 
(renumbered in this proposed rule as Sec.  275.23(c)).
    We are also proposing additional conforming changes to other 
sections of the regulations that identify these timeframes. These 
conforming amendments are not discussed in this preamble.

G. Section 275.23--Determination of State Agency Program Performance

    Section 275.23 establishes the procedures to be used to evaluate a 
State agency's performance through the quality control review system. 
This section includes the error rates to be established, the 
methodology used to establish those error rates (including regression), 
the thresholds for establishing potential liabilities for excessive 
error rates, the relationship of the sanction system to the warning 
process and negligence, the timeframes for announcing error rates, the 
procedures for resolving liabilities, the procedures for reducing 
liabilities based on good cause on appeal, the policy on charging 
interest on liabilities, and the procedures for new investment 
activities to reduce liabilities.
    Over time, as the authority for determining the error rates and the 
sanction system has been changed by legislation, changes have been made 
throughout Sec.  275.23. Those changes were made within the existing 
structure of the section. The changes to the sanction system made by 
the FSRA impact much of Sec.  275.23. Because several sections require 
substantive revision and many paragraphs require minor changes or 
reference changes, we have decided to take the opportunity to 
reorganize the section at the same time as making the necessary changes 
resulting from the legislation. Accordingly, we are proposing to revise 
and reorganize Sec.  275.23 in its entirety.
    Under this proposed reorganization, Sec.  275.23(a) will address 
the basic components of FNS determination of a State agency's 
efficiency and effectiveness (currently Sec.  275.23(a) and (b)). A new 
Sec.  275.23(b) will address error rates. The existing methodology for 
regression in Sec.  275.23(e)(6) is proposed to be incorporated into 
the new Sec.  275.23(b). Section 273.23(c) will address the timeframes 
for completing case reviews, conducting arbitration, and issuing error 
rates. Section 273.23(d) will address State agency liability. Included 
in this paragraph will be the procedure for establishing the national 
performance measure, the liability methodology, appeal rights, and the 
relationship to the warning process and negligence. Section 275.23(e) 
will address liability resolution plans; Sec.  275.23(f) will address 
good cause; Sec.  275.23(g) will address results of appeals on 
liability resolution; Sec.  275.23(h) will address new investment (the 
rules currently refer to such investment as ``reinvestment''; in this 
rule, we are proposing to change the term to ``new investment,'' 
consistent with the language used in the FSRA); Sec.  275.23(i) will 
address payment of the at-risk money; and Sec.  275.23(j) will address 
interest charges.
    Current Sec.  275.23(e)(4) (Relationship to warning process and 
negligence), Sec.  275.23(e)(5) (Good cause), and Sec.  275.23(e)(6) 
(Determination of payment error rates) are unchanged except for minor 
editing, renumbering, or reference changes. Sections 275.23(e)(4), 
(e)(5), and (e)(6) are proposed to be redesignated as Sec.  
275.23(d)(4), (f), and (b)(2), respectively. These changes are part of 
the restructuring for purposes of clarity. Necessary reference changes 
and language changes resulting from the elimination of enhanced funding 
have also been made. Such changes are technical in nature and do not 
impact the procedures themselves. These sections include the regression 
methodology and the criteria for good cause. Although these sections 
have been included in their entirety, their substantive content has not 
been changed, and comments are not being sought on these procedures. 
Because comments are not being sought on the substantive content of 
these sections, any comments received on the substantive content will 
not be taken into consideration in developing the final rule.

H. Elimination of Pre-Fiscal Year 2003 Liability Establishment 
Procedures

    The interim rule, published October 16, 2003, at 68 FR 59515, 
revised Sec.  275.23(e) to eliminate procedures for establishing 
liabilities for Fiscal Years 1983 through 1991. Section 275.23(e)(2) 
now provides procedures for establishing liability for excessive 
payment error rates for FY 2002. Section 275.23(e)(3) provides 
procedures for establishing liability amounts for FY 2003 and beyond, 
putting in place the provisions of Section 4118 of the FSRA. The 
provisions of Section 4118 give the Department the authority to waive 
any portion of the established liability amount, to require a State 
agency to invest up to 50 percent of any established liability amount 
in program administration activities, to establish up to 50 percent of 
the established liability amount as being ``at-risk'' for repayment if 
a liability amount is established for the subsequent fiscal year, or 
any combination of the three. Readers should refer to the interim rule 
for more information concerning the new liability system. Comments 
received in response to the interim rule and to this proposed rule will 
be considered in developing the final rule on liability resolution. The 
final rule will merge the interim rule and this proposed rule.
    We are proposing to remove Sec.  275.23(e)(2) (as part of the 
overall revision of Sec.  275.23) as it no longer necessary. All 
liabilities for FY 2002 have already been determined.

[[Page 55784]]

I. Appeals of Liability Determinations

    Section 16(c)(7) of the Food Stamp Act, as amended, provides that a 
State agency is entitled to appeal the amount of a liability only for a 
fiscal year in which a liability amount is established. That means that 
excessive payment error rates in the first year of the new 2-year 
liability system are not subject to appeal. Nor is the national 
performance measure subject to appeal, in accordance with Section 
16(c)(6)(D) of the Food Stamp Act, as amended. Thus, only a State 
agency's second year error rate and related liability determination are 
appealable. The Department recognizes that good cause may exist for an 
excessive error rate in year 2 that could be the result of events in 
year 1. The Department has proposed at Sec.  275.23(d)(3) to limit 
appeals to the determination of a State's payment error rate, or a 
determination of whether the payment error rate exceeds 105 percent of 
the national performance measure and the liability amount for any year 
for which a liability is established. To address the limitations on the 
appealability of year 1 and the possibility of causes extending back 
into that year, we are also proposing to allow a State agency to 
address areas of good cause in the prior fiscal year that may have 
impacted the fiscal year 2 for which a liability amount has been 
established.
    The recent significant drop in the national performance measure and 
individual State error rates has raised questions about the effect on 
this new liability system if the error rates continue to fall lower. 
Specifically questions have arisen about what happens if a State 
agency's error rate is below six percent but there is a 95 percent 
statistical probability that the State's payment error rate exceeds 105 
percent of the national performance measure. There are two significant 
points to be addressed. First, since six percent is the potential 
liability threshold provided in the FSRA no liability amount would be 
established. However, the year would be a year of poor performance 
under the new liability system and would be considered a year 1 in 
determining whether a State agency had two consecutive years of error 
rates exceeding 105 percent of the national performance measure. The 
law mandates that a year be considered a year of poor performance 
whenever there is a 95 percent statistical probability that a State 
agency's payment error rate exceeds 105 percent of the national 
performance measure. The six percent threshold for a liability amount 
determination is not relevant to the determination of poor performance. 
Second, questions have also arisen about whether the determination of 
whether a year for which no liability was established because the 
State's error rate was above the national performance measure but was 
below six percent was a year 1 is appealable. Under FSRA, this 
determination is not appealable. However, in the event a State agency 
incurs a potential liability in a subsequent year, a State agency would 
be able to address areas of good cause in prior fiscal year 1 that may 
have impacted the fiscal year 2 for which a liability amount has been 
established.
    Section 4118 of the FSRA provides that when a State agency appeals 
its liability amount determination, if the State agency began required 
new investment activities prior to an appeal determination, and if the 
liability amount is reduced to $0 through the appeal, the Secretary 
shall pay to the State agency an amount equal to 50 percent of the new 
investment amount that was included in the liability amount subject to 
appeal. If the Secretary wholly prevails on a State agency's appeal, 
Section 4118 provides that the Secretary will require the State agency 
to invest all or a portion of the amount designated for new investment 
to be invested or paid to the Federal government. Section 4118 further 
specifies that the Department will issue regulations addressing how the 
remaining new investment amount will be treated if neither party wholly 
prevails. The interim rule published October 16, 2003 at 68 FR 59519 
established in Sec.  275.23(e)(10) the provisions concerning either the 
Secretary or the State agency wholly prevailing. In accordance with 
Section 4118 of the FSRA, we are proposing procedures in this rule for 
use when neither party wholly prevails on appeal.
    Under the FSRA, liability is established based on two consecutive 
fiscal years of poor performance. Whenever there is a 95 percent 
statistical probability that a State's payment error rate exceeds 105 
percent of the national performance measure in each of two consecutive 
review years, the Department will issue, for the second consecutive 
fiscal year, a statement of potential liability amount to the State 
agency at the same time that the Department issues the State agency's 
official regressed payment error rate. The Department will also advise 
the State agency of the Department's determination of the portions of 
the liability amount (expressed as percentages) designated as waived, 
for new investment, and at-risk. If the State agency wishes to appeal 
the liability amount through the process in Part 283 of the 
regulations, the State agency may do so.
    As specified in the interim rule, if the State agency appeals the 
liability amount and wholly prevails and consequently its liability 
amount is reduced to $0 through the appeal, and the State agency began 
new investment activities prior to the appeal determination, FNS shall 
pay to the State agency an amount equal to 50 percent of the new 
investment amount expended that was included in the liability amount 
subject to the appeal. This provision has been moved to Sec.  
275.23(g)(1). The interim rule also provided that if FNS wholly 
prevails on a State agency's appeal, FNS will require the State agency 
to invest all or a portion of the amount designated for new investment 
to be invested or paid to the Federal government.
    The interim rule, however, did not address either the money 
designated as waived or as at-risk in the original determination with 
respect to either party wholly prevailing on appeal. As indicated 
above, the Department intends to identify the portions of the liability 
amount to be waived, newly invested, or at-risk as percentages of the 
liability amount. If the State agency wholly prevails on appeal, the 
amounts originally designated was waived or at-risk would be reduced to 
$0 (percentage designated multiplied by $0 liability amount). If FNS 
wholly prevails on appeal, the original liability amount determinations 
(expressed as percentages) and designated as waived, newly invested, or 
at-risk, would remain unchanged.
    If the State agency appeals the liability amount and the appeal 
decision results in neither FNS nor the State agency wholly prevailing, 
a decision needs to be made as to how the newly established liability 
amount will be treated. The Department believes that the only way to 
accomplish this and implement the statutory intent is to apply the 
initial determination percentages to the newly established liability 
amount. For example, if the original liability was $750,000 and the 
Department determined to waive 25% ($187,500) of it, require that 25% 
($187,500) be newly invested, and require 50% ($375,000) remain at-risk 
and if the appeal resulted in reducing the liability amount to 
$600,000, the determination under this option would be 25% ($150,000) 
waived, 25% ($150,000) required to be newly invested, and 50% 
($300,000) placed at-risk. Using the original percentages, immediate 
action can be taken by both

[[Page 55785]]

parties to process the results of the appeal decision.

