[Federal Register Volume 71, Number 110 (Thursday, June 8, 2006)]
[Proposed Rules]
[Pages 33344-33369]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-5143]



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Part II





Department of Agriculture





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Food and Nutrition Services



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7 CFR Part 250



Management of Donated Foods in Child Nutrition Programs, the Nutrition 
Services Incentive Programs, and Charitable Institutions; Proposed Rule

  Federal Register / Vol. 71 , No. 110 / Thursday, June 8, 2006 / 
Proposed Rules  

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DEPARTMENT OF AGRICULTURE

Food and Nutrition Service

7 CFR Part 250

RIN 0584-AD45


Management of Donated Foods in Child Nutrition Programs, the 
Nutrition Services Incentive Program, and Charitable Institutions

AGENCY: Food and Nutrition Service, USDA.

ACTION: Proposed rule.

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SUMMARY: This rule proposes to revise and clarify requirements with 
respect to the distribution, management, and use of donated foods in 
the National School Lunch Program and other child nutrition programs, 
the Nutrition Services Incentive Program, and by charitable 
institutions. Most significantly, it would establish specific 
requirements to ensure that school food authorities and other recipient 
agencies in child nutrition programs receive the value of all donated 
foods provided to food service management companies for use in 
providing school lunches and other meals. The latter requirements are 
proposed in response to an audit of the USDA Office of the Inspector 
General; the proposals relating to the Nutrition Services Incentive 
Program result from amendments to the Older Americans Act of 1965. This 
proposed rule would also include amended regulatory provisions using a 
plain language format, including the addition of new subparts, and 
several new sections under those subparts, in order to make them easier 
to understand.

DATES: To be assured of consideration, comments must be received on or 
before August 7, 2006.

ADDRESSES: The Food and Nutrition Service invites interested persons to 
submit comments on this proposed rule. You may submit comments, 
identified by RIN number 0584-AD45, by any of the following methods:
    E-mail: Send comments to [email protected]. Include RIN 
number 0584-AD45 in the subject line of the message.
    Fax: Submit comments by facsimile transmission to (703) 305-2420.
    Disk or CD-ROM: Submit comments on disk or CD-ROM to Lillie F. 
Ragan, Assistant Branch Chief, Policy Branch, Food Distribution 
Division, Food and Nutrition Service, U.S. Department of Agriculture, 
Room 500, 3101 Park Center Drive, Alexandria, Virginia 22302-1594.
    Mail: Send comments to Lillie F. Ragan at the above address.
    Hand Delivery or Courier: Deliver comments to the above address.
    Federal eRulemaking Portal: Go to http://www.regulations.gov. 
Follow the online instructions for submitting comments.
    Further information on the submission of comments, or the review of 
comments submitted, may be found under Part III, Procedural Matters, 
under SUPPLEMENTARY INFORMATION.

FOR FURTHER INFORMATION CONTACT: Lillie F. Ragan at the above address 
or telephone (703) 305-2662. A regulatory impact analysis has been 
prepared for this rule. You may request a copy of the analysis by 
contacting us at the above address or by e-mail to 
[email protected].

SUPPLEMENTARY INFORMATION:

I. Background

    The Department of Agriculture's (the Department or USDA) Food and 
Nutrition Service (FNS) provides donated foods to State distributing 
agencies for distribution to recipient agencies such as schools 
participating in the National School Lunch Program (NSLP) and other 
child nutrition programs, elderly nutrition projects that receive 
donated foods under the Nutrition Services Incentive Program (NSIP), 
and charitable institutions and other local nonprofit organizations 
providing nutritional assistance to recipients. This rule proposes to 
amend provisions contained in 7 CFR part 250 to accomplish several 
objectives, including:
     Incorporation of provisions designed to ensure that 
recipient agencies receive the value of donated foods provided to food 
service management companies in contracts with those recipient agencies 
to conduct a meal service;
     Reduction of the paperwork burden associated with the 
distribution of donated foods to charitable institutions and summer 
camps;
     Streamlining of provisions associated with the 
distribution of donated foods to elderly feeding sites in NSIP to 
reflect the transfer of responsibility for the allocation of resources 
in the program from USDA to the Department of Health and Human Services 
(DHHS).
    To meet the objectives, we are proposing minor changes to current 
Sec. Sec.  250.3, 250.12, 250.19, and 250.24, as well as a major 
restructuring of other sections. We propose to remove the current 
subpart E, which includes only Sec.  250.60, which contains addresses 
of FNS Regional Offices from which to obtain further information. This 
information is readily available on the FNS Web site at http://www.fns.usda.gov/fdd, and from other sources. We propose to restructure 
the current subpart D into three distinct subparts E, F, and G. We 
propose to include under a revised subpart D new sections describing 
the requirements for the use of donated foods under contracts between 
recipient agencies and food service management companies. The new 
sections would replace the current Sec.  250.12(d). We propose to 
include under a new subpart E new sections describing the distribution 
of donated foods in the National School Lunch Program and other child 
nutrition programs--i.e., the Child and Adult Care Food Program (CACFP) 
and the Summer Food Service Program (SFSP). The new sections would 
replace the current Sec. Sec.  250.48, 250.49, and 250.50.
    We propose to add a new subpart F to include the current Sec. Sec.  
250.45, 250.46, 250.47, and 250.51, which describe the distribution of 
donated foods in household programs--i.e., the Commodity Supplemental 
Food Program (CSFP), the Food Distribution Program in the Trust 
Territory of the Pacific Islands, the Food Distribution Program on 
Indian Reservations (FDPIR), and the Special Supplemental Nutrition 
Program for Women, Infants, and Children (WIC). While the content of 
these sections would not change, we would redesignate them as 
Sec. Sec.  250.63, 250.64, 250.65, and 250.66, respectively. We propose 
to add a new subpart G to include the distribution of donated foods to 
other outlets--i.e., charitable institutions, the Nutrition Services 
Incentive Program, and to organizations assisting in situations of 
disasters and distress. Under this new subpart, we would:
     Include current Sec. Sec.  250.40 and 250.41, revised and 
redesignated as Sec.  250.67, to describe the distribution of donated 
foods to charitable institutions and summer camps.
     Include current Sec.  250.42, revised and redesignated as 
Sec.  250.68, to describe the distribution of donated foods in NSIP.
     Include the current Sec. Sec.  250.43 and 250.44 
unchanged, but redesignated as Sec. Sec.  250.69 and 250.70, 
respectively.
    The following table provides a summary of the proposed locations in 
the restructured 7 CFR part 250 for each of the current sections in 
this part.

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       Current CFR structure               Proposed rule structure
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Subpart A, Sec.  Sec.   250.1-250.3  Same.
Subpart B, Sec.  Sec.   250.10-      Same.
 250.24.
Subpart B, Sec.   250.12(d)........  Subpart D, Sec.  Sec.   250.50
                                      through 250.55.
Subpart C, Sec.   250.30...........  Same.
Subpart D, Sec.  Sec.   250.40 and   Subpart G, Sec.   250.67.
 250.41.
Subpart D, Sec.   250.42...........  Subpart G, Sec.   250.68.
Subpart D, Sec.   250.43...........  Subpart G, Sec.   250.69.
Subpart D, Sec.   250.44...........  Subpart G, Sec.   250.70.
Subpart D, Sec.  Sec.   250.45,      Subpart F, Sec.  Sec.   250.63,
 250.46, 250.47.                      250.64, 250.65.
Subpart D, Sec.   250.48...........  Subpart E, Sec.  Sec.   250.56
                                      through 250.60.
Subpart D, Sec.   250.49...........  Subpart E, Sec.   250.61.
Subpart D, Sec.   250.50...........  Subpart E, Sec.   250.62.
Subpart D, Sec.   250.51...........  Subpart F, Sec.   250.66.
Subpart E, Sec.   250.60...........  No longer exists.
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    In new subparts D and E, and in new Sec. Sec.  250.67 and 250.68 in 
new subpart G, we propose to rewrite the regulations using a plain 
language format, including an increase in the number of subparts and 
sections, to make them easier to read and understand for the general 
public. The proposed changes in content and format to 7 CFR part 250 
are discussed in detail below.

II. Discussion of the Rule's Provisions

Definitions, Sec.  250.3

    Due to recent changes in food distribution programs, and use of the 
plain language initiative, we propose to remove, revise, and add 
definitions in Sec.  250.3 to provide program operators and recipients 
with a better understanding of the requirements contained in 7 CFR part 
250.
    We propose to remove the following definitions:
    Nonprofit summer camps for children. This would be replaced by a 
new definition of ``summer camps'', which may be private nonprofit 
organizations or public institutions.
    Nonresidential child or adult care institution. This would be 
replaced by new definitions of ``child care institution'' and ``adult 
care institution'', which, by definition, must be nonresidential. We 
would clarify that such institutions may participate independently in 
CACFP, or under the auspices of a sponsoring organization, in 
accordance with an agreement with the distributing agency.
    Nutrition program for the elderly. This would be replaced by a new 
definition of ``elderly nutrition project'', to more clearly designate 
the organizations eligible to receive donated foods under NSIP, and to 
avoid confusion with the former Nutrition Program for the Elderly.
    Offer-and-acceptance system. We propose to remove this term and to 
more clearly explain the ordering of donated foods and their provision 
to school food authorities in the proposed Sec.  250.58. There is no 
longer a need for State distributing agencies to maintain an offer-and-
acceptance system since, as discussed in detail later in the preamble, 
they are required by the Richard B. Russell National School Lunch Act 
(42 U.S.C. 1751 et seq.) to permit school food authorities to order 
from the complete list of donated foods available.
    Program. This would be replaced by reference to recipient agencies.
    Students in home economics. This is self-explanatory, and is 
applicable only with respect to the use of donated foods by such 
students participating in general home economics instruction, as 
described in the proposed Sec.  250.60.

    We propose to revise the following definitions:
    Charitable institutions. We propose to revise the definition of 
``charitable institutions'' to mean public institutions or nonprofit 
organizations, as defined in this section, that provide a meal service 
on a regular basis to predominantly needy persons in the same place 
without marked changes. The revised definition would reflect changing 
circumstances and provide greater clarity. The volume and variety of 
donated foods purchased under agriculture support programs and made 
available to charitable institutions has decreased significantly in 
recent years, as the capacity of organizations participating in the 
Emergency Food Assistance Program (TEFAP) to utilize such foods has 
increased, and schools participating in NSLP and other child nutrition 
programs have absorbed more of such foods. Therefore, we are proposing 
to narrow the definition from entities that serve at least some needy 
persons to those that serve predominantly needy persons, so that 
limited resources will be better targeted. The vast majority of 
organizations that currently receive donated foods as charitable 
institutions already serve mostly needy persons. We would retain the 
current requirement that charitable institutions be public institutions 
or nonprofit organizations that provide a meal service on a regular 
basis, and operate in the same place without marked changes. Under the 
revised definition, we would include examples of charitable 
institutions, such as emergency shelters, soup kitchens, hospitals, 
retirement homes, elderly nutrition projects; schools, summer camps, 
service institutions, and child and adult care institutions that do not 
participate in a child nutrition program, or as a commodity school, as 
they are defined in this section; and adult correctional institutions 
that conduct rehabilitation programs for a majority of inmates.
    As with charitable institutions, the volume and variety of donated 
foods available to summer camps has decreased significantly in recent 
years. The proposed definition of ``charitable institution'' explicitly 
includes summer camps that do not participate in child nutrition 
programs. A result of this inclusion is that summer camps wanting to 
receive donated foods as charitable institutions must demonstrate that 
they serve predominantly needy children. Thus, the proposed definition 
would narrow eligibility for summer camps as charitable institutions. 
Their eligibility to participate in child nutrition programs would not 
be altered by this proposal.
    The proposed definition would also remove the current requirement 
that charitable institutions be ``non-penal'' and ``non-educational'', 
in order to make the definition consistent with current regulations. In 
accordance with current Sec.  250.41(a)(2), adult correctional 
facilities that conduct rehabilitation programs for a majority of 
inmates are eligible to receive donated foods as charitable 
institutions. Educational institutions such as schools, service 
institutions, and child care institutions

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that do not participate in child nutrition programs are included in the 
current definition of ``charitable institution.''
    Child nutrition program. We would revise this definition to include 
the acronyms of the respective programs.
    Commodity school. We propose to clarify and define ``commodity 
school'' as a school operating a nonprofit food service, in accordance 
with 7 CFR part 210, but that receives additional donated food 
assistance rather than the general cash assistance available to it 
under section 4 of the Richard B. Russell National School Lunch Act (42 
U.S.C. 1753). We propose to include further detail on the provision of 
assistance to such schools in the proposed Sec.  250.57.
    End product. We propose to clarify that an ``end product'' is a 
food product that contains processed donated foods.
    Food service management company. We propose to clarify the current 
definition of ``food service management company'' by stating that a 
food service management company is a commercial enterprise, nonprofit 
organization, or public institution that is, or may be, contracted with 
by a recipient agency, to manage any aspect of a recipient agency's 
food service, in accordance with 7 CFR parts 210, 225, 226, or, with 
respect to charitable institutions, in accordance with this part. To 
the extent that such management includes the use of donated foods, the 
food service management company would be subject to the requirements 
proposed in the new subpart D of this rule. We propose to clarify, 
however, that a school food authority participating in NSLP that 
performs such functions is not considered a food service management 
company. Additionally, we propose to clarify that, in accordance with 
the definition in Sec.  250.3, a commercial enterprise that uses 
donated foods to prepare meals at a commercial facility, or to perform 
other activities that meet the definition of processing in this 
section, is considered a processor, and is subject to the requirements 
for processors in subpart C of 7 CFR part 250. We also make this 
distinction in the proposed Sec.  250.50(a).
    Processing. We propose to revise the current definition of 
``processing'' by restricting it to the currently described activities 
at a commercial facility, by a commercial enterprise, and not at a 
recipient agency facility; and, to specifically include the use of 
donated foods in the preparation of meals at a commercial facility as 
processing. Under the current definition, the use of donated foods to 
prepare meals at a recipient agency facility may be considered 
processing, as explained in the following paragraph.
    Processor. We propose to revise the current definition of 
``processor'' by clarifying that it is a commercial enterprise that 
processes donated foods at a commercial facility. We propose to retain 
the current statement that commercial enterprises that process donated 
foods on-site (i.e., at a recipient agency facility) are not included 
as processors. Under the current definition of ``processor'', recipient 
agencies that prepare meals for one or more other recipient agencies 
are categorized as processors unless they maintain separate records 
accounting for the donated foods that they handle on behalf of other 
recipient agencies. Their categorization as processors, which was 
implemented in a final rule published in the Federal Register on 
December 7, 1994 at 59 FR 62973, was intended to ensure that such 
recipient agencies properly accounted for donated foods, in accordance 
with Federal requirements in place at the time. However, as discussed 
later in the preamble, in a final rule published in the Federal 
Register on October 23, 2002 at 67 FR 65011, such recipient agencies 
were permitted, with the approval of the distributing agency, to 
maintain a single inventory management system, thus making it 
impossible for the recipient agencies to account for the donated foods 
separately from commercially purchased foods. Hence, it would no longer 
be logical or reasonable for regulations to impose the inventory and 
recordkeeping requirements required of processors on such recipient 
agencies. We propose to describe the situation in which a school food 
authority provides donated foods to another school food authority to 
conduct food service activities using donated foods in the proposed 
Sec.  250.60.
    Recipient agencies. We propose to clarify that the definition of 
``recipient agencies'' means agencies or organizations that receive 
donated foods, in accordance with an agreement signed with the 
distributing agency or with another recipient agency.
    Recipients. We propose to revise the definition of ``recipients'' 
to include persons receiving donated foods, or meals containing donated 
foods, provided by recipient agencies. The current definition includes 
only persons receiving donated foods for household consumption.
    Section 311. We propose to revise the definition to reflect 
amendments to the Older Americans Act of 1965 (42 U.S.C. 3030a), which 
now permits State Agencies on Aging to receive all, or part, of their 
NSIP grant as donated foods.
    Service institutions. We propose to clarify by defining ``service 
institutions'' as recipient agencies that participate in SFSP.
    State Agency on Aging. We propose to revise this definition to 
refer to the State agencies and Indian tribal organizations 
administering NSIP.
    We propose to add definitions of Adult care institution, AoA, Bonus 
foods, CACFP, Child care institution, Commodity offer value, DHHS, 
Elderly nutrition project, Entitlement, Entitlement foods, National 
per-meal value, Nonprofit organization, Nonprofit school food service 
account, NSIP, NSLP, Reimbursable meals, SBP, 7 CFR part 3016, 7 CFR 
part 3019, SFSP, Single inventory management, and Summer camp. 
Inclusion of the acronyms would alert the reader to the programs or 
agencies referred to in the regulations. Definitions of Adult care 
institution, Child care institution, and Summer camp would replace 
similar definitions currently included in this section without 
substantial change, as previously indicated.
    Definitions of Bonus foods and Entitlement foods would clearly 
distinguish between those donated foods purchased and provided to 
distributing agencies in addition to legislatively authorized levels of 
assistance, and those donated foods purchased and provided in 
accordance with levels of assistance mandated by program legislation. 
Similarly, Entitlement is the value of donated foods a distributing 
agency is authorized to receive in a specific food distribution or 
child nutrition program, in accordance with program legislation. A 
definition of National per-meal value would help the reader to 
understand the determination of the value of donated foods provided to 
distributing agencies in NSLP and CACFP each year, while Commodity 
offer value describes the minimum value of donated foods that the 
distributing agency must offer to a school food authority in NSLP each 
school year. A definition of Reimbursable meals would further explain 
the per-meal value of donated food assistance in NSLP and other child 
nutrition programs. A definition of Nonprofit school food service 
account would help the reader to understand the role of donated foods 
in the nonprofit school food service.
    Elderly nutrition project categorizes a recipient agency eligible 
to receive donated foods in NSIP, while Nonprofit organization 
clarifies that such an organization must have tax-exempt status under 
the Internal Revenue Code to meet the definition. Additionally, it 
clarifies that a nonprofit organization

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operated exclusively for religious purposes is automatically tax-exempt 
under the Internal Revenue Code.
    A definition of 7 CFR part 3016 would alert the reader to the 
departmental regulations relevant to administrative requirements for 
grants and cooperative agreements with State, local, and Indian tribal 
governments, while a definition of 7 CFR part 3019 would reference 
those regulations with applicability to private non-profit 
organizations, institutions of higher education, and hospitals. A 
definition of Single inventory management would help to describe the 
current option for school food authorities and other recipient agencies 
in the storage and inventory management of donated foods.

