[Federal Register Volume 75, Number 112 (Friday, June 11, 2010)]
[Rules and Regulations]
[Pages 33422-33444]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-13446]



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Part III





Department of Agriculture





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 Food and Nutrition Service



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7 CFR Parts 271, 273, 275, and 277



Supplemental Nutrition Assistance Program: Quality Control Provisions 
of Title IV of Public Law 107-171; Final Rule

  Federal Register / Vol. 75 , No. 112 / Friday, June 11, 2010 / Rules 
and Regulations  

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DEPARTMENT OF AGRICULTURE

Food and Nutrition Service

7 CFR Parts 271, 273, 275, and 277

 [FNS-2009-0045]
RIN 0584-AD31


Supplemental Nutrition Assistance Program: Quality Control 
Provisions of Title IV of Public Law 107-171

AGENCY: Food and Nutrition Service, USDA.

ACTION: Final rule.

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SUMMARY: This rule finalizes provisions of an interim rule entitled 
``Food Stamp Program: Non-Discretionary Quality Control Provisions of 
Title IV of Public Law 107-171'' published on October 16, 2003, and a 
proposed rule entitled ``Food Stamp Program: Discretionary Quality 
Control Provisions of Title IV of Public Law 107-171'' published on 
September 23, 2005. The Food Stamp Program is now referred to as the 
Supplemental Nutrition Assistance Program (SNAP) pursuant to the Food 
and Nutrition Act of 2008 (Act). This final rule codifies the 
provisions concerning the Quality Control system in Sections 4118 and 
4119 of the Food Stamp Reauthorization Act (FSRA) of 2002. This rule 
finalizes the liability procedures and the deadlines for completing the 
quality control review process and announcement of error rates 
established in the interim rule. It eliminates enhanced administrative 
funding for low error rates, establishes new time frames for completing 
individual quality control reviews, establishes procedures for 
resolving liabilities following appeal decisions, revises the negative 
case review procedures, and provides procedures for households that 
separate while subject to the penalty for refusal to cooperate with a 
quality control review. This rule also adopts several policy changes 
and technical corrections included in the proposed rule. In addition, 
this rule affects State agencies' quality control review operations and 
alters the impact on State agencies of assessment and resolution of 
potential liabilities for excessive payment error rates and awarding of 
bonuses for superior performance. Households with cases sampled for 
quality control review of their cases would be minimally affected by 
this rule.

DATES: Effective Date: This rule is effective July 12, 2010. 
Implementation date: This rule shall be implemented as follows: The 
provisions in 7 CFR 271.2, 7 CFR 275.11(e)(2)(i), 7 CFR 
275.11(e)(2)(ii), 7 CFR 275.13(b), and 7 CFR 275.12(c)(1) concerning 
negative cases and 7 CFR 273.2(d)(2) concerning consequences to 
households that refuse to cooperate with quality control (QC) reviews 
must be implemented no later than October 1, 2011. State agencies may 
choose to implement these provisions earlier than October 1, 2011. A 
120-day hold harmless is provided for implementation of 7 CFR 
273.2(d)(2), concerning consequences to households who refuse to 
cooperate with a QC review. If a State agency implements the provision 
before October 1, 2011, the 120-day hold harmless period begins on the 
date of implementation. All other provisions must be implemented August 
10, 2010.

FOR FURTHER INFORMATION CONTACT: Margaret Werts Batko, Quality Control 
Branch, Program Accountability and Administration Division, Food and 
Nutrition Service, USDA, 3101 Park Center Drive, Alexandria, Virginia 
22302, (703) 305-2516. The e-mail address is 
[email protected]. Questions regarding this rulemaking should 
be addressed at the above address, by telephone at (703) 305-2516, or 
via the Internet at [email protected].

SUPPLEMENTARY INFORMATION:

I. Additional Information on Electronic Access

Electronic Access

    You may view and download an electronic version of this final rule 
at http://www.fns.usda.gov/snap/. All comments, including names, street 
addresses, and other contact information of respondents, received in 
response to the interim and proposed rules are available for public 
inspection on the 8th floor, 3101 Park Center Drive, Alexandria, 
Virginia 22302 between 8:30 a.m. and 5 p.m. Eastern time, Monday 
through Friday, excluding Federal holidays.

II. Procedural Matters

Executive Order 12866

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

Executive Order 12372

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

Regulatory Flexibility Act

    This rule has been reviewed with regard to the requirements of the 
Regulatory Flexibility Act (5 U.S.C. 601-612). It has been certified 
that this rule will not have a significant economic impact on a 
substantial number of small entities. State welfare agencies will be 
the most affected to the extent that they administer the Supplemental 
Nutrition Assistance Program.

Public Law 104-4

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

Federalism Summary Impact Statement

    Executive Order 13132 requires Federal agencies to consider the 
impact of their regulatory actions on State and local governments. 
Where such actions have federalism implications, agencies are directed 
to provide a statement for inclusion in the preamble to the regulations 
describing the agency's considerations in terms of the three categories 
called for under section (6)(b)(2)(B) of E.O. 13132. The Food and 
Nutrition Service has considered this rule's impact on State and local 
agencies and has determined that it does not have Federalism 
implications under E.O. 13132.

[[Page 33423]]

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 that the rule might have on 
minorities, women, and persons with disabilities. After a careful 
review of the rule's intent and provisions, FNS has determined that 
this rule has no intended impact on any of the protected classes. These 
changes primarily affect the quality control (QC) review system and not 
individual recipients' eligibility for or participation in the 
Supplemental Nutrition Assistance Program. The only provision that has 
any direct impact on recipients is the conforming change made in 7 CFR 
273.2(d)(2). This section provides that a recipient who refuses to 
cooperate with a QC review of his or her case will be terminated from 
further participation in the Program; that if the household reapplies 
during the annual review period, it cannot be determined eligible until 
it cooperates with the QC review; and if it reapplies following the end 
of the QC review period, the household is required to provide full 
verification of its eligibility factors before it can be certified. The 
purpose of the requirement is to encourage household cooperation with 
the QC review of its case. This rule contains a conforming amendment to 
extend the time frame of the penalty consistent with the revised time 
frame for completing the QC review process established in Section 4119 
of the Food Stamp Reauthorization Act of 2002 and addressed in this 
rule at Sec.  275.23. Significant protection exists within the 
regulations to ensure that a household is terminated solely for 
refusal, and not inability, to cooperate. A household so terminated 
also has the right to request a fair hearing. Further, the household 
has the ability to reverse its termination by cooperating with the QC 
review during the QC review period. There were 56,954 active case 
households subject to a QC review, and 2,101 households who refused to 
cooperate with a QC review during Fiscal Year 2002, the last year 
information on non-cooperating households was collected. Information on 
protected classes is not available for these households.
    An additional change is also being made to 7 CFR 273.2(d)(2) that 
requires a State agency to convey the disqualification penalty for 
refusing to cooperate with a QC reviewer with the non-cooperating 
household member if the household breaks up and if the State agency can 
identify the non-cooperating individual. This change ameliorates the 
penalty on cooperating household members. It is not intended to have a 
disproportionate impact on any of the protected classes.
    All data available to FNS indicate that protected individuals have 
the same opportunity to participate in the SNAP as non-protected 
individuals. The QC system is a systematic method of measuring the 
validity of the SNAP caseload. A statistically valid sample of active 
and negative cases is reviewed to determine the extent to which 
households are receiving the allotments to which they are entitled, and 
to determine which decisions to deny, suspend, or terminate cases are 
correct. Protected classes should appear in any given sample to the 
extent that they are represented in the overall SNAP population. There 
is no way to determine the percentage of each of the protected classes 
terminated for refusal to cooperate with a QC review as that data is 
not collected.
    FNS specifically prohibits the State and local government agencies 
that administer the Program from engaging in actions that discriminate 
against any applicant or participant in any aspect of program 
administration, including, but not limited to, the certification of 
households, the issuance of coupons, the conduct of fair hearings, or 
the conduct of any other program service for reasons of age, race, 
color, sex, handicap, religious creed, national origin, or political 
beliefs (SNAP nondiscrimination policy can be found at 7 CFR 272.6). 
Discrimination in any aspect of program administration is prohibited by 
these regulations, the Food and Nutrition Act of 2008, the Age 
Discrimination Act of 1975 (Pub. L. 94-135), the Rehabilitation Act of 
1973 (Pub. L. 93-112, section 504), and title VI of the Civil Rights 
Act of 1964 (42 U.S.C. 2000d). Enforcement action may be brought under 
any applicable Federal law. Title VI complaints shall be processed in 
accordance with 7 CFR Part 15.

Paperwork Reduction Act

    This rule contains reporting or recordkeeping requirements that 
have been approved by the Office of Management and Budget (OMB) under 
several separate information collections under the Paperwork Reduction 
Act of 1995. The collections are:
    0584-0034, Negative Quality Control Review Schedule; Status of 
Sample Selection and Completion, Form FNS-245 and FNS-248 (expiration 
date November 30, 2009): This rule does not affect the negative review 
schedule, Form FNS-245. In the most recent approval of OMB Number 0584-
0034, the form FNS-247 (Statistical Summary of Sample Distribution) was 
eliminated. FNS has stopped requesting that this form be completed and 
the information be submitted. This rule removes the requirement to 
submit the report that is still found in the regulation. Eliminating 
from the regulations the requirement to complete the form does not 
affect the burden as the burden was already adjusted in the burden 
approval process when the actual use of the form was discontinued. We 
proposed to eliminate the Form FNS-248. Over time, we have discontinued 
requiring that the form itself be submitted. However, some of 
information on that form is still required. State agencies provide the 
information on the interval and the number of cases selected each month 
by phone or e-mail. With the elimination of the Form FNS 248, the 
regulations will permit that this information be submitted in another 
format. The burden difference from eliminating most of the data 
collection found on the form has already been accounted for through the 
burden approval process. Accordingly, elimination of this form will not 
increase or decrease the approved burden for OMB Number 0584-0034. We 
received no comments on this proposal; we are adopting it as proposed.
    0584-0074 (Form FNS-380, Worksheet for Supplemental Nutrition 
Assistance Program Quality Control Reviews) (expiration date February 
28, 2010) ; 0584-0299 (Form FNS-380-1, Quality Control Review 
Schedule)(expiration January 31, 2010); and 0584-0303 (Food Stamp 
Program Regulations, Part 275--Quality Control)(expiration date 
November 30, 2010) (Note the name of 0584-0303 will be changed to 
Supplemental Nutrition Assistance Program Regulations, Part 275--
Quality Control when it is next renewed or a change justification is 
done.): This rule does not affect these information collections. This 
rule does not change the requirements for development and submittal of 
the States' sampling plans. This rule does not change the requirements 
for submitting cases for arbitration nor will it impact the number of 
cases anticipated to be submitted. This rule does include the 
provisions for good cause; however, those provisions are unchanged 
except for redesignation. Therefore, this rule will not impact the 
burden currently approved for good cause either.
    OMB Number 0584-0010, Performance Reporting System, Management 
Evaluation, Data Analysis and Corrective Action (expiration date April 
30, 2010): Corrective action

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

E-Government Act Compliance

    The Food and Nutrition Service is committed to complying with the 
E-Government Act of 2002, to promote the use of the Internet and other 
information technologies to provide increased opportunities for citizen 
access to Government information and services, and for other purposes.

Executive Order 12988

    This rule has been reviewed under Executive Order 12988, Civil 
Justice Reform. This rule is intended to have preemptive effect with 
respect to any State or local laws, regulations, or policies that 
conflict with its provisions or that would otherwise impede its full 
implementation. This rule is not intended to have retroactive effect 
unless so specified in the ``Effective Date'' paragraph of the final 
rule. Prior to any judicial challenge to the provisions of this rule or 
to the application of its provisions, all applicable administrative 
procedures must be exhausted. In the Supplemental Nutrition Assistance 
Program the administrative procedures are as follows: (1) For Program 
benefit recipients--State administrative procedures issued pursuant to 
7 U.S.C. 2020(e)(10) and 7 CFR 273.15; (2) for State agencies--
administrative procedures issued pursuant to 7 U.S.C. 2023 set out at 7 
CFR 276.7 (for rules related to non-quality control (QC) liabilities) 
or Part 283 (for rules related to QC liabilities); (3) for retailers 
and wholesalers--administrative procedures issued pursuant to 7 U.S.C. 
2023 set out at 7 CFR Part 279.

Need for Action

    This action is needed to implement certain provisions of Sections 
4118 and 4119 of Title IV, the Food Stamp Reauthorization Act of 2002, 
Public Law 107-171, which was enacted on May 13, 2002. This rule 
finalizes provisions of the interim rule ``Food Stamp Program: Non-
Discretionary Quality Control Provisions of Title IV of Public Law 107-
171'' published on October 16, 2003, and a proposed rule entitled 
``Food Stamp Program: Discretionary Quality Control Provisions of Title 
IV of Public Law 107-171'' on September 23, 2005.
    The interim rule revised the liability procedures and established 
new deadlines for completing the quality control (QC) review process 
and announcement of payment error rates. This final rule would amend 
the Supplemental Nutrition Assistance Program regulations concerning 
the QC system to eliminate enhanced funding, to address the impact of 
appeals decisions on the resolution of QC liabilities for high payment 
error rates, to revise the time frames for completing individual case 
reviews and the time frames for penalties for households that refuse to 
cooperate with a QC review, to revise the negative review procedures, 
and to make a number of technical policy changes and corrections. This 
analysis addresses the liability procedures, elimination of enhanced 
funding, the impact of appeals decisions on the resolution of QC 
liabilities for high payment error rates, the revised time frames for 
completing individual case reviews and the entire review process and 
announcement of the error rates, the time frames for penalties for 
households that refuse to cooperate with a QC review, negative review 
procedures, and corrective action planning.
Cost Impact
    Since this action does not directly impact benefit levels or 
eligibility, we do not anticipate any impact on SNAP benefit costs. The 
provision extending the time frames for verification of households 
reapplying for benefits is not expected to have a measurable impact on 
benefit costs. Fewer States will be identified as having any potential 
liability, and most such liabilities will be significantly lower than 
those under the previous system.
    Elimination of enhanced funding will result in a savings of 
administrative matching funds. In 2002, the Agency paid $77.3 million 
in enhanced funding incentives to 13 States. Over the five years 
between 1998 and 2002, the Agency paid $250 million in enhanced 
funding, for an annual average of $50 million during this period.
    If State payment error rates had remained at their 1998-2002 
levels, the annual savings to the Supplemental Nutrition Assistance 
Program would have been $50 million and the five-year savings would 
have been $250 million. These savings would have been offset by the 
establishment of high performance bonuses (addressed in the final rule 
``Food Stamp Program: High Performance Bonuses'' published February 7, 
2005, at 70 FR 6313).
    However, between 2002 and 2008, payment error rates fell from 8.26 
percent to 5.01 percent. The number of States that would have qualified 
for enhanced funding would have risen to 28 by 2008 and the amount of 
incentive funding received by these States would have totaled nearly 
$188 million. The amount of incentive funding for the five

[[Page 33425]]

years from 2003-2007 would have totaled $720 million, of which only 
$240 million would have been offset by the new performance bonus, 
yielding a net savings of $480 million.
    See Table below.
Benefit Impact
    Elimination of enhanced funding based on payment accuracy did not 
have a benefit impact on State administrating agencies or on program 
operations if considered in isolation. However, when this provision was 
combined with the new performance bonus system in another rulemaking 
that proposes to change performance criteria from a narrow focus on 
payment accuracy to a broader measure that incorporates client service 
criteria in addition to payment accuracy, the new performance bonus 
system was expected to encourage States to assess and improve overall 
performance.