J. New Investment

    The State agency may choose to begin new investment of any amount 
of the liability so designated while the appeal is proceeding, based on 
an approvable new investment plan. The interim rule established 
procedures for adjusting reimbursement and collection procedures if a 
State began new investment during the appeal process and subsequently 
wholly prevailed in its appeal or if the Department wholly prevailed on 
appeal.
    In this rule we are proposing procedures for addressing the 
Department's responsibility if a State agency began investment prior to 
completion of an appeal and neither agency wholly prevailed.
    If a State begins new investment prior to an appeal decision, and 
the amount already invested is less than the originally designated 
percentage multiplied by the new liability amount, the Department will 
require that the State agency continue to invest up to the newly 
calculated investment requirement. In the instances where a State 
agency has expended more than the originally designated percentage 
multiplied by the new liability amount, we are proposing that the 
Department will match the amount of funds expended in excess of that 
amount. This is consistent with the requirement in Section 4118 for 
when the State agency wholly prevails on appeal.
    The regulations currently detail the requirements for reinvestment. 
We are proposing that these procedures remain essentially the same but 
for the above mentioned change of wording to new investment. Under the 
proposed reorganization, the procedures on new investment would be in 
new paragraph (h) in Sec.  275.23. In the event that a State agency 
fails to comply with its new investment plan, we are proposing in 
redesignated Sec.  275.23(h) that the State agency shall be required to 
remit to the Department the amount of funds that the State agency 
failed to invest. Those funds shall be remitted to the Department 
within 30 days of the date the State agency is notified of its failure 
to comply with its new investment plan. Further, we are proposing that 
interest shall be charged beginning with the date the State agency 
received the notice of failure to newly invest as required.

K. Payment of At-Risk Money

    We are proposing at Sec.  275.23(i) the procedures concerning a 
State agency's payment of the at-risk money. At-risk money becomes due 
if, in the year subsequent to the establishment of the money being at-
risk, the State agency is again potentially liable for a sanction. 
Payment shall be made before the end of the fiscal year following the 
reporting period in which the at-risk money became due (that is 
September 30 of the year that the subsequent liability notification is 
issued), unless an administrative appeal relating to liability is 
pending. For example, if, in FY 2003, a State agency's error rate 
exceeds the performance goal, and again its error rate is excessive in 
FY 2004 based on its announced error rate, FNS would send the 
notification of the FY 2004 liability amount by June 30, 2005. If the 
State agency's error rate in FY 2005 is excessive, any money designated 
as at-risk for the FY 2004 liability would be due by September 30, 
2006, unless an appeal for the FY 2004 liability is still pending. If 
the State agency has appealed the liability determination, the State 
agency will not be required to remit to FNS any at-risk money until any 
administrative and judicial appeals concerning the liability 
determination that the at-risk money was based upon have been 
completed. Appeal of a subsequent liability amount does not eliminate 
the State's requirement to pay the at-risk money when it becomes due. 
The appeal of the subsequent year's liability amount will determine 
whether the liability that year will be reduced and would affect the 
establishment of a possible additional designation of at-risk money.
    We are proposing that interest begin accruing beginning October 1 
following the September 30 due date for payment of any at-risk money, 
unless an appeal is pending. Section 4118 of the FSRA provides that 
interest shall not accrue on the at-risk amount during a reasonable 
period following the resolution of any administrative or judicial 
appeals. Therefore, if an appeal is pending on September 30, we are 
proposing that interest will begin to accrue beginning 30 calendar days 
after the completion of the appeals process and notification to the 
State agency of the final amount of the at-risk money determined to be 
required to be repaid. This is consistent with the requirement 
currently in the regulations at Sec.  275.23(e)(8) (redesignated as 
Sec.  275.23(j)) for payment of interest on quality control liability 
claims. We are also proposing that FNS will continue to have the 
authority to recover a State's liability for at-risk money through 
offsets to the letter of credit, billing a State directly, or using 
other authorized claims collection mechanisms, in accordance with 
redesignated Sec.  275.23(j). The reference to the Federal Claims 
Collection Act (Pub. L. 89-508, 80 Stat. 308) has been updated to refer 
to the Debt Collection Improvement Act of 1996, Pub. L. 104-134, and 
the Federal Claims Collection Standards, 31 CFR Parts 900-904.

L. Demonstration Projects/SSA Processing

    Demonstration project and SSA joint-processed cases (cases 
processed in accordance with Sec.  273.2(k) of the regulations) are 
subject to special consideration in terms of the QC review process. 
Demonstration project cases and SSA joint-processed cases are included 
in the sampling universe, sampled, reviewed, and in the calculation of 
completion rates. Demonstration project cases that significantly modify 
food stamp eligibility and benefit calculations and SSA joint-processed 
are excluded from the error rate calculations. The determination of 
whether the modification is significant enough to exclude the 
demonstration project cases is made on a project-by-project basis. SSA 
joint-processed cases are excluded under the current regulations in all 
instances. Because of recent demonstration project cases processed by 
SSA separately from the procedures in Sec.  273.2(k), questions have 
arisen about how to handle these cases for QC purposes. These cases 
would under normal procedures have been excluded from the error rate 
calculations. However, as demonstration projects, they have been 
determined to be more appropriately included in the error rate 
calculations. State agencies have initiated demonstration projects for 
many reasons, including program simplification and error reduction. In 
some instances State agencies want such cases included in the error 
rates because they perceive that the inclusion would result in improved 
error rates. Section 275.11(g), Sec.  275.12(h), Sec.  275.13(f), and 
Sec.  275.23(c)(5) (redesignated in this rule as Sec.  275.23(b)(1)) 
provide the procedures for sampling, reviewing, and reporting the 
results of demonstration project cases that significantly modify the 
rules for determining households' eligibility or allotment level and 
Social Security Administration (SSA) processed cases. The language in 
these sections has been interpreted variously by different parties and 
has been determined to be unclear. In order to clarify the procedures 
and make it clear that SSA processed demonstration projects may be 
included in the error rates, we are proposing to revise Sec.  275.11(g) 
and redesignated Sec.  275.23(b)(1) to provide that

[[Page 55786]]

demonstration project cases and SSA processed demonstration project 
cases may be included in error rate calculations, as determined on a 
project-by-project basis by the Department.

M. 120-Day Variance Exclusion (Sec.  275.12(d)(2)(vii))

    A variance is the incorrect application of policy and/or deviation 
between the information that was used to authorize the sample month 
issuance and the verified information that should have been used to 
calculate the sample month issuance. Section 275.12(d)(2)(vii) provides 
for exclusion of variances resulting from application of new 
regulations or implementing memoranda of Federal law changes. 
Originally the provision applied only to mandatory implementation of 
legislative and regulatory provisions and only during the 120 days of 
the exclusion. Over time, the extent of the variance exclusion has been 
expanded to reflect a change in viewpoint of the intent of this hold 
harmless period. The variance exclusion was expanded to provide that 
the variance exclusion covered errors made during the 120-day period 
until the case was next acted upon. Further, in response to passage of 
the FSRA, the Department applied this variance exclusion to optional 
provisions of the law. Throughout this expansion, numerous questions 
have been raised about what the variance exclusion actually means. We 
are proposing in this rule to clarify the language in Sec.  
275.12(d)(2)(vii) to provide that all variances that occur during the 
variance exclusion period that stem directly from the provision being 
implemented are excluded until the household's case is next recertified 
or otherwise acted upon. Further, we are proposing to modify the 
provision to indicate that the variance exclusion may be authorized on 
a case-by-case basis in the instance of optional legislative or 
regulatory changes, not just mandatory changes. However, we are not 
proposing to provide the exclusion for waivers. The legislative 
provision authorizing the variance exclusion is specific in applying it 
to regulatory implementation. The Department's extension of that to 
implementation of legislative provisions is driven by the fact that 
many legislative provisions are effective immediately, prior to any 
regulation being published.

N. FIX Errors (Sec.  275.12(f)(3))

    As discussed above, a variance is the incorrect application of 
policy and/or deviation between the information that was used to 
authorize the sample month issuance and the verified information that 
should have been used to calculate the sample month issuance. Section 
275.12(f)(3) requires that all variances resulting from use by the 
State agency of information received from automated Federal information 
exchange systems (FIX errors) be coded and reported as variances, 
although they are excluded in determining a State agency's error rates. 
Data subject to the FIX exclusion are limited to Federal sources that 
verify income provided by the Federal source providing the data, 
Federal sources that provide the deduction for which the Federal source 
directly bills the household, and the Federal source that defines the 
disability. Information provided by Federal sources that are comprised 
of data provided to the Federal source by other entities is not 
information subject to the FIX variance exclusion. This requirement was 
established in an interim rule published November 2, 1988, at 53 FR 
44171 and again addressed in the final rule published November 23, 
1990, at 55 FR 48831. The requirement was established for program 
management purposes. After fifteen years of having the requirement in 
place to report such variance, the Department has not found the 
information to serve any program management purpose. While State 
agencies would still be required to correct any identified variances in 
individual cases, as they are for any other identified variance, we 
feel there is no reason to continue to require States to report this 
information to FNS. There have been few reported variances. Further, 
there has been no identified corrective action necessary at a national 
level during the period this requirement has been in place. Therefore, 
we are proposing to remove Sec.  275.12(f)(3) in this rule.