Agreements and Contracts, Sec.  250.12

    Section 217 of the Consolidated Appropriations Resolution, 2003 
(Pub. L. 108-7) amended section 311 of the Older Americans Act of 1965 
(42 U.S.C. 3030a) by transferring the responsibility for the allocation 
of resources in NSIP from USDA to DHHS. Under the amended Older 
Americans Act, State Agencies on Aging may still choose to receive all, 
or part, of their NSIP grants in the form of donated foods (rather than 
funds), on behalf of their participating elderly nutrition projects. 
However, USDA is responsible only for the purchase of the foods and 
their delivery to the appropriate State agency. Therefore, we propose 
to amend Sec.  250.12(a) by removing reference to agreements between 
the Department and State Agencies on Aging that elect to receive cash 
in lieu of commodities.
    As mentioned earlier in the preamble, we are proposing to revise 
current requirements associated with food service management company 
contracts to ensure that schools and other recipient agencies that 
participate in child nutrition programs receive the value of donated 
foods used by those commercial enterprises in conducting the food 
service. We propose to include these revised requirements in the new 
subpart D. Therefore, we propose to remove Sec.  250.12(d). We propose 
to remove, without replacement, the current requirements in Sec.  
250.12(d) that, for nonprofit summer camps for children, charitable 
institutions, and nutrition programs for the elderly, a contract with a 
food service management company: (1) May not exceed one year, with an 
option for four additional one-year periods; and, (2) must include the 
provision that it may be terminated for cause by either party upon 30 
days notice. Summer camps and charitable institutions do not receive 
Federal funds for distribution of donated foods or other administrative 
activities. Hence, Federal regulations in 7 CFR part 3019 relating to 
contracts do not apply to them. Additionally, donated foods are only a 
very small part of the food service provided by such recipient 
agencies. Thus, it is unreasonable to require specific provisions in 
their contracts with food service management companies. As indicated 
above, USDA would not oversee the use of donated foods in NSIP, as it 
is now responsible only for procurement and delivery of donated foods 
in the program. Therefore, current contract requirements with food 
service management companies, as well as those proposed in this rule, 
do not apply to donated foods provided in NSIP.
    We also propose to remove Sec.  250.12(e) and (f), as requirements 
relative to storage facility and processor contracts are currently 
addressed in Sec. Sec.  250.14 and 250.30, respectively. As the changes 
proposed above would remove all reference to contract requirements in 
this section, we propose to revise the section heading to Agreements.

Reviews, Sec.  250.19

    We propose to amend the current review requirements for 
distributing agencies in Sec.  250.19(b), primarily as they relate to 
management reviews of elderly nutrition projects, and of food service 
management companies under contract with several types of recipient 
agencies that receive donated foods for use in their food service.
    We propose to amend the introductory text of Sec.  250.19(b)(1) to 
state that the distributing agency must establish review procedures 
encompassing the listed activities as they apply to specific programs. 
For example, the distributing agency would not be expected to establish 
procedures to review donated food inventories for school food 
authorities utilizing a single inventory management system.
    As previously mentioned, under the amended Older Americans Act the 
responsibility for the allocation of resources in NSIP now rests with 
DHHS, and not USDA; hence, program funds are appropriated to DHHS for 
allocation to State Agencies on Aging. USDA is now responsible only for 
the purchase of donated foods for those State Agencies on Aging that 
choose to receive donated foods as part of their NSIP grant, and for 
delivering those foods to State or local agencies. USDA may also 
provide bonus foods to such outlets, although their availability for 
donation has increasingly diminished. Therefore, we propose to remove 
Sec.  250.19(b)(1)(i), which requires on-site reviews of nutrition 
programs for the elderly (i.e., elderly nutrition projects, as proposed 
in this rule) participating in NSIP. Consequently, current Sec.  
250.19(b)(1)(ii), (b)(1)(iii), (b)(1)(iv), and (b)(1)(v), which address 
reviews of charitable institutions, processors, distributing agency 
storage facilities, and food service management companies, would be 
redesignated as Sec.  250.19(b)(1)(i), (b)(1)(ii), (b)(1)(iii), and 
(b)(1)(iv) respectively, but otherwise without change, except as noted 
below.
    We propose to revise the redesignated Sec.  250.19(b)(1)(i) to 
retain the current review requirement for charitable institutions and 
summer camps, and the food service management companies under contract 
with them, in a more streamlined form. The revised language would 
require on-site reviews of charitable institutions (which include 
summer camps), or the food service management companies under contract 
with them, whenever the distributing agency identifies actual or 
probable deficiencies in the use of donated foods by such institutions, 
or by their contractors, through audits, investigations, complaints, or 
any other information.
    We propose to revise the redesignated Sec.  250.19(b)(1)(iv) to 
require the distributing agency to conduct an on-site review of 
recipient agencies in NSLP, CACFP, and SFSP, to ensure compliance with 
the requirements for the use of donated foods in contracts with food 
service management companies. We propose to require such a review at a 
frequency established in 7 CFR parts 210, 225, or 226, as applicable, 
for the State administering agency, in the conduct of its reviews. 
Lastly, we propose to permit the distributing agency to enter into an 
agreement with the appropriate State administering agency to include 
its review as part of the State administering agency's review. An 
integrated review of all aspects of the food service operation has the 
potential to be more effective and efficient than piecemeal reviews by 
two separate agencies.
    We propose to remove Sec.  250.19(d), which requires the monitoring 
of cash disbursements to nutrition programs for the elderly by State 
Agencies on Aging to ensure purchase of only U.S. agricultural 
products. Under the amended Older Americans Act, this responsibility 
now rests with DHHS.

Distributing Agency Performance Standards, Sec.  250.24

    As discussed in detail later in the preamble, we propose to revise 
current regulatory provisions associated with

[[Page 33348]]

the ordering of donated foods and their distribution to school food 
authorities in the proposed Sec.  250.58. In conjunction with these 
proposals, we are also proposing here to revise current distributing 
agency performance standards in Sec.  250.24(d) relating to these 
areas. We propose to consolidate the content of Sec.  250.24(d)(8) and 
(d)(10) in a revised Sec.  250.24(d)(8) to state that distributing 
agencies are responsible for providing recipient agencies with ordering 
options and commodity values, and considering the specific needs and 
capabilities of such agencies in ordering donated foods. We propose to 
revise Sec.  250.24(d)(9) to state that distributing agencies are 
responsible for offering school food authorities participating in NSLP, 
at a minimum, the commodity offer value of donated food assistance, and 
for determining an adjusted assistance level in consultation with 
school food authorities, as appropriate, in accordance with the 
proposed Sec.  250.58. We propose to include a new Sec.  250.24(d)(10) 
to state that distributing agencies are responsible for providing each 
school food authority in NSLP with the opportunity to order, or select, 
donated foods from the full list of available foods, and to distribute 
the selected donated foods to each school food authority, to the extent 
that distribution of such foods to, and within, the State would be 
cost-effective, in accordance with the proposed Sec.  250.58.

Subpart D--Donated Foods in Contracts With Food Service Management 
Companies

    Over the last 10-15 years, school food authorities have 
increasingly entered into contracts with food service management 
companies to provide the school meals and to conduct other food service 
activities. As cited in the Department's Office of Inspector General 
(OIG) audit referenced below, 905 school food authorities participating 
in NSLP contracted with a food service management company in school 
year 1991, while in school year 2000, 1,648 school food authorities had 
such contracts. In providing the school meals, food service management 
companies may use the donated foods provided to school food 
authorities.
    Currently, in Sec.  250.12(d), a contract between a recipient 
agency and a food service management company must ensure that donated 
foods provided to the food service management company are used solely 
for the benefit of the recipient agency's food service. Additionally, 
the recipient agency must demonstrate that the full value of the 
donated foods is utilized for its benefit. However, the regulations do 
not require that the contract indicate what actions must be taken to 
ensure that donated foods benefit the recipient agency, or how the 
recipient agency is to demonstrate that the full donated food value has 
been received.
    In April 2002, OIG conducted an audit (27601-0027-CH) of 
several school food authorities under contract with food service 
management companies. The OIG found that, for contracts in which the 
food service management company charges a fixed price per meal, school 
food authorities did not always receive the full value of the donated 
foods provided for use in the school food service. The OIG found this 
to result, in part, from the lack of specific instructions in Federal 
regulations regarding the means by which the contract with the food 
service management company must incorporate requirements that ensure 
school food authorities receive the full value of the donated foods. To 
correct this, the OIG recommended that, for fixed-price contracts, the 
donated food value be deducted on monthly invoices. The OIG also 
recommended that bid documents to procure food service management 
company services reflect that this type of crediting is required.
    In the absence of specific regulatory requirements, school food 
authorities have developed different means to ensure that they receive 
the benefit of the donated foods provided by the Department. Some 
school food authorities require the food service management company to 
credit them for the value of donated foods used in the food service 
through reductions on monthly invoices or other means. However, food 
service management companies have not always used and credited donated 
foods in an expeditious or accurate manner. Some school food 
authorities may ensure the receipt of the donated food benefit through 
a review of production or inventory records, or a review of menu plans 
or the meals served. Other school food authorities allow the food 
service management company to ``pre-credit'' for donated foods in the 
contracted fixed price per meal. Under a pre-credit method, the value 
of donated foods is deducted from the cost of the food service upfront, 
at the per-meal value of donated food assistance established for that 
school year. However, the full amount of donated foods received by the 
school food authority is often not established until later in the year, 
for several reasons. For example, initial donated food entitlements are 
based on preliminary meal counts that are adjusted when final meal 
counts become available later in the year. Additionally, the bonus 
foods that are to be provided are generally not known at the beginning 
of the school year. Furthermore, donated food assistance in NSLP is 
sometimes augmented to ensure, in accordance with section 6(e) of the 
National School Lunch Act (42 U.S.C. 1755), that the total amount of 
such assistance equals at least 12 per cent of the total assistance 
provided under sections 4, 6, and 11 of that Act. Hence, unless end-of-
year adjustments are made, a pre-crediting system would not include 
crediting for all donated foods received in a school year.
    In its response to the OIG recommendation, FNS agreed that Federal 
regulations must be revised to include specific requirements to ensure 
that school food authorities receive the full benefit of the donated 
foods provided in NSLP. However, before developing specific regulatory 
proposals, FNS indicated that it would seek input from State 
distributing agencies, school food authorities, food service management 
companies, and industry consultants. On October 24, 2002, FNS conducted 
a public meeting at its headquarters office in Alexandria, Virginia to 
allow interested parties the opportunity for dialogue. In advance of 
the meeting, FNS presented the OIG recommendations for regulatory 
revision in a notice published in the Federal Register on October 8, 
2002 at 67 FR 62683. The meeting was attended by several food service 
management companies and a number of industry consultants, as well as a 
few State distributing agency directors or staff members. Some of the 
issues or concerns expressed at this meeting include the following:
     Food service management companies do not always receive 
donated foods that are easily utilized in the food service.
     Food service management companies are sometimes able to 
purchase foods on the commercial market for a lower price than the 
price the Department paid for the same, or similar, food.
     In the absence of standard contract language, school food 
authorities are not sure what provisions relating to donated foods must 
be included in a contract with a food service management company.
     The uncertainty of donated food availability or deliveries 
presents difficulties in utilization of donated foods, and may result 
in an increase in the price charged by food service management 
companies for the food service.

[[Page 33349]]

    We propose to address the concerns raised in the OIG audit by 
proposing specific requirements to ensure that recipient agencies in 
child nutrition programs receive the value of all donated foods 
provided to food service management companies with which they have 
contracts, in a new subpart D, which is discussed below. As mentioned 
previously, this new subpart would replace the current Sec.  250.12(d). 
Subpart D would contain the following 6 new sections:

Sec.  250.50, Food service management companies.
Sec.  250.51, Contracts and procurement.
Sec.  250.52, Crediting for, and use of, donated foods.
Sec.  250.53, Storage and inventory management of donated foods.
Sec.  250.54, Contract provisions.
Sec.  250.55, Recordkeeping and reviews.

Food Service Management Companies, Sec.  250.50

    In the new Sec.  250.50(a), we propose to clarify that, in 
accordance with the definition in Sec.  250.3, as we are proposing to 
revise it in this rule, a food service management company is a 
commercial enterprise, nonprofit organization, or public institution 
that is, or may be, contracted with by a recipient agency to manage any 
aspect of a recipient agency's food service, in accordance 7 CFR parts 
210, 225, or 226, or, with respect to charitable institutions, in 
accordance with 7 CFR part 250. We propose to require that, to the 
extent that such management includes the use of donated foods, the food 
service management company is subject to the applicable requirements 
proposed in this subpart. We propose to clarify, however, that a school 
food authority participating in NSLP that performs such functions is 
not considered a food service management company. We also propose to 
indicate, for the sake of clarity, that a commercial enterprise that 
uses donated foods to prepare meals at a commercial facility, or to 
perform other activities that meet the definition of processing in 
Sec.  250.3, is considered a processor in this part, and is subject to 
the requirements in subpart C of 7 CFR part 250, rather than the 
requirements of this proposed subpart.
    In Sec.  250.50(b), we propose to indicate the food service 
activities using donated foods that a food service management company 
is permitted to perform, in accordance with its contract. We propose to 
permit a food service management company to perform the following 
activities:
    (1) Preparing and serving meals;
    (2) Ordering or selection of donated foods, in coordination with 
the recipient agency, and in accordance with Sec.  250.58(c);
    (3) Storage and inventory management of donated foods, in 
accordance with the proposed Sec.  250.53;
    (4) Payment of processing fees or costs on behalf of the recipient 
agency, in accordance with the requirements in the proposed Sec.  
250.52(e); and
    (5) Submittal of refund applications to the processor, and the 
remittance of refunds to the recipient agency, for donated foods 
contained in processed end products, in accordance with the current 
Sec.  250.30(k).
    All of these activities are currently performed by some food 
service management companies. Their performance helps school food 
authorities and other recipient agencies to conduct the food service in 
the most cost-efficient manner. However, we propose to clarify that, in 
ordering or selecting donated foods for use in preparing meals, the 
food service management company must coordinate with the recipient 
agency, in accordance with the proposed requirements in Sec.  
250.58(c).

Contracts and Procurement, Sec.  250.51

    In the new Sec.  250.51(a), we propose to require that, prior to 
donated foods being made available to a food service management 
company, a recipient agency must enter into a written contract with a 
food service management company to allow it to perform food service 
activities, including the use of donated foods. We propose to require 
that the contract ensure that all donated foods received by the 
recipient agency for use in its food service in a school year or a 
fiscal year, as applicable, be used to benefit the recipient agency's 
food service. We propose to require that recipient agencies in child 
nutrition programs (i.e., NSLP and commodity schools, CACFP, SFSP, and 
SBP) meet additional requirements in this subpart, as discussed below, 
and also indicate that such recipient agencies must comply with Federal 
regulations in 7 CFR parts 210, 220, 225, and 226, (which concern, 
respectively, NSLP, SBP, SFSP, and CACFP), and 7 CFR parts 3016 or 3019 
(the Department's regulations establishing administrative requirements 
for grants to governmental entities and nonprofit organizations, 
respectively), as applicable, in the procurement of such contracts.
    In Sec.  250.51(b), we propose to indicate that recipient agencies 
may enter into a fixed-price or a cost-reimbursable contract with food 
service management companies, except that recipient agencies in CACFP 
are prohibited from entering into cost-reimbursable contracts, in 
accordance with 7 CFR part 226. Under a fixed-price contract, the 
recipient agency pays a fixed cost per meal provided or a fixed cost 
for a certain time period. Under a cost-reimbursable contract, the food 
service management company charges the recipient agency for food 
service operating costs, and also charges fixed fees for management or 
services. We include a reference to the FNS guidance entitled 
``Contracting with Food Service Management Companies: Guidance for 
School Food Authorities'', which contains more detail on the 
distinguishing characteristics of the two allowable types of contracts, 
as well as their procurement.
    In Sec.  250.51(c), we propose to indicate that recipient agencies 
in child nutrition programs must adhere to the Federal regulations 
referenced above in the procurement of food service management 
companies. We also state that the required contract provisions proposed 
in Sec.  250.54 of this rule must also be included in the contract 
solicitation documents, as required in 7 CFR parts 3016 and 3019. Such 
provisions include the method used to determine the donated food values 
to be used in crediting, or the actual values assigned, in accordance 
with the proposed Sec.  250.52. The method used to determine the 
donated food values cannot be established through a post-award 
negotiation, or by another method that may directly or indirectly alter 
the terms and conditions of the solicitation or contract.
    In Sec.  250.51(d), we propose to prohibit a food service 
management company from entering into a contract or agreement with a 
processor to process donated foods or end products for use in the 
recipient agency's food service. In accordance with Sec.  250.30, 
processing of donated foods must take place under a contract or 
agreement between a processor and the distributing or recipient agency, 
in order to ensure that the requirements in that section are met.