    Cost Impact of Certain Quality Control Provisions of the Food Stamp Reauthorization Act of 2002 (Federal
                                                    Outlays)
                                            [In millions of dollars]
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                                        2003         2004         2005         2006         2007        5-Year
----------------------------------------------------------------------------------------------------------------
Elimination of Enhanced funding...         -$95        -$133        -$158        -$160        -$174        -$720
High Performance Bonus............           48           48           48           48           48          240
                                   -----------------------------------------------------------------------------
    Net Savings...................          -47          -85         -110         -112         -126         -480
----------------------------------------------------------------------------------------------------------------

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

III. Background

    On May 13, 2002, the President signed Public Law 107-171, the Farm 
Security and Rural Investment Act of 2002. Title IV of Public Law 107-
171, the Food Stamp Reauthorization Act of 2002 (FSRA), significantly 
revised the sanction, liability, and enhanced funding provisions of the 
QC system. An interim rule entitled ``Food Stamp Program: Non-
Discretionary Quality Control Provisions of Title IV of Public Law 107-
171'' was published October 16, 2003, at 68 FR 59519 that addressed 
certain provisions of Sections 4118 and 4119. A final rule entitled 
``Food Stamp Program: High Performance Bonuses'' was published February 
7, 2005, at 70 FR 6313 that implemented Section 4120 of the FSRA. A 
proposed rulemaking, published September 23, 2005, at 70 FR 55776 
addressed the remaining provisions of Sections 4118 and 4119 of the 
FSRA, negative case review procedures, and several discretionary policy 
changes, and numerous technical corrections. This rule finalizes both 
the interim and the proposed rules.

A. Enhanced Funding

    The current regulations at 7 CFR 275.1(b) provide that the 
Department shall pay a State agency enhanced administrative funding if 
its payment error rate is less than or equal to 5.90 percent and the 
negative case error rate is less than the national weighted mean 
negative case error rate for the prior fiscal year. Section 4118 of 
FSRA removed the provision in the Food Stamp Act of 1977 (now the Food 
and Nutrition Act of 2008) for giving enhanced funding to State 
agencies with low payment and negative case error rates, effective 
fiscal year (FY) 2003, effectively ending enhanced payments. Section 
4120 of the FSRA replaced these enhanced funding provisions with high 
performance bonuses. Regulations addressing high performance bonuses 
have been published separately (proposed rule published December 17, 
2003, at 68 FR 70193; final rule published February 7, 2005, at 70 FR 
6313). Section 275.23(d) establishes procedures for providing enhanced 
funding. In accordance with the elimination of enhanced funding, these 
sections are no longer necessary. We proposed to eliminate paragraphs 
(b)(1) and (b)(2) of 7 CFR 275.1, to change paragraph (a) of 7 CFR 
275.1 into a general introductory paragraph, and to remove 7 CFR 
275.23(d). We received two comments on the proposed elimination of 
enhanced funding. Both commenters supported the proposal. Accordingly, 
we are adopting as proposed the revisions to 7 CFR 275.1, eliminating 
paragraphs (b)(1) and (2), changing paragraph (a) into a general 
introductory paragraph, and removing 7 CFR 275.23(d).
    Section 275.3(c) requires that FNS validate the negative case error 
rate when a State agency's payment error rate for an annual review 
period appears to entitle it to an increased share of Federal 
administrative funding and its reported negative case error rate for 
that period is less than two percentage points above the national 
weighted mean negative case error rate for the prior fiscal year. That 
section also provides that FNS may review any negative case for other 
reasons. Validation of the negative case error rate is no longer 
necessary for purposes of establishing eligibility for enhanced 
funding. However, we proposed in 7 CFR 275.3(c) to require that all 
States' negative error rates be validated by FNS. First, we believe 
that fair and equitable treatment needs to be ensured when it comes to 
denying households benefits. Second, the negative error rate is one of 
the measurements of high performance. We believe that it is necessary 
to ensure the accuracy of those error rates if awards will be driven by 
these rates. We received two comments supporting this proposal. We are 
adopting the provision mandating FNS validation of all States' negative 
error rates in 7 CFR 275.3(c).
    In addition, we are adopting as proposed the technical changes 
throughout Part 275 that remove references to enhanced funding. These 
deletions are not discussed in this preamble.
    Part 277, Payments of Certain Administrative Costs of State 
Agencies, establishes the rules for paying State agency administrative 
costs for operating the SNAP. In 7 CFR 277.4, paragraphs (b)(1), 
(b)(4), (b)(5), and (b)(6) describe the procedures for increasing State 
administrative funding when State agency QC error rates meet certain 
standards. Each paragraph provides the authority for different fiscal 
year periods beginning with Fiscal Year 1980. Sections 277.4(b)(1)(i), 
(b)(4), (b)(5), and (b)(6) cover fiscal year periods beginning October 
1, 1980, through September 30, 1988. Section 277.4(b)(1)(ii) provides 
the authority for the period beginning October 1988 and forward. The 
authority in the Food Stamp Act (now the Food and Nutrition Act of 
2008) for 7 CFR 277.4(b)(1)(i) was

[[Page 33426]]

removed by the Hunger Prevention Act of 1988 (Public Law 100-435). The 
authority for 7 CFR 277.4(b)(4), (b)(5), and (b)(6) was removed by the 
Omnibus Budget Reconciliation Act of 1982 (Public Law 97-253). Section 
4118 of the FSRA eliminated enhanced funding based on QC error rates 
for fiscal years beginning October 2002 and beyond, thus making 7 CFR 
277.4(b)(1)(ii) obsolete for FY 2003 and beyond. All enhanced funding 
for Fiscal Years 1980 through 2002 paid under any of these authorities 
has already been made. Therefore, these paragraphs are no longer 
necessary. No comments were received on these proposed changes. 
Accordingly, we are removing 7 CFR 277.4(b)(1), (b)(4), (b)(5), and 
(b)(6). Sections 277.4(b)(2), (b)(3), (b)(7), and (b)(8) are 
redesignated as 7 CFR 277.4(b)(1), (b)(2), (b)(3), and (b)(4), 
respectively. In addition, we are also revising the references in 
redesignated 7 CFR 277.4(b)(3) to reflect these changes.

B. Disposition of Cases Where the Household Refuses To Cooperate

    Section 275.12(g) establishes procedures for disposition of active 
QC cases. Section 275.12(g)(1)(ii) provides procedures for handling 
cases when the household refuses to cooperate in the review. Under 
these procedures, the State agency is required to notify the household 
of the penalties for refusing to cooperate with the review. In 7 CFR 
275.12(g)(1)(ii), regulations currently provide that a reviewer may 
attempt to complete the case if this notice has been sent. This policy 
was revised by FNS memorandum on September 1, 1998, in ``Change 1 to 
the September 1997 version of FNS Handbook 310,'' to require the State 
agency reviewer to attempt to complete the review. The change was 
effective October 1, 1998. The revised policy has been retained in 
subsequent revisions of FNS Handbook 310. The Department requires such 
completion because incomplete reviews introduce bias into the system. 
Consistent with this change in policy, we proposed to revise 7 CFR 
275.12(g)(1)(ii) to say that the reviewer must attempt to complete the 
case. As provided for in the FNS Handbook 310, the reviewer will 
attempt to determine all of the necessary information to the point 
where either ineligibility or the appropriate benefit allotment is 
determined, verified, and documented. We received six comments 
addressing this proposed revision, all supporting the revision to the 
regulations. This policy has been in effect since October 1998 and 
benefits State agencies. Accordingly, we are adopting as proposed the 
revision to 7 CFR 275.12(g)(1)(ii) that requires QC reviewers to 
attempt to complete cases where a household refuses to cooperate.

C. Negative Case Reviews

    The Department proposed significant changes to the negative review 
procedures. In order to fully understand the changes made in this 
rulemaking to the procedures for reviewing negative cases, readers are 
referred to the proposed rule located at 70 FR 55776. The proposed rule 
has a detailed description of the existing requirements and the 
proposed changes.
    First, the Department proposed that the negative universe be 
selected based only on ``action,'' eliminating the option to use 
``effective date.'' Second, the Department proposed to delete the 
requirement that there be a break in participation in order for a 
negative action to be subject to review. Finally, the Department 
proposed to limit the use of the expanded review process.
    We received 22 comments on one or more aspects of the proposals to 
revise the negative review procedures. Most commenters opposed all the 
proposed changes; a few supported all the changes; some addressed only 
one or two of the proposed changes; and some commenters supported one 
or more of the proposals while opposing one or more of them. The 
opposing commenters also believed that these proposed changes reflected 
a change from ``outcome'' based reviews to ``procedural'' reviews.
    Specific comments will be addressed during the discussion of each 
proposed change to the negative review procedures.
    Currently, the regulations allow either ``action'' or ``effective 
date'' as the selection criteria for the sampling universe. Use of the 
two different selection criteria, ``action'' and ``effective date,'' 
has resulted in differences in the sampling universes among the States 
and inconsistent reviews. These sampling differences are of statistical 
concern in calculating both the States' and the national negative error 
rate. Because multiple actions can occur within a sampling period, 
States using ``effective date'' have had to decide which of the several 
actions to review. This decision process introduces bias into the 
system. Focusing on the ``action'' means that each negative action has 
an equal opportunity to be sampled and reviewed. We proposed to revise 
7 CFR 275.11(e)(2)(i) and (e)(2)(ii) accordingly. Sixteen commenters 
addressed the proposal to eliminate ``effective date'' for constructing 
the sample. Ten commenters opposed the proposal; 4 commenters supported 
the proposal; and two commenters supported the proposal but said they 
used ``effective date''. We have not categorized these last two 
commenters as either supporting or opposing the proposals because we 
believe that, based on how they worded their comments, that these 
commenters misunderstood the proposal. However, it is possible that 
they supported the proposal even though these States would be required 
to change their methods of sample selection.
    Commenters did not address the statistical issues that resulted in 
the decision to propose requiring the use of ``action date'' and 
eliminate the use of ``effective date.'' States did, however, discuss 
how this has been the process for many years and has apparently worked. 
It has worked largely because the Department was unaware that not all 
actions were being included in the universe. The problem only came to 
our attention when we began universal validation of negatives. The 
increased attention to negatives has resulted in an awareness of many 
of the problem addressed. State agencies started asking many questions 
about how to review negatives, questions that were not raised before 
validation was universal. The Department became aware of problems 
surrounding sample construction in two major ways. First, statistical 
reviews revealed that not all negative actions were being captured in 
some States that were relying on ``effective date'' to capture 
terminations. Further, the Department has been receiving questions 
about what action should be reviewed when multiple actions occurred 
during a sample month and the reviewer has not been able to determine 
what action was sampled.
    Commenters were concerned that the proposed change would 
necessitate major computer changes to change the sample selection 
process. Such computer changes are costly and time-consuming, according 
to the commenters. While we understand the commenters' concerns about 
computer changes that will be required, we believe that it is necessary 
that the sampling universe include all possible negative actions. 
Therefore, the best way to obtain all possible negative actions and to 
eliminate possible bias in the selection process is to select based on 
``action'' rather than ``effective date.'' Accordingly, we are adopting 
as proposed the changes to 7 CFR 275.11(e)(2)(i) and (e)(2)(ii).
    We have revised the definition of a ``Negative case'' in 7 CFR 
271.2 to say that a ``Negative case means any action to deny, suspend, 
or terminate a case''. One commenter believed the proposed

[[Page 33427]]

definition was not consistent with the proposal to sample based on 
action taken. We disagree with that commenter. The current definition 
in 7 CFR 271.2 is not consistent with the proposed change; however, the 
new definition is. We are adopting the revised definition in 7 CFR 
271.2 as proposed.
    One commenter requested additional time for implementation if the 
proposal were to be adopted. We have considered this suggestion and 
have decided to make the modifications to the negative review 
procedures effective beginning with the first day of FY 2012, October 
1, 2011.
    Section 275.11(f)(2)(vi) currently provides that a negative action 
would only be subject to review if there was a break in participation. 
The Department proposed to eliminate the requirement in 
275.11(f)(2)(vi) that there be a break in participation for a negative 
action to be subject to review because limiting the focus only to the 
``action'' eliminates a need for determining whether there was a break 
in participation. A conforming change was also proposed to be made to 
the definition ``Negative case'' in 7 CFR 271.2. Twelve commenters 
opposed this proposal; three commenters supported the proposal. As 
stated in the preamble to the proposed rule, this proposed change to 
eliminate the ``break in participation'' is consistent with the change 
in focus to review each individual action taken. We are adopting the 
change to 7 CFR 275.11(f)(2)(iv) as proposed.
    Finally, the Department proposed to limit the expanded review in 7 
CFR 275.13(b). The expanded review allows the QC reviewer to look 
beyond the reason given for action taken by the eligibility worker (EW) 
to deny, terminate, or suspend a household. Under current procedures as 
provided for in 7 CFR 275.13(b) and expanded in FNS Handbook 310, the 
QC reviewer may examine the case file for additional reasons to support 
the denial, suspension, or termination. Section 275.13(b) permits 
contacting the household or a collateral contact to clarify whether a 
reason exists that supports a denial, suspension, or termination. The 
FNS Handbook 310 also permits a field investigation. During the 
validation process, it has become apparent that the expanded review has 
become an opportunity to search for information to eliminate an invalid 
negative decision, making the decision correct, rather than determining 
the validity of the action the EW took. The Department considers this 
an inappropriate use of the review process that needs to be curtailed. 
Limiting the expanded review is also consistent with a review of 
``action.''
    Under the review procedures as proposed, the QC review would be 
focused solely on the action taken, not on other possible negative 
actions that could have been taken. Under this proposal, an action 
could only be determined ``valid'' if the case record supported the 
negative action under review, as it was presented to the household. If 
documentation is missing in the case file to support and verify the 
reason for the specific denial action, the Department proposed to 
continue to allow the QC reviewer to contact the household or a 
collateral contact to verify the validity of the specific negative 
action.
    The Department received 20 comments on this proposal. Eighteen 
commenters opposed the proposal; two supported it. The commenters 
opposing the change felt that this change, especially in combination 
with the other two changes, emphasized procedure rather than outcome. 
These commenters believed that the purpose of the negative review 
should be to determine if a household was ineligible for benefits, 
regardless of what a household may have been told about its 
eligibility. One commenter even stated that its notices to households 
were not always as accurate as one might wish them to be. Ten 
commenters suggested that if the expanded review be limited, it be 
limited to other information in the case file that would support an 
alternative reason for a negative action, but prohibit contact with the 
household or a collateral contact. State agencies pointed out that 
while wrong reasons may be coded for a specific negative action, the 
correct reason may be in the case file. The commenters felt that such 
coding errors were procedural rather than outcome based.
    During the period following the publication of the proposed rule, 
the Department revised the FNS 310 Handbook to conform the procedures 
in the Handbook to the regulations. By doing so, the Department 
eliminated the most far-reaching forms of the expanded review in use by 
some States, i.e., field investigations. The FNS 310 Handbook now 
requires the State agency to review the case record to determine if 
there is another reason in the case record that makes the negative 
action valid and allows the reviewer to contact the household or a 
collateral contact to verify information in the case record.
    The Department has considered the commenters' concerns about the 
expanded review. However, the Department has decided the limitations on 
the scope of the expanded review are appropriate and consistent with 
reviews based on ``action.'' Further, the Department believes that 
households are impacted by the reasons they are given for their case 
closures and denials. Section 273.13(a)(2) requires that the notice of 
adverse action clearly explain the proposed action, the reason for the 
proposed action, and the household's right to appeal. We do not believe 
that it is purely procedural when a household is given an incorrect 
reason for the negative action. We do not believe that it is purely 
procedural when the State agency fails to follow certification policy 
and provide households with the rights to which they are entitled, such 
as (but not limited to) Notices of Missed Interview (NOMIs), expedited 
service, or properly-timed denials. Therefore, we believe that it is in 
the best interests of program integrity and service to households to 
adopt the procedure as proposed. Further, with the change to ``action'' 
only reviews, we do not believe it necessary or appropriate to seek 
reasons other than the stated one given for the negative action. 
Accordingly, the Department is adopting as proposed the limiting of the 
expanded review in 7 CFR 275.13(b), with minor wording changes of 
``correct'' to ``valid'' and ``incorrect'' to ``invalid''. The State 
agency will continue to be allowed to contact the household or a 
collateral contact to verify the validity of the specific negative 
action. A conforming change is also being made to 7 CFR 275.13(c)(1).
    In summary, the Department has adopted the provisions revising the 
negative case review process because we believe that to do so is 
necessary to correct the statistical issues surrounding sampling, that 
the changes will result in consistent interpretations among the States, 
and represents a better balance between accuracy and customer service.
    One commenter requested a 120-day hold harmless period if the 
Department adopted the proposed changes. We have considered this 
request but have determined that it is not appropriate. Section 
16(c)(3) of the Act and Section 275.12(d)(2)(vii) of the regulations 
(as modified by this rule) provide for exclusion of errors resulting in 
the application of new regulations. However, a change in review 
procedures does not result in an error; the QC system is a measurement 
system and review procedures are the mechanism of that measurement. The 
errors that are measured are errors in the certification process. 
Changes to the review procedures do not change the certification 
requirements. The Department has not been able to