O. Technical Changes

    In addition, we are proposing in Part 271 Definitions to remove 
definitions no longer used in the quality control system and to add the 
definition ``National performance measure'' to reflect current quality 
control policy, and we are proposing to make technical changes 
throughout Part 275 to remove references to other Federally mandated 
quality control samples, the Worksheet for Integrated AFDC, Food 
Stamps, and Medicaid Quality Control Reviews, and the Integrated Review 
Schedule. With the passage of the Personal Responsibility and Work 
Opportunity Reconciliation Act of 1996, Pub. L. 104-193, the Aid to 
Families with Dependent Children was eliminated and consequently, the 
integrated quality control review system was eliminated. Therefore, we 
are proposing to change throughout Part 275 the titles of the Work 
Sheet and Review Schedule to reflect that quality control reviews are 
now food stamp only reviews. We are also proposing to remove throughout 
Part 275 references to integrated quality control samples, reviews, and 
other Federally mandated quality control systems.
    Throughout the rule, we are proposing to remove references to the 
``underissuance error rate'' wherever payment error rate and 
underissuance error rate are used. The definition of payment error rate 
includes both the overissuance error rate and the underissuance error 
rate, making the separate reference to the underissuance error rate 
redundant. This does not mean that FNS will not calculate the 
underissuance error rate.
    With full implementation of electronic benefit transfer systems of 
issuance, food stamp benefits are no longer being issued as coupons. 
Accordingly we are proposing to remove references to coupons in Sec.  
275.12(c)(2) and Sec.  275.13(d).
    In addition, we are proposing technical changes throughout Part 275 
to correct references based on changes proposed to be made in this 
rule. Due to the restructuring of Sec.  275.23, many sections required 
renumbering and reference changes throughout Sec.  275. These reference 
changes are not discussed in this preamble. Any substantive changes are 
discussed in the preamble.

                           Distribution Table
------------------------------------------------------------------------
              Old section                          New section
------------------------------------------------------------------------
275.23(a)..............................  275.23(a)
275.23(b)..............................  275.23(a)
275.23(c)..............................  275.23(c)
275.23(c)(1)...........................  Removed
275.23(c)(2)...........................  Removed

[[Page 55787]]

 
275.23(c)(3)...........................  Removed
275.23(c)(4)...........................  Removed
275.23(c)(5)...........................  275.23(b)(1)
275.23(d)..............................  Removed
275.23(e)(1)...........................  275.23(d) introductory text
275.23(e)(2)...........................  Removed
275.23(e)(3) [1st and 3rd sentences]...  275.23(d)(1)
275.23(e)(3) [2nd sentence]............  271.2 Definition of ``National
                                          Performance Measure''
275.23(e)(3) [4th sentence]............  275.23(d)(3)
275.23(e)(3) [last sentence and (i),     275.23(d)(2)
 (ii), and (iii)].
275.23(e)(4)...........................  275.23(d)(4)
275.23(e)(5)...........................  275.23(f)
275.23(e)(6)...........................  275.23(b)(2)
275.23(e)(7)...........................  275.23(c)
275.23(e)(8)...........................  275.23(j)
275.23(e)(9)(i)........................  275.23(h)(1)
275.23(e)(9)(ii).......................  275.23(h)(2)
275.23(e)(9)(iii)......................  275.23(h)(3)
275.23(e)(10)..........................  275.23(e)
------------------------------------------------------------------------


                            Derivation Table
------------------------------------------------------------------------
              New section                          Old section
------------------------------------------------------------------------
271.2 Definition of National             275.23(e)(3) second sentence
 Performance Measure.
275.23(a)..............................  275.23(a), 275.23(b)
275.23(b)..............................  275.23(c) [1st sentence]
                                         275.23(c)(1) [end of sentence
                                          beginning with word ``based'']
                                         275.23(c)(4) [end of sentence
                                          beginning with word ``based'']
273.23(b)(1)...........................  275.23(c)(5) revised
273.23(b)(2)...........................  275.23(e)(6)
275.23(c)..............................  275.23(e)(7)
275.23(d)(1)...........................  275.23(e)(3) [1st three
                                          sentences]
275.23(d)(2)...........................  275.23(e)(3) [sentences 5 & 6]
                                          and paragraphs (i), (ii), and
                                          (iii)
275.23(d)(3)...........................  275.23(e)(3) [fourth sentence]
275.23(d)(4)...........................  275.23(e)(4)
275.23(e)(1)...........................  275.23(e)(10) [first sentence]
275.23(e)(2)...........................  275.23(e)(10) [second and third
                                          sentences]
                                         275.23(e)(9)(iii) [1st
                                          sentence]
275.23(f)..............................  275.23(e)(5) [introductory text
                                          revised]
275.23(g)(1)...........................  275.23(e)(10) [fourth sentence]
275.23(g)(2)...........................  275.23(e)(10) [last sentence]
275.23(h)(1)...........................  275.23(e)(9)(i)
275.23(h)(2)...........................  275.23(e)(9)(ii)
275.23(h)(3)...........................  275.23(e)(9)(iv) [first
                                          sentence]
275.23(h)(4)...........................  275.23(e)(9)(v)
275.23(h)(5)...........................  275.23(e)(9)(vi)
275.23(j)..............................  275.23(e)(8)
------------------------------------------------------------------------

IV. Implementation

    The Department is proposing that the changes in this rule be 
effective and be implemented 60 days following publication of the final 
rule in the Federal Register. Section 4118 of the FSRA eliminated 
enhanced funding, effective October 1, 2002, for FY 2003. This rule 
would codify that elimination.

List of Subjects

7 CFR Part 271

    Administrative practice and procedure, Food stamps, Grant 
programs--social programs.

7 CFR Part 273

    Administrative practice and procedures, Aliens, Claims, Food 
stamps, Fraud, Grant programs--social programs, Penalties, Reporting 
and recordkeeping requirements, Social Security, Students.

7 CFR Part 275

    Administrative practice and procedure, Food stamps, Reporting, and 
recordkeeping requirements.

7 CFR Part 277

    Food stamps, Government procedure, Grant programs--Social programs, 
Investigations, Records, Reporting and recordkeeping requirements.

    Accordingly, 7 CFR Parts 271, 273, 275, and 277 are proposed to be 
amended as follows:
    1. The authority citation for Parts 271, 273, 275, and 277 
continues to read as follows:

    Authority: 7 U.S.C. 2011-2036.

PART 271--GENERAL INFORMATION AND DEFINITIONS

    2. In Sec.  271.2:
    a. Remove the definition ``Base period''.
    b. Remove the definition ``National standard payment error rate''.

[[Page 55788]]

    c. Add the definition ``National performance measure'' in 
alphabetical order.
    d. Revise the definition ``Negative case''.
    The addition and revision read as follows:


Sec.  271.2  Definitions.

* * * * *
    National performance measure means the sum of the products of each 
State agency's payment error rate times that State agency's proportion 
of the total value of the national allotments issued for the fiscal 
year using the most recent issuance data available at the time the 
State agency is notified of its performance error rate.
    Negative case means any action taken to deny, suspend, or terminate 
a case in the sample month.
* * * * *

PART 273--CERTIFICATION OF ELIGIBLE HOUSEHOLDS

    3. In Sec.  273.2, paragraph (d)(2) is amended by:
    a. Removing the reference ``Sec.  275.3(c)(5) or Sec.  
275.12(g)(1)(ii),'' and adding in its place the reference ``Sec. Sec.  
275.3(c)(5) and 275.12(g)(1)(ii) of this chapter,'';
    b. Removing the number ``95'' in the third sentence and adding in 
its place the number ``123'';
    c. Removing the reference ``Sec.  273.2(f)(1)(ix)'' at the end of 
the third sentence and adding in its place the reference ``paragraph 
(f)(1)(ix) of this section'';
    d. Removing the word ``seven'' in the last sentence and adding in 
its place the word ``nine'';
    e. Removing the reference ``Sec.  273.2(f)(1)(ix)'' at the end of 
the last sentence and adding in its place the reference ``paragraph 
(f)(1)(ix) of this section.'';
    f. Adding a new sentence at the end of the paragraph to read as 
follows:


Sec.  273.2  Office operations and application processing.

* * * * *
    (d) * * *
    (2) * * * In the event that one or more household members leave a 
household terminated for refusal to cooperate, the penalty for refusal 
to cooperate will attach to the person(s) who refused to cooperate.
* * * * *

PART 275--PERFORMANCE REPORTING SYSTEM


Sec.  275.1  [Amended]

    4. In Sec.  275.1:
    a. Paragraph (a) is amended by removing the paragraph designation; 
and
    b. Paragraph (b) is removed.
    5. In Sec.  275.3:
    a. The introductory text of Sec.  275.3 is amended by removing the 
word ``conduct'' in the second sentence and adding in its place the 
word ``conduction''.
    b. The introductory text of paragraph (c) is amended by removing 
the words ``and underissuance error rate'' in the first sentence, by 
removing the third and fourth sentences and adding a new sentence in 
their place, and by removing the reference to ``Sec.  275.23(e)(6)'' in 
the last sentence and adding in its place a reference to ``Sec.  
275.23(d)(4)''.
    The addition reads as follows:


Sec.  275.3  Federal monitoring.