Crediting for, and Use of, Donated Foods, Sec.  250.52

    In the new Sec.  250.52, we propose to describe how the recipient 
agency must ensure that it receives the value of donated foods in the 
meal service provided. In Sec.  250.52(a), we propose to state that, in 
both fixed-price and cost-reimbursable contracts, the recipient agency 
must require the food service management company to credit it for the 
value of all donated foods received for use in the recipient agency's 
food

[[Page 33350]]

service in a school year or fiscal year (including both entitlement and 
bonus foods). We propose to require that crediting be performed through 
invoice reductions, refunds, discounts, or by another means of 
crediting.
    The above proposals would permit the use of pre-crediting for 
donated foods in fixed-price contracts. If provided for in the contract 
between a recipient agency and food service management company, the 
recipient agency may permit the food service management company to 
deduct the value of donated foods from the established fixed price per 
meal. However, as noted previously in this preamble, the use of pre-
crediting has not always resulted in crediting of recipient agencies 
for all donated foods received for the school or fiscal year. This has 
resulted because availability of some donated foods is not established 
until later in the year. Hence, we propose to clarify that the 
recipient agency must require the food service management company to 
provide an additional credit for the value of any donated foods not 
accounted for in the fixed-price per meal. Additionally, we propose to 
clarify that, in cost-reimbursable contracts, crediting may be 
performed by disclosure: i.e., the food service management company may 
indicate the value of donated foods credited for the period in which it 
bills the recipient agency for food costs.
    To ensure that the food service management company credits the 
recipient agency for all donated foods received in the school or fiscal 
year, in the new Sec.  250.55(c) we are proposing to require that the 
recipient agency conduct a reconciliation of such crediting at least 
annually in its review of food service management company activities. 
In Sec.  250.52(a), we also propose to require that all forms of 
crediting, including pre-crediting, provide clear documentation of the 
value received from donated foods. For example, in crediting by invoice 
reductions, the value of donated foods must be included as separate 
line item entries on invoices.
    In Sec.  250.52(b), we propose to require that crediting be 
performed not less frequently than annually, and that such frequency be 
determined by the recipient agency. The frequency must be provided for 
in the contract between the recipient agency and the food service 
management company. For example, a food service management company that 
billed a school food authority for all meals provided in a quarter 
could include a reduction on the invoice for the value of all donated 
foods received by the school food authority in that quarter. Or, as 
another example, the food service management company may simply provide 
a refund at the end of the school year for the value of all donated 
foods received by the school food authority for that year. In 
determining the frequency of crediting, the recipient agency must 
ensure that the specified method of valuation of donated foods, as 
described in the following paragraphs, permits crediting to be achieved 
in the time period established. Additionally, a school food authority 
must ensure that the method, and timing, of crediting does not cause 
its cash resources to exceed the limits established in 7 CFR 
210.9(b)(2).
    In Sec.  250.52(c), we propose to establish the donated food values 
that must be used in crediting. We propose to require that the 
recipient agency ensure that the food service management company uses 
the donated food values determined by the distributing agency, in 
accordance with the proposed Sec.  250.58(g), or, if approved by the 
distributing agency, donated food values determined by an alternate 
means of the recipient agency's choosing. For example, the recipient 
agency may, with the approval of the distributing agency, specify that 
the value will be the average price per pound for a food, or for a 
group or category of foods (e.g., all frozen foods or cereal products), 
as listed in market journals over a specified period of time. This 
flexibility in valuing donated foods for the purpose of crediting would 
help to ensure that donated foods always provide a good value to the 
recipient agency, when compared, for example, to the cost of the same, 
or similar, foods in the commercial market.
    In Sec.  250.52(d), we propose to clarify that the actual donated 
food values are not required to be included in the solicitation and 
contract, but that the method of determining the donated food values to 
be used in crediting must be included in the solicitation and contract. 
For example, the solicitation and contract may stipulate that the 
average USDA purchase price for purchases made during the duration of 
the contract with the food vendor will be utilized, or the average 
price per pound listed in market journals over a specified period of 
time. Although the actual donated food values may also be included, the 
donated foods that a recipient agency will receive often are not known 
until after the procurement has taken place. However, we propose to 
require that the method of valuation specified must result in the 
determination of actual values, and may not permit any negotiation of 
such values. Additionally, we propose to state that the method of 
valuation must ensure that crediting may be achieved in accordance with 
the time frame established in the solicitation and contract (e.g., 
quarterly or annually).
    In Sec.  250.52(e), we propose to indicate that the food service 
management company is not required to credit the recipient agency for 
donated foods contained in processed end products. In accordance with 
current Sec.  250.30, the processor must credit the recipient agency 
for donated foods contained in end products through a discount or 
refund sales system, or charge the recipient agency a fee-for-service 
to produce the end product, either directly or through a distributor. 
However, as indicated in proposed Sec.  250.50(c), the food service 
management company, under its contract with the recipient agency, may 
be responsible for the payment of processing costs on behalf of the 
recipient agency, or the submittal of refund applications and 
remittance of refunds for donated foods contained in processed end 
products. In order to ensure that the recipient agency is credited for 
donated foods in such cases, we propose to require the recipient agency 
to ensure that the food service management company:
    (1) Bills the recipient agency separately for processing costs, and 
not include these costs in a fixed-price charge for the food service; 
and
    (2) Submits refund applications to processors, in accordance with 
the requirements in Sec.  250.30(k), and remits refunds to the 
recipient agency in an expeditious manner.
    In Sec.  250.52(f), we propose to indicate that, with certain 
exceptions, as listed below, the food service management company is not 
required to use the donated foods received, or a commercial substitute 
of the same generic identity, in the recipient agency's meal service, 
unless the contract specifically stipulates that such foods must be 
used. However, the food service management company must ensure that:
    (1) Donated ground beef and ground pork products, and all end 
products received from processors, are used in the recipient agency's 
meal service, for the benefit of eligible program recipients; and,
    (2) If menu plans include foods of the same generic identity as the 
donated foods received, then such donated foods, or commercially 
purchased foods of the same generic identity, of U.S. origin, and 
identical or superior in quality, must be used in the recipient 
agency's food service.
    The proposals described above would provide the recipient agency 
and its contractor with the flexibility needed to integrate donated 
foods into the food

[[Page 33351]]

service with minimal time and effort. Hence, as long as the food 
service management company credits the recipient agency for the donated 
foods, it would not be obligated to use those foods in the food 
service, with the following exceptions. Since USDA specifications for 
ground beef and ground pork include more stringent requirements for 
grading and testing for microbial pathogens than such products produced 
for the commercial market, we want to ensure that these donated foods 
are used in the recipient agency's food service. For the same reason, 
processors are currently prohibited from substituting commercial beef 
and pork for donated beef and pork. Additionally, since recipient 
agencies provide donated foods to processors for processing into 
specific end products in accordance with processing agreements or 
contracts, they must be assured of receiving those end products for use 
in their food service. Lastly, if menu plans include foods of the same 
generic identity as the donated foods received, then such donated 
foods, or commercially purchased foods of the same generic identity, of 
U.S. origin, and identical or superior in quality to the donated foods, 
must be used in the food service. For example, we would not want 
commercial canned corn of Grade B quality to be included in meals in 
place of the donated canned corn of Grade A quality that the recipient 
agency has received.
    In Sec.  250.52(g), we propose to require that, when a contract 
terminates, and is not extended, the food service management company 
must return any unused donated ground beef and ground pork products, 
and end products received from processors, to the recipient agency. 
This proposal is in accordance with the requirement that these foods 
must be used in the recipient agency's food service, for the reasons 
indicated above. We propose to state that the food service management 
company must, at the discretion of the recipient agency, return other 
donated foods for which the recipient agency has not been credited, or 
pay the recipient agency the value of such donated foods.

Storage and Inventory Management of Donated Foods, Sec.  250.53

    In the new Sec.  250.53, we propose to include requirements for 
food service management companies to follow in the storage and 
inventory management of donated foods. In Sec.  250.53(a), we propose 
to include the requirement that food service management companies must 
meet the general requirements in Sec.  250.14 for the storage and 
inventory management of donated foods.
    In Sec.  250.53(b), we propose to allow the food service management 
company to store and inventory donated foods together with commercially 
purchased foods--i.e., utilize a single inventory management system, as 
defined in this part--if allowed in its contract with the recipient 
agency. The use of single inventory management would reduce the time 
and effort required of food service management companies in the 
management and use of donated foods, and could result in reduced costs 
to schools. However, the food service management company must ensure 
that donated ground beef and ground pork products, and end products 
received from processors, are stored in a manner that assures they will 
be used in the recipient agency's food service.
    We would also include a statement that, in cost-reimbursable 
contracts, the food service management company must ensure that its 
system of inventory management does not result in the recipient agency 
being charged for donated foods. Under such contracts, the food service 
management company often charges the recipient agency for food costs by 
measuring changes in its inventory records, which, under single 
inventory management, may result in a charge for donated foods in its 
billings for food costs. The food service management company may 
prevent this by checking inventory records against its actual costs for 
food purchases, or by differentiating between donated foods and end 
products, and commercially purchased foods, in its inventory records.

Contract Provisions, Sec.  250.54

    In the new Sec.  250.54, we propose to require specific contract 
provisions relating to donated foods in fixed-price and cost-
reimbursable contracts. We would stipulate, again, that such provisions 
must also be included in the contract solicitation documents. In Sec.  
250.54(a), we propose to require the following provisions in fixed-
price contracts:
    (1) A statement that the food service management company will 
credit the recipient agency for all donated foods received for use in 
the recipient agency's food service in the school year or fiscal year, 
as applicable.
    (2) The method and frequency by which crediting will occur--e.g., 
through invoice reductions, refunds, discounts, or other means of 
crediting--and the means of documentation to be utilized to verify that 
that the value of all donated foods has been credited.
    (3) The method of determining the donated food values to be used in 
crediting, in accordance with Sec.  250.52(c), or the actual donated 
food values;
    (4) If applicable, a statement that the food service management 
company will ensure that the recipient agency receives the full benefit 
of all refunds and discounts received from processors and distributors 
for processed end products, and will not charge the recipient agency 
for processing costs paid on its behalf as part of a fixed-price charge 
for the food service.
    (5) Any activities relating to donated foods that the food service 
management company will be responsible for, such as the payment of 
processing fees, or the remittance of refunds to the recipient agency 
for donated foods contained in processed end products.
    (6) A statement that donated ground beef and ground pork products, 
and all end products received from processors, will be used in the food 
service, and will not be substituted with commercial products.
    (7) A statement that, if menu plans include foods of the same 
generic identity as donated foods received, then those donated foods, 
or commercially purchased foods of the same generic identity, of U.S. 
origin, and identical or superior in quality to the donated foods, will 
be used.
    (8) An assurance that the food service management company will use 
donated foods in accordance with the requirements in 7 CFR part 250.
    (9) An assurance that the food service management company will not 
enter into a contract or agreement with a processor to process donated 
foods or end products for use in the recipient agency's food service.
    (10) A statement that the distributing agency, subdistributing 
agency, or recipient agency, the Comptroller General, the Department of 
Agriculture, or their duly authorized representatives, may perform on-
site reviews of the food service management company's food service 
operation to ensure that all activities relating to donated foods are 
performed in accordance with the requirements in 7 CFR part 250.
    (11) A statement that the food service management company will 
maintain records to document that crediting for all donated foods 
received for the school year or fiscal year, as applicable, has been 
achieved, and will meet other recordkeeping requirements in 7 CFR part 
250; and
    (12) A statement that extensions or renewals of the contract, if 
applicable, are contingent upon the fulfillment of all contract 
provisions relating to donated foods.
    In Sec.  250.54(b), we propose to require the same provisions in 
cost-

[[Page 33352]]

reimbursable contracts as those listed in paragraph (a) of new Sec.  
250.54, but to propose, in addition, that the food service management 
company assure that its system of inventory management will not result 
in the recipient agency being charged for donated foods.

Recordkeeping and Reviews, Sec.  250.55

    In the new Sec.  250.55, we propose to include the recordkeeping 
and review requirements for distributing and recipient agencies in 
contracts with food service management companies, to ensure that the 
use and management of donated foods is in accordance with the 
requirements of this part. In Sec.  250.55(a), we propose to require 
that the recipient agency maintain the following records:
    (1) The donated foods and end products received and provided to the 
food service management company for use in the food service.
    (2) Crediting for donated foods by the food service management 
company, including documentation verifying that the full donated food 
value has been credited.
    (3) The donated food values used in crediting.
    In Sec.  250.55(b), we propose to require that the food service 
management company maintain the following records:
    (1) The donated foods and end products received from, or on behalf 
of, the recipient agency, for use in its food service.
    (2) Documentation that all donated foods received for use in the 
recipient agency's food service have been credited.
    In Sec.  250.55(c), we propose to require that the recipient agency 
include a review of food service management company activities relating 
to the use and management of donated foods as part of its monitoring of 
the food service operation required in 7 CFR parts 210, 220, 225, or 
226, as applicable. We also propose to require that the recipient 
agency conduct a reconciliation of the food service management 
company's crediting for donated foods at least annually to ensure that 
it has received credit for all donated foods received in the school 
year.
    In Sec.  250.55(d), we propose to require that the distributing 
agency conduct an on-site review of the recipient agency's use of 
donated foods in its food service in contracts with food service 
management companies, in accordance with the management reviews 
required in Sec.  250.19(b)(1), as we propose to revise it in this 
rule. In accordance with the proposed Sec.  250.19(b)(1)(iv), the 
distributing agency would be permitted to enter into an agreement with 
the State administering agency (if a different agency) for NSLP, SFSP, 
or CACFP, to include its review as part of the administrative review 
required of the State administering agency in 7 CFR parts 210, 225, or 
226, as applicable.
    Lastly, in Sec.  250.55(e), we propose to state that USDA may 
conduct reviews of food service management company operations with 
respect to the use and management of donated foods, to ensure 
compliance with the requirements of this part.

Subpart E--National School Lunch Program (NSLP) and Other Child 
Nutrition Programs

    As described earlier in the preamble, we propose to provide a 
clearer, more comprehensive, description of the requirements relating 
to donated foods in NSLP and other child nutrition programs in a new 
subpart E, which is described below. This new subpart would include 
seven new sections, which would replace the current Sec. Sec.  250.48, 
250.49, and 250.50. The new sections under subpart E would include the 
following:

Sec.  250.56, Provision of donated foods in NSLP.
Sec.  250.57, Commodity schools.
Sec.  250.58, Ordering donated foods and their provision to school food 
authorities.
Sec.  250.59, Storage and inventory management of donated foods.
Sec.  250.60, Use of donated foods in the school food service.
Sec.  250.61, Child and Adult Care Food Program (CACFP).
Sec.  250.62, Summer Food Service Program (SFSP).

Provision of Donated Foods in NSLP, Sec.  250.56

    In the new Sec.  250.56, we propose to describe the basis for 
providing donated foods for use in NSLP, and for determining the types 
and amounts provided. In Sec.  250.56(a), we propose to include the 
current regulatory provisions regarding the distribution of donated 
foods to distributing agencies, which provide them to school food 
authorities that participate in NSLP. The distributing agency must 
confirm the participation of school food authorities in NSLP with the 
State education agency (if different from the distributing agency). We 
would also indicate that, in addition to the requirements of this part 
relating to donated foods, distributing agencies, subdistributing 
agencies, and school food authorities that participate in NSLP must 
adhere to the requirements in 7 CFR part 210, as applicable. We propose 
to remove the reference in current Sec.  250.48(a) to the provision of 
donated foods in the School Breakfast Program, as donated foods are not 
specifically provided for this program at the current time. However, 
school food authorities participating in NSLP may also use donated 
foods in their school breakfast programs, as indicated in the proposed 
Sec.  250.60(a).
    In Sec.  250.56(b), we propose to indicate that a wide variety of 
donated foods is purchased for distribution to school food authorities 
participating in NSLP each school year. A list of available donated 
foods is made available to distributing agencies and school food 
authorities on the FNS Web site. We propose to include the types of 
available donated foods by legislative purchase authority, as currently 
included in Sec.  250.48(e)--i.e., section 6 and 14 foods under the 
Richard B. Russell National School Lunch Act (42 U.S.C. 1755 and 
1762a), and section 32, 416, and 709 foods, as available.
    In Sec.  250.56(c), we describe how FNS determines the quantity of 
donated foods to provide to distributing agencies each school year, as 
currently described in Sec.  250.48(b). We indicate that, in accordance 
with section 6(c) of the Richard B. Russell National School Lunch Act 
(42 U.S.C. 1755(c)), the distributing agency receives, at a minimum, 
the national per-meal value of donated food assistance multiplied by 
the number of reimbursable lunches served in the previous school year. 
We describe the annual adjustment of the national per-meal value of 
donated food assistance to reflect changes in the Bureau of Labor 
Statistic's Producer Price Index for Foods Used in Schools and 
Institutions, in accordance with the Richard B. Russell National School 
Lunch Act (42 U.S.C. 1753). However, we propose to remove the detail 
regarding the calculation of that value currently included in current 
Sec.  250.48(b)(2). We propose, instead, to include a reference to the 
publication of a notice in the Federal Register each July that includes 
a more detailed description of the calculation of the national per-meal 
value for the school year. We propose to state that reimbursable 
lunches are those that meet the nutritional standards established in 7 
CFR part 210, and that are reported to FNS, in accordance with the 
requirements in that part. We propose to remove the current description 
of the determination of the number of meals used in the above 
calculation through the submittal of claims, and the modification of 
such numbers in subsequent years based on current data, as this 
information is currently included in 7 CFR part 210.

[[Page 33353]]

    In Sec.  250.56(d), we propose to state that FNS uses the average 
price for USDA purchases of donated food made during the duration of 
the purchase contract to credit distributing agency entitlement levels. 
This information is not currently included in 7 CFR part 250.
    Finally, in Sec.  250.56(e), we propose that those States that 
phased out food distribution operations prior to July 1, 1974, are 
permitted to choose to receive cash in lieu of the donated foods to 
which they would be entitled in NSLP, in accordance with the Richard B. 
Russell National School Lunch Act (42 U.S.C. 1765) and 7 CFR part 240.

Commodity Schools, Sec.  250.57

    In the new Sec.  250.57, we propose to describe the provision of 
donated foods to commodity schools. In Sec.  250.57(a), we propose to 
describe commodity schools as schools that operate a nonprofit school 
food service, in accordance with 7 CFR part 210, but receive additional 
donated food assistance rather than the general cash assistance 
available to them under section 4 of the Richard B. Russell National 
School Lunch Act (42 U.S.C. 1753). We would also indicate that, in 
addition to the requirements of this part relating to donated foods, 
commodity schools must adhere to the requirements in 7 CFR part 210.
    In Sec.  250.57(b), we propose to describe how FNS determines the 
quantity of donated foods to provide to distributing agencies for 
commodity schools each school year, as described in current Sec.  
250.48(b)(2)(ii). We would indicate that, in accordance with section 
6(c) of the Richard B. Russell National School Lunch Act (42 U.S.C. 
1755(c)), the distributing agency receives, at a minimum, donated foods 
valued at the sum of the national per-meal value of donated food 
assistance and the national average cash payment established under 
section 4 of the Richard B. Russell National School Lunch Act (42 
U.S.C. 1753), multiplied by the number of reimbursable lunches served 
by commodity schools in the previous school year. We would include the 
current option for the commodity school to receive, from the total 
value of donated food assistance available to it, 5 cents per meal in 
cash to cover processing and handling expenses related to donated 
foods. We would also include the types of donated foods available to 
commodity schools by legislative purchase authority--i.e., in addition 
to section 6 and section 14 foods under the Richard B. Russell National 
School Lunch Act (42 U.S.C. 1755 and 1762(a)), and section 32, 416, and 
709 foods, as included in current Sec.  250.48(e).
    We propose to remove provisions in current Sec.  250.48 describing 
the distribution of donated foods to schools not participating in NSLP 
or as commodity schools, since we are proposing to include the 
distribution of donated foods to such schools as charitable 
institutions in the new Sec.  250.67.