[[Page 33428]]

determine what the commenter expected to be excluded.
    We would like to address at this point the need for States to be 
consistent, thorough, and accurate in the construction of the sample 
universe. All actions to deny, terminate, or suspend households need to 
be included in the universe. While we believe that using the notices of 
adverse action would be the simplest way to capture the terminations, 
it may not be the only way. Further, the failure to send a notice is 
not in and of itself a reason for an action to be not subject to 
review. For example, if for some reason, the State's computer fails to 
issue notices of adverse action to a category of households being 
terminated from the Program those terminations would still be subject 
to review. The State agency would be responsible for ensuring that that 
group of negative actions is subject to sampling. Also, if the computer 
sends notices of adverse action even if the ``action'' is solely the 
expiration of the certification period, it should be noted that expired 
certification periods are not negative actions and such cases should be 
excluded from the sample. Another category of concern is administrative 
closures that do not result in adverse action notices to households, 
such as a case closure and transfer to another number because the 
worker incorrectly opened the case under the wrong number. The 
Department does not consider such administrative closures to be 
negative actions as defined by this rule.

D. Corrective Action Planning

    Section 4118 of the FSRA requires a State agency to do corrective 
action planning whenever its payment error rate is six percent or 
greater. In the interim rule published October 16, 2003 at 68 FR 59519, 
7 CFR 275.16(b)(1) was revised to require corrective action planning 
whenever a State agency's error rate equals or exceeds six percent. 
Current regulations provide that corrective action planning shall also 
be done by a State agency when the State agency is not entitled to 
enhanced funding (7 CFR 275.16(b)(2)) or when the State agency's 
negative case error rate exceeds one percent (7 CFR 275.16(b)(3)). We 
proposed to remove 7 CFR 275.16(b)(2) as no longer necessary because 
enhanced funding has been eliminated. We also proposed to continue to 
require State agencies to conduct corrective action planning whenever 
the negative case error rate exceeds one percent (7 CFR 275.16(b)(3)), 
(redesignated as 7 CFR 275.16(b)(2) to reflect the deletion of 7 CFR 
275.16(b)(2)). We proposed retaining the requirement to do corrective 
action planning when the negative error rate exceeds one percent to 
ensure that households are not being inappropriately denied or 
terminated. Further, this proposal is consistent with the High 
Performance Bonuses final rule that provides criteria for rewarding 
States with very low negative case error rates.
    Finally, we proposed to redesignate 7 CFR 275.16(b)(4), (b)(5), and 
(b)(6) as 7 CFR 275.16(b)(3), (b)(4), and (b)(5), respectively, to 
reflect the removal of 7 CFR 275.16(b)(2) and redesignation of 7 CFR 
275.16(b)(3) as 7 CFR 275.16(b)(2). In practical terms, this change 
will have little impact on the number of State agencies required to do 
corrective action planning. In FY 2002, the last year of enhanced 
funding, no State that had a payment error rate of less than six 
percent failed to qualify for enhanced funding. We received 4 comments 
concerning corrective action plans for negative reviews. Two commenters 
supported the proposal. Two commenters were concerned about the impact 
of the proposed changes to the negative review process on the negative 
error rate and were opposed to the provision as written if the changes 
to the negative review process were adopted. As discussed above, the 
Department has adopted the changes to the negative review process. We 
have considered the comments; however, we are adopting as final the 
change made in the interim rule to 7 CFR 275.16(b)(1) and the deletion 
of 7 CFR 275.16(b)(2) and the change in the proposed rule to 7 CFR 
275.16(b)(3) (redesignated as 7 CFR 275.16(b)(2)). We believe the 1-
percent threshold is appropriate even though some States' error rates 
may rise.
    Section 275.13 requires State agencies to review suspended cases as 
part of the negative case sample. Suspended cases were added to the 
negative universe in a final rule published July 16, 1999, at 64 FR 
38287. That rule did not add suspended cases to those deficiencies 
requiring corrective action at 7 CFR 275.16(b)(6) (redesignated in this 
rule as 7 CFR 275.16(b)(5)). To correct this oversight, we proposed to 
revise redesignated 7 CFR 275.16(b)(5) to include deficiencies which 
result in improper suspensions. One commenter addressed and supported 
this proposal. We are adopting as proposed the requirement to address 
deficiencies in the handling of suspended cases through the corrective 
action planning process.

E. Time Frames for Announcing the National Performance Measure and for 
Completing QC Reviews and Resolving State/Federal Differences

    The interim rule published October 16, 2003 at 68 FR 59519 revised 
the regulations at 7 CFR 275.23(e)(7) to establish the following time 
frames for completing QC reviews and resolving State/Federal 
differences and for announcing the national performance measure. The 
deadline for completing QC reviews and resolving State/Federal 
differences is May 31 of the following year. The deadline for 
announcing the national performance measure is June 30 following the 
end of the fiscal year review period. These time frames are mandated by 
the Act, and we did not receive any comments addressing these new time 
frames for completing the review process. Accordingly, we are adopting 
these time frames established in the interim rule.
    These new time frames provide approximately two additional months 
to complete the case review and arbitration process and to develop and 
announce the national performance measure. We proposed to use this 
additional time in the following way: (1) Provide State agencies at 
least 100 days from the end of the sample month to complete and 
transmit to FNS 90 percent of all cases and that State agencies shall 
have at least 113 days from the end of the sample month to complete and 
transmit to FNS 100 percent of all cases selected for the sample month; 
(2) provide State agencies at least 123 days from the end of the annual 
review period to complete or otherwise account for all cases selected 
for review during the annual review period and to report to FNS the 
results of all the reviews; (3) provide State agencies until January 21 
after the end of the review year to complete and dispose of all cases; 
and (4) stipulate that FNS may grant additional time as warranted upon 
request by a State agency for cause shown beyond these dates to 
complete and dispose of all cases. We also proposed to revise 7 CFR 
275.21(b)(4) by replacing ``95'' with ``113''; to revise 7 CFR 
275.21(c) by replacing ``105'' with ``123''; and to add a sentence to 
each of these paragraphs stating that if FNS extends the time frames in 
7 CFR 275.21(b)(2), that the time frames in these paragraphs will be 
extended accordingly. We also proposed to continue to allow States 20 
days to request arbitration of individual cases; however, we also 
requested comments about whether this time was considered adequate.
    On January 22, 2003, we waived the deadlines for State agencies to 
complete

[[Page 33429]]

processing cases in 7 CFR 273.21(b) for FY 2003 and provided States 
with 113 days to complete each sample month's cases. This waiver was 
extended on March 4, 2004 for Fiscal Years 2005 and 2006. The waiver 
was again extended on September 12, 2006, for FY 2007 and FY 2008. In 
providing comments on this proposal, we requested comments about 
whether this amount of additional time was useful and/or sufficient. In 
addition to the extended time frames for completion of individual 
cases, that waiver provides State agencies an additional 10 days at the 
end of the review period, i.e., January 22 through January 31, to 
perform checks on the individual data transmitted by State agencies (c-
trails). In the proposed rulemaking, we did not allow this additional 
10 days at the end of the review year for checking the c-trails. We did 
not propose allowing the additional 10 days at the end of the review 
year because we felt that States had already received a significant 
additional amount of time to perform and complete all work related to 
the individual case reviews. Delaying completion of the State work 
until January 31 delays the completion of the Federal re-review process 
which in turn impacts FNS's ability to timely and accurately prepare 
the payment error rates. However, we were interested in receiving 
comments on this issue.
    We received 16 comments addressing the individual case time frames, 
the 10-day period at the end of the review year to check the c-trails, 
and the time period to request arbitration. Concerns were also raised 
about the failure of FNS to establish individual case review times for 
the Federal validation process and delayed arbitration responses. Six 
commenters supported the individual case time frames as proposed; six 
commenters recommended additional time, up to as much as 125 days. 
Also, six commenters recommended that we eliminate the interim tracking 
and establish only a final deadline. We have considered the comments 
and will eliminate the interim tracking and establish only a final date 
for completion of each month's sample; provide the States 115 days to 
complete each month's sample; and allow 10 days at the end of the 
review year to check the c-trails. We also revised 7 CFR 275.21(b)(4) 
by replacing the two-tiered time frame completion schedule with 115 
days; revised 7 CFR 275.21(c) by replacing ``105'' with ``125''; and 
adopted the proposed addition to each of these paragraphs stating that 
if FNS extends the time frames in 7 CFR 275.21(b)(2), that the time 
frames in these paragraphs will be extended accordingly.
    Although we did not provide the States with 125 days to complete 
individual reviews each month as some State agencies recommended, we 
did provide the State agencies with 2 days more than proposed to 
complete individual reviews, i.e., 115 days instead of 113 days. As 
discussed in the preamble to the proposed rule, when the time to 
complete reviews and issue error rates was cut back by the Mickey 
Leland Childhood Hunger Relief Act, Public Law 103-66, FNS absorbed the 
entire reduction. When the FSRA replaced the 60 days lost under Public 
Law 103-66, FNS provided the States with a significant amount of that 
replaced time. We believe that FNS needs the remaining time to complete 
the individual case reviews. In addition to replacing some of the lost 
time, FNS's work load has increased with the advent of 100 percent 
validation of negative cases.
    Currently, there is one level of arbitration. Quality control 
arbitration is the resolution of disagreements between the FNS regional 
office and the State agency concerning individual QC case findings and 
the appropriateness of actions taken to dispose of an individual case. 
The time frames for conducting arbitration are in 7 CFR 275.3(c)(4). 
Under these rules, a State agency is required to submit its request for 
arbitration within 20 calendar days of the date of receipt by the State 
agency of the regional office case findings. The FNS arbitrator has 20 
calendar days from receipt of the State agency request to review and 
make a decision on the case. Prior to Public Law 103-66, States had 28 
days to request arbitration. As discussed above, originally FNS 
absorbed the total cut in review time and States lost 8 days to request 
arbitration. Although we considered the amount of time allowed for 
requesting arbitration to be adequate, we specifically requested 
comments, however, about whether affected parties and the public agree 
that the time frames are adequate. We received 7 comments addressing 
the time frames for requesting arbitration. Five commenters supported 
additional time to request arbitration; two commenters supported the 
existing 20 days. One commenter suggested that the arbitration process 
be changed to include a State person. This proposal was outside the 
scope of the proposed rule and has not been addressed.
    Two commenters wanted both more time to do reviews and more time to 
request arbitration. Three other commenters wanted additional time to 
request arbitration. In the proposed rule, States were given part of 
the restored time, and in this rule have been given two more days to 
perform their reviews, time which has come out of the Department's time 
to complete the Federal re-reviews, conduct arbitration, and calculate 
and release the error rates. As we indicated in the proposed rule, if 
we provided more time to request arbitration, time to conduct reviews 
by the States may have had to be reduced. States did not address this 
point; further, States were more concerned about the amount of time 
available for them to conduct individual reviews than about the time 
frames to request arbitration. In response to that concern, we provided 
them more time to conduct individual reviews. That time was taken from 
time for Federal re-reviews to be conducted.
    Three States commented that 20 days was not a sufficient amount of 
time to request arbitration when multiple cases are received at the 
same time. We believe that 20 days is an adequate amount of time for a 
State agency to prepare its case for arbitration. This time period is 
intended primarily for the State agency to prepare its letter 
addressing what issue or issues it is appealing, assemble the case 
file, and transmit the request. This time period is not intended for 
State agencies to conduct additional review activities. Overall, there 
are very few arbitration cases in any one review year. In FY 2000 there 
were a total of 75 cases nationwide; in FY 2001 there were 37; in FY 
2002, there were 43 cases; in FY 2004, there were 24 cases; in FY 2005, 
there were 38 cases; in FY 2006, there were 27 cases; in FY 2007, there 
were 47 cases, and in FY 2008, there were 55 cases. The commenters did 
not provide a compelling case stating why this work cannot be completed 
in the 20 days provided for that purpose. The arbitration time frames 
as currently established appear to be adequate from our perspective. 
Accordingly, we have decided to make no change to the time frames to 
request arbitration.
    Under the time frames as provided in the January 23, 2003; March 4, 
2004; and September 12, 2006 memoranda from FNS headquarters to FNS 
regional offices, FNS regional offices were given until March 31 to 
complete their subsample review process in order for all arbitration to 
be completed timely and to provide some additional time to ensure the 
accuracy of the error rates, liabilities, and adjustments to the 
liabilities. Although we did not request comments on the establishment 
of Federal review time frames, we received three comments suggesting 
the

[[Page 33430]]

establishment of time frames for completion of Federal reviews. Those 
comments were outside the scope of the proposed rule. While we 
understand the concerns expressed by the commenters about delays in 
receiving Federal re-review results, we believe that this is an issue 
that can be addressed on a case-by-case basis.
    Section 275.21(c) provides that State agencies report the monthly 
progress of sample selection and completion on the Form FNS-248, Status 
of Sample Selection and Completion or other format specified by FNS. 
Prior to publication of the proposed rule (published on September 23, 
2005, at 70 FR 55776), in response to a notice published at 68 FR 10437 
on March 5, 2003, the Department received two comments suggesting 
elimination of the form. Federal statisticians use the information on 
the FNS-248 to track the status of case completions and identify when 
timely generation of an error rate is jeopardized. Most of the 
information on the FNS-248 is available elsewhere. Further, the form 
itself is not necessary for State agencies to provide the necessary 
information, and the regulation currently provides that States may 
submit this information other than on the form. Therefore, we proposed 
to revise 7 CFR 275.21(c) to eliminate the form. State agencies will 
still be required to submit the information on a monthly basis as 
directed by the appropriate regional office. We received no comments 
concerning this proposal; we are adopting it as proposed.
    Section 275.21(d) requires State agencies to submit an FNS-247, 
Statistical Summary of Sample Distribution, annually. Although the 
requirement is still in the regulations, FNS no longer requires State 
agencies to submit this form. Accordingly, we proposed to remove 7 CFR 
275.21(d). We received no comments concerning this proposal; we are 
adopting it as proposed.