* * * * *
    (c) * * * FNS shall validate each State agency's reported negative 
case error rate. * * *
* * * * *


Sec.  275.4  [Amended]

    6. In Sec.  275.4, paragraph (c) is amended by removing the words 
``Integrated TANF, Food Stamps and Medicaid'' and by adding in their 
place the words ``Food Stamp Program'', by removing the words 
``Integrated Review Schedule'' and by adding in their place the words 
``Quality Control Review Schedule'', and by removing the words ``, and 
Form FNS-248, Status of Sample Selection and Completion''.


Sec.  275.10  [Amended]

    7. In Sec.  275.10:
    a. Paragraph (a) is amended by removing the words ``and eligibility 
for enhanced funding'' and the words ``that is not entitled to enhanced 
funding'' in the last sentence.
    b. Paragraph (b)(4) is amended by removing the word ``standard'' 
and adding in its place the words ``performance measure'' and by 
removing the words ``and State agency eligibility for enhanced 
funding''.
    8. In Sec.  275.11:
    a. Paragraph (a)(1) is amended by removing the last sentence.
    b. Paragraph (a)(2) introductory text is amended by removing the 
words ``integrated sampling,''.
    c. Paragraph (b)(1)(i) is amended by removing the words ``and 
underissuance error rates'' and adding in their place the word 
``rate''.
    d. Paragraph (e)(2)(i) is revised.
    e. Paragraph (e)(2)(ii) is revised.
    f. Paragraph (f)(2) introductory text is revised.
    g. Paragraph (f)(2)(v) and (f)(2)(vi) are removed and paragraphs 
(f)(2)(vii), (f)(2)(viii), and (f)(2)(ix) are redesignated as 
(f)(2)(v), (f)(2)(vi), and (f)(2)(vii), respectively.
    h. Paragraph (g) is amended by removing the reference ``Sec.  
275.23(e)(6)'' in the third sentence and by adding in its place the 
reference ``Sec.  275.23(b)(2)''; by removing the fourth sentence; and 
by adding three new sentences at the end of the paragraph.
    The revisions and addition read as follows:


Sec.  275.11  Sampling.

* * * * *
    (e) * * *
    (2) * * *
    (i) All actions to deny an application in the sample month except 
those excluded from the universe in paragraph (f)(2) of this section. 
If a household is subject to more than one denial action in a single 
sample month, each action shall be listed separately in the sample 
frame; and
    (ii) All actions to suspend or terminate a household in the sample 
month except those excluded from the universe in paragraph (f)(2) of 
this section. Each action to suspend or terminate a household in the 
sample month shall be listed separately in the sample frame.
* * * * *
    (f) * * *
    (2) Negative cases. The universe for negative cases shall include 
all actions taken to deny, suspend or terminate a household in the 
sample month except the following:
* * * * *
    (g) * * * FNS shall establish on an individual demonstration 
project basis whether the results of the reviews of active and negative 
demonstration project cases shall be included or excluded from the 
determination of State agencies' error rates as described in Sec.  
275.23(b). Cases processed by SSA in accordance with Sec.  273.2(k) of 
this chapter, except for demonstration project cases, shall be excluded 
from the determination of State agencies' error rates. FNS shall 
establish on an individual project basis whether demonstration project 
cases processed by SSA shall be included or excluded from the 
determination of State agencies' error rates.
    9. In Sec.  275.12:
    a. Paragraph (a) is amended by adding the words ``of this chapter'' 
after the reference ``273.9'' at the end of the fourth sentence and by 
adding the words ``of this chapter'' after the reference ``273.21'' in 
the sixth sentence.

[[Page 55789]]

    b. Paragraph (b) is amended by removing the words ``Integrated 
Worksheet,'' in the last sentence.
    c. The introductory text of paragraph (c) is amended by adding the 
words ``of this chapter'' after the reference ``Sec.  272.8'' at the 
end of the second sentence and by removing the words ``Integrated 
Worksheet,'' in the last sentence.
    d. Paragraph (c)(2) is amended by removing the word ``coupon'' in 
the second sentence.
    e. The introductory text of paragraph (d) is amended by removing 
the words ``column (5) of the Integrated Worksheet,'' in the last 
sentence, and by adding in their place the words ``column (4) of the''.
    f. Paragraph (d)(1) is amended by adding the words ``of this 
chapter'' after the references ``Sec.  273.6(c)'' and ``Sec.  
273.7(f)'' in the last sentence.
    g. Paragraph (d)(2)(i) is amended by adding the words ``of this 
chapter'' after the reference ``Sec.  273.2(f)(1)(i)'' in the last 
sentence.
    h. Paragraph (d)(2)(ii) is amended by adding the words ``of this 
chapter'' after the reference ``Sec.  273.2(i)(4)(i)'' in the first 
sentence.
    i. Paragraph (d)(2)(iii) is amended by adding the words ``of this 
chapter'' after the reference ``Sec. Sec.  273.12(a) and 273.21(h) and 
(i)'' in the second sentence and after the reference ``Sec. Sec.  
273.12(c) and 273.21(j)'' in the last sentence.
    j. Paragraph (d)(2)(iv) is amended by adding the words ``of this 
chapter'' after the reference ``Sec.  273.2(f)(3)(i)(B)'' in the first 
sentence and after the reference ``Sec.  273.12(c)'' in the last 
sentence.
    k. The introductory text of paragraph (d)(2)(vii) is revised.
    l. Paragraph (d)(3) is amended by adding the words ``of this 
chapter'' after the words ``part 273'' in the second sentence.
    m. Paragraph (e) is amended by removing the words ``Integrated 
Worksheet,'' in the last sentence.
    n. The introductory text of paragraph (f) is amended by removing 
the words ``Integrated Review Schedule,'' in the last sentence.
    o. Paragraph (f)(3) is removed.
    p. The introductory text of paragraph (g) is amended by removing 
the words ``Integrated Review Schedule,'' in the last sentence.
    q. Paragraph (g)(1)(ii) introductory text is amended by removing 
the word ``may'' in the second sentence and adding in its place the 
word ``must''.
    r. Paragraph (g)(2)(iv) is amended by adding the words ``of this 
chapter'' after the reference ``Sec.  273.17''.
    s. Paragraph (h) is amended by adding the words ``of this chapter'' 
after the reference ``Sec.  273.2(k)(2)(ii)'' in the last sentence.
    The revision reads as follows:


Sec.  275.12  Review of active cases.

* * * * *
    (d) * * *
    (2) * * *
    (vii) Subject to the limitations provided in paragraphs 
(d)(2)(vii)(A) through (d)(2)(vii)(F) of this section, any variance 
resulting from application of a new Program regulation or implementing 
memorandum of a mandatory change in Federal law that occurs during the 
first 120 days from the required implementation date. The variance 
exclusion shall apply to any action taken on a case directly related to 
implementation of a covered provision during the 120-day exclusionary 
period until the case is required to be recertified or acted upon for 
some other reason. FNS may choose to apply this variance exclusion to 
optional regulatory or legislative provisions.
* * * * *
    10. In Sec.  275.13:
    a. Paragraphs (a), (b), and (c)(1) are revised.
    b. Paragraph (d) is amended by removing the word ``coupon'' in the 
first sentence.
    The revisions read as follows:


Sec.  275.13  Review of negative cases.

    (a) General. A sample of actions to deny applications, or suspend 
or terminate a household in the sample month shall be selected for 
quality control review. These negative actions shall be reviewed to 
determine whether the State agency's decision to deny, suspend, or 
terminate the household, as of the review date, was correct. Depending 
on the characteristics of individual State systems, the review date for 
negative cases could be the date of the agency's decision to deny, 
suspend, or terminate program benefits, the date on which the decision 
is entered into the computer system, or the date of the notice to the 
client. State agencies must consistently apply the same definition for 
review date to all sample cases of the same classification. The review 
of negative cases shall include a household case record review; an 
error analysis; and the reporting of review findings, including 
procedural problems with the action regardless of the validity of the 
decision to deny, suspend or terminate. In certain instances, contact 
with the household or a collateral contact may be permitted.
    (b) Household case record review. The reviewer shall examine the 
household case record and verify through documentation in it whether 
the reason given for the denial, suspension, or termination is correct. 
Through the review of the household case record, the reviewer shall 
complete the household case record sections and document the reasons 
for denial, suspension or termination on the Negative Quality Control 
Review Schedule, Form FNS-245.
    (c) * * *
    (1) A negative case shall be considered correct if the reviewer is 
able to verify through documentation in the household case record that 
a household was correctly denied, suspended, or terminated from the 
program in accordance with the reason for the action given by the State 
agency in the notice. Whenever the reviewer is unable to verify the 
correctness of the State agency's decision to deny, suspend, or 
terminate a household's participation through such documentation, the 
QC reviewer may contact the household or a collateral contact to verify 
the correctness of the specific negative action under review. If the 
reviewer is unable to verify the correctness of the State agency's 
decision to deny, suspend, or terminate the case for the specific 
reason given for the action, the negative case shall be considered 
incorrect.
* * * * *


Sec.  275.14  [Amended]

    11. In Sec.  275.14:
    a. Paragraph (c) is amended by removing the words ``Integrated 
Review Worksheet, Form FNS-380,'' in the first sentence and by adding 
in their place the words ``Form FNS-380''.
    b. Paragraph (d) is amended by removing the words ``Integrated 
Review Schedule,'' in the first sentence and by removing the words 
``Integrated Review Worksheet,'' in the second sentence.
    12. In Sec.  275.16:
    a. Paragraph (b)(2) is removed and paragraphs (b)(3), (b)(4), 
(b)(5), and (b)(6) are redesignated as (b)(2), (b)(3), (b)(4), and 
(b)(5), respectively.
    b. Newly-redesignated paragraph (b)(5) is revised.
    The revision reads as follows:


Sec.  275.16  Corrective action planning.