Ordering Donated Foods and Their Provision to School Food Authorities, 
Sec.  250.58

    In the new Sec.  250.58, we propose to describe the means by which 
the distributing agency orders donated foods, and ensures that school 
food authorities receive the quantities and types of donated foods that 
they can best utilize in their food service each school year. In Sec.  
250.58(a), we state that the distributing agency orders donated foods 
through a web-based system called the Electronic Commodity Ordering 
System (ECOS). ECOS was fully implemented for all distributing agencies 
in July 2003, and replaced the more cumbersome system of data 
submission formerly utilized.
    In Sec.  250.58(b), we propose to describe the value of donated 
foods that the school food authority is eligible to receive each school 
year, as described in current Sec.  250.48(c)(1). We propose to include 
the requirement, under section 6(c)(2) of the Richard B. Russell 
National School Lunch Act (42 U.S.C. 1755(c)(2)), that the distributing 
agency offer the school food authority, at a minimum, the national per-
meal value of donated food assistance multiplied by the number of 
reimbursable lunches served by the school food authority in the 
previous school year. This is referred to as the commodity offer value. 
We also propose to include the requirement, under section 14(f) of the 
Richard B. Russell National School Lunch Act (42 U.S.C. 1762(f)), that 
the distributing agency offer commodity schools the national per-meal 
value of donated food assistance plus the national average cash payment 
established under section 4 of the Richard B. Russell National School 
Lunch Act (42 U.S.C. 1753), multiplied by the number of reimbursable 
lunches served by the school in the previous school year, less, if 
applicable, the 5 cents per meal available as cash in lieu of donated 
foods. We would also include the eligibility of the school food 
authority to receive bonus foods in addition to the Section 6 foods. We 
propose to remove the current option provided to the distributing 
agency in Sec.  250.48(c)(1) to use another method (instead of the one 
described above) to determine the value of donated foods offered to 
school food authorities that would provide them with an equitable share 
of foods.
    Section 6(c)(2) of the Richard B. Russell National School Lunch Act 
(42 U.S.C 1755(c)(2)) mandates that distributing agencies offer school 
food authorities the full range of commodities that are available from 
the Secretary of Agriculture to the extent that quantities requested 
are sufficient to allow efficient delivery to and within the State. 
Accordingly, Sec.  250.48(c)(2) of current regulations requires the 
distributing agency to allow their school food authorities to order 
from the full range of donated foods offered by USDA. In the new Sec.  
250.58(c), we would retain this provision and clarify the legislative 
mandate by requiring additionally that the distributing agency solicit 
and receive orders from school food authorities before the distributing 
agency submits its orders to FNS.
    Current regulations may be interpreted in a way that needlessly 
restricts school food authorities' access to some foods. Under current 
Sec.  250.48(c)(2), the State must offer and efficiently deliver the 
full variety of available foods to the extent that quantities requested 
or available are sufficient to make a statewide distribution. However, 
depending on the State's storage and distribution system, it may be 
efficient to provide a given donated food to some of the school food 
authorities that have ordered it, but not to others. All school food 
authorities should not be denied a particular donated food because it 
would not be cost-effective to provide that food to one or more of 
them. Therefore, the proposal would remove the standard of statewide 
distribution, and the current stipulation that the distributing agency 
develop a procedure for the distribution of donated foods when the 
amount of such foods is not sufficient to make a statewide 
distribution. Instead, pursuant to the legislative standard (i.e., to 
allow efficient delivery to and within a State), we propose to require 
in Sec.  250.58(d) that the distributing agency ensure distribution of 
all donated foods selected by school food authorities that may be cost-
effectively distributed to them.
    In order to further ensure school food authorities' access to a 
wide variety of donated foods, we also propose to require, in Sec.  
250.58(d), that the distributing agency explore all available storage 
and distribution options to determine if distribution of the desired 
foods to each individual school food

[[Page 33354]]

authority that ordered them would be cost-effective. We propose to 
require that the distributing agency not prohibit the use of split 
shipments--i.e., shipments that provide for a single truckload of a 
donated food to be divided among multiple stops. Other options that 
should be explored include direct shipments from vendors to a school 
food authority or to a processor designated by the school food 
authority to receive the foods. We also propose to require that, if 
distribution of donated foods to a school food authority would not be 
cost-effective, the distributing agency provide the school food 
authority with the opportunity to select other available donated foods 
that may be distributed to it cost-effectively. While this proposal 
would help to ensure that school food authorities receive the desired 
donated foods, we invite comments on whether further regulatory action 
would provide additional assurance. We are especially interested in 
receiving input from program operators at the State and local levels, 
and other parties, on what would constitute cost-effective distribution 
of donated foods, and whether further requirements in this area would 
be helpful.
    Most States currently use the system proposed above to order and 
provide donated foods to school food authorities. However, some States 
order for delivery to a distributing agency storage facility a limited 
variety of the donated foods that USDA has made available, and then 
offer this limited selection to their school food authorities. This 
practice, which would be prohibited under the proposed rule, finds 
implicit support in current Sec.  250.48(f). This section establishes 
an ``offer and refusal'' system under which school food authorities may 
refuse donated foods offered by the distributing agency, and receive 
other foods instead. The distributing agency is not required to replace 
more than 20 percent of donated foods so refused with other foods. We 
propose to remove this ``offer and refusal'' provision because 
implementation of the proposals described above would render it 
unnecessary. Under these proposals, the distributing agency must allow 
all school food authorities to order from the full list of available 
foods, and must provide all such foods that can be distributed to them 
in a cost-effective manner. If a selected food cannot be distributed 
cost-effectively to a school food authority that has ordered it, the 
distributing agency must allow the school food authority to select 
other available foods.
    Under the proposals described above, school food authorities would 
have a better opportunity to select and receive the donated foods that 
they can best utilize in their food service. The proposals would also 
facilitate more efficient and effective use of donated foods by the 
food service management companies with which school food authorities 
enter into contracts to conduct their food service.
    In Sec.  250.58(e), we propose to describe some factors that may 
result in a school food authority receiving less than the commodity 
offer value of donated foods, which would be termed an ``adjusted 
assistance level''. We propose to state that a school food authority 
may receive an adjusted assistance level if, for example:
    (1) The distributing agency, in consultation with the school food 
authority, determines that the school food authority cannot efficiently 
utilize the commodity offer value of donated foods; or
    (2) The school food authority does not order, or select, donated 
foods equal to the commodity offer value that can be cost-effectively 
distributed to it.
    A school food authority may not be able to utilize the commodity 
offer value of donated foods due, for example, to current food 
inventories, scheduled food purchases in the commercial market, or a 
projected reduction in school enrollment. Additionally, in certain 
cases a school food authority may not order, or select, donated foods 
equal to the commodity offer value that may be distributed to it cost-
effectively. For example, a school food authority may order a specific 
type of donated food that may not be distributed to it in a full 
truckload, resulting in transportation costs that would be prohibitive. 
Unless the school food authority selects an alternate type of donated 
food that may be distributed cost-effectively, it may receive less than 
the commodity offer value.
    In Sec.  250.58(f), we propose to describe circumstances in which a 
school food authority may receive more than the commodity offer value 
of donated foods. We propose to state that the school food authority 
may receive more than the commodity offer value of donated foods if the 
distributing agency, in consultation with the school food authority, 
determines that the school food authority may efficiently utilize more 
donated foods than the commodity offer value, and more donated foods 
are available for distribution. This may occur, for example, if other 
school food authorities receive less than the commodity offer value of 
donated foods, for one of the reasons described above. A larger amount 
of donated foods may also be available for distribution as a result of 
the augmentation of donated food purchases to meet section 6(e) of the 
Richard B. Russell National School Lunch Act (42 U.S.C. 1755(e)), as 
previously discussed in the preamble, or in accordance with 
agricultural support provisions under section 32 of the Act of August 
24, 1935 (Section 32), of section 416 of the Agricultural Act of 1949 
(Section 416), or under section 709 of the Food and Agriculture Act of 
1965 (Section 709). This contingency, while already applicable, is not 
currently described in 7 CFR part 250.
    In Sec.  250.58(g), we propose to include the current options in 
Sec.  250.13(a)(5) that the distributing agency may use to value 
donated foods in crediting school food authorities for the commodity 
offer value or adjusted assistance level. However, we propose to 
clarify that the USDA purchase price may be an average price paid for a 
donated food over the duration of the contract with the food vendor, 
rather than the actual price paid for a specific purchase or shipment.

Storage and Inventory Management of Donated Foods, Sec.  250.59

    Over the last several years, FNS has allowed for fuller integration 
of donated foods with commercially purchased foods in the inventories 
of program operators, in order to reduce their time and labor in 
administering the programs. In 1996, the Department initiated a pilot 
project to test the use of commercial labels for donated foods, instead 
of a special USDA label. Over the course of the pilot project, the use 
of commercial labels was found to result in lower costs to the program, 
as vendors did not have to meet the expense of creating distinct labels 
for the donated foods, or meet food specifications unique to USDA. 
Consequently, the Department allowed the use of commercial labels for 
an increasing number of donated foods; at present, most donated foods 
are now packed with commercial labels.
    In a final rule published in the Federal Register on October 23, 
2002, at 67 FR 65011, FNS amended Sec.  250.14(b)(4) to remove the 
requirement that school food authorities, and other recipient agencies 
providing a meal service, maintain donated food inventories separate 
from inventories of commercially purchased foods. Hence, most 
distributing agencies currently allow school food authorities to 
commingle donated foods with commercially purchased foods in storage, 
and to maintain a single inventory record of all such foods. This type 
of system is referred to as single

[[Page 33355]]

inventory management, as we propose to define it in this rule. FNS also 
disseminated Policy Memorandum No. FD-020, on May 23, 2003, to further 
describe single inventory management and its applicability to the 
management of donated foods by recipient agencies in food distribution 
and child nutrition programs.
    In the new Sec.  250.59, we propose to describe the requirements 
for the storage and inventory management of donated foods at the 
distributing agency, subdistributing agency, and school food authority 
levels, including the use of commercial storage facilities. In Sec.  
250.59(a), we propose to state that distributing agencies, 
subdistributing agencies, and school food authorities must meet the 
requirements for storage and inventories of donated foods in Sec.  
250.14, in addition to the requirements in this section.
    In Sec.  250.59(b), we propose to include the requirement in 
current Sec.  250.14(b)(4) that the distributing agency or 
subdistributing agency, or a commercial storage facility under contract 
with either, store and inventory donated foods separately from 
commercially purchased foods or other foods. This requirement is 
necessary to ensure distribution of the donated foods that have been 
purchased for school food authorities and other recipient agencies in 
child nutrition programs.
    In Sec.  250.59(c), we propose to state that the school food 
authority is not required to store and inventory donated foods 
separately from commercially purchased foods, unless the distributing 
agency requires separate storage and inventory of donated foods. This 
is in accordance with Sec.  250.14(b)(4), as amended in the final rule 
of October 23, 2002, as described above. The use of single inventory 
management significantly reduces the time and paperwork required of 
school food authorities and other recipient agencies by more 
effectively integrating donated foods into program operations.
    In Sec.  250.59(d), we propose to indicate that a commercial 
storage facility under contract with the school food authority may 
store and inventory donated foods together with commercially purchased 
foods it is storing for the school food authority, unless it is 
prohibited under its contract with the school food authority. However, 
the commercial enterprise may not commingle foods it is storing for a 
school food authority with foods it is storing for a commercial 
enterprise or other entity, as this would jeopardize the use of the 
donated foods provided in the school food service. These storage and 
inventory requirements for commercial storage facilities are not 
clearly indicated in the current Sec.  250.14.

Use of Donated Foods in the School Food Service, Sec.  250.60

    In the new Sec.  250.60, we propose to describe the options and 
requirements for school food authorities in the use of donated foods in 
the school food service. In Sec.  250.60(a), we propose to state that 
the school food authority should use donated foods, as far as 
practical, in the lunches served to schoolchildren, for which they 
receive, at a minimum, an established per-meal value of donated food 
assistance each year (i.e., the national per-meal value). However, we 
also propose to state that the school food authority may use donated 
foods in other nonprofit school food service activities. We propose to 
state that, in accordance with the Richard B. Russell National School 
Lunch Act (42 U.S.C. 1751), revenues received from such meals or 
activities must accrue to the school food authority's nonprofit school 
food service account. We propose to include the following meals or 
activities in which donated foods may be used:
    (1) School breakfasts or other meals served in child nutrition 
programs.
    (2) A la carte foods sold to children.
    (3) Meals served to adults directly involved in the operation and 
administration of the nonprofit food service; and,
    (4) Training in nutrition, health, food service, or general home 
economics instruction for students.
    The above list of meals or activities in which donated foods may be 
used incorporates some current regulatory provisions in 7 CFR part 250. 
In the current Sec.  250.13(d)(1), donated foods may be used to serve 
meals to persons that are few in number and receive meals as an 
incident of service to eligible persons. Such persons may include 
teachers and other staff members. Also, in the current Sec.  250.48(g), 
donated foods may be used in training students in the areas of 
nutrition, health, food service, or general home economics.
    In Sec.  250.60(b), we propose to state that donated foods should 
not be used in food service activities that do not benefit primarily 
schoolchildren, such as banquets or catered events. However, their use 
in such activities may not always be avoided. This is true, for 
example, for a school food authority storing donated foods together 
with other foods, as in single inventory management. Thus, we propose 
to state that, in conducting activities described above, the school 
food authority must, in all cases, ensure reimbursement to the 
nonprofit school food service account for donated foods, in addition to 
reimbursement for other resources utilized from that account. Since 
school food authorities utilizing single inventory management cannot 
reimburse the nonprofit food service account based on actual usage of 
donated foods, they must establish an alternate method to ensure that 
donated foods do not subsidize food service activities that do not 
benefit schoolchildren--e.g., by including the current per-meal value 
of donated food reimbursement in the price charged for the food service 
activities. We also propose to include a reference to FNS Instruction 
782-5, Pricing of Adult Meals in the National School Lunch and School 
Breakfast Programs, which provides further guidance in this area.
    In Sec.  250.60(c), we propose to include the school food 
authority's option to use donated foods in a contract with a food 
service management company to conduct its food service. We propose to 
state that the school food authority must meet the requirements in the 
proposed subpart D of this part with respect to the use and management 
of donated foods in such contracts, and must also meet requirements in 
7 CFR part 210 and 7 CFR parts 3016 or 3019, as applicable, with 
respect to the procurement and execution of such contracts. We also 
propose to require the school food authority to ensure that a food 
service management company providing catered meals, or other food 
service activities that do not benefit primarily schoolchildren, ensure 
reimbursement to the nonprofit food service account for donated foods 
used in such activities, in accordance with the proposed Sec.  
250.60(b), as described above.
    In Sec.  250.60(d), we propose to state that a school food 
authority may use donated foods to provide a meal service to other 
school food authorities, in accordance with an agreement between the 
parties. We propose to clarify that the school food authority providing 
such a service may commingle its own donated foods and the donated 
foods of the other school food authorities that are parties to the 
agreement.

Donated Foods in CACFP, Sec.  250.61

    In the new Sec.  250.61, we propose to describe the use of donated 
foods in CACFP. As previously indicated, this new section would replace 
the current Sec.  250.49. In Sec.  250.61(a), we propose to describe 
the provision of donated foods to child and adult care institutions 
participating in CACFP for use in serving lunches and suppers to 
eligible recipients. We also propose to indicate that distributing 
agencies and child and

[[Page 33356]]

adult care institutions must also adhere to Federal regulations in 7 
CFR part 226, as applicable.
    In Sec.  250.61(b), we propose to include the determination of the 
minimum value of donated foods provided for distribution to 
institutions participating in CACFP, in accordance with section 6(c) of 
the Richard B. Russell National School Lunch Act (42 U.S.C. 1755(c)). 
This is currently described in Sec.  250.49(b). The value is determined 
by multiplying the national per-meal value of donated food assistance 
by the number of reimbursable lunches and suppers served in the 
previous school year. We would describe the annual adjustment of the 
national per-meal value of donated food assistance to reflect changes 
in the Bureau of Labor Statistic's Producer Price Index for Foods Used 
in Schools and Institutions, in accordance with the Richard B. Russell 
National School Lunch Act (42 U.S.C. 1755). However, we propose to 
remove the detail regarding the calculation of that value currently 
included in Sec.  250.49(b)(2). We would include instead a reference to 
the publication of a notice in the Federal Register each July that 
includes a more detailed description of this calculation. We also 
propose to remove the current detail regarding the submittal of claims 
for reimbursement, and the adjustments in the number of reimbursable 
meals in subsequent years. We would simply indicate that the number of 
reimbursable lunches and suppers may be adjusted during, or at the end 
of the year, in accordance with 7 CFR part 226. We also propose to 
include the types of donated foods the distributing agency may receive 
for distribution to child and adult care institutions, i.e., section 6 
and section 14 foods under the Richard B. Russell National School Lunch 
Act (42 U.S.C. 1755 and 1762a), and section 32, 416, and 709 foods, as 
included in current Sec.  250.49(d).
    In Sec.  250.61(c), we propose to include the current option in 
Sec.  250.49(c) for the State education agency to receive cash in lieu 
of the donated foods to which it would be entitled in CACFP, which is 
provided under section 17(h)(1) of the Richard B. Russell National 
School Lunch Act (42 U.S.C. 1766(h)(1)). However, we propose to 
indicate that, in accordance with 7 CFR part 226, the State 
administering agency must determine whether child and adult care 
institutions participating in CACFP wish to receive donated foods or 
cash in lieu of donated foods, and ensure that they receive the 
preferred means of assistance. The State administering agency must 
inform the distributing agency (if a different agency) which 
institutions wish to receive donated foods and must ensure that such 
foods are provided to them. However, if the State administering agency, 
in consultation with the distributing agency, determines that 
distribution of such foods would not be cost-effective, it may, with 
the concurrence of FNS, provide cash payments to the applicable 
institutions instead.
    In Sec.  250.61(d), we propose to include the child or adult care 
institution's option to use donated foods in a contract with a food 
service management company to conduct its food service, as included in 
current Sec.  250.49(a). We propose to state that the contract must 
meet the requirements with respect to donated foods in the proposed 
subpart D of 7 CFR part 250, and must also meet requirements in 7 CFR 
part 226 and 7 CFR parts 3016 or 3019, as applicable, with respect to 
the procurement of such contracts.
    In Sec.  250.61(e), we propose to indicate that the proposed 
requirements in this subpart relating to the ordering, storage and 
inventory management, and use of donated foods in NSLP, also apply to 
CACFP. However, we propose to indicate that, in accordance with 7 CFR 
part 226, a child or adult care institution that uses donated foods to 
prepare and provide meals to other such institutions is considered a 
food service management company.