F. Consequences to Households Who Refuse To Cooperate With QC Reviews

    Section 273.2(d)(2) provides procedures for handling the cases of 
SNAP participants who refuse to cooperate with a QC review of their 
case. Currently, a household is determined ineligible if it refuses to 
cooperate with a QC review. Questions have arisen about what happens 
when one or more household members leave a household subject to this 
penalty. Because the regulations do not provide an answer to the 
question, it has been left to State agencies to determine which 
household members continue to be subject to the penalty. We proposed to 
amend this provision to provide that the ineligibility penalty will 
follow the household member(s) who refused to cooperate. We received 13 
comments addressing this proposal. Nine commenters opposed the 
provision; 4 commenters supported; one commenter pointed out that a 
tracking mechanism would have to be developed. Commenters opposed to 
the proposal believed that it would be difficult to accomplish and were 
concerned about the need for a tracking mechanism to be developed that 
would involve computer expenses. We recognize these concerns; however, 
we do not believe households should be prohibited from participating in 
the program if the person who refused to cooperate with the QC review 
no longer resides with the remaining household members. Therefore, we 
are adopting as proposed the requirement that the ineligibility penalty 
follow the household member(s) who refused to cooperate. If the State 
agency is unable to identify a particular household member as the 
refusing person, the State agency may continue to decide what member(s) 
to disqualify. We recognize that it will take States time to adapt 
their computer systems to track the refusing individual. Accordingly we 
are giving the States an extended time to implement the provision, 
until October 1, 2011. States may opt to implement this provision 
earlier. A 120-day hold harmless provision applies to implementation of 
this change.
    In this rule, we also proposed to make a conforming change to 7 CFR 
273.2(d)(2). Current procedures in 7 CFR 273.2(d)(2) require that a 
household be terminated for refusal to cooperate with a State or 
Federal QC reviewer. If a household terminated for refusal to cooperate 
with a State QC reviewer reapplies within 95 days of the end of the 
annual review period, the household cannot be determined eligible until 
it cooperates with the State QC reviewer. If the household terminated 
for refusal to cooperate with a State QC reviewer reapplies more than 
95 days after the end of the review period, the household is required 
to provide verification of all eligibility factors before it can be 
certified. If a household terminated for refusal to cooperate with a 
Federal QC reviewer reapplies within 7 months of the end of the annual 
review period, the household cannot be determined eligible until it 
cooperates with the Federal QC reviewer. If the household terminated 
for refusal to cooperate with a Federal reviewer reapplies more than 
seven months after the end of the review period, the household is 
required to provide verification of all eligibility factors before it 
can be certified. We proposed to change the dates in 7 CFR 273.2(d)(2) 
to 123 days and nine months to conform the dates in 7 CFR 273.2(d)(2) 
to the proposed changes in the dates for completion of the State review 
process in 7 CFR 275.21(b) and the end of the Federal QC review process 
in 7 CFR 275.23(e)(7) (renumbered in this proposed rule as 7 CFR 
275.23(c)). As we modified the change in dates for completing the QC 
review process to 125, we are adopting this conforming change, making 
the appropriate change to 125 days.
    We also proposed additional conforming changes to other sections of 
the regulations that identify these time frames. These conforming 
amendments are not discussed in this preamble and are adopted with 
appropriate modifications to reflect the additional time provided to 
complete the reviews.

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

    Section 275.23 establishes the procedures to be used to evaluate a 
State agency's performance through the QC review system. This section 
includes the error rates to be established, the methodology used to 
establish those error rates (including regression), the thresholds for 
establishing potential liabilities for excessive error rates, the 
relationship of the sanction system to the warning process and 
negligence, the time frames for announcing error rates, the procedures 
for resolving liabilities, the procedures for reducing liabilities 
based on good cause on appeal, the policy on charging interest on 
liabilities, and the procedures for new investment activities to reduce 
liabilities.
    Over time, as the authority for determining the error rates and the 
sanction system has been changed by legislation, changes have been made 
throughout 7 CFR 275.23. Those changes were made within the existing 
structure of the section. The changes to the sanction system made by 
the FSRA impact much of 7 CFR 275.23. Because several sections require 
substantive revision and many paragraphs require minor changes or 
reference changes, we proposed to reorganize the section at the same 
time as making the necessary changes resulting from the legislation. We 
have adopted the reorganization to 7 CFR 275.23 in its entirety.
    Under this reorganization, 7 CFR 275.23(a) addresses the basic 
components of FNS determination of a State agency's efficiency and 
effectiveness (currently 7 CFR 275.23(a) and (b)). A new 7 CFR 
275.23(b) addresses the error rates. The existing

[[Page 33431]]

methodology for regression in 7 CFR 275.23(e)(6) is incorporated into 
the new 7 CFR 275.23(b). Section 273.23(c) addresses the time frames 
for completing case reviews, conducting arbitration, and issuing error 
rates. Section 273.23(d) addresses State agency liability. Included in 
this section is the procedure for establishing the national performance 
measure, the liability amount methodology, appeal rights, and the 
relationship to the warning process and negligence. Section 275.23(e) 
addresses liability resolution plans; 7 CFR 275.23(f) addresses good 
cause; 7 CFR 275.23(g) addresses results of appeals on liability 
resolution; 7 CFR 275.23(h) addresses new investment (the term 
``reinvestment'' has been changed in this rule to the term ``new 
investment,'' consistent with the language used in the FSRA); 7 CFR 
275.23(i) addresses payment of the at-risk money; and 7 CFR 275.23(j) 
addresses interest charges.
    Current 7 CFR 275.23(e)(4) (Relationship to warning process and 
negligence), 7 CFR 275.23(e)(5) (Good cause), and 7 CFR 275.23(e)(6) 
(Determination of payment error rates) are unchanged except for minor 
editing, renumbering, or reference changes. Sections 275.23(e)(4), 
(e)(5), and (e)(6) are redesignated as 7 CFR 275.23(d)(4), (f), and 
(b)(2), respectively. These changes are being made as part of the 
restructuring for purposes of clarity. Necessary reference changes and 
language changes resulting from the elimination of enhanced funding 
have also been made. Such changes are technical in nature and do not 
impact the procedures themselves. These sections include the regression 
methodology and the criteria for good cause. As indicated in the 
preamble of the proposed rule, comments were not being sought on the 
substantive content of these sections nor was any consideration going 
to be given to any comments submitted pertinent to these sections in 
developing the final rule. The inclusion of these sections in the 
proposed rule was done solely for purposes of structuring. The 
restructuring and redesignations described in this paragraph have been 
adopted as proposed.

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

    The interim rule, published October 16, 2003, at 68 FR 59515, 
revised 7 CFR 275.23(e) to eliminate procedures for establishing 
liabilities for Fiscal Years 1983 through 1991. We are adopting as 
final the revisions to 7 CFR 275.23(e) that eliminated procedures for 
establishing liabilities for Fiscal Years 1983 through 1991.
    Section 275.23(e)(2) provides procedures for establishing liability 
for excessive payment error rates for FY 2002. We proposed removing 7 
CFR 275.23(e)(2) (as part of the overall revision of 7 CFR 275.23) as 
it no longer is necessary. All liabilities for FY 2002 have already 
been determined. We are adopting this deletion as proposed.

I. Determination of Payment Error Rates and Potential Liability Amounts

    Under the FSRA, liability is established based on two consecutive 
fiscal years of poor performance. Whenever there is a 95 percent 
statistical probability that a State's payment error rate exceeds 105 
percent of the national performance measure in each of two consecutive 
review years, the Department will issue, for the second consecutive 
fiscal year, a statement of potential liability amount to the State 
agency at the same time that the Department issues the State agency's 
official regressed payment error rate. One commenter recommended that 
the regulations incorporate the formula for calculating that there is a 
95 percent confidence that error rate is greater than 105 percent of 
the national average error rate. We have determined that this is 
unnecessary. This calculation is basic statistical methodology.
    Section 275.23(e)(3) provides procedures for establishing liability 
amounts for FY 2003 and beyond, putting in place the provisions of 
Section 4118 of the FSRA. The provisions of Section 4118 give the 
Department the authority to waive any portion of the established 
liability amount, to require a State agency to invest up to 50 percent 
of any established liability amount in new program administration 
activities, to establish up to 50 percent of the established liability 
amount as being ``at-risk'' for repayment if a liability amount is 
established for the subsequent fiscal year, or any combination of the 
three. Readers should refer to the interim rule for more information 
concerning the new liability system.
    As discussed in the preamble of the proposed rule, at the same time 
as the Department advises the State agency of its error rates, the 
Department will also advise the State agency of the Department's 
determination of the portions of the liability amount (expressed as 
percentages) designated as waived, for new investment, and at-risk. If 
the State agency wishes to appeal the liability amount through the 
process in Part 283 of the regulations, the State agency may do so.
    We received two comments on the interim rule provision establishing 
procedures for addressing the Secretary's authority to resolve the 
liability amounts for FY 2003 and beyond.
    One commenter recommended that liabilities be resolved only through 
the use of new investment. This would require the Department to waive 
50 percent of any potential liability amount that is established. The 
Department does not believe that this was the intent of the law and is 
not adopting this proposal.
    In the proposed rule, 7 CFR 275.23(c) specified that the Department 
would issue the potential liability amount settlement proposal at the 
same time it issues the State's official regressed payment error rate. 
One comment to the interim rule recommended that the Department delay 
sending the determination about the disposition of the liability amount 
until September 30th, and use the time between the issuance of the 
error rates and the potential liability amount and September 30th to 
negotiate a proposed liability settlement plan. Under this proposal, 
the Department would retain the ability to determine amounts to be 
designated as ``at-risk.'' The Department has considered the 
commenter's proposal. However, assuming that the statute allows for the 
delay, the time constraints built into the process do not allow us to 
proceed as proposed. If the error rates are issued on June 30, there 
are only 92 days available to negotiate settlements. The Department's 
experience has been that it takes all of that time just to address the 
issues surrounding approval of the settlement agreement for new 
investment. Therefore, we have not adopted the proposal submitted in 
response to the interim rule to delay release of the proposed potential 
liability amount settlement plan until after negotiation with the 
affected States.

J. Appeals of Liability Determinations

    One commenter, in response to the interim rule, recommended that 
the regulations should provide that the notification letter sent to the 
State agency, Governor, and legislature include a notification of the 
State agency's appeal rights pursuant to Section 16(c)(8)(D). As a 
general practice, the letters sent by the Department already include 
this information. We do not believe that it is necessary to incorporate 
a requirement in the regulations that the Department include this 
information in the letters.
    Section 16(c)(7) of the Food and Nutrition Act, as amended, 
provides

[[Page 33432]]

that a State agency is entitled to appeal the amount of a liability 
only for a fiscal year in which a liability amount is established. That 
means that excessive payment error rates in the first year of the new 
2-year liability system are not subject to appeal. Nor is the national 
performance measure subject to appeal, in accordance with Section 
16(c)(6)(D) of the Food and Nutrition Act, as amended. Thus, only a 
State agency's second year error rate and related potential liability 
determination are appealable. The Department recognizes that good cause 
may exist for an excessive error rate in year 2 that could be the 
result of events in year 1. The Department proposed at 7 CFR 
275.23(d)(3) to limit appeals to the determination of a State's payment 
error rate, or a determination of whether the payment error rate 
exceeds 105 percent of the national performance measure and the 
liability amount for any year for which a liability is established. To 
address the limitations on the appealability of year 1 and the 
possibility of causes extending back into that year, the Department 
also proposed to allow a State agency to address areas of good cause in 
the prior fiscal year that may have impacted the fiscal year 2 for 
which a liability amount has been established.
    We received two comments on the proposal to allow a State agency to 
address areas of good cause in the prior fiscal year that may have 
impacted the fiscal year 2 for which a liability amount has been 
established. One commenter supported the provision as proposed. The 
second commenter expressed concern that the proposed rule makes no 
provision for good cause from the year prior to year one to be 
considered in determining the status of year 1. As discussed in the 
preamble to the proposed rule and above, there is no appeal right for a 
determination of a year 1 status. Appeal rights only exist when a 
potential liability amount is established in year 2 and only that 
year's error rate and potential liability amount are appealable.
    The recent significant drop in the national performance measure and 
individual State error rates has raised questions about the effect on 
this new liability system if the error rates continue to fall lower. 
Specifically questions have arisen about what happens if a State 
agency's error rate is below six percent but there is a 95 percent 
statistical probability that the State's payment error rate exceeds 105 
percent of the national performance measure. Six percent is the 
potential liability threshold provided in the FSRA. Thus, if the 
State's error rate was below 6 percent, no liability amount would be 
established. However, if the State's error rate was determined by a 95 
percent statistical probability to be 105 percent of the national 
performance measure, the year would be a year of poor performance under 
the new liability system and would be considered a year 1 in 
determining whether a State agency would have two consecutive years of 
error rates exceeding 105 percent of the national performance measure. 
The law mandates that a year be considered a year 1 whenever there is a 
95 percent statistical probability that a State agency's payment error 
rate exceeds 105 percent of the national performance measure. The six 
percent threshold for a liability amount determination is not relevant 
to the determination of year 1 status. We received one comment 
addressing the relationship between the threshold for establishing a 
liability amount and the determination of year 1 status. The commenter 
recommended that a State be considered to be meeting minimum 
performance standards and that it not be counted as a year 1 whenever a 
State's error rate fell below 6 percent but there was a 95 percent 
statistical probability that the State agency's payment error rate 
exceeded 105 percent of the national performance measure. While we 
understand the State's viewpoint, these separate measurements are 
provided by law and the Department has no discretion in this area.
    Section 4118 of the FSRA provides that when a State agency appeals 
its potential liability amount determination, if the State agency began 
new investment activities prior to an appeal determination, and if the 
potential liability amount is reduced to $0 through the appeal, the 
Secretary shall pay to the State agency an amount equal to 50 percent 
of the new investment amount that was included in the liability amount 
subject to appeal. If the Secretary wholly prevails on a State agency's 
appeal, Section 4118 provides that the Secretary will require the State 
agency to invest all or a portion of the amount designated for new 
investment to be invested or paid to the Federal government. Section 
4118 further specifies that the Department will issue regulations 
addressing how the remaining new investment amount will be treated if 
neither party wholly prevails.
    As specified in the interim rule, if the State agency appeals the 
potential liability amount and wholly prevails and consequently its 
potential liability amount is reduced to $0 through the appeal, and the 
State agency began new investment activities prior to the appeal 
determination, FNS shall pay to the State agency an amount equal to 50 
percent of the new investment amount expended that was included in the 
potential liability amount subject to the appeal. The interim rule also 
provided that if FNS wholly prevails on a State agency's appeal, FNS 
will require the State agency to invest all or a portion of the amount 
designated for new investment to be invested or paid to the Federal 
government. The interim rule published October 16, 2003, at 68 FR 59519 
established in 7 CFR 275.23(e)(10) the provisions concerning either the 
Secretary or the State agency wholly prevailing. These provisions were 
moved to 7 CFR 275.23(g)(1) in the proposed rule. The provisions of the 
interim rule, redesignated as 7 CFR 275.23(g)(1) by the proposed rule, 
are adopted as final.
    Section 16(c)(1)(F)(iv) of the Food Stamp Act (as amended by 
Section 4118 of the FSRA) (now the Food and Nutrition Act of 2008) 
provides that the Department shall promulgate regulations when neither 
the Department nor the State agency wholly prevails on appeal. As that 
section of the Act pertains specifically to liability amounts used for 
new investment, the Department needed to address a split appeals 
decision in terms of the amount designated for new investment. The 
Department believed that the only way to accomplish this and implement 
the statutory intent was to apply the initial determination percentages 
to the liability amount newly established through the appeal. For 
example, if the original liability was $750,000 and the Department 
determined to waive 25 percent ($187,500) of it, require that 25 
percent ($187,500) be newly invested, and require 50 percent ($375,000) 
remain at-risk and if the appeal resulted in reducing the liability 
amount to $600,000, the determination under this option would be 25 
percent ($150,000 waived, 25 percent ($150,000) required to be newly 
invested, and 50 percent ($300,000) placed at-risk. Using the original 
percentages, immediate action can be taken by both parties to process 
the results of the appeal decision. The Department received no comments 
on this proposal. We are adopting the provision as proposed.
    As indicated above, the Department intends to identify the portions 
of the liability amount to be waived, newly invested, or at-risk as 
percentages of the liability amount at the same time that it provides 
the State agency with notification of its error rates. If the State 
agency wholly prevails on appeal, the amounts originally designated as

[[Page 33433]]

waived, newly invested, or at-risk would be reduced to $0 (percentage 
designated multiplied by $0 liability amount). If FNS wholly prevails 
on appeal, the original liability amount determinations (expressed as 
percentages) and designated as waived, newly invested, or at-risk, 
would remain unchanged.