* * * * *
    (b) * * *
    (5) Result in underissuances, improper denials, improper 
suspensions, improper termination, or improper systemic suspension of 
benefits to eligible households where such errors are caused by State 
agency rules, practices, or procedures.
* * * * *
    13. In Sec.  275.21:

[[Page 55790]]

    a. The introductory text of paragraph (b) is amended by removing 
the words ``Integrated Review Schedule,'' in the second sentence.
    b. Paragraph (b)(2) is revised.
    c. Paragraph (b)(4) is amended by removing the number ``95'' in the 
first sentence and adding in its place the number ``113'' and adding a 
new sentence after the first sentence.
    d. Paragraph (c) is revised.
    e. Paragraph (d) is removed and paragraph (e) is redesignated as 
paragraph (d).
    f. Newly-redesignated paragraph (d) is revised.
    The revisions and addition read as follows:


Sec.  275.21  Quality control review reports.

* * * * *
    (b) * * *
    (2) The State agency shall have at least 100 days from the end of 
the sample month to dispose of and report the findings of 90 percent of 
all selected cases in a given sample month. The State agency shall have 
at least 113 days from the end of the sample month to dispose of and 
report the findings of all cases selected in a sample month. FNS may 
grant additional time as warranted upon request by a State agency for 
cause shown to complete and dispose of individual cases.
* * * * *
    (4) * * * If FNS extends the timeframes in paragraph (b)(2) of this 
section, this date will be extended accordingly. * * *
    (c) Monthly status. The State agency shall report in a manner 
directed by the regional office the monthly progress of sample 
selection and completion within 123 days after the end of the sample 
month. Each report shall reflect sampling and review activity for a 
given sample month. If FNS extends the timeframes in paragraph (b)(2) 
of this section, this date will be extended accordingly.
    (d) Demonstration projects/SSA processing. The State agency shall 
identify the monthly status of active and negative demonstration 
project/SSA processed cases (i.e., those cases described in Sec.  
275.11(g)) in accordance with paragraph (c) of this section.
    14. Section 275.23 is revised to read as follows:


Sec.  275.23  Determination of State agency program performance.

    (a) Determination of efficiency and effectiveness. FNS shall 
determine the efficiency and effectiveness of a State's administration 
of the Food Stamp Program by measuring State compliance with the 
standards contained in the Food Stamp Act, regulations, and the State 
Plan of Operation and State efforts to improve program operations 
through corrective action. This determination shall be made based on:
    (1) Reports submitted to FNS by the State;
    (2) FNS reviews of State agency operations;
    (3) State performance reporting systems and corrective action 
efforts; and
    (4) Other available information such as Federal audits and 
investigations, civil rights reviews, administrative cost data, 
complaints, and any pending litigation.
    (b) State agency error rates. FNS shall estimate each State 
agency's active case, payment, and negative case error rate based on 
the results of quality control review reports submitted in accordance 
with the requirements outlined in Sec.  275.21. The determination of 
the correctness of the case shall be based on certification policy as 
set forth in part 273 of this chapter.
    (1) Demonstration projects/SSA processing. FNS shall make a project 
by project determination whether the reported results of reviews of 
active and negative demonstration project cases shall be included or 
excluded from the estimate of the active case error rate, payment error 
rate, and negative case error rate. The reported results of reviews of 
cases processed by SSA in accordance with Sec.  273.2(k) of this 
chapter shall be excluded from the estimate of the active case error 
rate, payment error rate, and negative case error rate. FNS shall make 
a project by project determination whether the reported results of 
reviews of active and negative demonstration project cases processed by 
SSA shall be included or excluded from the estimate of the active case 
error rate, payment error rate, and negative case error rate.
    (2) Determination of payment error rates. As specified in Sec.  
275.3(c), FNS will validate each State agency's estimated payment error 
rate by rereviewing the State agency's active case sample and ensuring 
that its sampling, estimation, and data management procedures are 
correct.
    (i) Once the Federal case reviews have been completed and all 
differences with the State agency have been identified, FNS shall 
calculate regressed error rates using the following linear regression 
equations.
    (A) y1' = y1 + b1(X1-
x1), where y1' is the average value of allotments 
overissued to eligible and ineligible households; y1 is the 
average value of allotments overissued to eligible and ineligible 
households in the rereview sample according to the Federal finding, 
b1 is the estimate of the regression coefficient regressing 
the Federal findings of allotments overissued to eligible and 
ineligible households on the corresponding State agency findings, 
x1 is the average value of allotments overissued to eligible 
and ineligible households in the rereview sample according to State 
agency findings, and X1 is the average value of allotments 
overissued to eligible and ineligible households in the full quality 
control sample according to State agency's findings. In stratified 
sample designs Y1, X1, and x1 are 
weighted averages and b1 is a combined regression 
coefficient in which stratum weights sum to 1.0 and are proportional to 
the estimated stratum caseloads subject to review.
    (B) y2' = y2 + b2(X2-
x2), where y2' is the average value of allotments 
underissued to households included in the active error rate, 
y2 is the average value of allotments underissued to 
participating households in the rereview sample according to the 
Federal finding, b2 is the estimate of the regression 
coefficient regressing the Federal findings of allotments underissued 
to participating households on the corresponding State agency findings, 
x2 is the average value of allotments underissued to 
participating households in the rereview sample according to State 
agency findings, and X2 is the average value of allotments 
underissued to participating households in the full quality control 
sample according to the State agency's findings. In stratified sample 
designs y2, X2, and x2 are weighted 
averages and b2 is a combined regression coefficient in 
which stratum weights sum to 1.0 and are proportional to the estimated 
stratum caseloads subject to review.
    (C) The regressed error rates are given by r1 = 
y1/u, yielding the regressed overpayment error rate, and 
r2' = y2'/u, yielding the regressed underpayment 
error rate, where u is the average value of allotments issued to 
participating households in the State agency sample.
    (D) After application of the adjustment provisions of paragraph 
(b)(2)(iii) of this section, the adjusted regressed payment error rate 
shall be calculated to yield the State agency's payment error rate. The 
adjusted regressed payment error rate is given by r1'' + 
r2''.
    (ii) If FNS determines that a State agency has sampled incorrectly, 
estimated improperly, or has deficiencies in its QC data management 
system, FNS will correct the State agency's payment and negative case 
error rates based upon a correction to that aspect of the State 
agency's QC

[[Page 55791]]