Donated Foods in SFSP, Sec.  250.62

    In the new Sec.  250.62, we propose to describe the use of donated 
foods in SFSP. As previously indicated, this new section would replace 
the current Sec.  250.50. In Sec.  250.62(a), we propose to describe 
the provision of donated foods to service institutions participating in 
SFSP for use in serving nutritious meals to needy children primarily in 
the summer months, in their nonprofit food service programs. We also 
propose to indicate the applicability of Federal regulations in 7 CFR 
part 225 to SFSP.
    In Sec.  250.62(b), we propose to describe the types and quantities 
of donated foods received by the distributing agency in SFSP. As 
currently indicated in Sec.  250.50(c), the distributing agency may 
receive donated foods under section 14, and may receive donated foods 
under section 32, 416, and 709. However, we would also indicate that 
the distributing agency receives donated foods available under section 
6 based on the number of meals served in the State in the previous year 
that are eligible for donated food support. While the Richard B. 
Russell National School Lunch Act does not establish a per-meal value 
of donated food assistance in SFSP, as it does in NSLP and CACFP, FNS 
has traditionally provided donated food assistance valued at 1.5 cents 
per meal.
    In Sec.  250.62(c), we propose to include the stipulation in 
current Sec.  250.50(b) that the distributing agency provide donated 
foods to service institutions based on the number of meals served that 
are eligible for donated food support, in accordance with 7 CFR part 
225.
    In Sec.  250.62(d), we propose to include the service institution's 
option to use donated foods in a contract with a food service 
management company to conduct its food service, as currently provided 
in 7 CFR part 225. We propose to state that the contract must meet the 
requirements in the proposed subpart D with respect to donated foods, 
and must also meet requirements in 7 CFR part 225 and 7 CFR parts 3016 
or 3019, as applicable, with respect to the procurement of such 
contracts.
    In Sec.  250.62(e), we propose to indicate that the proposed 
requirements in this subpart relating to the ordering, storage and 
inventory management, and use of donated foods in NSLP, also apply to 
SFSP.

Subpart F--Household Programs

    We propose to include, in a new subpart F, the current Sec. Sec.  
250.45, 250.46, 250.47, and 250.51, and redesignate them as Sec. Sec.  
250.63 through 250.66, respectively, but otherwise without change.

Subpart G--Other Donated Food Outlets

    As described earlier in the preamble, we propose to add a new 
subpart G to include the distribution of donated foods to other 
outlets, including charitable institutions, NSIP, and to organizations 
assisting in situations of disasters and distress. In this new subpart, 
we propose to add two new sections to better describe the distribution 
of donated foods to charitable institutions (including summer camps) 
and in NSIP. The new sections would replace the current Sec. Sec.  
250.40, 250.41, and 250.42 in their entirety. However, as noted below, 
several of the provisions currently contained in those sections would 
be revised and included in the new Sec. Sec.  250.67, Charitable 
Institutions, and 250.68, Nutrition Services Incentive Program (NSIP) 
in subpart G. Additionally, we propose to include the current 
Sec. Sec.  250.43 and 250.44, which describe the distribution of 
donated foods in disasters and situations of distress, in their 
entirety and otherwise without change. However, we would redesignate 
the current sections as Sec. Sec.  250.69 and 250.70.

[[Page 33357]]

Charitable Institutions, Sec.  250.67

    We propose to describe the distribution of donated foods to 
charitable institutions and summer camps in the new Sec.  250.67. As 
discussed earlier in the preamble, the volume and variety of donated 
foods available to charitable institutions and summer camps that do not 
participate in a child nutrition program has decreased significantly in 
recent years. Therefore, in addition to including summer camps that do 
not participate in a child nutrition program in the definition of 
``charitable institution,'' as discussed earlier, we propose to revise 
several of the provisions currently contained in Sec. Sec.  250.40 and 
250.41. These changes, which are discussed in detail below, would 
reduce the burden imposed on distributing agencies and better target 
limited resources.
    In Sec.  250.67(a), we propose to describe the distribution of 
donated foods to eligible charitable institutions, as defined in this 
part. We propose to retain the requirement, in current Sec.  
250.41(a)(1), that a charitable institution have a signed agreement 
with the distributing agency in order to receive donated foods. 
However, we propose to remove the current requirements in that section 
that the agreement include information on the days of operation, the 
number of participants and meals served, and data relating to the 
number of needy persons served. We also propose to remove the current 
requirements, in Sec.  250.40(a)(1), that the agreement for summer 
camps include data on the number of adults participating at the camp 
relative to the number of children.
    We propose to remove the requirement in current Sec.  250.41(a)(1) 
that agreements between distributing agencies and charitable 
institutions include a statement assuring that proper inventory 
controls will be maintained and that all reports will be submitted as 
required by the distributing agency. In accordance with the current 
Sec.  250.14(b), charitable institutions are not required to store and 
inventory donated foods separately from other foods. As stated above, 
we are proposing to remove the requirements for reporting information 
on participants and meals served.
    In Sec.  250.67(b), we propose to list some types of charitable 
institutions that may receive donated foods, if they meet the 
requirements of this section. In accordance with current Sec.  
250.41(a)(2), we propose to include the eligibility of adult 
correctional institutions that conduct rehabilitation programs for a 
majority of inmates. However, we propose to remove the additional 
eligibility requirement in that section that the rehabilitation 
programs be available to inmates for at least 10 hours per week, as it 
is overly restrictive. We propose to list schools, summer camps, 
service institutions, and child and adult care institutions that do not 
participate in child nutrition programs as eligible charitable 
institutions in this section. These organizations are currently 
included under the definition of charitable institution. In addition to 
the institutions described above, the list of eligible charitable 
institutions would include, but not be limited to:
    (1) Hospitals or retirement homes.
    (2) Emergency shelters, soup kitchens, or emergency kitchens.
    (3) Elderly nutrition projects or adult day care centers.
    In light of the above, we propose to clarify, in Sec.  250.67(a), 
that the following organizations may not receive donated foods as 
charitable institutions:
    (1) Schools, summer camps, service institutions, and child and 
adult care institutions that participate in child nutrition programs or 
as commodity schools.
    (2) Adult correctional institutions that do not conduct 
rehabilitation programs for a majority of inmates.
    In Sec.  250.67(c), we propose to describe how the distributing 
agency must determine if an institution or organization serves 
predominantly needy persons, which is a requirement to meet the revised 
definition of ``charitable institution'' proposed in this rule. We 
propose to require that the distributing agency use data similar to the 
data currently used in 7 CFR part 251 to determine the eligibility of a 
recipient agency to receive donated foods in TEFAP. We would require 
the distributing agency to use:
    (1) Socioeconomic data on the area in which the organization is 
located, or on the clientele served by the organization;
    (2) Data from other public or private social service agencies, or 
from State advisory boards, such as those established in accordance 
with Sec.  251.4(h)(4); or
    (3) Other similar data.
    Such data would replace the current information that a charitable 
institution is required to submit as part of the agreement: data on 
meals served and participation, or, for summer camps, data on the 
number of adults compared to the number of children at the camp. Thus, 
in place of the current review of such data, the distributing agency 
would use readily available data, as described above, to determine if 
the institution serves predominantly needy persons. The use of such 
data would significantly reduce the time and paperwork currently 
required of charitable institutions and distributing agencies, and 
would be more appropriate to the small and sporadic distributions of 
donated foods now provided to charitable institutions, for the reasons 
described earlier.
    In Sec.  250.67(d), we propose to include the types of donated 
foods provided to charitable institutions--donated foods under section 
4(a), 32, 416, and 709 (i.e., surplus foods), as available. We propose 
to include the requirement that the distributing agency distribute 
donated foods to charitable institutions based on the amounts that they 
may effectively utilize without waste, and the total amounts available 
for distribution to such institutions. The distributing agency may 
determine the charitable institution's capacity to utilize a specific 
amount of donated foods by the means indicated under Sec.  250.67(c), 
which may include specific information provided by charitable 
institutions, as the distributing agency deems necessary. This approach 
to donated food allocation renders unnecessary the requirement, in 
current Sec.  250.41(b), that distribution be based on a calculation of 
the number of needy persons served by charitable institutions, using 
data provided by them.
    In Sec.  250.67(e), we propose to include the stipulation in 
current Sec.  250.41(a)(3) that a charitable institution may use 
donated foods in a contract with a food service management company. We 
propose to require that the contract ensure that all donated foods 
received for use by the charitable institution in a fiscal year are 
used to benefit the charitable institution's food service. However, we 
propose to state that the charitable institution would not have to meet 
other requirements in the proposed subpart D to ensure this.

Nutrition Services Incentive Program (NSIP), Sec.  250.68

    With the enactment of the Older Americans Act Amendments of 2000 
(Pub. L. 106-501), the Nutrition Program for the Elderly was renamed 
the Nutrition Services Incentive Program (NSIP). In addition to the 
name change, the allocation of resources in NSIP was changed to provide 
donated foods or funds to State Agencies on Aging and their 
participating organizations based on the number of meals served in the 
previous year, and not in the current year. Subsequently, with the 
enactment of the Consolidated Appropriations Resolution, 2003 (Pub. L. 
108-7), section 311 of the Older Americans Act of 1965 (42 U.S.C. 
3030a) was amended to transfer the responsibility for the allocation of

[[Page 33358]]

program resources from USDA to DHHS. In concert with this legislative 
change, DHHS'' Administration on Aging (AoA) provides NSIP grants to 
State Agencies on Aging from the annual program appropriations provided 
to DHHS. However, under the amended Older Americans Act, State Agencies 
on Aging may still choose to receive all, or part, of their NSIP grants 
in the form of donated foods (rather than funds), on behalf of their 
participating elderly nutrition projects. In such cases, USDA is 
responsible for the purchase of the foods and their delivery to the 
appropriate State or local agency, using funds advanced to it by DHHS.
    In the new Sec.  250.68, we propose to remove provisions in current 
Sec.  250.42 relating to administrative responsibilities that are now 
undertaken by AoA, and to revise other provisions to reflect USDA's 
current role in NSIP, in accordance with the amendments to the Older 
Americans Act described above. In Sec.  250.68(a), we propose to 
describe the administration of NSIP by DHHS/AoA, and the FNS role in 
the purchase and delivery of donated foods to State Agencies on Aging 
in the program, as described above.
    In Sec.  250.68(b), we propose to indicate the types and quantity 
of donated foods that the State Agency on Aging may receive on behalf 
of its elderly nutrition projects. We propose to state that the State 
Agency on Aging may receive donated foods with a value up to its NSIP 
grant. We propose to state that the State Agency on Aging and its 
elderly nutrition projects may receive any types of donated foods 
available in other food distribution or child nutrition programs, to 
the extent that such foods may be distributed cost-effectively. We also 
propose to include the provision in current Sec.  250.42(d) that the 
State Agency on Aging may also receive section 32, section 416, and 
section 709 donated foods, as available, and section 14 donated foods.
    In Sec.  250.68(c), we propose to clarify that FNS delivers the 
NSIP donated foods to distributing agencies, usually together with 
shipments of donated foods for NSLP, and the distributing agencies then 
distribute the NSIP donated foods to elderly nutrition projects 
selected by the State or Area Agency on Aging. This is the procedure 
currently used, although it is not currently described in 7 CFR part 
250. The small amounts of donated foods ordered for NSIP would make the 
cost of direct shipments to State Agencies on Aging or elderly 
nutrition projects prohibitive. We propose to include the provision in 
current Sec.  250.42(a) that the distributing agency must only 
distribute donated foods to elderly nutrition projects with which it 
has signed agreements. We propose to indicate that the agreements must 
include provisions that describe the roles of each party in ensuring 
that the desired donated foods are ordered, stored, and distributed in 
an effective manner.
    In Sec.  250.68(d), we propose to state that the donated food 
values used in crediting a State Agency on Aging's grant are the 
average price (cost per lb.) for USDA purchases of donated food made 
over a contract period. These are the same values used in crediting 
distributing agency entitlements in NSLP, in accordance with the 
proposed Sec.  250.56(d).
    Finally, in Sec.  250.68(e), we propose to indicate that FNS and 
AoA coordinate their respective roles in NSIP through the execution of 
annual agreements. The agreements ensure that FNS is properly 
reimbursed for donated food purchases and related expenses, and that 
advanced funds not used for donated food purchases are returned to AoA 
for disbursement to the appropriate State Agencies on Aging.
    We propose to remove the current provision in Sec.  250.42(a) that 
allows food service management companies to use donated foods to 
provide the food service for elderly nutrition projects. Since USDA is 
now responsible only for the procurement and delivery of donated foods 
in the program, their use in contracts with food service management 
companies no longer falls under USDA's regulatory authority.
    We propose to remove several other provisions included in current 
Sec.  250.42 to reflect the legislative changes. These include 
provisions in Sec.  250.42(b) relating to the per-meal value of donated 
foods and the reporting of meals served, and provisions in Sec.  
250.42(c) relating to the provision and use of program funds. The 
specific provisions in the latter section that would be removed 
include:
     Payments in funds made by FNS.
     Agreements between FNS and State Agencies on Aging 
choosing to receive funds.
     Monitoring of the disbursal of funds to elderly nutrition 
projects.
     Monitoring of the use of funds by elderly nutrition 
projects.
     Maintenance of records of the receipt and use of funds.

III. Procedural Matters

A. Public Comment Procedures

    Your written comments on this proposed rule should be specific, 
confined to issues pertinent to the proposed rule, and should explain 
your reasons for any change recommended. Where possible, you should 
reference the specific section or paragraph of the proposal you are 
addressing. Comments received after the close of the comment period 
(see DATES) will not be considered or included in the Administrative 
Record for the final rule.
    The comments, including names, street addresses, and other contact 
information of commenters, will be available for public review at the 
Food and Nutrition Service, Room 500, 3101 Park Center Drive, 
Alexandria, Virginia, during regular business hours (8:30 a.m. to 5 
p.m.), Mondays through Fridays, except Federal holidays.
    Executive Order 12866 requires each agency to write regulations 
that are simple and easy to understand. We invite your comments on how 
to make these regulations easier to understand, including answers to 
questions such as the following:
    (1) Are the requirements in the rule clearly stated?
    (2) Does the rule contain technical language or jargon that 
interferes with its clarity?
    (3) Does the format of the rule (grouping and order of sections, 
use of headings, paragraphing, etc.) make it more or less clear?
    (4) Would the rule be easier to understand if it were divided into 
more (but shorter) sections?
    (5) Is the description of the rule in the preamble section entitled 
``Background and Discussion of the Proposed Rule'' helpful in 
understanding the rule? How could this description be more helpful?

B. Executive Order 12866

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

C. Regulatory Impact Analysis

Need for Action
    This action is needed to respond to an OIG audit that found that 
school food authorities did not always receive the benefit of the 
donated foods provided for use in NSLP. It also incorporates amendments 
to the Older Americans Act of 1965 that affect NSIP.
Benefits
    The regulatory changes would help ensure that school food 
authorities and other recipient agencies receive the benefit of all 
donated foods provided to food service management companies for use in 
serving school lunches and other meals. It would provide some 
flexibility in the use and management of donated foods by food service 
management

[[Page 33359]]

companies in providing the meal service. It would also help to ensure 
that school food authorities receive the donated foods they may best 
utilize in their food service, and would remove reporting requirements 
for charitable institutions to determine the amount of surplus donated 
foods they may receive for service to needy persons.
Costs
    This action is not expected to significantly increase costs of 
State and local agencies, or their commercial contractors, in using 
donated foods.

D. Regulatory Flexibility Act

    This proposed rule has been reviewed with regard to the 
requirements of the Regulatory Flexibility Act (5 U.S.C. 601-612). The 
Under Secretary of Food, Nutrition, and Consumer Services, Eric M. 
Bost, has certified that this action will not have a significant impact 
on a substantial number of small entities. Although the rule would 
require specific procedures for food service management companies and 
contracting agencies to follow in using donated foods, USDA does not 
expect them to have a significant impact on such entities.

E. Public Law 104-4

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Public 
Law 104-4, establishes requirements for Federal agencies to assess the 
effects of their regulatory actions on State, local, and tribal 
governments and the private sector. Under Section 202 of the UMRA, 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.

F. Executive Order 12372

    The donation of foods in USDA food distribution and child nutrition 
programs, to charitable institutions, and to elderly nutrition projects 
in NSIP is included in the Catalog of Federal Domestic Assistance under 
10.550. 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), the donation 
of foods in such programs is included in the scope of Executive Order 
12372, which requires intergovernmental consultation with State and 
local officials.