K. New Investment

    The State agency may choose to begin new investment of any amount 
of the liability so designated while the appeal is proceeding, based on 
an approved new investment plan. The interim rule established 
procedures for adjusting reimbursement and collection procedures if a 
State began new investment during the appeal process and subsequently 
wholly prevailed in its appeal or if the Department wholly prevailed on 
appeal.
    We proposed procedures for addressing the Department's 
responsibility if a State agency began investment prior to completion 
of an appeal and neither agency wholly prevailed.
    If a State begins new investment prior to an appeal decision, and 
the amount already invested is less than the originally designated 
percentage multiplied by the new liability amount, the Department 
proposed to require that the State agency continue to invest up to the 
newly calculated investment requirement. In the instances where a State 
agency has expended more than the originally designated percentage 
multiplied by the new liability amount, we proposed that the Department 
will match the amount of funds expended in excess of that amount. This 
is consistent with the requirement in Section 4118 for when the State 
agency wholly prevails on appeal.
    The regulations currently detail the requirements for reinvestment. 
We proposed that these procedures remain essentially the same but for 
the above mentioned change of wording to new investment. Under the 
proposed reorganization, the procedures on new investment would be in 
new paragraph (h) in 7 CFR 275.23. In the event that a State agency 
fails to comply with its new investment plan, we proposed in 
redesignated 7 CFR 275.23(h) that the State agency shall be required to 
remit to the Department the amount of funds that the State agency 
failed to invest. Those funds shall be remitted to the Department 
within 30 days of the date the State agency is notified of its failure 
to comply with its new investment plan. Further, we proposed that 
interest shall be charged beginning with the date the State agency 
received the notice of failure to newly invest as required. The 
Department received no comments on these proposals. We are adopting 
these provisions as proposed.

L. Payment of At-Risk Money

    We proposed at 7 CFR 275.23(i) the procedures concerning a State 
agency's payment of the at-risk money. We proposed that the at-risk 
money would become due if, in the year subsequent to the establishment 
of the money being at-risk, the State agency is again potentially 
liable for a sanction. Under the proposal, payment would have to be 
made before the end of the fiscal year following the reporting period 
in which the at-risk money became due (that is September 30 of the year 
that the subsequent liability notification is issued) unless an 
administrative appeal relating to liability is pending.
    For example, if, in FY 2003, a State agency's error rate exceeds 
the performance goal, and again its error rate is excessive in FY 2004 
based on its announced error rate, FNS would send the notification of 
the FY 2004 liability amount by June 30, 2005. If the State agency's 
error rate in FY 2005 is excessive, any money designated as at-risk for 
the FY 2004 liability would be due by September 30, 2006 unless an 
appeal for the FY 2004 liability was still pending. If the State agency 
had appealed the liability determination, the State agency would not be 
required to remit to FNS any at-risk money until any administrative and 
judicial appeals concerning the liability determination that the at-
risk money was based upon had been completed. Appeal of a subsequent 
liability amount would not have eliminated the State's requirement to 
pay the at-risk money when it became due. The appeal of the subsequent 
year's liability amount would determine whether the liability that year 
would be reduced and would affect the establishment of a possible 
additional designation of at-risk money.
    We did not receive any comments on this proposal. However, 
subsequent to the publication of the proposed rule, we have determined 
that a precise reading of the law requires that payment of the at-risk 
money be held in abeyance until any appeal for the subsequent year's 
potential liability is resolved. If the potential liability amount for 
the subsequent year is reduced to zero, the at-risk money would not be 
subject to repayment. If the potential liability amount is not reduced 
to zero, the at-risk money would be required to be repaid. We have 
revised 7 CFR 275.23(i) accordingly.
    If an appeal is not pending, we proposed that interest begin 
accruing beginning October 1 following the September 30 due date for 
payment of any at-risk money. Section 4118 of the FSRA provides that 
interest shall not accrue on the at-risk amount during a reasonable 
period following the resolution of any administrative or judicial 
appeals. Therefore, if an appeal is pending on September 30, we 
proposed that interest will begin to accrue beginning 30 calendar days 
after the completion of the appeals process and notification to the 
State agency of the final amount of the at-risk money determined to be 
required to be repaid. This is consistent with the current regulations 
at 7 CFR 275.23(e)(8) (redesignated as 7 CFR 275.23(j)) for payment of 
interest on QC liability claims. We also proposed that FNS will 
continue to have the authority to recover a State's liability for at-
risk money through offsets to the letter of credit, billing a State 
directly, or using other authorized claims collection mechanisms, in 
accordance with redesignated 7 CFR 275.23(j). The reference to the 
Federal Claims Collection Act of 1966 (Pub. L. 89-508, 80 Stat. 308) 
has been updated to refer to the Debt Collection Improvement Act of 
1996, Public Law 104-134, and the Federal Claims Collection Standards, 
31 CFR Parts 900-904. The Department received no comments on these 
proposals and is adopting them as proposed.

M. Demonstration Projects/Social Security Administration (SSA) 
Processing

    Demonstration project and SSA joint-processed cases (cases 
processed in accordance with 7 CFR 273.2(k) of the regulations) are 
subject to special consideration in terms of the QC review process. 
Demonstration project cases and SSA joint-processed cases are included 
in the sampling universe, sampled, reviewed, and in the calculation of 
completion rates. Demonstration project cases that significantly modify 
SNAP eligibility and benefit calculations and SSA joint-processed are 
excluded from the error rate calculations. The determination of whether 
the modification is significant enough to exclude the demonstration 
project cases is made on a project-by-project basis. SSA joint-
processed cases are excluded under the current regulations in all 
instances. Because of recent demonstration project cases processed by 
SSA separately from the procedures in 7 CFR 273.2(k), questions have 
arisen about how to handle these cases for QC purposes.
    These cases would under normal procedures have been excluded from 
the

[[Page 33434]]

error rate calculations. However, as demonstration projects, they have 
been determined to be more appropriately included in the error rate 
calculations. State agencies have initiated demonstration projects for 
many reasons, including program simplification and error reduction. In 
some instances State agencies want such cases included in the error 
rates because they perceive that the inclusion would result in improved 
error rates. Sections 275.11(g), 7 CFR 275.12(h), 7 CFR 275.13(f), and 
7 CFR 275.23(c)(5) (redesignated in this rule as 7 CFR 275.23(b)(1)) 
provide the procedures for sampling, reviewing, and reporting the 
results of demonstration project cases that significantly modify the 
rules for determining households' eligibility or allotment level and 
SSA processed cases. The language in these sections has been 
interpreted variously by different parties and has been determined to 
be unclear. In order to clarify the procedures and make it clear that 
SSA processed demonstration projects may be included in the error 
rates, we proposed to revise 7 CFR 275.11(g) and redesignated 7 CFR 
275.23(b)(1) to provide that demonstration project cases and SSA 
processed demonstration project cases may be included in error rate 
calculations, as determined on a project-by-project basis by the 
Department. The Department received two comments supporting the 
proposed revisions. We are adopting the revisions as proposed.

N. 120-Day Variance Exclusion (7 CFR 275.12(d)(2)(vii))

    A variance is the incorrect application of policy and/or deviation 
between the information that was used to authorize the sample month 
issuance and the verified information that should have been used to 
calculate the sample month issuance. Paragraph 275.12(d)(2)(vii) 
provides for exclusion of variances resulting from application of new 
regulations or implementing memoranda of Federal law changes. 
Originally the provision applied only to mandatory implementation of 
legislative and regulatory provisions and only during the 120 days of 
the exclusion. Over time, the extent of the variance exclusion has been 
expanded to reflect a change in viewpoint of the intent of this hold 
harmless period. The variance exclusion was expanded to provide that 
the variance exclusion covered errors made during the 120-day period 
until the case was next acted upon. Further, in response to passage of 
the FSRA, the Department applied this variance exclusion to optional 
provisions of the law. Throughout this expansion, numerous questions 
have been raised about what the variance exclusion actually means. We 
proposed to clarify the language in 7 CFR 275.12(d)(2)(vii) to provide 
that all variances that occur during the variance exclusion period that 
stem directly from the provision being implemented are excluded until 
the household's case is next recertified or otherwise acted upon. 
Further, we proposed to modify the provision to indicate that the 
variance exclusion may be authorized on a case-by-case basis in the 
instance of optional legislative or regulatory changes, not just 
mandatory changes. However, we did not propose to provide the exclusion 
for waivers. The legislative provision authorizing the variance 
exclusion is specific in applying it to regulatory implementation. The 
Department's extension of that to implementation of legislative 
provisions is driven by the fact that many legislative provisions are 
effective immediately, prior to any regulation being published. The 
Department received 6 comments on this proposal; 4 commenters supported 
the proposal as written; one commenter wanted the exclusion to apply to 
all optional regulatory and legislative provisions; one commenter 
wanted the exclusion to apply to waivers. We have adopted the provision 
as proposed.

O. Federal Information Exchange (FIX) Errors (7 CFR 275.12(f)(3))

    As discussed above, a variance is the incorrect application of 
policy and/or deviation between the information that was used to 
authorize the sample month issuance and the verified information that 
should have been used to calculate the sample month issuance. Paragraph 
275.12(f)(3) requires that all variances resulting from use by the 
State agency of information received from automated Federal information 
exchange systems (FIX errors) be coded and reported as variances, 
although they are excluded in determining a State agency's error rates. 
Data subject to the FIX exclusion are limited to Federal sources that 
verify income provided by the Federal source providing the data, 
Federal sources that provide the deduction for which the Federal source 
directly bills the household, and the Federal source that defines the 
disability. Information provided by Federal sources that are comprised 
of data provided to the Federal source by other entities is not 
information subject to the FIX variance exclusion. This requirement was 
established for program management purposes in an interim rule 
published November 2, 1988 at 53 FR 44171 and again addressed in the 
final rule published November 23, 1990, at 55 FR 48831. After fifteen 
years of having the requirement in place to report such variance, the 
Department has not found the information to serve any program 
management purpose. While State agencies would still be required to 
correct any identified variances in individual cases, as they are for 
any other identified variance, we feel there is no reason to continue 
to require States to report this information to FNS. There have been 
few reported variances. Further, there has been no identified 
corrective action necessary at a national level during the period this 
requirement has been in place. Therefore, we proposed to remove 7 CFR 
275.12(f)(3). We received 4 comments supporting this proposed removal, 
all supporting the change. We are adopting it as proposed.

P. Technical Changes

    In addition, we proposed in Part 271 Definitions to remove 
definitions no longer used in the QC system and to add the definition 
``National performance measure'' to reflect current QC policy, and we 
also proposed to make technical changes throughout Part 275 to remove 
references to other Federally mandated QC samples, the Worksheet for 
Integrated AFDC, Supplemental Nutrition Assistance Program, and 
Medicaid QC Reviews, and the Integrated Review Schedule. With the 
passage of the Personal Responsibility and Work Opportunity 
Reconciliation Act of 1996, Public Law 104-193, the Aid to Families 
with Dependent Children was eliminated and consequently, the integrated 
QC review system was eliminated. Therefore, we proposed to change 
throughout Part 275 the titles of the Work Sheet and Review Schedule to 
reflect that QC reviews are now Supplemental Nutrition Assistance 
Program only reviews. We also proposed to remove throughout Part 275 
references to integrated QC samples, reviews, and other Federally-
mandated QC systems.
    Throughout the rule, we proposed to remove references to the 
``underissuance error rate'' wherever payment error rate and 
underissuance error rate are used. The definition of payment error rate 
includes both the overissuance error rate and the underissuance error 
rate, making the separate reference to the underissuance error rate 
redundant. This does not mean that FNS will not calculate the 
underissuance error rate.
    With full implementation of electronic benefit transfer systems of 
issuance, benefits are no longer being issued as coupons. Accordingly 
we proposed to remove references to

[[Page 33435]]

coupons in 7 CFR 275.12(c)(2) and 7 CFR 275.13(d).
    In addition, we proposed technical changes throughout Part 275 to 
correct references based on changes proposed to be made in the proposed 
rule. Due to the restructuring of 7 CFR 275.23, many sections required 
renumbering and reference changes throughout 7 CFR 275. These reference 
changes are not discussed in this preamble. Any substantive changes are 
discussed in the preamble.

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


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

IV. Implementation

    The interim rule was effective December 15, 2003. The proposed rule 
provided that the changes in that rule would be effective and be 
implemented 60 days following publication of the final rule in the 
Federal Register. This rule finalizes both the interim rule and the 
proposed rule and is effective July 12, 2010. The provisions in 7 CFR 
271.2, 7 CFR 275.11(e)(2)(i), 7 CFR 275.11(e)(2)(ii), 7 CFR 275.13(b), 
and 7 CFR 275.13(c)(1) concerning negative cases and 7 CFR 273.2(d)(2) 
concerning consequences to households that refuse to cooperate with QC 
reviews must be implemented no later than October 1, 2011. State 
agencies may choose to implement these provisions earlier than October 
1, 2011. A 120-day hold

[[Page 33436]]

harmless is provided for implementation of 7 CFR 273.2(d)(2), 
concerning consequences to households who refuse to cooperate with a QC 
review. If a State agency implements the provision before October 1, 
2011, the 120-day hold harmless period begins on the date of 
implementation. All other provisions must be implemented August 10, 
2010.

List of Subjects

7 CFR Part 271

    Administrative practice and procedure, Supplemental Nutrition 
Assistance Program, Grant programs--social programs.