system which is deficient. If FNS cannot accurately correct the State 
agency's deficiency, FNS will assign the State agency a payment error 
rate or negative case error rate based upon the best information 
available. After consultation with the State agency, the assigned 
payment error rate will then be used in the liability determination. 
After consultation with the State agency, the assigned negative case 
error rate will be the official State negative case error rate for any 
purpose. State agencies shall have the right to appeal assessment of an 
error rate in this situation in accordance with the procedures of Part 
283 of this chapter.
    (iii) Should a State agency fail to complete 98 percent of its 
required sample size, FNS shall adjust the State agency's regressed 
error rates using the following equations:
    (A) r1''=r1'+2(1-C)S1, where 
r1'' is the adjusted regressed overpayment error rate, 
r1', is the regressed overpayment error rate computed from 
the formula in paragraph (b)(2)(i)(C) of this section, C is the State 
agency's rate of completion of its required sample size expressed as a 
decimal value, and S1 is the standard error of the State 
agency sample overpayment error rate. If a State agency completes all 
of its required sample size, then r1''=r1'.
    (B) r2''=r2'+2(1 -C)S2, where 
r2'' is the adjusted regressed underpayment error rate, 
r2' is the regressed underpayment error rate computed from 
the formula in paragraph (b)(2)(i)(C) of this section, C is the State 
agency's rate of completion of its required sample size expressed as a 
decimal value, and S2 is the standard error of the State 
agency sample underpayment error rate. If a State agency completes all 
of its required sample size, then r2''=r2'.
    (c) FNS Timeframes for completing case review process, arbitration, 
and issuing error rates. The case review process and the arbitration of 
all difference cases shall be completed by May 31 following the end of 
the fiscal year. FNS shall determine and announce the national average 
payment and negative case error rates for the fiscal year by June 30 
following the end of the fiscal year. At the same time FNS shall notify 
all State agencies of their individual payment and negative case error 
rates and payment error rate liabilities, if any. FNS shall provide a 
copy of each State agency's notice of potential liability to its 
respective chief executive officer and legislature. FNS shall initiate 
collection action on each claim for such liabilities before the end of 
the fiscal year following the reporting period in which the claim arose 
unless an appeal relating to the claim is pending. Such appeals include 
administrative and judicial appeals pursuant to Section 14 of the Food 
Stamp Act. While the amount of a State's liability may be recovered 
through offsets to their letter of credit as identified in Sec.  
277.16(c) of this chapter, FNS shall also have the option of billing a 
State directly or using other claims collection mechanisms authorized 
under the Debt Collection Improvement Act of 1996 (Pub. L. 104-134) and 
the Federal Claims Collection Standards (31 CFR Parts 900-904), 
depending upon the amount of the State's liability. FNS is not bound by 
the timeframes referenced in paragraph (c) of this section in cases 
where a State fails to submit QC data expeditiously to FNS and FNS 
determines that, as a result, it is unable to calculate the State's 
payment error rate and payment error rate liability within the 
prescribed timeframe.
    (d) State agencies' liabilities for payment error rates. At the end 
of each fiscal year, each State agency's payment error rate over the 
entire fiscal year will be computed and evaluated to determine whether 
the payment error rate goal (national performance measure) established 
in paragraph (d)(1) of this section has been met. Each State agency 
that fails to achieve its payment error rate goal during a fiscal year 
shall be liable as specified in paragraph (d)(2) of this section.
    (1) National performance measure. FNS shall announce a national 
performance measure not later than June 30 after the end of the fiscal 
year. The national performance measure is the sum of the products of 
each State agency's error rate times that State agency's proportion of 
the total value of national allotments issued for the fiscal year using 
the most recent issuance data available at the time the State agency is 
notified of its payment error rate. Once announced, the national 
performance measure for a given fiscal year will not be subject to 
administrative or judicial appeal.
    (2) Liability. For fiscal year 2003 and subsequent years, liability 
for payment shall be established whenever there is a 95 percent 
statistical probability that, for the second or subsequent consecutive 
fiscal year, a State agency's payment error rate exceeds 105 percent of 
the national performance measure. The amount of the liability shall be 
equal to the product of the value of all allotments issued by the State 
agency in the second (or subsequent consecutive) fiscal year; 
multiplied by the difference between the State agency's payment error 
rate and 6 percent; multiplied by 10 percent.
    (3) Right to appeal payment error rate liability. Determination of 
a State agency's payment error rate or whether that payment error rate 
exceeds 105 percent of the national performance measure shall be 
subject to administrative or judicial review only if a liability amount 
is established for that fiscal year. Procedures for good cause appeals 
of excessive payment error rates are addressed in paragraph (f) of this 
section. The established national performance measure is not subject to 
administrative or judicial appeal, nor is any prior fiscal year payment 
error rate subject to appeal as part of the appeal of a later fiscal 
year's liability amount. However, State agencies may address matters 
related to good cause in an immediately prior fiscal year that impacted 
the fiscal year for which a liability amount has been established. The 
State agency will need to address how year 2 was impacted by the 
event(s) in the prior year.
    (4) Relationship to warning process and negligence.
    (i) States' liability for payment error rates as determined above 
in paragraphs (d)(1) through (d)(3) of this section are not subject to 
the warning process of Sec.  276.4(d) of this chapter.
    (ii) FNS shall not determine negligence (as described in Sec.  
276.3 of this chapter) based on the overall payment error rate for 
issuances to ineligible households and overissuances to eligible 
households in a State or political subdivision thereof. FNS may only 
establish a claim under Sec.  276.3 of this chapter for dollar losses 
from failure to comply, due to negligence on the part of the State 
agency (as defined in Sec.  276.3 of this chapter), with specific 
certification requirements. Thus, FNS will not use the result of 
States' QC reviews to determine negligence.
    (iii) Whenever a State is assessed a liability amount for an 
excessive payment error rate, the State shall have the right to request 
an appeal in accordance with procedures set forth in part 283 of this 
chapter. While FNS may determine a State to be liable for dollar loss 
under the provisions of this section and the negligence provisions of 
Sec.  276.3 of this chapter for the same period of time, FNS shall not 
bill a State for the same dollar loss under both provisions. If FNS 
finds a State liable for dollar loss under both the QC liability system 
and the negligence provisions, FNS shall adjust the billings to ensure 
that two claims are not made against the State for the same dollar 
loss.
    (e) Liability Amount Determinations. (1) FNS shall provide each 
State agency whose payment error rate subjects it to a liability amount 
the following

[[Page 55792]]

determinations each expressed as a percentage of the total liability 
amount. FNS shall:
    (i) Waive all or a portion of the liability;
    (ii) Require the State agency to invest up to 50 percent of the 
liability in activities to improve program administration (new 
investment money shall not be matched by Federal funds);
    (iii) Designate up to 50 percent of the liability as ``at-risk'' 
for repayment if a liability is established based on the State agency's 
payment error rate for the subsequent fiscal year; or
    (iv) Choose any combination of these options.
    (2) Once FNS determines the percentages in accordance with 
paragraphs (e)(1)(i) through (e)(1)(iv) of this section, the amount 
assigned as at-risk is not subject to settlement negotiation between 
FNS and the State agency and may not be reduced unless an appeal 
decision revises the total dollar liability. FNS and the State agency 
shall settle any waiver percentage amount or new investment percentage 
amount before the end of the fiscal year in which the liability amount 
is determined. The determination of percentages for waiver, new 
investment and/or at-risk amounts by the Department is not appealable. 
Likewise, a settlement of the waiver and new investment amounts is 
unappealable.
    (f) Good cause. When a State agency with otherwise effective 
administration exceeds the tolerance level for payment errors as 
described in this section, the State agency may seek relief from 
liability claims that would otherwise be levied under this section on 
the basis that the State agency had good cause for not achieving the 
payment error rate tolerance. State agencies desiring such relief must 
file an appeal with the Department's Administrative Law Judge (ALJ) in 
accordance with the procedures established under part 283 of this 
chapter. Paragraphs (f)(1) through (f)(5) of this section describe the 
unusual events that are considered to have a potential for disrupting 
program operations and increasing error rates to an extent that relief 
from a resulting liability amount or increased liability amount is 
appropriate. The occurrence of an event(s) does not automatically 
result in a determination of good cause for an error rate in excess of 
the national performance measure. The State agency must demonstrate 
that the event had an adverse and uncontrollable impact on program 
operations during the relevant period, and the event caused an 
uncontrollable increase in the error rate. Good cause relief will only 
be considered for that portion of the error rate/liability amount 
attributable to the unusual event. The following are unusual events 
which State agencies may use as a basis for requesting good cause 
relief and specific information that must be submitted to justify such 
requests for relief:
    (1) Natural disasters and civil disorders. Natural disasters such 
as those under the authority of The Disaster Relief and Emergency 
Assistance Amendments of 1988 (Pub. L. 100-707), which amended The 
Robert T. Stafford Disaster Relief and Emergency Assistance Act (Pub. 
L. 93-288), or civil disorders that adversely affect program 
operations.
    (i) When submitting a request for good cause relief based on this 
example, the State agency shall provide the following information:
    (A) The nature of the disaster(s) (e.g. a tornado, hurricane, 
earthquake, flood, etc.) or civil disorder(s) and evidence that the 
President has declared a disaster;
    (B) The date(s) of the occurrence;
    (C) The date(s) after the occurrence when program operations were 
affected;
    (D) The geographic extent of the occurrence (i.e. the county or 
counties where the disaster occurred);
    (E) The proportion of the food stamp caseload whose management was 
affected;
    (F) The reason(s) why the State agency was unable to control the 
effects of the disaster on program administration and errors.
    (G) The identification and explanation of the uncontrollable nature 
of errors caused by the event (types of errors, geographic location of 
the errors, time period during which the errors occurred, etc.).
    (H) The percentage of the payment error rate that resulted from the 
occurrence and how this figure was derived; and
    (I) The degree to which the payment error rate exceeded the 
national performance measure in the subject fiscal year.
    (ii) (A) The following criteria and methodology will be used to 
assess and evaluate good cause in conjunction with the appeals process, 
and to determine that portion of the error rate/liability amount 
attributable to the uncontrollable effects of a disaster or civil 
disorder:
    (1) Geographical impact of the disaster;
    (2) State efforts to control impact on program operations;
    (3) The proportion of food stamp caseload affected; and/or
    (4) The duration of the disaster and its impact on program 
operations.
    (B) Adjustments for these factors may result in a waiver of all, 
part, or none of the liability amount for the applicable period. As 
appropriate, the waiver amount will be adjusted to reflect States' 
otherwise effective administration of the program based upon the degree 
to which the error rate exceeds the national performance measure. For 
example, a reduction in the waiver amount may be made when a State 
agency's recent error rate history indicates that even absent the 
events described, the State agency would have exceeded the national 
performance measure in the review period.
    (iii) If a State agency has provided insufficient information to 
determine a waiver amount for the uncontrollable effects of a natural 
disaster or civil disorder using factual analysis, the waiver amount 
shall be evaluated using the following formula and methodology which 
measures both the duration and intensity of the event. Duration will be 
measured by the number of months the event had an adverse impact on 
program operations. Intensity will be a proportional measurement of the 
issuances for the counties affected to the State's total issuance. This 
ratio will be determined using issuance figures for the first full 
month immediately preceding the disaster. This figure will not include 
issuances made to households participating under disaster certification 
authorized by FNS and already excluded from the error rate calculations 
under Sec.  275.12(g)(2)(vi). The counties considered affected will 
include counties where the disaster/civil disorder occurred, and any 
other county that the State agency can demonstrate had program 
operations adversely impacted due to the event (such as a county that 
diverted significant numbers of food stamp certification or 
administrative staff). The amount of the waiver of liability will be 
determined using the linear equation W = Ia/Ib x [M/12 or Mp/18] x L, 
where Ia is the issuance for the first full month immediately preceding 
the unusual event for the county affected; Ib is the State's total 
issuance for the first full month immediately preceding the unusual 
event; M/12 is the number of months in the subject fiscal year that the 
unusual event had an adverse impact on program operations; Mp/18 is the 
number of months in the last half (April through September) of the 
prior fiscal year that the unusual event had an adverse impact on 
program operations; L is the total amount of the liability for the 
fiscal year. Mathematically this formula could result in a waiver of 
more than 100% of the liability amount;