G. Executive Order 13132

    Executive Order 13132 requires Federal agencies to consider the 
impact of their regulatory actions on State and local governments. 
Where such actions have federalism implications, agencies are directed 
to provide a statement for inclusion in the preamble to the regulations 
describing the agency's considerations in terms of the three categories 
called for under section (6)(b)(2)(B) of Executive Order 13132.
Prior Consultation With State Officials
    The programs affected by the regulatory proposals in this rule are 
all State-administered, Federally funded programs. Hence, our national 
headquarters and regional offices have formal and informal discussions 
with State and local officials on an ongoing basis regarding program 
issues relating to the distribution of donated foods. FNS meets 
annually with the American Commodity Distribution Association, a 
national group with State, local, and industry representation, to 
discuss issues relating to food distribution.
Nature of Concerns and the Need To Issue This Rule
    The rule addresses concerns identified in an OIG audit in a manner 
that will affect State and local agencies. While it may increase the 
workload of such agencies to a certain extent, it would help to ensure 
that school food authorities receive the benefit of the donated foods 
provided for their use. It also addresses the need to better ensure 
that all State agencies provide school food authorities with the 
opportunity to order all varieties of donated foods available for their 
use.
Extent To Which We Meet Those Concerns
    FNS has considered the impact of the proposed rule on State and 
local agencies. The overall effect is to ensure that such agencies 
receive the greatest benefit from the donated foods made available for 
their use in food distribution and child nutrition programs. FNS is not 
aware of any case in which the provisions of the rule would preempt 
State law.

H. Executive Order 12988

    This proposed rule has been reviewed under Executive Order 12988, 
Civil Justice Reform. This proposed rule, when finalized, would have 
preemptive effect with respect to any State or local laws, regulations, 
or policies which conflict with its provisions or which would otherwise 
impede its full implementation. This proposed rule would not have 
retroactive effect. Prior to any judicial challenge to the provisions 
of this rule or the application of its provisions, all applicable 
administrative procedures must be exhausted.

I. Civil Rights Impact Analysis

    FNS has reviewed this 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 will not in any way limit or reduce the ability of 
participants to receive the benefits of donated foods in food 
distribution programs on the basis of an individual's or group's race, 
color, national origin, sex, age, or disability. FNS found no factors 
that would negatively and disproportionately affect any group of 
individuals.

J. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. Chap. 35; see 5 CFR 
part 1320) requires that OMB approve all collections of information by 
a Federal agency from the public before they can be implemented. 
Respondents are not required to respond to any collection of 
information unless it displays a current valid OMB control number. This 
proposed rule contains information collections that are subject to 
review and approval by OMB; therefore, in accordance with the Paperwork 
Reduction Act of 1995, this notice invites the general public and other 
agencies to comment on the proposed information collections affected by 
the proposals in the rule. Written comments on this proposed 
information collection must be received on or before August 7, 2006.
    Comments concerning the information collection aspects of this 
proposed rule should be sent to the Office of Information and 
Regulatory Affairs, OMB, Room 10235, New Executive Office Building, 
Washington, DC 20503, Attention: Desk Officer for

[[Page 33360]]

the Food and Nutrition Service. A copy of these comments may also be 
sent to Lillie F. Ragan, at the address listed in the ADDRESSES section 
of this preamble. Commenters are asked to separate their comments on 
the information collection requirements from their comments on the 
remainder of the proposed rule.
    OMB is required to make a decision concerning the collection of 
information contained in this proposed regulation between 30 to 60 days 
after the publication of this document in the Federal Register. 
Therefore, a comment to OMB is best assured of having full 
consideration if OMB receives it within 30 days of publication. This 
does not affect the deadline for the public to comment to the 
Department on the proposed regulation.
    Comments are invited on: (a) Whether the proposed collection of 
information is necessary for the proper performance of the functions of 
the agency, including whether the information will have practical 
utility; (b) the accuracy of the agency's estimate of the burden of the 
proposed collection of information, including the validity of the 
methodology and assumptions used; (c) ways to enhance the quality, 
utility, and clarity of the information to be collected; (d) ways to 
minimize the burden of the collection of information on those who are 
to respond, including use of appropriate automated, electronic, 
mechanical, or other technological collection techniques or other forms 
of information technology.
    The title, description, and respondent description of the 
information collections affected by this rule are shown below, with an 
estimate of the annual reporting and recordkeeping burdens. These 
burden hours represent proposed changes to current reporting and 
recordkeeping requirements, and incorporate some additional proposed 
requirements.
    Title: Food Distribution Forms.
    OMB Number: 0584-0293.
    Expiration Date: March 31, 2009.
    Type of Request: Revision of a currently approved collection.
    Abstract: This proposed rule would affect only the following 
reporting and recordkeeping requirements under 7 CFR part 250.
Reporting Requirements
    Section 250.12(c), Recipient agency/food service management company 
contracts. Currently, the reporting burden associated with the use of 
donated foods in contracts with food service management companies is 
included in Sec.  250.12(c) (the citation is in error, as current 
regulatory requirements for these contracts are included in Sec.  
250.12(d)). In this rule, we are proposing new requirements to ensure 
that recipient agencies in child nutrition programs receive the full 
benefit of donated foods in contracts with food service management 
companies. We propose to require that food service management companies 
credit such recipient agencies for all donated foods through invoice 
reductions, refunds, discounts, or other means of crediting. Such 
crediting would be required not less frequently than annually. In 
addition to the proposed new requirements, the number of contracts that 
recipient agencies enter into with food service management companies 
has increased over the last several years. Hence, we project the 
increase in the reporting burden for the use of donated foods in food 
service management company contracts as follows.
    In school year 2000, 1,648 school food authorities of a total of 
19,329 (8.5 percent) had contracts with food service management 
companies to conduct their food service. Hence, of the total of 20,770 
school food authorities operating in school year 2004, we estimate that 
1,765 had contracts with food service management companies. We estimate 
the burden hours needed to meet the requirements proposed for donated 
foods in the contract to be 1 hour. While each respondent (the food 
service management company) may submit more than one response per year, 
our proposal would allow for only one submittal per year. Hence, we 
project the number of reports submitted annually by each respondent to 
be 1. Hence, the estimated total annual reporting burden for food 
service management company contracts would be:
    1,765 x 1 hour = 1,765 hours.
    1,765 x 1 response per year = 1,765 burden hours annually.
    The estimated total annual reporting burden of 1,765 hours would be 
an increase from the current reporting burden of 24.75 hours. As we are 
proposing to include requirements for the use of donated foods in 
contracts with food service management companies in the new Sec.  
250.54 in this rule, we would also include the burden associated with 
this activity under Sec.  250.54 in the ICB package.
    Section 250.17(e), Food orders. Currently, in Sec.  250.17(e), the 
distributing agency must submit orders for donated foods in NSLP and 
other child nutrition programs using form FNS-52, Food Requisition. 
However, in July 2003, FNS implemented a web-based system called the 
Electronic Commodity Ordering System (ECOS), which allows distributing 
agencies to submit orders for donated foods electronically. In 
submitting orders through ECOS, the number of submissions has increased 
but the time needed for each submission has been substantially reduced. 
We estimate that each distributing agency submits 642 orders per year 
(one for each donated food ordered), instead of the 112 paper 
submittals (with multiple food orders) previously submitted annually. 
Each submission takes an estimated 30 seconds, rather than the current 
2 hours. Hence, we propose to reduce the reporting burden for this 
activity to 416 hours from the current 18,144 hours. As we are 
proposing to include food ordering in NSLP in the new Sec.  250.58 in 
this rule, we would also include the burden associated with this 
activity under Sec.  250.58 in the ICB package.
    Section 250.41(b), Reporting of needy persons served by charitable 
institutions. Currently, in Sec.  250.41(b), charitable institutions 
must report the number of meals served, and information necessary to 
determine the number of meals served to needy persons. We are proposing 
to remove this submission requirement for charitable institutions in 
this rule, and to require instead that the distributing agency use 
readily available data to determine that a charitable institution 
serves predominantly needy persons. Hence, the reporting burden of 108 
hours currently listed in Sec.  250.41(b) would be removed.
Recordkeeping Requirements
    Section 250.12(c), Food service records. The current recordkeeping 
burden for the use of donated foods in food service management company 
contracts is 24 hours. In this rule, we are proposing to require 
recipient agencies in child nutrition programs to maintain 
documentation of crediting of donated foods by food service management 
companies and the donated food values used in crediting. Hence, the 
recordkeeping burden for this activity would increase. We estimate the 
total number of respondents would be 1,765, as stated above. We 
estimate that each response would take 0.25 hours. Hence, the 
recordkeeping burden associated with the use of donated foods in food 
service management company contracts would increase to 442 hours from 
the current 24 hours. As we are proposing to include these 
recordkeeping requirements in the new Sec.  250.55, we would also 
include the burden hours under Sec.  250.55 in the ICB package.
    Section 250.42(c)(5), Cash in lieu of donated foods for State 
Agencies on Aging. Currently, in Sec.  250.42(c)(5), the State Agency 
on Aging must keep a

[[Page 33361]]

record of the agreement with FNS to receive cash in lieu of donated 
foods. We are proposing to remove this agreement requirement in this 
rule, as DHHS is now responsible for making cash disbursements to State 
Agencies on Aging. Hence, the recordkeeping burden of 5.60 hours 
currently listed in Sec.  250.42(c)(5) would be removed.
    Respondents: State, local, or Tribal Government; Program 
participants; Business or other for-profit; Nonprofit institutions; 
Federal government.
    Total Annual Responses: Current: 1,272,952; Proposed: 1,317,518.
    Estimated Total Annual Burden on Respondents: Current: 1,101,497; 
Proposed: 1,085,814.
    The proposed changes in the reporting and recordkeeping 
requirements described above are included in the following table.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                           Responses per       Total          Hours/
                  Section                                                   Respondents        year          responses       response      Total  hours
--------------------------------------------------------------------------------------------------------------------------------------------------------
Reporting:
    250.54................................  Current.....................             300            0.25              75            0.33           24.75
                                            Proposed....................           1,765               1           1,765               1           1,765
    250.58................................  Current.....................              81             112           9,072               2          18,144
                                            Proposed....................              81             642          52,002           0.008             416
    250.67................................  Current.....................              54               1              54               2             108
                                            Proposed....................               0               0               0               0               0
Recordkeeping:
    250.54/250.55.........................  Current.....................             300  ..............  ..............            0.08              24
                                            Proposed....................           1,765  ..............  ..............            0.25             442
    250.68................................  Current.....................              70  ..............  ..............            0.08            5.60
                                            Proposed....................               0  ..............  ..............               0               0
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The resulting changes in the reporting and recordkeeping 
requirements in OMB Number 0584-0293 are included in the following 
table.

----------------------------------------------------------------------------------------------------------------
                                                                                      Annual
                                                                    Respondents      responses     Total  hours
----------------------------------------------------------------------------------------------------------------
Part 250:
    Current.....................................................         255,452          35,803          68,733
    Proposed....................................................         258,258          80,369          53,049
Grand total:
    Current.....................................................         367,182       1,272,952       1,101,497
    Proposed....................................................         369,988       1,317,518       1,085,814
----------------------------------------------------------------------------------------------------------------

K. Government Paperwork Elimination Act Compliance

    FNS is committed to compliance with the Government Paperwork 
Elimination Act, which requires government agencies to provide the 
public with the option of submitting information or transacting 
business electronically to the maximum extent possible. This commitment 
is exemplified by our transition to an electronic web-based system for 
the submittal of donated food orders, as described earlier in the 
preamble.

List of Subjects in 7 CFR Part 250

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

    Accordingly, 7 CFR part 250 is proposed to be amended as follows:

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

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

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

    2. In Sec.  250.3:
    a. Remove definitions of Nonprofit summer camps for children, 
Nonresidential child or adult care institution, Nutrition program for 
the elderly, Offer-and-acceptance system, Program, and Students in home 
economics.
    b. Revise definitions of Charitable institutions, Child nutrition 
program, Commodity school, End product, Food service management 
company, Processing, Processor, Recipient agencies, Recipients, Section 
311, Service institutions, and State Agency on Aging.
    c. Add definitions, in the appropriate alphabetical order, of Adult 
care institution, AoA, Bonus foods, CACFP, Child care institution, 
Commodity offer value, DHHS, Elderly nutrition project, Entitlement, 
Entitlement foods, National per-meal value, Nonprofit organization, 
Nonprofit school food service account, NSIP, NSLP, Reimbursable meals, 
SBP, 7 CFR part 3016, 7 CFR part 3019, SFSP, Single inventory 
management, and Summer camp.
    The revisions and additions read as follows:


Sec.  250.3  Definitions.

    Adult care institution means a nonresidential adult day care center 
that participates independently in CACFP, or that participates as a 
sponsoring organization, in accordance with an agreement with the 
distributing agency.
    AoA means the Administration on Aging, which is the DHHS agency 
that administers NSIP.
    Bonus foods means Section 32, Section 416, and Section 709 donated 
foods, as defined in this section, which are purchased under surplus 
removal or price support authority, and provided to distributing 
agencies in addition to legislatively authorized levels of assistance.

[[Page 33362]]

    CACFP means the Child and Adult Care Food Program, 7 CFR part 226.
    Charitable institutions means public institutions or nonprofit 
organizations, as defined in this section, that provide a meal service 
on a regular basis to predominantly needy persons in the same place 
without marked changes. Charitable institutions include, but are not 
limited to, emergency shelters, soup kitchens, hospitals, retirement 
homes, elderly nutrition projects; schools, summer camps, service 
institutions, and child and adult care institutions that do not 
participate in a child nutrition program, or as a commodity school, as 
they are defined in this section; and adult correctional institutions 
that conduct rehabilitation programs for a majority of inmates.
    Child care institution means a nonresidential child care center 
that participates independently in CACFP, or that participates as a 
sponsoring organization, in accordance with an agreement with the 
distributing agency.
    Child nutrition program means NSLP, CACFP, SFSP, or SBP.
* * * * *
    Commodity offer value means the minimum value of donated foods that 
the distributing agency must offer to a school food authority 
participating in NSLP each school year. The commodity offer value is 
equal to the national per-meal value of donated food assistance 
multiplied by the number of reimbursable meals served by the school 
food authority in the previous school year.
    Commodity school means a school that operates a nonprofit food 
service, in accordance with 7 CFR part 210, but that receives 
additional donated food assistance rather than the cash assistance 
available to it under section 4 of the National School Lunch Act (42 
U.S.C. 1753).
* * * * *
    DHHS means the Department of Health and Human Services.
* * * * *
    Elderly nutrition project means a recipient agency selected by the 
State or Area Agency on Aging to receive donated foods in NSIP, for use 
in serving meals to elderly persons.
    End product means a food product that contains processed donated 
foods.
    Entitlement means the value of donated foods a distributing agency 
is authorized to receive in a specific program, in accordance with 
program legislation.
    Entitlement foods means donated foods that USDA purchases and 
provides in accordance with levels of assistance mandated by program 
legislation.
* * * * *
    Food service management company means a commercial enterprise, 
nonprofit organization, or public institution that is, or may be, 
contracted with by a recipient agency to manage any aspect of a 
recipient agency's food service, in accordance with 7 CFR parts 210, 
225, or 226, or, with respect to charitable institutions, in accordance 
with this part. However, a school food authority participating in NSLP 
that performs such functions is not considered a food service 
management company. Also, a commercial enterprise that uses donated 
foods to prepare meals at a commercial facility, or to perform other 
activities that meet the definition of processing in this section, is 
considered a processor in this part, and is subject to the requirements 
in subpart C of this part.
* * * * *
    National per-meal value means the value of donated foods provided 
for each reimbursable lunch served in NSLP in the previous school year, 
and for each reimbursable lunch and supper served in CACFP in the 
previous school year, as established in section 6(c) of the National 
School Lunch Act.
* * * * *
    Nonprofit organization means a private organization with tax-exempt 
status under the Internal Revenue Code. Nonprofit organizations 
operated exclusively for religious purposes are automatically tax-
exempt under the Internal Revenue Code.
    Nonprofit school food service account means the restricted account 
in which all of the revenue from all food service operations conducted 
for the school food authority principally for the benefit of school 
children is retained and used only for the operation or improvement of 
the nonprofit school food service.
    NSIP means the Nutrition Services Incentive Program.
    NSLP means the National School Lunch Program, 7 CFR part 210.
* * * * *
    Processing means a commercial enterprise's use of a commercial 
facility to:
    (a) Convert donated foods into an end product;
    (b) Repackage donated foods; or
    (c) Use donated foods in the preparation of meals.
    Processor means a commercial enterprise that processes donated 
foods at a commercial facility.
    Recipient agencies means agencies or organizations that receive 
donated foods, in accordance with agreements signed with a distributing 
agency, or with another recipient agency.
    Recipients means persons receiving donated foods, or meals 
containing donated foods, provided by recipient agencies.
* * * * *
    Reimbursable meals means meals that meet the nutritional standards 
established in Federal regulations pertaining to NSLP, SFSP, and CACFP, 
and that are served to eligible recipients.
    SBP means the School Breakfast Program, 7 CFR part 220.
* * * * *
    Section 311 means section 311 of the Older Americans Act of 1965 
(42 U.S.C. 3030a), which authorizes State Agencies on Aging under Title 
III of that Act, and any Title VI grantee (Indian Tribal Organization) 
under that Act, to receive all, or part, of their NSIP grant as donated 
foods.
* * * * *
    Service institutions means recipient agencies that participate in 
SFSP.
    7 CFR part 3016 means the Department's regulations establishing 
uniform administrative requirements for Federal grants and cooperative 
agreements and subawards to State, local, and Indian tribal 
governments.
    7 CFR part 3019 means the Department's regulations establishing 
uniform administrative requirements for Federal grants and cooperative 
agreements awarded to institutions of higher education, hospitals, and 
other nonprofit organizations.
    SFSP means the Summer Food Service Program, 7 CFR part 225.
* * * * *
    Single inventory management means the commingling in storage of 
donated foods and foods from other sources, and the maintenance of a 
single inventory record of such commingled foods.
* * * * *
    State Agency on Aging means:
    (a) The State agency that has been designated by the Governor and 
approved by DHHS to administer the Nutrition Services Incentive 
Program; or
    (b) The Indian Tribal Organization that has been approved by DHHS 
to administer the Nutrition Services Incentive Program.
* * * * *
    Summer camp means a nonprofit or public camp for children aged 18 
and under.
* * * * *
    3. In Sec.  250.12:
    a. Revise the section heading to read, as set forth below.
    b. Remove the last sentence in paragraph (a).

[[Page 33363]]

    c. Remove paragraphs (d), (e), and (f).
    The revision reads as follows:


Sec.  250.12  Agreements.