7 CFR Part 273

    Administrative practice and procedures, Aliens, Claims, 
Supplemental Nutrition Assistance Program, Fraud, Grant programs--
social programs, Penalties, Reporting and recordkeeping requirements, 
Social Security, Students.

7 CFR Part 275

    Administrative practice and procedure, Supplemental Nutrition 
Assistance Program, Reporting, and recordkeeping requirements.

7 CFR Part 277

    Supplemental Nutrition Assistance Program, Government procedure, 
Grant programs--Social programs, Investigations, Records, Reporting and 
recordkeeping requirements.

0
Accordingly, 7 CFR Parts 271, 273, 275, and 277 are amended to read as 
follows:
0
1. The authority citation for Parts 271, 273, 275, and 277 continues to 
read as follows:

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

PART 271--GENERAL INFORMATION AND DEFINITIONS

0
2. In Sec.  271.2:
0
a. Remove the definition ``Base period''.
0
b. Remove the definition ``National standard payment error rate''.
0
c. Add the definition ``National performance measure'' in alphabetical 
order.
0
d. Revise the definition ``Negative case''.
    The addition and revision read as follows:


Sec.  271.2  Definitions.

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

PART 273--CERTIFICATION OF ELIGIBLE HOUSEHOLDS

0
3. In Sec.  273.2, paragraph (d)(2) is amended as follows:
0
a. Revise ``Sec.  275.3(c)(5) or Sec.  275.12(g)(1)(ii),'' to read 
``Sec.  275.3(c)(5) and 275.12(g)(1)(ii) of this chapter,'';
0
b. Third sentence, revise the number ``95'' to read ``125'';
0
c. End of the third sentence revise ``Sec.  273.2(f)(1)(ix)'' to read 
``paragraph (f)(1)(ix) of this section'';
0
d. Last sentence revise ``seven'' to read ``nine'' and revise ``Sec.  
273.2(f)(1)(ix)'' to read ``paragraph (f)(1)(ix) of this section.'';
0
e. Add two new sentences at the end of the paragraph to read as 
follows:


Sec.  273.2  Office operations and application processing.

* * * * *
    (d)* * *
    (2) * * * In the event that one or more household members no longer 
resides with a household terminated for refusal to cooperate, the 
penalty for refusal to cooperate will attach to household of the 
person(s) who refused to cooperate. If the State agency is unable to 
determine which household member(s) refused to cooperate, the State 
agency shall determine the household to which the penalty shall apply.
* * * * *

PART 275--PERFORMANCE REPORTING SYSTEM


Sec.  275.1  [Amended]

0
4. Section 275.1 is amended by removing the paragraph designation from 
paragraph (a), and removing paragraph (b).

0
5. In Sec.  275.3:
0
a. The introductory text of Sec.  275.3 is amended by revising the term 
``scheduling and conduct'' to read ``scheduling and conduction''.
0
b. The introductory text of paragraph (c) is amended by removing the 
words ``and underissuance error rate'' in the first sentence, by 
removing the third sentence, by revising the fourth sentence, and by 
revising ``Sec.  275.23(e)(6)'' in the last sentence to read ``Sec.  
275.23(d)(4)''.
    The revision reads as follows:


Sec.  275.3  Federal monitoring.

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


Sec.  275.4  [Amended]

0
6. In Sec.  275.4, paragraph (c) is amended by revising the words 
``Integrated TANF, Food Stamps and Medicaid Quality Control Reviews'' 
to read ``Supplemental Nutrition Assistance Program'', by revising 
``Integrated Review Schedule'' to read ``Quality Control Review 
Schedule'', and by removing the words ``, and Form FNS-248, Status of 
Sample Selection and Completion''.


Sec.  275.10  [Amended]

0
7. In Sec.  275.10:
0
a. Paragraph (a) is amended by removing the words ``and eligibility for 
enhanced funding'' and the words ``that is not entitled to enhanced 
funding'' in the last sentence.
0
b. Paragraph (b)(4) is amended by revising ``standard'' to read 
``performance measure'' and by removing the words ``and State agency 
eligibility for enhanced funding''.

0
8. In Sec.  275.11:
0
a. Paragraph (a)(1) is amended by removing the last sentence.
0
b. Paragraph (a)(2) introductory text is amended by removing the words 
``integrated sampling,''.
0
c. Paragraph (b)(1)(i) is amended by revising the words ``and 
underissuance error rates'' to read ``rate''.
0
d. Paragraph (e)(2)(i) is revised.
0
e. Paragraph (e)(2)(ii) is revised.
0
f. Paragraph (f)(2) introductory text is revised.
0
g. Paragraph (f)(2)(v) and (f)(2)(vi) are removed and paragraphs 
(f)(2)(vii), (f)(2)(viii), and (f)(2)(ix) are redesignated as 
(f)(2)(v), (f)(2)(vi), and (f)(2)(vii), respectively.
0
h. Paragraph (g) is amended by revising ``Sec.  275.23(e)(6)'' in the 
third sentence to read ``Sec.  275.23(b)(2)''; by removing the fourth 
sentence; and by adding three new sentences at the end of the 
paragraph.
    The revisions and addition read as follows:


Sec.  275.11  Sampling.

* * * * *
    (e) * * *
    (2) * * *
    (i) All actions to deny an application in the sample month except 
those excluded from the universe in paragraph (f)(2) of this section. 
If a household is subject to more than one denial action in a single 
sample month,

[[Page 33437]]

each action shall be listed separately in the sample frame; and
    (ii) All actions to suspend or terminate a household in the sample 
month except those excluded from the universe in paragraph (f)(2) of 
this section. Each action to suspend or terminate a household in the 
sample month shall be listed separately in the sample frame.
* * * * *
    (f) * * *
    (2) Negative cases. The universe for negative cases shall include 
all actions taken to deny, suspend, or terminate a household in the 
sample month except the following:
* * * * *
    (g) * * * FNS shall establish on an individual demonstration 
project basis whether the results of the reviews of active and negative 
demonstration project cases shall be included or excluded from the 
determination of State agencies' error rates as described in Sec.  
275.23(b). Cases processed by SSA in accordance with Sec.  273.2(k) of 
this chapter, except demonstration project cases, shall be excluded 
from the determination of State agencies' error rates. FNS shall 
establish on an individual project basis whether demonstration project 
cases processed by SSA shall be included or excluded from the 
determination of State agencies' error rates.

0
9. In Sec.  275.12:
0
a. Paragraph (a) is amended by adding the words ``of this chapter'' 
after the reference ``273.9'' at the end of the fourth sentence and by 
adding the words ``of this chapter'' after the reference ``273.21'' in 
the sixth sentence.
0
b. Paragraph (b) is amended by removing the words ``Integrated 
Worksheet,'' in the last sentence.
0
c. The introductory text of paragraph (c) is amended by adding the 
words ``of this chapter'' after the reference ``Sec.  272.8'' at the 
end of the second sentence and by removing the words ``Integrated 
Worksheet,'' in the last sentence.
0
d. Paragraph (c)(2) is amended by removing the word ``coupon'' in the 
second sentence.
0
e. The introductory text of paragraph (d) is amended by revising the 
words ``column (5) of the Integrated Worksheet,'' in the last sentence 
to read ``column (4) of the''.
0
f. Paragraph (d)(1) is amended by adding the words ``of this chapter'' 
after the references ``Sec.  273.6(c)'' and ``Sec.  273.7(f)'' in the 
last sentence.
0
g. Paragraph (d)(2)(i) is amended by adding the words ``of this 
chapter'' after the reference ``Sec.  273.2(f)(1)(i)'' in the last 
sentence.
0
h. Paragraph (d)(2)(ii) is amended by adding the words ``of this 
chapter'' after the reference ``Sec.  273.2(i)(4)(i)'' in the first 
sentence.
0
i. Paragraph (d)(2)(iii) is amended by adding the words ``of this 
chapter'' after the reference ``Sec. Sec.  273.12(a) and 273.21(h) and 
(i)'' in the second sentence and after the reference ``Sec. Sec.  
273.12(c) and 273.21(j)'' in the last sentence.
0
j. Paragraph (d)(2)(iv) is amended by adding the words ``of this 
chapter'' after the reference ``Sec.  273.2(f)(3)(i)(B)'' in the first 
sentence and after the reference ``Sec.  273.12(c)'' in the last 
sentence.
0
k. Introductory text of paragraph (d)(2)(vii) is revised.
0
l. Paragraph (d)(3) is amended by adding the words ``of this chapter'' 
after the words ``part 273'' in the second sentence.
0
m. Paragraph (e) is amended by removing the words ``Integrated 
Worksheet,'' in the last sentence.
0
n. The introductory text of paragraph (f) is amended by removing the 
words ``Integrated Review Schedule,'' in the last sentence and 
paragraph (f)(3) is removed.
0
o. The introductory text of paragraph (g) is amended by removing the 
words ``Integrated Review Schedule,'' in the last sentence.
0
p. Paragraph (g)(1)(ii) is amended by removing the word ``may'' in the 
second sentence and adding in its place the word ``must''.
0
q. Paragraph (g)(2)(iv) is amended by adding the words ``of this 
chapter'' after the reference ``Sec.  273.17''.
0
r. Paragraph (h) is amended by adding the words ``of this chapter'' 
after the reference ``Sec.  273.2(k)(2)(ii)'' in the last sentence.
    The revision reads as follows:


Sec.  275.12  Review of active cases.

* * * * *
    (d) * * *
    (2) * * *
    (vii) Subject to the limitations provided in paragraphs 
(d)(2)(vii)(A) through (d)(2)(vii)(F) of this section, any variance 
resulting from application of a new Program regulation or implementing 
memorandum of a mandatory or optional change in Federal law that occurs 
during the first 120 days from the required implementation date. The 
variance exclusion shall apply to any action taken on a case directly 
related to implementation of a covered provision during the 120-day 
exclusionary period until the case is required to be recertified or 
acted upon for some other reason.
* * * * *

0
10. In Sec.  275.13 is amended by revising paragraphs (a), (b), and 
(c)(1), and paragraph (d) is amended by removing the word ``coupon'' in 
the first sentence.
    The revisions read as follows:


Sec.  275.13  Review of negative cases.

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

[[Page 33438]]

suspend, or terminate the case for the specific reason given for the 
action, the negative case shall be considered invalid.
* * * * *


Sec.  275.14  [Amended]

0
11. In Sec.  275.14 is amended in paragraph (c) by revising the words 
``Integrated Review Worksheet, Form FNS-380,'' in the first sentence to 
read ``Form FNS-380'' and in paragraph (d) by revising the words 
``Integrated Review Schedule,'' in the first sentence to read 
``Integrated Review Worksheet,''.

0
12. Section 275.16 is amended by removing paragraph (b)(2) and 
redesignating paragraphs (b)(3), (b)(4), (b)(5), and (b)(6) as (b)(2), 
(b)(3), (b)(4), and (b)(5), respectively; and newly redesignated 
paragraph (b)(5) is revised to read as follows:


Sec.  275.16  Corrective action planning.

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

0
13. In Sec.  275.21:
0
a. The introductory text of paragraph (b) is amended by removing the 
words ``Integrated Review Schedule,'' in the second sentence.
0
b. Paragraph (b)(2) is revised.
0
c. Paragraph (b)(4) is amended by revising the number ``95'' in the 
first sentence to read ``115'' and adding a new sentence after the 
first sentence.
0
d. Paragraph (c) is revised.
0
e. Paragraph (d) is removed and paragraph (e) is redesignated as 
paragraph (d).
0
f. Newly redesignated paragraph (d) is revised.
    The revisions and additions read as follows:


Sec.  275.21  Quality control review reports.

* * * * *
    (b) * * *
    (2) The State agency shall have at least 115 days from the end of 
the sample month to dispose of and report the findings of all cases 
selected in a sample month. FNS may grant additional time as warranted 
upon request by a State agency for cause shown to complete and dispose 
of individual cases.
* * * * *
    (4) * * * If FNS extends the time frames in paragraph (b)(2) of 
this section, this date will be extended accordingly. * * *
    (c) Monthly status. The State agency shall report in a manner 
directed by the regional office the monthly progress of sample 
selection and completion within 125 days after the end of the sample 
month. Each report shall reflect sampling and review activity for a 
given sample month. If FNS extends the time frames in paragraph (b)(2) 
of this section, this date will be extended accordingly.
    (d) Demonstration projects/SSA processing. The State agency shall 
identify the monthly status of active and negative demonstration 
project/SSA processed cases (i.e., those cases described in Sec.  
275.11(g)) in accordance with paragraph (c) of this section.

0
14. Section 275.23 is revised to read as follows:


Sec.  275.23  Determination of State agency program performance.

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

[[Page 33439]]