[[Page 55793]]

however, no more than 100% of a State's liability amount will be waived 
for any one fiscal year. Under this approach, unless the State agency 
can demonstrate a direct uncontrollable impact on the error rate, the 
effects of disasters or civil disorders that ended prior to the second 
half of the prior fiscal year will not be considered.
    (2) Strikes. Strikes by State agency staff necessary to determine 
Food Stamp Program eligibility and process case changes.
    (i) When submitting a request for good cause relief based on this 
example, the State agency shall provide the following information:
    (A) Which workers (i.e. eligibility workers, clerks, data input 
staff, etc.) and how many (number and percentage of total staff) were 
on strike or refused to cross picket lines;
    (B) The date(s) and nature of the strike (i.e., the issues 
surrounding the strike);
    (C) The date(s) after the occurrence when program operations were 
affected;
    (D) The geographic extent of the strike (i.e. the county or 
counties where the strike occurred);
    (E) The proportion of the food stamp caseload whose management was 
affected;
    (F) The reason(s) why the State agency was unable to control the 
effects of the strike on program administration and errors;
    (G) Identification and explanation of the uncontrollable nature of 
errors caused by the event (types of errors, geographic location of the 
errors, time period during which the errors occurred, etc.);
    (H) The percentage of the payment error rate that resulted from the 
strike and how this figure was derived; and
    (I) The degree to which the payment error rate exceeded the 
national performance measure in the subject fiscal year.
    (ii) (A) The following criteria shall be used to assess, evaluate 
and respond to claims by the State agency for a good cause waiver of a 
liability amount in conjunction with the appeals process, and to 
determine that portion of the error rate/liability amount attributable 
to the uncontrollable effects of the strike:
    (1) Geographical impact of the strike;
    (2) State efforts to control impact on program operations;
    (3) The proportion of food stamp caseload affected; and/or
    (4) The duration of the strike and its impact on program 
operations.
    (B) Adjustments for these factors may result in a waiver of all, 
part, or none of the liability amount for the applicable period. For 
example, the amount of the waiver might be reduced for a strike that 
was limited to a small area of the State. As appropriate, the waiver 
amount will be adjusted to reflect States' otherwise effective 
administration of the program based upon the degree to which the error 
rate exceeded the national performance measure.
    (iii) If a State agency has provided insufficient information to 
determine a waiver amount for the uncontrollable effects of a strike 
using factual analysis, a waiver amount shall be evaluated by using the 
formula described in paragraph (f)(1) of this section. Under this 
approach, unless the State agency can demonstrate a direct 
uncontrollable impact on the error rate, the effects of strikes that 
ended prior to the second half of the prior fiscal year will not be 
considered.
    (3) Caseload growth. A significant growth in food stamp caseload in 
a State prior to or during a fiscal year, such as a 15 percent growth 
in caseload. Caseload growth which historically increases during 
certain periods of the year will not be considered unusual or beyond 
the State agency's control.
    (i) When submitting a request for good cause relief based on this 
example, the State agency shall provide the following information:
    (A) The amount of growth (both actual and percentage);
    (B) The time the growth occurred (what month(s)/year);
    (C) The date(s) after the occurrence when program operations were 
affected;
    (D) The geographic extent of the caseload growth (i.e. Statewide or 
in which particular counties);
    (E) The impact of caseload growth;
    (F) The reason(s) why the State agency was unable to control the 
effects of caseload growth on program administration and errors;
    (G) The percentage of the payment error rate that resulted from the 
caseload growth and how this figure was derived; and
    (H) The degree to which the error rate exceeded the national 
performance measure in the subject fiscal year.
    (ii)(A) The following criteria and methodology shall be used to 
assess and evaluate good cause in conjunction with the appeals process, 
and to determine that portion of the error rate/liability amount 
attributable to the uncontrollable effects of unusual caseload growth:
    (1) Geographical impact of the caseload growth;
    (2) State efforts to control impact on program operations;
    (3) The proportion of food stamp caseload affected; and/or
    (4) The duration of the caseload growth and its impact on program 
operations.
    (B) Adjustments for these factors may result in a waiver of all, 
part, or none of the liability amount for the applicable period. As 
appropriate, the waiver amount will be adjusted to reflect States' 
otherwise effective administration of the program based upon the degree 
to which the error rate exceeded the national performance measure. For 
example, a reduction in the waiver amount may be made when a State 
agency's recent error rate history indicates that even absent the 
events described, the State agency would have exceeded the national 
performance measure in the review period. Under this approach, unless 
the State agency can demonstrate a direct uncontrollable impact on the 
error rate, the effects of caseload growth that ended prior to the 
second half of the prior fiscal year will not be considered.
    (iii) If the State agency has provided insufficient information to 
determine a waiver amount for the uncontrollable effects of caseload 
growth using factual analysis, the waiver amount shall be evaluated 
using the following five-step calculation:
    (A) Step 1, determine the average number of households certified to 
participate Statewide in the Food Stamp program for the base period 
consisting of twelve consecutive months ending with March of the prior 
fiscal year;
    (B) Step 2, determine the percentage of increase in caseload growth 
from the base period (Step 1) using the average number of households 
certified to participate Statewide in the Food Stamp Program for any 
twelve consecutive months in the period beginning with April of the 
prior fiscal year and ending with June of the current year;
    (C) Step 3, determine the percentage the error rate for the subject 
fiscal year, as calculated under paragraph (b)(2) of this section, 
exceeds the national performance measure determined in accordance with 
paragraph (d)(1) of this section;
    (D) Step 4, divide the percentage of caseload growth increase 
arrived at in step 2 by the percentage the error rate for the subject 
fiscal year exceeds the national performance measure as determined in 
step 3; and
    (E) Step 5, multiply the quotient arrived at in step 4 by the 
liability amount for the current fiscal year to determine the amount of 
waiver of liability.
    (iv) Under this methodology, caseload growth of less than 15% and/
or occurring in the last three months of the subject fiscal year will 
not be

[[Page 55794]]

considered. Mathematically this formula could result in a waiver of 
more than 100% of the liability amount; however, no more than 100% of a 
State's liability amount will be waived for any one fiscal year.
    (4) Program changes. A change in the Food Stamp Program or other 
Federal or State program that has a substantial adverse impact on the 
management of the Food Stamp Program of a State. Requests for relief 
from errors caused by the uncontrollable effects of unusual program 
changes other than those variances already excluded by Sec.  
275.12(d)(2)(vii) will be considered to the extent the program change 
is not common to all States.
    (i) When submitting a request for good cause relief based on 
unusual changes in the Food Stamp or other Federal or State programs, 
the State agency shall provide the following information:
    (A) The type of changes(s) that occurred;
    (B) When the change(s) occurred;
    (C) The nature of the adverse effect of the changes on program 
operations and the State agency's efforts to mitigate these effects;
    (D) Reason(s) the State agency was unable to adequately handle the 
change(s);
    (E) Identification and explanation of the uncontrollable errors 
caused by the changes (types of errors, geographic location of the 
errors, time period during which the errors occurred, etc.);
    (F) The percentage of the payment error rate that resulted from the 
adverse impact of the change(s) and how this figure was derived; and
    (G) The degree to which the payment error rate exceeded the 
national performance measure in the subject fiscal year.
    (ii)(A) The following criteria will be used to assess and evaluate 
good cause in conjunction with the appeals process and to determine 
that portion of the error rate/liability amount attributable to the 
uncontrollable effects of unusual changes in the Food Stamp Program or 
other Federal and State programs:
    (1) State efforts to control impact on program operations;
    (2) The proportion of food stamp caseload affected; and/or
    (3) The duration of the unusual changes in the Food Stamp Program 
or other Federal and State programs and the impact on program 
operations.
    (B) Adjustments for these factors may result in a waiver of all, 
part, or none of the liability amount for the applicable period. As 
appropriate, the waiver amount will be adjusted to reflect States' 
otherwise effective administration of the program based upon the degree 
to which the error rate exceeded the national performance measure.
    (5) Significant circumstances beyond the control of a State agency. 
Requests for relief from errors caused by the uncontrollable effect of 
a significant circumstance other than those specifically set forth in 
paragraphs (f)(1) through (f)(4) of this section will be considered to 
the extent that the circumstance is not common to all States, such as a 
fire in a certification office.
    (i) When submitting a request for good cause relief based on 
significant circumstances, the State agency shall provide the following 
information:
    (A) The significant circumstances that the State agency believes 
uncontrollably and adversely affected the payment error rate for the 
fiscal year in question;
    (B) Why the State agency had no control over the significant 
circumstances;
    (C) How the significant circumstances had an uncontrollable and 
adverse impact on the State agency's error rate;
    (D) Where the significant circumstances existed (i.e. Statewide or 
in particular counties);
    (E) When the significant circumstances existed (provide specific 
dates whenever possible);
    (F) The proportion of the food stamp caseload whose management was 
affected;
    (G) Identification and explanation of the uncontrollable errors 
caused by the event (types of errors, geographic location of the 
errors, time period during which the errors occurred, etc.);
    (H) The percentage of the payment error rate that was caused by the 
significant circumstances and how this figure was derived; and
    (I) The degree to which the payment error rate exceeded the 
national performance measure in the subject fiscal year.
    (ii)(A) The following criteria shall be used to assess and evaluate 
good cause in conjunction with the appeals process, and to determine 
that portion of the error rate/liability amount attributable to the 
uncontrollable effects of a significant circumstance beyond the control 
of the State agency, other than those set forth in paragraph (f)(5) of 
this section:
    (1) Geographical impact of the significant circumstances;
    (2) State efforts to control impact on program operations;
    (3) The proportion of food stamp caseload affected; and/or
    (4) The duration of the significant circumstances and the impact on 
program operations.
    (B) Adjustments for these factors may result in a waiver of all, 
part, or none of the liability amount for the applicable period. As 
appropriate, the waiver amount will be adjusted to reflect States' 
otherwise effective administration of the program based upon the degree 
to which the error rate exceeded the national performance measure.
    (6) Adjustments. When good cause is found under the criteria in 
paragraphs (f)(1) through (f)(5) of this section, the waiver amount may 
be adjusted to reflect States' otherwise effective administration of 
the program based upon the degree to which the error rate exceeds the 
national performance measure.
    (7) Evidence. When submitting a request to the ALJ for good cause 
relief, the State agency shall include such data and documentation as 
is necessary to support and verify the information submitted in 
accordance with the requirements of paragraph (f) of this section so as 
to fully explain how a particular significant circumstance(s) 
uncontrollably affected its payment error rate.
    (8) Finality. The initial decision of the ALJ concerning good cause 
shall constitute the final determination for purposes of judicial 
review as established under the provisions of Sec.  283.17 and Sec.  
283.20 of this chapter.
    (g) Results of appeals on liability amount determinations.
    (1) If a State agency wholly prevails on appeal and, consequently, 
its liability amount is reduced to $0 through the appeal, and if the 
State agency began new investment activities prior to the appeal 
determination, FNS shall pay to the State agency an amount equal to 50 
percent of the new investment amount that was expended by the State 
agency.
    (2) If FNS wholly prevails on a State agency's appeal, FNS will 
require the State agency to invest all or a portion of the amount 
designated for new investment to be invested or to be paid to the 
Federal government.
    (3) If neither the State agency nor FNS wholly prevails on a State 
agency's appeal, FNS shall apply the original waiver, new investment, 
and at-risk percentage determinations to the liability amount 
established through the appeal. If the State agency began new 
investment prior to the appeal decision and has already expended more 
than the amount produced for new investment as a result of the appeal 
decision, the Department will match the amount of funds expended in 
excess of the amount now required by the Department for new investment.