* * * * *
    4. In Sec.  250.19:
    a. In the first sentence of the introductory text of paragraph 
(b)(1), after the word ``provisions'', add the words, ``, as they apply 
to specific programs.''
    b. Remove paragraph (b)(1)(i), and redesignate paragraphs 
(b)(1)(ii), (b)(1)(iii), (b)(1)(iv), and (b)(1)(v), as paragraphs 
(b)(1)(i), (b)(1)(ii), (b)(1)(iii), and (b)(1)(iv), respectively.
    c. Revise newly redesignated paragraphs (b)(1)(i) and (b)(1)(iv).
    d. Remove paragraph (d).
    The revisions read as follows:


Sec.  250.19  Reviews.

* * * * *
    (b) * * *
    (1) * * *
    (i) An on-site review of all charitable institutions, or the food 
service management companies under contract with them, at a minimum, 
whenever the distributing agency identifies actual or probable 
deficiencies in the use of donated foods by such institutions, or by 
their contractors, through audits, investigations, complaints, or any 
other information.
* * * * *
    (iv) An on-site review of recipient agencies in NSLP, CACFP, and 
SFSP, to ensure compliance with requirements for the use of donated 
foods in contracts with food service management companies. Such a 
review must be conducted at the frequency established in 7 CFR parts 
210, 225, or 226, as applicable, for the State administering agency, in 
the conduct of its reviews. The distributing agency may enter into an 
agreement with the appropriate State administering agency to include 
its review as part of the State administering agency's review.
* * * * *
    5. In Sec.  250.24, revise paragraphs (d)(8), (d)(9), and (d)(10), 
to read as follows:


Sec.  250.24  Distributing agency performance standards.

* * * * *
    (d) * * *
    (8) Providing recipient agencies with ordering options and 
commodity values, and considering the specific needs and capabilities 
of such agencies in ordering donated foods;
    (9) Offering school food authorities participating in NSLP, or as 
commodity schools, at a minimum, the commodity offer value of donated 
food assistance, and determining an adjusted assistance level in 
consultation with school food authorities, as appropriate, in 
accordance with Sec.  250.58; and
    (10) Providing each school food authority participating in NSLP 
with the opportunity to order, or select, donated foods from the full 
list of available foods, and to distribute the selected donated foods 
to each school food authority, to the extent that distribution of such 
foods to, and within, the State would be cost-effective, in accordance 
with Sec.  250.58.
* * * * *
    6. Add the heading for new subpart F to read as follows:

Subpart F--Household Programs

    7. Redesignate Sec. Sec.  250.45, 250.46, 250.47, and 250.51, as 
Sec. Sec.  250.63, 250.64, 250.65, and 250.66, respectively, and 
transfer them from subpart D to new subpart F.
    8. Add the heading for new subpart G to read as follows:

Subpart G--Other Donated Food Outlets

    9. Add new Sec. Sec.  250.67 and 250.68 to new subpart G to read as 
follows:


Sec.  250.67  Charitable institutions.

    (a) Distribution to charitable institutions. The Department 
provides donated foods to distributing agencies for distribution to 
charitable institutions, as defined in this part. A charitable 
institution must have a signed agreement with the distributing agency 
in order to receive donated foods, in accordance with Sec.  250.12(b). 
However, the following organizations may not receive donated foods as 
charitable institutions:
    (1) Schools, summer camps, service institutions, and child and 
adult care institutions that participate in child nutrition programs or 
as commodity schools; and
    (2) Adult correctional institutions that do not conduct 
rehabilitation programs for a majority of inmates.
    (b) Types of charitable institutions. Some types of charitable 
institutions that may receive donated foods, if they meet the 
requirements of this section, include:
    (1) Hospitals or retirement homes;
    (2) Emergency shelters, soup kitchens, or emergency kitchens;
    (3) Elderly nutrition projects or adult day care centers;
    (4) Schools, summer camps, service institutions, and child care 
institutions that do not participate in child nutrition programs; and
    (5) Adult correctional institutions that conduct rehabilitation 
programs for a majority of inmates.
    (c) Determining service to predominantly needy persons. To 
determine if a charitable institution serves predominantly needy 
persons, the distributing agency must use:
    (1) Socioeconomic data of the area in which the organization is 
located, or of the clientele served by the organization;
    (2) Data from other public or private social service agencies, or 
from State advisory boards, such as those established in accordance 
with 7 CFR 251.4(h)(4); or
    (3) Other similar data.
    (d) Types and quantities of donated foods distributed. A charitable 
institution may receive donated foods under section 4(a), section 32, 
section 416, or section 709, as available. The distributing agency must 
distribute donated foods to charitable institutions based on the 
quantities that each may effectively utilize without waste, and the 
total quantities available for distribution to such institutions.
    (e) Contracts with food service management companies. A charitable 
institution may use donated foods in a contract with a food service 
management company. The contract must ensure that all donated foods 
received for use by the charitable institution in a fiscal year are 
used to benefit the charitable institution's food service. However, the 
charitable institution is not subject to the other requirements in 
subpart D of this part relating to the use of donated foods under such 
contracts.


Sec.  250.68  Nutrition Services Incentive Program (NSIP).

    (a) Distribution of donated foods in NSIP. The Department provides 
donated foods in NSIP to State Agencies on Aging and their selected 
elderly nutrition projects, for use in providing meals to elderly 
persons. NSIP is administered at the Federal level by DHHS' 
Administration on Aging (AoA), which provides an NSIP grant each year 
to State Agencies on Aging. The State agencies may choose to receive 
all, or part, of the grant as donated foods, on behalf of its elderly 
nutrition projects. The Department is responsible for the purchase of 
the donated foods and their delivery to State Agencies on Aging. AoA is 
responsible for reimbursing the Department for the cost of donated food 
purchases and related administrative expenses.
    (b) Types and quantities of donated foods distributed. The State 
Agency, and its elderly nutrition projects, may receive any types of 
donated foods

[[Page 33364]]

available in food distribution or child nutrition programs, to the 
extent that such foods may be distributed cost-effectively. The State 
Agency on Aging may receive donated foods with a value equal to its 
NSIP grant. The State Agency on Aging and elderly nutrition projects 
may also receive donated foods under section 32, section 416, and 
section 709, as available, and under section 14 (42 U.S.C. 1762(a)).
    (c) Role of distributing agency. The Department delivers NSIP 
donated foods to distributing agencies, which distribute them to 
elderly nutrition projects selected by the State or Area Agency on 
Aging. The distributing agency may only distribute donated foods to 
elderly nutrition projects with which they have signed agreements. The 
agreements must contain provisions that describe the roles of each 
party in ensuring that the desired donated foods are ordered, stored, 
and distributed in an effective manner.
    (d) Donated food values used in crediting a State Agency on Aging's 
NSIP grant. FNS uses the average price (cost per pound) for USDA 
purchases of a donated food made in a contract period in crediting a 
State Agency on Aging's NSIP grant.
    (e) Coordination between FNS and AoA. FNS and AoA coordinate their 
respective roles in NSIP through the execution of annual agreements. 
The agreement ensures that FNS is properly reimbursed for donated food 
purchases and related expenses, and that advanced funds not used for 
donated food purchases are returned to AoA for disbursement to the 
appropriate State Agencies on Aging.


Sec. Sec.  250.43, 250.44  [Redesignated]

    10. Redesignate Sec. Sec.  250.43 and 250.44 as Sec. Sec.  250.69 
and 250.70, respectively, and transfer them from subpart D to new 
subpart G.
    11. Revise subparts D and E to read as follows:
Subpart D--Donated Foods in Contracts With Food Service Management 
Companies
250.50 Food service management companies.
250.51 Contracts and procurement.
250.52 Crediting for, and use of, donated foods.
250.53 Storage and inventory management of donated foods.
250.54 Contract provisions.
250.55 Recordkeeping and reviews.
Subpart E--National School Lunch Program (NSLP) and Other Child 
Nutrition Programs
250.56 Provision of donated foods in NSLP.
250.57 Commodity schools.
250.58 Ordering donated foods and their provision to school food 
authorities.
250.59 Storage and inventory management of donated foods.
250.60 Use of donated foods in the school food service.
250.61 Child and Adult Care Food Program (CACFP).
250.62 Summer Food Service Program (SFSP).

Subpart D--Donated Foods in Contracts With Food Service Management 
Companies


Sec.  250.50  Food service management companies.

    (a) Categorizing a food service management company. As defined in 
Sec.  250.3, a food service management company is a commercial 
enterprise, nonprofit organization, or public institution that is, or 
may be, contracted with by a recipient agency to manage any aspect of a 
recipient agency's food service, in accordance with 7 CFR parts 210, 
225, or 226, or, with respect to charitable institutions, in accordance 
with this part. To the extent that such management includes the use of 
donated foods, the food service management company is subject to the 
applicable requirements in this subpart. However, a school food 
authority participating in NSLP that performs such functions is not 
considered a food service management company. Also, a commercial 
enterprise that uses donated foods to prepare meals at a commercial 
facility, or to perform other activities that meet the definition of 
processing in Sec.  250.3, is considered a processor in this part, and 
is subject to the requirements in subpart C of this part, rather than 
the requirements of this subpart.
    (b) Activities relating to donated foods. A food service management 
company may perform the following activities relating to donated foods, 
in accordance with its contract with the recipient agency:
    (1) Preparing and serving meals;
    (2) Ordering or selecting donated foods, in coordination with the 
recipient agency, and in accordance with Sec.  250.58(c);
    (3) Storage and inventory management of donated foods, in 
accordance with Sec.  250.53;
    (4) Payment of processing fees or costs on behalf of the recipient 
agency, in accordance with the requirements in Sec.  250.52(e); and
    (5) Submittal of refund applications to the processor, and 
remittance of refunds to the recipient agency, for donated foods 
contained in processed end products, in accordance with the 
requirements of Sec.  250.30(k).


Sec.  250.51  Contracts and procurement.

    (a) Contract requirement. Prior to donated foods being made 
available to a food service management company, the recipient agency 
must enter into a contract with the food service management company. 
The contract must ensure that all donated foods received for use by the 
recipient agency for a period specified as either the school year or 
fiscal year are used to benefit the recipient agency's food service. 
Contracts between child nutrition program recipient agencies and food 
service management companies must also ensure that the other 
requirements in this subpart relating to donated foods, as well as 
other Federal requirements in 7 CFR parts 210, 220, 225, or 226, as 
applicable, are met. Contracts between other recipient agencies--i.e., 
charitable institutions and recipient agencies utilizing TEFAP foods--
and food service management companies are not subject to the other 
requirements in this subpart.
    (b) Types of contracts. Recipient agencies may enter into a fixed-
price or a cost-reimbursable contract with a food service management 
company, except that recipient agencies in CACFP are prohibited from 
entering into cost-reimbursable contracts, in accordance with 7 CFR 
part 226. Under a fixed-price contract, the recipient agency pays a 
fixed cost per meal provided or a fixed cost for a certain time period. 
Under a cost-reimbursable contract, the food service management company 
charges the recipient agency for food service operating costs, and also 
charges fixed fees for management or services.
    (c) Requirements for procurement. The recipient agency must meet 
Federal requirements relating to the procurement of a food service 
management company in 7 CFR parts 210, 220, 225, or 226, and with 7 CFR 
parts 3016 or 3019, as applicable. The recipient agency must ensure 
that required contract provisions relating to donated foods, as listed 
in Sec.  250.54, are also included in the contract solicitation 
documents. Such provisions include the method used to determine the 
donated food values to be used in crediting, or the actual values 
assigned, in accordance with Sec.  250.52. The method used to determine 
the donated food values may not be established through a post-award 
negotiation, or by any other method that may directly or indirectly 
alter the terms and conditions of the solicitation or contract.
    (d) Prohibition against contracts or agreements with processors. A 
food service management company may not enter into a contract or 
agreement with a processor to process donated foods or end products for 
use in the recipient agency's food service.

[[Page 33365]]

Sec.  250.52  Crediting for, and use of, donated foods.

    (a) Crediting for donated foods. In both fixed-price and cost-
reimbursable contracts, the recipient agency must require the food 
service management company to credit it for the value of all donated 
foods received for use in the recipient agency's meal service in a 
school year or fiscal year (including both entitlement and bonus 
foods). The recipient agency may permit crediting through invoice 
reductions, refunds, discounts, or by another means of crediting. All 
forms of crediting must provide clear documentation of the value 
received from the donated foods--e.g., by separate line item entries on 
invoices. If provided for in a fixed-price contract, the recipient 
agency may permit a food service management company to pre-credit for 
donated foods. In pre-crediting, a deduction for the value of donated 
foods is included in the established fixed price per meal. However, the 
recipient agency must ensure that the food service management company 
provides an additional credit for any donated foods not accounted for 
in the fixed price per meal--e.g., for donated foods that are not made 
available until later in the year. In cost-reimbursable contracts, 
crediting may be performed by disclosure: i.e., the food service 
management company may indicate the value of donated foods credited for 
the period in which it bills the recipient agency for food costs.
    (b) Frequency of crediting. The recipient agency must require 
crediting to be performed not less frequently than annually, and must 
ensure that the specified method of valuation of donated foods permits 
crediting to be achieved in the required time period. A school food 
authority must also ensure that the method, and timing, of crediting 
does not cause its cash resources to exceed the limits established in 7 
CFR 210.9(b)(2).
    (c) Donated food values required in crediting. The recipient agency 
must ensure that the food service management company uses the donated 
food values determined by the distributing agency, in accordance with 
Sec.  250.58(g), or, if approved by the distributing agency, donated 
food values determined by an alternate means of the recipient agency's 
choosing. For example, the recipient agency may, with the approval of 
the distributing agency, specify that the value will be the average 
price per pound for a food, or for a group or category of foods (e.g., 
all frozen foods or cereal products), as listed in market journals over 
a specified period of time.
    (d) Method of determining values of donated foods required in 
solicitation and contract. The method of determining the donated food 
values to be used in crediting must be included in the solicitation and 
contract: e.g., the value will be the average USDA purchase price for 
the period of the contract with the food vendor, or the average price 
per pound listed in market journals over a specified period of time. 
The method of valuation must result in the determination of actual 
values; any negotiation of donated food values is not permitted. 
Additionally, the method of valuation must ensure that crediting may be 
achieved in accordance with the time frame specifically established in 
the solicitation and contract (e.g., quarterly or annually).
    (e) Donated foods in processed end products. In accordance with 
Sec.  250.30, the processor must credit the recipient agency for 
donated foods contained in end products through a discount or refund 
sales system, or charge the recipient agency a fee-for-service to 
produce the end product. Hence, the food service management company is 
not required to credit recipient agencies for donated foods contained 
in processed end products. However, as indicated in Sec.  250.50(b), 
the food service management company may, under its contract with the 
recipient agency, be responsible for the payment of processing costs, 
or the submittal of refund applications, and the remittance of refunds, 
for donated foods contained in processed end products. In such cases, 
the recipient agency must ensure that the food service management 
company:
    (1) Bills it separately for processing costs, and does not include 
these costs in a fixed-price charge for the food service; and
    (2) Submits refund applications to processors, in accordance with 
the requirements in Sec.  250.30(k), and remits refunds to the 
recipient agency in an expeditious manner.
    (f) Use of donated foods in the recipient agency's meal service. 
While the food service management company must credit the recipient 
agency for all donated foods received, it is not required to use those 
donated foods, or a commercial substitute of the same generic identity, 
in the recipient agency's meal service, unless the contract 
specifically stipulates that such foods must be used. However, the food 
service management company must ensure that:
    (1) Donated ground beef and ground pork products, and all end 
products received from processors are used in the recipient agency's 
food service, for the benefit of eligible program recipients; and
    (2) If menu plans include foods of the same generic identity as the 
donated foods received, then such donated foods, or commercially 
purchased foods of the same generic identity, of U.S. origin, and 
identical or superior in quality, are used in the recipient agency's 
food service.
    (g) Return of unused donated foods upon termination of the 
contract. The food service management company must return all donated 
ground beef and ground pork products, and end products received from 
processors, to the recipient agency when the contract is terminated by 
either party, or is not extended. The food service management company 
must, at the discretion of the recipient agency, return other donated 
foods for which the recipient agency has not been credited, or pay the 
recipient agency the value of such donated foods.


Sec.  250.53  Storage and inventory management of donated foods.

    (a) General requirements. The food service management company must 
meet the general requirements in Sec.  250.14 for the storage and 
inventory management of donated foods.
    (b) Storage with commercially purchased foods. The food service 
management company may store and inventory donated foods together with 
commercially purchased foods, if provided for in its contract with the 
recipient agency. However, the food service management company must 
ensure that donated ground beef and ground pork products, and all end 
products received from processors, are stored in a manner that assures 
they will be used in the recipient agency's food service. Additionally, 
under cost-reimbursable contracts, the food service management company 
must ensure that its system of inventory management does not result in 
the recipient agency being charged for donated foods.


Sec.  250.54  Contract provisions.

    (a) Required contract provisions in fixed-price contracts. The 
following provisions relating to the use of donated foods must be 
included in a recipient agency's fixed-price contract with a food 
service management company. Such provisions must also be included in 
the contract solicitation documents. The required provisions are:
    (1) A statement that the food service management company will 
credit the recipient agency for all donated foods received for use in 
the recipient agency's food service for the school year or fiscal year, 
as applicable;

[[Page 33366]]

    (2) The method and frequency by which crediting will occur--e.g., 
through invoice reductions, refunds, discounts, or other means of 
crediting--and the means of documentation to be utilized to verify that 
the value of all donated foods has been credited;
    (3) The method of determining the donated food values to be used in 
crediting, in accordance with Sec.  250.52(c), or the actual donated 
food values;
    (4) If applicable, a statement that the food service management 
company will ensure that the recipient agency receives the full benefit 
of all refunds and discounts received from processors and distributors 
for processed end products, and will not charge the recipient agency 
for processing costs paid on its behalf as part of a fixed-price charge 
for the food service;
    (5) Any activities relating to donated foods that the food service 
management company will be responsible for, such as the payment of 
processing fees, or the remittance of refunds to the recipient agency 
for donated foods contained in processed end products;
    (6) A statement that donated ground beef and ground pork products, 
and all end products received from processors, will be used in the food 
service, and will not be substituted with commercial products;
    (7) A statement that, if menu plans include foods of the same 
generic identity as the donated foods received, then those donated 
foods, or commercially purchased foods of the same generic identity, of 
U.S. origin, and identical or superior in quality to the donated foods, 
will be used;
    (8) An assurance that the food service management company will use 
donated foods in accordance with the requirements in this part;
    (9) An assurance that the food service management company will not 
enter into a contract or agreement with a processor to process donated 
foods or end products for use in the recipient agency's food service;
    (10) A statement that the distributing agency, subdistributing 
agency, or recipient agency, the Comptroller General, the Department of 
Agriculture, or their duly authorized representatives, may perform on-
site reviews of the food service management company's food service 
operation to ensure that all activities relating to donated foods are 
performed in accordance with the requirements in this part;
    (11) A statement that the food service management company will 
maintain records to document that crediting for all donated foods 
received for the school or fiscal year has been achieved, and will meet 
other recordkeeping requirements in this part; and
    (12) A statement that extensions or renewals of the contract, if 
applicable, are contingent upon the fulfillment of all contract 
provisions relating to donated foods.
    (b) Required contract provisions in cost-reimbursable contracts. A 
cost-reimbursable contract must include the same provisions as those 
required for a fixed-price contract in paragraph (a) of this section. 
Such provisions must also be included in the contract solicitation 
documents. However, in a cost-reimbursable contract, the food service 
management company must also assure that its system of inventory 
management will not result in the recipient agency being charged for 
donated foods.