to participating households in the full quality control sample 
according to the State agency's findings. In stratified sample designs 
y2, X2, and x2 are weighted averages 
and b2 is a combined regression coefficient in which stratum 
weights sum to 1.0 and are proportional to the estimated stratum 
caseloads subject to review.
    (C) The regressed error rates are given by r1' = 
y1'/u, yielding the regressed overpayment error rate, and 
r2' = y2'/u, yielding the regressed underpayment 
error rate, where u is the average value of allotments issued to 
participating households in the State agency sample.
    (D) After application of the adjustment provisions of paragraph 
(b)(2)(iii) of this section, the adjusted regressed payment error rate 
shall be calculated to yield the State agency's payment error rate. The 
adjusted regressed payment error rate is given by r1'' + 
r2''.
    (ii) If FNS determines that a State agency has sampled incorrectly, 
estimated improperly, or has deficiencies in its QC data management 
system, FNS will correct the State agency's payment and negative case 
error rates based upon a correction to that aspect of the State 
agency's QC system which is deficient. If FNS cannot accurately correct 
the State agency's deficiency, FNS will assign the State agency a 
payment error rate or negative case error rate based upon the best 
information available. After consultation with the State agency, the 
assigned payment error rate will then be used in the liability 
determination. After consultation with the State agency, the assigned 
negative case error rate will be the official State negative case error 
rate for any purpose. State agencies shall have the right to appeal 
assessment of an error rate in this situation in accordance with the 
procedures of Part 283 of this chapter.
    (iii) Should a State agency fail to complete 98 percent of its 
required sample size, FNS shall adjust the State agency's regressed 
error rates using the following equations:
    (A) r1'' = r1' + 2(1-C)S1, where 
r1'' is the adjusted regressed overpayment error rate, 
r1' is the regressed overpayment error rate computed from 
the formula in paragraph (b)(2)(i)(C) of this section, C is the State 
agency's rate of completion of its required sample size expressed as a 
decimal value, and S1 is the standard error of the State 
agency sample overpayment error rate. If a State agency completes all 
of its required sample size, then r1'' = r1'.
    (B) r2'' = r2' + 2(1-C)S2,where 
r2'' is the adjusted regressed underpayment error rate, 
r2' is the regressed underpayment error rate computed from 
the formula in paragraph (b)(2)(i)(C) of this section, C is the State 
agency's rate of completion of its required sample size expressed as a 
decimal value, and S2 is the standard error of the State 
agency sample underpayment error rate. If a State agency completes all 
of its required sample size, then r2'' = r2'.
    (c) FNS Time frames for completing case review process, 
arbitration, and issuing error rates. The case review process and the 
arbitration of all difference cases shall be completed by May 31 
following the end of the fiscal year. FNS shall determine and announce 
the national average payment and negative case error rates for the 
fiscal year by June 30 following the end of the fiscal year. At the 
same time FNS shall notify all State agencies of their individual 
payment and negative case error rates and payment error rate 
liabilities, if any. FNS shall provide a copy of each State agency's 
notice of potential liability to its respective chief executive officer 
and legislature. FNS shall initiate collection action on each claim for 
such liabilities before the end of the fiscal year following the 
reporting period in which the claim arose unless an appeal relating to 
the claim is pending. Such appeals include administrative and judicial 
appeals pursuant to Section 14 of the Food and Nutrition Act. While the 
amount of a State's liability may be recovered through offsets to their 
letter of credit as identified in Sec.  277.16(c) of this chapter, FNS 
shall also have the option of billing a State directly or using other 
claims collection mechanisms authorized under the Debt Collection 
Improvement Act of 1996 (Pub. L. 104-134) and the Federal Claims 
Collection Standards (31 CFR Parts 900-904), depending upon the amount 
of the State's liability. FNS is not bound by the time frames 
referenced in paragraph (c) of this section in cases where a State 
fails to submit QC data expeditiously to FNS and FNS determines that, 
as a result, it is unable to calculate the State's payment error rate 
and payment error rate liability within the prescribed time frame.
    (d) State agencies' liabilities for payment error rates. At the end 
of each fiscal year, each State agency's payment error rate over the 
entire fiscal year will be computed and evaluated to determine whether 
the payment error rate goal (national performance measure) established 
in paragraph (d)(1) of this section has been met. Each State agency 
that fails to achieve its payment error rate goal during a fiscal year 
shall be liable as specified in the paragraph (d)(2) of this section.
    (1) National performance measure. FNS shall announce a national 
performance measure not later than June 30 after the end of the fiscal 
year. The national performance measure is the sum of the products of 
each State agency's error rate multiplied by that State agency's 
proportion of the total value of national allotments issued for the 
fiscal year using the most recent issuance data available at the time 
the State agency is notified of its payment error rate. Once announced, 
the national performance measure for a given fiscal year will not be 
subject to administrative or judicial appeal.
    (2) Liability. For fiscal year 2003 and subsequent years, liability 
for payment shall be established whenever there is a 95 percent 
statistical probability that, for the second or subsequent consecutive 
fiscal year, a State agency's payment error rate exceeds 105 percent of 
the national performance measure. The amount of the liability shall be 
equal to the product of the value of all allotments issued by the State 
agency in the second (or subsequent consecutive) fiscal year; 
multiplied by the difference between the State agency's payment error 
rate and 6 percent; multiplied by 10 percent.
    (3) Right to appeal payment error rate liability. Determination of 
a State agency's payment error rate or whether that payment error rate 
exceeds 105 percent of the national performance measure shall be 
subject to administrative or judicial review only if a liability amount 
is established for that fiscal year. Procedures for good cause appeals 
of excessive payment error rates are addressed in paragraph (f) of this 
section. The established national performance measure is not subject to 
administrative or judicial appeal, nor is any prior fiscal year payment 
error rate subject to appeal as part of the appeal of a later fiscal 
year's liability amount. However, State agencies may address matters 
related to good cause in an immediately prior fiscal year that impacted 
the fiscal year for which a liability amount has been established. The 
State agency will need to address how year 2 was impacted by the 
event(s) in the prior year.
    (4) Relationship to warning process and negligence. (i) States' 
liability for payment error rates as determined above in paragraphs 
(d)(1) through (d)(3) of this section are not subject to the warning 
process of Sec.  276.4(d) of this chapter.
    (ii) FNS shall not determine negligence (as described in Sec.  
276.3 of this chapter) based on the overall payment error rate for 
issuances to ineligible households and overissuances

[[Page 33440]]

to eligible households in a State or political subdivision thereof. FNS 
may only establish a claim under Sec.  276.3 of this chapter for dollar 
losses from failure to comply, due to negligence on the part of the 
State agency (as defined in Sec.  276.3 of this chapter), with specific 
certification requirements. Thus, FNS will not use the result of 
States' QC reviews to determine negligence.
    (iii) Whenever a State is assessed a liability amount for an 
excessive payment error rate, the State shall have the right to request 
an appeal in accordance with procedures set forth in part 283 of this 
chapter. While FNS may determine a State to be liable for dollar loss 
under the provisions of this section and the negligence provisions of 
Sec.  276.3 of this chapter for the same period of time, FNS shall not 
bill a State for the same dollar loss under both provisions. If FNS 
finds a State liable for dollar loss under both the QC liability system 
and the negligence provisions, FNS shall adjust the billings to ensure 
that two claims are not made against the State for the same dollar 
loss.
    (e) Liability amount determinations. (1) FNS shall provide for each 
State agency whose payment error rate subjects it to a liability amount 
the following determinations, each expressed as a percentage of the 
total liability amount. FNS shall:
    (i) Waive all or a portion of the liability;
    (ii) Require the State agency to invest up to 50 percent of the 
liability in activities to improve program administration (new 
investment money shall not be matched by Federal funds);
    (iii) Designate up to 50 percent of the liability as ``at-risk'' 
for repayment if a liability is established based on the State agency's 
payment error rate for the subsequent fiscal year; or
    (iv) Choose any combination of these options.
    (2) Once FNS determines the percentages in accordance with 
paragraphs (e)(1)(i) through (e)(1)(iv) of this section, the amount 
assigned as at-risk is not subject to settlement negotiation between 
FNS and the State agency and may not be reduced unless an appeal 
decision revises the total dollar liability. FNS and the State agency 
shall settle any waiver percentage amount or new investment percentage 
amount before the end of the fiscal year in which the liability amount 
is determined. The determination of percentages for waiver, new 
investment, and/or at-risk amounts by the Department is not appealable. 
Likewise, a settlement of the waiver and new investment amounts cannot 
be appealed.
    (f) Good cause. When a State agency with otherwise effective 
administration exceeds the tolerance level for payment errors as 
described in this section, the State agency may seek relief from 
liability claims that would otherwise be levied under this section on 
the basis that the State agency had good cause for not achieving the 
payment error rate tolerance. State agencies desiring such relief must 
file an appeal with the Department's Administrative Law Judge (ALJ) in 
accordance with the procedures established under part 283 of this 
chapter. Paragraphs (f)(1) through (f)(5) of this section describe the 
unusual events that are considered to have a potential for disrupting 
program operations and increasing error rates to an extent that relief 
from a resulting liability amount or increased liability amount is 
appropriate. The occurrence of an event(s) does not automatically 
result in a determination of good cause for an error rate in excess of 
the national performance measure. The State agency must demonstrate 
that the event had an adverse and uncontrollable impact on program 
operations during the relevant period, and the event caused an 
uncontrollable increase in the error rate. Good cause relief will only 
be considered for that portion of the error rate/liability amount 
attributable to the unusual event. The following are unusual events 
which State agencies may use as a basis for requesting good cause 
relief and specific information that must be submitted to justify such 
requests for relief:
    (1) Natural disasters and civil disorders. Natural disasters such 
as those under the authority of The Disaster Relief and Emergency 
Assistance Amendments of 1988 (Pub. L. 100-707), which amended The 
Robert T. Stafford Disaster Relief and Emergency Assistance Act (Pub. 
L. 93-288), or civil disorders that adversely affect program 
operations.
    (i) When submitting a request for good cause relief based on this 
example, the State agency shall provide the following information:
    (A) The nature of the disaster(s) (e.g., a tornado, hurricane, 
earthquake, flood, etc.) or civil disorder(s) and evidence that the 
President has declared a disaster;
    (B) The date(s) of the occurrence;
    (C) The date(s) after the occurrence when program operations were 
affected;
    (D) The geographic extent of the occurrence (i.e., the county or 
counties where the disaster occurred);
    (E) The proportion of the Supplemental Nutrition Assistance Program 
caseload whose management was affected;
    (F) The reason(s) why the State agency was unable to control the 
effects of the disaster on program administration and errors.
    (G) The identification and explanation of the uncontrollable nature 
of errors caused by the event (types of errors, geographic location of 
the errors, time period during which the errors occurred, etc.).
    (H) The percentage of the payment error rate that resulted from the 
occurrence and how this figure was derived; and
    (I) The degree to which the payment error rate exceeded the 
national performance measure in the subject fiscal year.
    (ii) (A) The following criteria and methodology will be used to 
assess and evaluate good cause in conjunction with the appeals process, 
and to determine that portion of the error rate/liability amount 
attributable to the uncontrollable effects of a disaster or civil 
disorder:
    (1) Geographical impact of the disaster;
    (2) State efforts to control impact on program operations;
    (3) The proportion of Supplemental Nutrition Assistance Program 
caseload affected; and/or
    (4) The duration of the disaster and its impact on program 
operations.
    (B) Adjustments for these factors may result in a waiver of all, 
part, or none of the liability amount for the applicable period. As 
appropriate, the waiver amount will be adjusted to reflect States' 
otherwise effective administration of the program based upon the degree 
to which the error rate exceeds the national performance measure. For 
example, a reduction in the waiver amount may be made when a State 
agency's recent error rate history indicates that even absent the 
events described the State agency would have exceeded the national 
performance measure in the review period.
    (iii) If a State agency has provided insufficient information to 
determine a waiver amount for the uncontrollable effects of a natural 
disaster or civil disorder using factual analysis, the waiver amount 
shall be evaluated using the following formula and methodology which 
measures both the duration and intensity of the event. Duration will be 
measured by the number of months the event had an adverse impact on 
program operations. Intensity will be a proportional measurement of the 
issuances for the counties affected to the State's total issuance. This 
ratio will be determined using issuance figures for the first full 
month immediately preceding the disaster. This figure will

[[Page 33441]]

not include issuances made to households participating under disaster 
certification authorized by FNS and already excluded from the error 
rate calculations under Sec.  275.12(g)(2)(vi). The counties considered 
affected will include counties where the disaster/civil disorder 
occurred, and any other county that the State agency can demonstrate 
had program operations adversely impacted due to the event (such as a 
county that diverted significant numbers of Supplemental Nutrition 
Assistance Program certification or administrative staff). The amount 
of the waiver of liability will be determined using the linear equation 
W = Ia/Ib x [M/12 or Mp/18] x L, where Ia is the issuance for the first 
full month immediately preceding the unusual event for the county 
affected; Ib is the State's total issuance for the first full month 
immediately preceding the unusual event; M/12 is the number of months 
in the subject fiscal year that the unusual event had an adverse impact 
on program operations; Mp/18 is the number of months in the last half 
(April through September) of the prior fiscal year that the unusual 
event had an adverse impact on program operations; L is the total 
amount of the liability for the fiscal year. Mathematically this 
formula could result in a waiver of more than 100 percent of the 
liability amount; however, no more than 100 percent of a State's 
liability amount will be waived for any one fiscal year. Under this 
approach, unless the State agency can demonstrate a direct 
uncontrollable impact on the error rate, the effects of disasters or 
civil disorders that ended prior to the second half of the prior fiscal 
year will not be considered.
    (2) Strikes. Strikes by State agency staff necessary to determine 
Supplemental Nutrition Assistance Program eligibility and process case 
changes.
    (i) When submitting a request for good cause relief based on this 
example, the State agency shall provide the following information:
    (A) Which workers (i.e., eligibility workers, clerks, data input 
staff, etc.) and how many (number and percentage of total staff) were 
on strike or refused to cross picket lines;
    (B) The date(s) and nature of the strike (i.e., the issues 
surrounding the strike);
    (C) The date(s) after the occurrence when program operations were 
affected;
    (D) The geographic extent of the strike (i.e., the county or 
counties where the strike occurred);
    (E) The proportion of the Supplemental Nutrition Assistance Program 
caseload whose management was affected;
    (F) The reason(s) why the State agency was unable to control the 
effects of the strike on program administration and errors;
    (G) Identification and explanation of the uncontrollable nature of 
errors caused by the event (types of errors, geographic location of the 
errors, time period during which the errors occurred, etc.);
    (H) The percentage of the payment error rate that resulted from the 
strike and how this figure was derived; and
    (I) The degree to which the payment error rate exceeded the 
national performance measure in the subject fiscal year.
    (ii) (A) The following criteria shall be used to assess, evaluate 
and respond to claims by the State agency for a good cause waiver of a 
liability amount in conjunction with the appeals process, and to 
determine that portion of the error rate/liability amount attributable 
to the uncontrollable effects of the strike:
    (1) Geographical impact of the strike;
    (2) State efforts to control impact on program operations;
    (3) The proportion of Supplemental Nutrition Assistance Program 
caseload affected; and/or
    (4) The duration of the strike and its impact on program 
operations.
    (B) Adjustments for these factors may result in a waiver of all, 
part, or none of the liability amount for the applicable period. For 
example, the amount of the waiver might be reduced for a strike that 
was limited to a small area of the State. As appropriate, the waiver 
amount will be adjusted to reflect States' otherwise effective 
administration of the program based upon the degree to which the error 
rate exceeded the national performance measure.
    (iii) If a State agency has provided insufficient information to 
determine a waiver amount for the uncontrollable effects of a strike 
using factual analysis, a waiver amount shall be evaluated by using the 
formula described in paragraph (f)(1) of this section. Under this 
approach, unless the State agency can demonstrate a direct 
uncontrollable impact on the error rate, the effects of strikes that 
ended prior to the second half of the prior fiscal year will not be 
considered.
    (3) Caseload growth. A significant growth in Supplemental Nutrition 
Assistance Program caseload in a State prior to or during a fiscal 
year, such as a 15 percent growth in caseload. Caseload growth which 
historically increases during certain periods of the year will not be 
considered unusual or beyond the State agency's control.
    (i) When submitting a request for good cause relief based on this 
example, the State agency shall provide the following information:
    (A) The amount of growth (both actual and percentage);
    (B) The time the growth occurred (what month(s)/year);
    (C) The date(s) after the occurrence when program operations were 
affected;
    (D) The geographic extent of the caseload growth (i.e. Statewide or 
in which particular counties);
    (E) The impact of caseload growth;
    (F) The reason(s) why the State agency was unable to control the 
effects of caseload growth on program administration and errors;
    (G) The percentage of the payment error rate that resulted from the 
caseload growth and how this figure was derived; and
    (H) The degree to which the error rate exceeded the national 
performance measure in the subject fiscal year.
    (ii) (A) The following criteria and methodology shall be used to 
assess and evaluate good cause in conjunction with the appeals process, 
and to determine that portion of the error rate/liability amount 
attributable to the uncontrollable effects of unusual caseload growth:
    (1) Geographical impact of the caseload growth;
    (2) State efforts to control impact on program operations;
    (3) The proportion of Supplemental Nutrition Assistance Program 
caseload affected; and/or
    (4) The duration of the caseload growth and its impact on program 
operations.
    (B) Adjustments for these factors may result in a waiver of all, 
part, or none of the liability amount for the applicable period. As 
appropriate, the waiver amount will be adjusted to reflect States' 
otherwise effective administration of the program based upon the degree 
to which the error rate exceeded the national performance measure. For 
example, a reduction in the waiver amount may be made when a State 
agency's recent error rate history indicates that even absent the 
events described the State agency would have exceeded the national 
performance measure in the review period. Under this approach, unless 
the State agency can demonstrate a direct uncontrollable impact on the 
error rate, the effects of caseload growth that ended prior to the 
second half of the prior fiscal year will not be considered.
    (iii) If the State agency has provided insufficient information to 
determine a waiver amount for the uncontrollable effects of caseload 
growth using factual