[[Page 55795]]

    (h) New investment requirements. Once FNS has determined the 
percentage of a liability amount to be invested or following an appeal 
and recalculation by FNS of an amount to be invested, a State agency 
shall submit a plan of offsetting investments in program administration 
activities intended to reduce error rates.
    (1) The State agency's investment plan activity or activities must 
meet the following conditions to be accepted by the Department:
    (i) The activity or activities must be directly related to error 
reduction in the ongoing program, with specific objectives regarding 
the amount of error reduction, and type of errors that will be reduced. 
The costs of demonstration, research, or evaluation projects under 
sections 17(a) through (c) of the Act will not be accepted. The State 
agency may direct the investment plan to a specific project area or 
implement the plan on a Statewide basis. In addition, the Department 
will allow an investment plan to be tested in a limited area, as a 
pilot project, if the Department determines it to be appropriate. A 
request by the State agency for a waiver of existing rules will not be 
acceptable as a component of the investment plan. The State agency must 
submit any waiver request through the normal channels for approval and 
receive approval of the request prior to including the waiver in the 
investment plan. Waivers that have been approved for the State agency's 
use in the ongoing operation of the program may continue to be used.
    (ii) The program administration activity must represent a new or 
increased expenditure. The proposed activity must also represent an 
addition to the minimum program administration required by law for 
State agency administration including corrective action. Therefore, 
basic training of eligibility workers or a continuing correction action 
from a Corrective Action Plan shall not be acceptable. The State agency 
may include a previous initiative in its plan; however, the State 
agency would have to demonstrate that the initiative is entirely funded 
by State money, represents an increase in spending and there are no 
remaining Federal funds earmarked for the activity.
    (iii) Investment activities must be funded in full by the State 
agency, without any matching Federal funds until the entire amount 
agreed to is spent. Amounts spent in excess of the settlement amount 
included in the plan may be subject to Federal matching funds.
    (2) The request shall include:
    (i) A statement of the amount of money that is a quality control 
liability claim that is to be offset by investment in program 
improvements;
    (ii) A detailed description of the planned program administration 
activity;
    (iii) Planned expenditures, including time schedule and anticipated 
cost breakdown;
    (iv) Anticipated impact of the activity, identifying the types of 
error expected to be affected;
    (v) Documentation that the funds would not replace expenditures 
already earmarked for an ongoing effort; and
    (vi) A statement that the expenditures are not simply a 
reallocation of resources.
    (3) A State agency may choose to begin expending State funds for 
any amount of the liability designated as ``new investment'' in the 
liability amount determination prior to any appeal. FNS reserves the 
right to approve whether the expenditure meets the requirements for new 
investment. Expenditures made prior to approval by the Department will 
be subject to approval before they are accepted. Once a new investment 
plan is approved, the State agency shall submit plan modifications to 
the Department for approval, prior to implementation.
    (4) Each State agency which has part of a liability designated for 
new investment shall submit periodic documented reports according to a 
schedule in its approved investment plan. At a minimum, these reports 
shall contain:
    (i) A detailed description of the expenditure of funds, including 
the source of funds and the actual goods and services purchased or 
rented with the funds;
    (ii) A detailed description of the actual activity; and
    (iii) An explanation of the activity's effect on errors, including 
an explanation of any discrepancy between the planned effect and the 
actual effect.
    (5) Any funds that the State agency's reports do not document as 
spent as specified in the new investment plan may be recovered by the 
Department. Before the funds are withdrawn, the State agency will be 
provided an opportunity to provide the missing documentation.
    (6) If the funds are recovered, the Department shall charge 
interest on the funds not spent according to the plan in accordance 
with paragraph (j) of this section.
    (i) At-risk money. If appropriate, FNS shall initiate collection 
action on each claim for such liabilities before the end of the fiscal 
year following the reporting period in which the claim arose unless an 
administrative appeal relating to the claim is pending. Such appeals 
include administrative and judicial appeals pursuant to Section 14 of 
the Food Stamp Act. If a State agency, in the subsequent year, is again 
subject to a liability amount based on the national performance measure 
and the error rate issued to the State agency, the State agency will be 
required to remit to FNS any money designated as at-risk for the prior 
fiscal year in accordance with either the original liability amount or 
a revised liability amount arising from an appeal, as appropriate, 
within 30 days of the date of the final billing. Appeals of the 
subsequent liability amount will not affect the requirement that the 
State agency pay the at-risk amount for the prior year. The amount of a 
State's at-risk money may be recovered through offsets to the State 
agency's letter of credit as identified in Sec.  277.16(c) of this 
chapter. FNS shall also have the option of billing a State directly or 
using other claims collection mechanisms authorized under the Debt 
Collection Improvement Act of 1996 (Pub. L. 104-134) and the Federal 
Claims Collection Standards (31 CFR Parts 900-904), depending upon the 
amount of the State's liability.
    (j) Interest charges.
    (1) To the extent that a State agency does not pay an at-risk 
amount within 30 days from the date on which the bill for collection is 
received by the State agency, the State agency shall be liable for 
interest on any unpaid portion of such claim accruing from the date on 
which the bill for collection was received by the State agency. If the 
State agency is notified that it failed to invest funds in accordance 
with an approved new investment plan, the State agency has 30 days from 
the date of receipt of notification of non-expenditure of new 
investment funds to pay the Department the amount of funds not so 
invested. If the State agency does not pay the Department the amount of 
funds not invested within 30 days from the date of receipt of the 
notification of non-expenditure, the State agency shall be liable for 
interest on the non-expended funds from the date on which the 
notification was received by the State agency. If the State agency 
agrees to pay the claim through reduction in Federal financial 
participation for administrative costs, this agreement shall be 
considered to be paying the claim. If the State agency appeals such 
claim (in whole or in part), the interest on any unpaid portion of the 
claim shall accrue from the date of the decision on the administrative 
appeal, or from a date that is one year after the date the bill is

[[Page 55796]]

received, whichever is earlier, until the date the unpaid portion of 
the payment is received.
    (2) A State agency may choose to pay the amount designated as at-
risk prior to resolution of any appeals. If the State agency pays such 
claim (in whole or in part) and the claim is subsequently overturned or 
adjusted through administrative or judicial appeal, any amounts paid by 
the State agency above what is actually due shall be promptly returned 
with interest, accruing from the date the payment was received until 
the date the payment is returned.
    (3) Any interest assessed under paragraph (j)(1) of this section 
shall be computed at a rate determined by the Secretary based on the 
average of the bond equivalent of the weekly 90-day Treasury bill 
auction rates during the period such interest accrues. The bond 
equivalent is the discount rate (i.e., the price the bond is actually 
sold for as opposed to its face value) determined by the weekly auction 
(i.e., the difference between the discount rate and face value) 
converted to an annualized figure. The Secretary shall use the 
investment rate (i.e., the rate for 365 days) compounded in simple 
interest for the period for which the claim is not paid. Interest 
billings shall be made quarterly with the initial billing accruing from 
the date the interest is first due. Because the discount rate for 
Treasury bills is issued weekly, the interest rate for State agency 
claims shall be averaged for the appropriate weeks.

PART 277--PAYMENTS OF CERTAIN ADMINISTRATIVE COSTS OF STATE 
AGENCIES


Sec.  277.4  [Amended]

    15. In Sec.  277.4:
    a. Paragraph (b) is amended by removing paragraphs (b)(1), (b)(4), 
(b)(5), and (b)(6) and by redesignating paragraphs (b)(2), (b)(3), 
(b)(7), and (b)(8) as paragraphs (b)(1), (b)(2), (b)(3), and (b)(4), 
respectively.
    b. Newly redesignated paragraph (b)(3) is amended by removing the 
words ``Beginning October 1982,'' and by removing the reference 
``paragraphs (b)(2) and (b)(3)'' and adding in its place the reference 
``paragraphs (b)(1) and (b)(2)''.

    Dated: September 12, 2005.
Eric M. Bost,
Under Secretary, Food, Nutrition, and Consumer Services.
[FR Doc. 05-19020 Filed 9-22-05; 8:45 am]
BILLING CODE 3410-30-P