Sec.  250.55  Recordkeeping and reviews.

    (a) Record requirements for the recipient agency. The recipient 
agency must maintain the following records relating to the use of 
donated foods in a contract with a food service management company:
    (1) The donated foods and end products received and provided to the 
food service management company for use in the food service;
    (2) Crediting for donated foods by the food service management 
company, including documentation verifying that the full donated food 
value has been credited; and
    (3) The actual donated food values used in crediting.
    (b) Record requirements for the food service management company. 
The food service management company must maintain the following records 
relating to the use of donated foods in its contract with the recipient 
agency:
    (1) The donated foods and end products received from, or on behalf 
of, the recipient agency, for use in its food service; and
    (2) Documentation that all donated foods received for use in the 
recipient agency's food service have been credited.
    (c) Review requirements for the recipient agency. The recipient 
agency must include a review of food service management company 
activities relating to the use of donated foods as part its monitoring 
of the food service operation required in 7 CFR parts 210, 220, 225, or 
226, as applicable. The recipient agency must also conduct a 
reconciliation of the food service management company's crediting for 
donated foods at least annually to ensure that it has received credit 
for all donated foods received in the school year or fiscal year.
    (d) Review requirements for the distributing agency. The 
distributing agency must conduct an on-site review of the recipient 
agency's use of donated foods in its food service in contracts with 
food service management companies, in accordance with the management 
reviews required in Sec.  250.19(b)(1). In accordance with Sec.  
250.19(b)(1)(iv), the distributing agency may enter into an agreement 
with the State administering agency (if a different agency) for NSLP, 
SFSP, or CACFP, to include its review as part of the administrative 
review required of the State administering agency in 7 CFR parts 210, 
225, or 226, as applicable.
    (e) Departmental reviews of food service management companies. The 
Department may conduct reviews of food service management company 
operations with respect to the use and management of donated foods to 
ensure compliance with the requirements of this part.

Subpart E--National School Lunch Program (NSLP) and Other Child 
Nutrition Programs


Sec.  250.56  Provision of donated foods in NSLP.

    (a) Distribution of donated foods in NSLP. The Department provides 
donated foods in NSLP to distributing agencies. Distributing agencies 
provide donated foods to school food authorities that participate in 
NSLP for use in serving nutritious lunches or other meals to 
schoolchildren in their nonprofit school food service. The distributing 
agency must confirm the participation of school food authorities in 
NSLP with the State education agency (if different from the 
distributing agency). In addition to requirements in this part relating 
to donated foods, distributing agencies and school food authorities in 
NSLP must adhere to Federal regulations in 7 CFR part 210, as 
applicable.
    (b) Types of donated foods distributed. The Department purchases a 
wide variety of foods for distribution in NSLP each school year. A list 
of available foods is posted on the FNS web site, for access by 
distributing agencies and school food authorities. In addition to 
section 6 foods (42 U.S.C. 1755) as described in paragraph (c) of this 
section, the distributing agency may also receive section 14 donated 
foods (42 U.S.C. 1762(a)), and donated foods under section 32, section 
416, or section 709, as available.
    (c) National per-meal value of donated foods. For each school year, 
the distributing agency receives, at a minimum, the national per-meal 
value

[[Page 33367]]

of donated foods, as established by section 6(c) of the Richard B. 
Russell National School Lunch Act (42 U.S.C. 1755(c)), multiplied by 
the number of reimbursable lunches served in the State in the previous 
school year. The donated foods provided in this manner are referred to 
as section 6 foods, or entitlement foods. The national per-meal value 
is adjusted each year to reflect changes in the Bureau of Labor 
Statistic's Producer Price Index for Foods Used in Schools and 
Institutions, in accordance with the Richard B. Russell National School 
Lunch Act. The adjusted value is published in a notice in the Federal 
Register in July of each year. Reimbursable lunches are those that meet 
the nutritional standards established in 7 CFR part 210, and that are 
reported to FNS, in accordance with the requirements in that part.
    (d) Donated food values used to credit distributing agency 
entitlement levels. FNS uses the average price (cost per pound) for 
USDA purchases of donated food made in a contract period to credit 
distributing agency entitlement levels.
    (e) Cash in lieu of donated foods. States that phased out their 
food distribution facilities prior to July 1, 1974, are permitted to 
choose to receive cash in lieu of the donated foods to which they would 
be entitled in NSLP, in accordance with the Richard B. Russell National 
School Lunch Act (42 U.S.C. 1765) and with 7 CFR part 240.


Sec.  250.57  Commodity schools.

    (a) Categorization of commodity schools. Commodity schools are 
schools that operate a nonprofit school food service in accordance with 
7 CFR part 210, but receive additional donated food assistance rather 
than the general cash payment available to them under section 4 of the 
Richard B. Russell National School Lunch Act (42 U.S.C. 1753). In 
addition to requirements in this part relating to donated foods, 
commodity schools must adhere to Federal regulations in 7 CFR part 210, 
as applicable.
    (b) Value of donated foods for commodity schools. For participating 
commodity schools, the distributing agency receives donated foods 
valued at the sum of the national per-meal value and the value of the 
general cash payment available to it under Section 4 of the Richard B. 
Russell National School Lunch Act (42 U.S.C. 1753), multiplied by the 
number of reimbursable lunches served by commodity schools in the 
previous school year. From the total value of donated food assistance 
for which it is eligible, a commodity school may elect to receive up to 
5 cents per meal in cash to cover processing and handling expenses 
related to the use of donated foods. In addition to section 6 and 
section 14 foods under the Richard B. Russell National School Lunch Act 
(42 U.S.C. 1755 and 1762(a)), the distributing agency may also receive 
donated foods under section 32, section 416, or section 709, as 
available, for commodity schools.


Sec.  250.58  Ordering donated foods and their provision to school food 
authorities.

    (a) Ordering donated foods. The distributing agency orders donated 
foods through a web-based system called the Electronic Commodity 
Ordering System (ECOS). Through ECOS, the distributing agency places 
orders directly into a centralized computer system.
    (b) Value of donated foods offered to school food authorities. In 
accordance with section 6(c) of the Richard B. Russell National School 
Lunch Act (42 U.S.C. 1755(c)), the distributing agency must offer the 
school food authority, at a minimum, the national per-meal value of 
donated food assistance multiplied by the number of reimbursable 
lunches served by the school food authority in the previous school 
year. This is referred to as the commodity offer value. For a commodity 
school, the distributing agency must offer the sum of the national per-
meal value of donated foods and the value of the general cash payment 
available to it under section 4 of the Richard B. Russell National 
School Lunch Act (42 U.S.C. 1753), multiplied by the number of 
reimbursable lunches served by the school in the previous school year. 
The school food authority may also receive bonus foods, as available, 
in addition to the section 6 foods.
    (c) Variety of donated foods offered to school food authorities. 
Before submitting orders for donated foods to FNS, the distributing 
agency must provide the school food authority with the opportunity to 
order, or select, donated foods for its school food service from the 
full list of available foods.
    (d) Distribution of donated foods to school food authorities. The 
distributing agency must ensure distribution of all donated foods 
selected by the school food authority that may be cost-effectively 
distributed to it. The distributing agency must explore all available 
storage and distribution options to determine if distribution of the 
desired foods to the school food authority would be cost-effective, and 
may not prohibit the use of split shipments. If distribution of such 
foods would not be cost-effective, the distributing agency must provide 
the school food authority with an opportunity to select other available 
donated foods that may be distributed to it cost-effectively.
    (e) Receipt of less donated foods than the commodity offer value. 
In certain cases, the school food authority may receive less donated 
foods than the commodity offer value in a school year. This 
``adjusted'' value of donated foods is referred to as the adjusted 
assistance level. For example, the school food authority may receive an 
adjusted assistance level if:
    (1) The distributing agency, in consultation with the school food 
authority, determines that the school food authority cannot efficiently 
utilize the commodity offer value of donated foods; or
    (2) The school food authority does not order, or select, donated 
foods equal to the commodity offer value that can be cost-effectively 
distributed to it.
    (f) Receipt of more donated foods than the commodity offer value. 
The school food authority may receive more donated foods than the 
commodity offer value if the distributing agency, in consultation with 
the school food authority, determines that the school food authority 
may efficiently utilize more donated foods than the commodity offer 
value, and more donated foods are available for distribution. This may 
occur, for example, if other school food authorities receive less than 
the commodity offer value of donated foods for one of the reasons 
described in paragraph (e) of this section.
    (g) Donated food values required in crediting school food 
authorities. The distributing agency must use one of the following 
values for donated foods, in crediting the school food authority for 
its commodity offer value or adjusted assistance level:
    (1) The USDA purchase price (cost per lb.), which may be an average 
price for purchases made for the duration of the contract with the food 
vendor;
    (2) Estimated cost-per-pound data provided by the Department, as 
included in commodity survey memoranda; or
    (3) The USDA commodity file cost as of a date specified by the 
distributing agency.


Sec.  250.59  Storage and inventory management of donated foods.

    (a) General requirements. Distributing agencies, subdistributing 
agencies, and school food authorities must meet the requirements for 
storage and inventory of donated foods in Sec.  250.14, in addition to 
the requirements in this section.
    (b) Storage at distributing agency level. The distributing or 
subdistributing

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agency, or storage facilities with which they have contracts, must 
store donated foods separately from commercially purchased foods or 
other foods to ensure distribution of the donated foods that have been 
purchased for school food authorities.
    (c) Storage by school food authorities. The school food authority 
may store and inventory donated foods with commercially purchased foods 
and other foods, under a single inventory management system, as defined 
in this part, unless the distributing agency requires separate storage 
and inventory of donated foods.
    (d) Storage by storage facilities under contract with school food 
authorities. A storage facility under contract with a school food 
authority may store and inventory donated foods together with 
commercially purchased foods it is storing for the school food 
authority, unless its contract with the school food authority prohibits 
this. However, the storage facility may not commingle foods it is 
storing for a school food authority with foods it is storing for a 
commercial enterprise or other entity.


Sec.  250.60  Use of donated foods in the school food service.

    (a) Use of donated foods in school lunches and other meals or 
activities. The school food authority should use donated foods, as far 
as practical, in the lunches served to schoolchildren, for which they 
receive an established per-meal value of donated food assistance each 
school year. However, the school food authority may also use donated 
foods in other nonprofit school food service activities. Revenues 
received from such activities must accrue to the school food 
authority's nonprofit school food service account. Some examples of 
other activities in which donated foods may be used include:
    (1) School breakfasts or other meals served in child nutrition 
programs;
    (2) A la carte foods sold to children;
    (3) Meals served to adults directly involved in the operation and 
administration of the nonprofit food service; and
    (4) Training in nutrition, health, food service, or general home 
economics instruction for students.
    (b) Use of donated foods outside of the nonprofit school food 
service. The school food authority should not use donated foods in 
meals or food service activities that do not benefit primarily 
schoolchildren, such as banquets or catered events. However, their use 
in such meals or activities may not always be avoided, e.g., for a 
school food authority utilizing single inventory management. In all 
cases, the school food authority must ensure reimbursement to the 
nonprofit food service account for donated foods used in such 
activities, in addition to reimbursement for other resources utilized 
from that account. Since school food authorities utilizing single 
inventory management cannot reimburse the nonprofit food service 
account based on actual usage of donated foods, they must establish an 
alternate method to ensure that donated foods do not subsidize food 
service activities that do not benefit schoolchildren--e.g., by 
including the current per-meal value of donated food reimbursement in 
the price charged for the food service activities.
    (c) Use of donated foods in a contract with a food service 
management company. A school food authority may use donated foods in a 
contract with a food service management company to conduct the food 
service. The contract must meet the requirements in subpart D of this 
part with respect to donated foods, and must also meet requirements in 
7 CFR part 210 and 7 CFR parts 3016 or 3019, as applicable, with 
respect to the procurement of such contracts. The school food authority 
must also ensure that a food service management company providing 
catered meals, or other food service activities that do not benefit 
primarily schoolchildren, ensure reimbursement to the nonprofit school 
food service account for donated foods used in such activities, in 
accordance with paragraph (b) of this section.
    (d) Use of donated foods in providing a meal service to other 
school food authorities. A school food authority may use donated foods 
to provide a meal service to other school food authorities, under an 
agreement between the parties. A school food authority providing such a 
service may commingle its own donated foods and the donated foods of 
other school food authorities that are parties to the agreement.


Sec.  250.61  Child and Adult Care Food Program (CACFP).

    (a) Distribution of donated foods in CACFP. The Department provides 
donated foods in CACFP to distributing agencies, which provide them to 
child and adult care institutions participating in CACFP for use in 
serving nutritious lunches and suppers to eligible recipients. 
Distributing agencies and child and adult care institutions must also 
adhere to Federal regulations in 7 CFR part 226, as applicable.
    (b) Types and quantities of donated foods distributed. For each 
school year, the distributing agency receives, at a minimum, the 
national per-meal value of donated food assistance multiplied by the 
number of reimbursable lunches and suppers served in the State in the 
previous school year, as established in section 6(c) of the Richard B. 
Russell National School Lunch Act (42 U.S.C. 1755(c)). The national 
per-meal value is adjusted each year to reflect changes in the Bureau 
of Labor Statistics' Producer Price Index for Foods Used in Schools and 
Institutions. The adjusted per-meal value is published in a notice in 
the Federal Register in July of each year. Reimbursable lunches and 
suppers are those meeting the nutritional standards established in 7 
CFR part 226. The number of reimbursable lunches and suppers may be 
adjusted during, or at the end of the school year, in accordance with 7 
CFR part 226. In addition to section 6 entitlement foods (42 U.S.C. 
1755(c)), the distributing agency may also receive section 14 donated 
foods (42 U.S.C. 1762(a)), and donated foods under section 32, section 
416, or section 709, as available, for distribution to child and adult 
care institutions participating in CACFP.
    (c) Cash in lieu of donated foods. In accordance with the Richard 
B. Russell National School Lunch Act, and with 7 CFR part 226, the 
State administering agency must determine whether child and adult care 
institutions participating in CACFP wish to receive donated foods or 
cash in lieu of donated foods, and ensure that they receive the 
preferred form of assistance. The State agency must inform the 
distributing agency (if a different agency) which institutions wish to 
receive donated foods and must ensure that such foods are provided to 
them. However, if the State agency, in consultation with the 
distributing agency, determines that distribution of such foods would 
not be cost-effective, it may, with the concurrence of FNS, provide 
cash payments to the applicable institutions instead.
    (d) Use of donated foods in a contract with a food service 
management company. A child or adult care institution may use donated 
foods in a contract with a food service management company to conduct 
its food service. The contract must meet the requirements in subpart D 
of this part with respect to donated foods, and must also meet 
requirements in 7 CFR part 226 and 7 CFR parts 3016 or 3019, as 
applicable, with respect to the procurement of such contracts.
    (e) Applicability of other requirements in this subpart to CACFP. 
The requirements in this subpart relating to the ordering, storage and 
inventory management, and use of donated foods in NSLP, also apply to 
CACFP. However, in accordance with 7 CFR part 226, a child or adult 
care institution that

[[Page 33369]]

uses donated foods to prepare and provide meals to other such 
institutions is considered a food service management company.


Sec.  250.62  Summer Food Service Program (SFSP).

    (a) Distribution of donated foods in SFSP. The Department provides 
donated foods in SFSP to distributing agencies, which provide them to 
eligible service institutions participating in SFSP for use in serving 
nutritious meals to needy children primarily in the summer months, in 
their nonprofit food service programs. Distributing agencies and 
service institutions in SFSP must also adhere to Federal regulations in 
7 CFR part 225, as applicable.
    (b) Types and quantities of donated foods distributed. The 
distributing agency receives donated foods available under section 6 
and section 14 of the Richard B. Russell National School Lunch Act (42 
U.S.C. 1755 and 1762), and may also receive donated foods under section 
32, section 416, or section 709, as available, for distribution to 
eligible service institutions participating in SFSP. Section 6 donated 
foods are provided to distributing agencies in accordance with the 
number of meals served in the State in the previous school year that 
are eligible for donated food support, in accordance with 7 CFR part 
225.
    (c) Distribution of donated foods to service institutions in SFSP. 
The distributing agency provides donated food assistance to eligible 
service institutions participating in SFSP based on the number of meals 
served that are eligible for donated food support, in accordance with 7 
CFR part 225.
    (d) Use of donated foods in a contract with a food service 
management company. A service institution may use donated foods in a 
contract with a food service management company to conduct the food 
service. The contract must meet the requirements in subpart D of this 
part with respect to donated foods, and must also meet requirements in 
7 CFR part 225 and 7 CFR parts 3016 or 3019, as applicable, with 
respect to the procurement of such contracts.
    (e) Applicability of other requirements in this subpart to SFSP. 
The requirements in this subpart relating to the ordering, storage and 
inventory management, and use of donated foods in NSLP, also apply to 
SFSP.

    Dated: May 25, 2006.
Eric M. Bost,
Under Secretary, Food, Nutrition, and Consumer Services.
[FR Doc. 06-5143 Filed 6-7-06; 8:45 am]
BILLING CODE 3410-30-P