[[Page 33442]]

analysis, the waiver amount shall be evaluated using the following 
five-step calculation:
    (A) Step 1--determine the average number of households certified to 
participate Statewide in the Supplemental Nutrition Assistance Program 
for the base period consisting of twelve consecutive months ending with 
March of the prior fiscal year;
    (B) Step 2--determine the percentage of increase in caseload growth 
from the base period (Step 1) using the average number of households 
certified to participate Statewide in the Supplemental Nutrition 
Assistance Program for any twelve consecutive months in the period 
beginning with April of the prior fiscal year and ending with June of 
the current year;
    (C) Step 3--determine the percentage the error rate for the subject 
fiscal year, as calculated under paragraph (b)(2) of this section, 
exceeds the national performance measure determined in accordance with 
paragraph (d)(1) of this section;
    (D) Step 4--divide the percentage of caseload growth increase 
arrived at in step 2 by the percentage the error rate for the subject 
fiscal year exceeds the national performance measure as determined in 
step 3; and
    (E) Step 5--multiply the quotient arrived at in step 4 by the 
liability amount for the current fiscal year to determine the amount of 
waiver of liability.
    (iv) Under this methodology, caseload growth of less than 15% and/
or occurring in the last three months of the subject fiscal year will 
not be considered. Mathematically this formula could result in a waiver 
of more than 100 percent of the liability amount; however, no more than 
100 percent of a State's liability amount will be waived for any one 
fiscal year.
    (4) Program changes. A change in the Supplemental Nutrition 
Assistance Program or other Federal or State program that has a 
substantial adverse impact on the management of the Supplemental 
Nutrition Assistance Program of a State. Requests for relief from 
errors caused by the uncontrollable effects of unusual program changes 
other than those variances already excluded by Sec.  275.12(d)(2)(vii) 
will be considered to the extent the program change is not common to 
all States.
    (i) When submitting a request for good cause relief based on 
unusual changes in the Supplemental Nutrition Assistance Program or 
other Federal or State programs, the State agency shall provide the 
following information:
    (A) The type of changes(s) that occurred;
    (B) When the change(s) occurred;
    (C) The nature of the adverse effect of the changes on program 
operations and the State agency's efforts to mitigate these effects;
    (D) Reason(s) the State agency was unable to adequately handle the 
change(s);
    (E) Identification and explanation of the uncontrollable errors 
caused by the changes (types of errors, geographic location of the 
errors, time period during which the errors occurred, etc.);
    (F) The percentage of the payment error rate that resulted from the 
adverse impact of the change(s) and how this figure was derived; and
    (G) The degree to which the payment error rate exceeded the 
national performance measure in the subject fiscal year.
    (ii) (A) The following criteria will be used to assess and evaluate 
good cause in conjunction with the appeals process and to determine 
that portion of the error rate/liability amount attributable to the 
uncontrollable effects of unusual changes in the Supplemental Nutrition 
Assistance Program or other Federal and State programs:
    (1) State efforts to control impact on program operations;
    (2) The proportion of Supplemental Nutrition Assistance Program 
caseload affected; and/or
    (3) The duration of the unusual changes in the Supplemental 
Nutrition Assistance Program or other Federal and State programs and 
the impact on program operations.
    (B) Adjustments for these factors may result in a waiver of all, 
part, or none of the liability amount for the applicable period. As 
appropriate, the waiver amount will be adjusted to reflect States' 
otherwise effective administration of the program based upon the degree 
to which the error rate exceeded the national performance measure.
    (5) Significant circumstances beyond the control of a State agency. 
Requests for relief from errors caused by the uncontrollable effect of 
a significant circumstance other than those specifically set forth in 
paragraphs (f)(1) through (f)(4) of this section will be considered to 
the extent that the circumstance is not common to all States, such as a 
fire in a certification office.
    (i) The State agency shall provide the following information when 
submitting a request for good cause relief based on significant 
circumstances, the State agency shall provide the following 
information:
    (A) The significant circumstances that the State agency believes 
uncontrollably and adversely affected the payment error rate for the 
fiscal year in question;
    (B) Why the State agency had no control over the significant 
circumstances;
    (C) How the significant circumstances had an uncontrollable and 
adverse impact on the State agency's error rate;
    (D) Where the significant circumstances existed (i.e. Statewide or 
in particular counties);
    (E) When the significant circumstances existed (provide specific 
dates whenever possible);
    (F) The proportion of the Supplemental Nutrition Assistance Program 
caseload whose management was affected;
    (G) Identification and explanation of the uncontrollable errors 
caused by the event (types of errors, geographic location of the 
errors, time period during which the errors occurred, etc.);
    (H) The percentage of the payment error rate that was caused by the 
significant circumstances and how this figure was derived; and
    (I) The degree to which the payment error rate exceeded the 
national performance measure in the subject fiscal year.
    (ii) (A) The following criteria shall be used to assess and 
evaluate good cause in conjunction with the appeals process, and to 
determine that portion of the error rate/liability amount attributable 
to the uncontrollable effects of a significant circumstance beyond the 
control of the State agency, other than those set forth in paragraph 
(f)(5) of this section:
    (1) Geographical impact of the significant circumstances;
    (2) State efforts to control impact on program operations;
    (3) The proportion of Supplemental Nutrition Assistance Program 
caseload affected; and/or
    (4) The duration of the significant circumstances and the impact on 
program operations.
    (B) Adjustments for these factors may result in a waiver of all, 
part, or none of the liability amount for the applicable period. As 
appropriate, the waiver amount will be adjusted to reflect States' 
otherwise effective administration of the program based upon the degree 
to which the error rate exceeded the national performance measure.
    (6) Adjustments. When good cause is found under the criteria in 
paragraphs (f)(1) through (f)(5) of this section, the waiver amount may 
be adjusted to reflect States' otherwise effective administration of 
the program based upon the degree to which the error rate

[[Page 33443]]

exceeds the national performance measure.
    (7) Evidence. When submitting a request to the ALJ for good cause 
relief, the State agency shall include such data and documentation as 
is necessary to support and verify the information submitted in 
accordance with the requirements of paragraph (f) of this section so as 
to fully explain how a particular significant circumstance(s) 
uncontrollably affected its payment error rate.
    (8) Finality. The initial decision of the ALJ concerning good cause 
shall constitute the final determination for purposes of judicial 
review as established under the provisions of Sec.  283.17 and Sec.  
283.20 of this chapter.
    (g) Results of appeals on liability amount determinations. (1) If a 
State agency wholly prevails on appeal and, consequently, its liability 
amount is reduced to $0 through the appeal, and if the State agency 
began new investment activities prior to the appeal determination, FNS 
shall pay to the State agency an amount equal to 50 percent of the new 
investment amount that was expended by the State agency.
    (2) If FNS wholly prevails on a State agency's appeal, FNS will 
require the State agency to invest all or a portion of the amount 
designated for new investment to be invested or to be paid to the 
Federal government.
    (3) If neither the State agency nor FNS wholly prevails on a State 
agency's appeal, FNS shall apply the original waiver, new investment, 
and at-risk percentage determinations to the liability amount 
established through the appeal. If the State agency began new 
investment prior to the appeal decision and has already expended more 
than the amount produced for new investment as a result of the appeal 
decision, the Department will match the amount of funds expended in 
excess of the amount now required by the Department for new investment.
    (h) New investment requirements. Once FNS has determined the 
percentage of a liability amount to be invested or following an appeal 
and recalculation by FNS of an amount to be invested, a State agency 
shall submit a plan of offsetting investments in program administration 
activities intended to reduce error rates.
    (1) The State agency's investment plan activity or activities must 
meet the following conditions to be accepted by the Department:
    (i) The activity or activities must be directly related to error 
reduction in the ongoing program, with specific objectives regarding 
the amount of error reduction, and type of errors that will be reduced. 
The costs of demonstration, research, or evaluation projects under 
sections 17(a) through (c) of the Act will not be accepted. The State 
agency may direct the investment plan to a specific project area or 
implement the plan on a Statewide basis. In addition, the Department 
will allow an investment plan to be tested in a limited area, as a 
pilot project, if the Department determines it to be appropriate. A 
request by the State agency for a waiver of existing rules will not be 
acceptable as a component of the investment plan. The State agency must 
submit any waiver request through the normal channels for approval and 
receive approval of the request prior to including the waiver in the 
investment plan. Waivers that have been approved for the State agency's 
use in the ongoing operation of the program may continue to be used.
    (ii) The program administration activity must represent a new or 
increased expenditure. The proposed activity must also represent an 
addition to the minimum program administration required by law for 
State agency administration including corrective action. Therefore, 
basic training of eligibility workers or a continuing correction action 
from a Corrective Action Plan shall not be acceptable. The State agency 
may include a previous initiative in its plan; however, the State 
agency would have to demonstrate that the initiative is entirely funded 
by State money, represents an increase in spending and there are no 
remaining Federal funds earmarked for the activity.
    (iii) Investment activities must be funded in full by the State 
agency, without any matching Federal funds until the entire amount 
agreed to is spent. Amounts spent in excess of the settlement amount 
included in the plan may be subject to Federal matching funds.
    (2) The request shall include:
    (i) A statement of the amount of money that is a quality control 
liability claim that is to be offset by investment in program 
improvements;
    (ii) A detailed description of the planned program administration 
activity;
    (iii) Planned expenditures, including time schedule and anticipated 
cost breakdown;
    (iv) Anticipated impact of the activity, identifying the types of 
error expected to be affected;
    (v) Documentation that the funds would not replace expenditures 
already earmarked for an ongoing effort; and
    (vi) A statement that the expenditures are not simply a 
reallocation of resources.
    (3) A State agency may choose to begin expending State funds for 
any amount of the liability designated as ``new investment'' in the 
liability amount determination prior to any appeal. FNS reserves the 
right to approve whether the expenditure meets the requirements for new 
investment. Expenditures made prior to approval by the Department will 
be subject to approval before they are accepted. Once a new investment 
plan is approved, the State agency shall submit plan modifications to 
the Department for approval, prior to implementation.
    (4) Each State agency which has part of a liability designated for 
new investment shall submit periodic documented reports according to a 
schedule in its approved investment plan. At a minimum, these reports 
shall contain:
    (i) A detailed description of the expenditure of funds, including 
the source of funds and the actual goods and services purchased or 
rented with the funds;
    (ii) A detailed description of the actual activity; and
    (iii) An explanation of the activity's effect on errors, including 
an explanation of any discrepancy between the planned effect and the 
actual effect.
    (5) Any funds that the State agency's reports do not document as 
spent as specified in the new investment plan may be recovered by the 
Department. Before the funds are withdrawn, the State agency will be 
provided an opportunity to provide the missing documentation.
    (6) If the funds are recovered, the Department shall charge 
interest on the funds not spent according to the plan in accordance 
with paragraph (j) of this section.
    (i) At-risk money. If appropriate, FNS shall initiate collection 
action on each claim for such liabilities before the end of the fiscal 
year following the reporting period in which the claim arose unless an 
administrative appeal relating to the claim is pending. Such appeals 
include administrative and judicial appeals pursuant to Section 14 of 
the Food and Nutrition Act. If a State agency, in the subsequent year, 
is again subject to a liability amount based on the national 
performance measure and the error rate issued to the State agency, the 
State agency will be required to remit to FNS any money designated as 
at-risk for the prior fiscal year in accordance with either the 
original liability amount or a revised liability amount arising from an 
appeal, as appropriate, within 30 days

[[Page 33444]]

of the date of the final billing. The requirement that the State agency 
pay the at-risk amount for the prior year will be held in abeyance 
pending the outcome of any pending appeal for the subsequent liability. 
If the subsequent year's liability is reduced to $0, the at-risk money 
from for the prior fiscal year will not be required to be paid. If the 
subsequent year's liability is not reduced to $0, the State agency will 
be required to pay the at-risk money within 30 days of the date of the 
appeal decision. The amount of a State's at-risk money may be recovered 
through offsets to the State agency's letter of credit as identified in 
Sec.  277.16(c) of this chapter. FNS shall also have the option of 
billing a State directly or using other claims collection mechanisms 
authorized under the Debt Collection Improvement Act of 1996 (Pub. L. 
104-134) and the Federal Claims Collection Standards (31 CFR Parts 900-
904), depending upon the amount of the State's liability.
    (j) Interest charges. (1) To the extent that a State agency does 
not pay an at-risk amount within 30 days from the date on which the 
bill for collection is received by the State agency, the State agency 
shall be liable for interest on any unpaid portion of such claim 
accruing from the date on which the bill for collection was received by 
the State agency. If the State agency is notified that it failed to 
invest funds in accordance with an approved new investment plan, the 
State agency has 30 days from the date of receipt of notification of 
non-expenditure of new investment funds to pay the Department the 
amount of funds not so invested. If the State agency does not pay the 
Department the amount of funds not invested within 30 days from the 
date of receipt of the notification of non-expenditure, the State 
agency shall be liable for interest on the non-expended funds from the 
date on which the notification was received by the State agency. If the 
State agency agrees to pay the claim through reduction in Federal 
financial participation for administrative costs, this agreement shall 
be considered to be paying the claim. If the State agency appeals such 
claim (in whole or in part), the interest on any unpaid portion of the 
claim shall accrue from the date of the decision on the administrative 
appeal, or from a date that is one year after the date the bill is 
received, whichever is earlier, until the date the unpaid portion of 
the payment is received.
    (2) A State agency may choose to pay the amount designated as at-
risk prior to resolution of any appeals. If the State agency pays such 
claim (in whole or in part) and the claim is subsequently overturned or 
adjusted through administrative or judicial appeal, any amounts paid by 
the State agency above what is actually due shall be promptly returned 
with interest, accruing from the date the payment was received until 
the date the payment is returned.
    (3) Any interest assessed under paragraph (j)(1) of this section 
shall be computed at a rate determined by the Secretary based on the 
average of the bond equivalent of the weekly 90-day Treasury bill 
auction rates during the period such interest accrues. The bond 
equivalent is the discount rate (i.e., the price the bond is actually 
sold for as opposed to its face value) determined by the weekly auction 
(i.e., the difference between the discount rate and face value) 
converted to an annualized figure. The Secretary shall use the 
investment rate (i.e., the rate for 365 days) compounded in simple 
interest for the period for which the claim is not paid. Interest 
billings shall be made quarterly with the initial billing accruing from 
the date the interest is first due. Because the discount rate for 
Treasury bills is issued weekly, the interest rate for State agency 
claims shall be averaged for the appropriate weeks.

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


Sec.  277.4  [Amended]

0
15. In Sec.  277.4:
0
a. Paragraph (b) is amended by removing paragraphs (b)(1), (b)(4), 
(b)(5), and (b)(6) and by redesignating paragraphs (b)(2), (b)(3), 
(b)(7), and (b)(8) as paragraphs (b)(1), (b)(2), (b)(3), and (b)(4), 
respectively.
0
b. Newly redesignated paragraph (b)(3) is amended by removing the words 
``Beginning October 1982,'' and by revising ``paragraphs (b)(2) and 
(b)(3)'' to read ``paragraphs (b)(1) and (b)(2)''.

    Dated: May 27, 2010.
Kevin Concannon,
Under Secretary, Food, Nutrition, and Consumer Services.
[FR Doc. 2010-13446 Filed 6-10-10; 8:45 am]
BILLING CODE 3410-30-P