[Federal Register Volume 76, Number 113 (Monday, June 13, 2011)]
[Rules and Regulations]
[Pages 34542-34572]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-13623]



[[Page 34541]]

Vol. 76

Monday,

No. 113

June 13, 2011

Part IV





Department of Agriculture





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Food and Nutrition Service



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7 CFR Parts 210, 215, 220 et al.



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

  Federal Register / Vol. 76 , No. 113 / Monday, June 13, 2011 / Rules 
and Regulations  

[[Page 34542]]


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DEPARTMENT OF AGRICULTURE

Food and Nutrition Service

7 CFR Parts 210, 215, 220, 225, and 226

RIN 0584-AC24


Child and Adult Care Food Program Improving Management and 
Program Integrity

AGENCY: Food and Nutrition Service, USDA.

ACTION: Final rule.

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SUMMARY: This final rule incorporates into the Child and Adult Care 
Food Program regulations modifications, clarifications, and technical 
changes to the two interim rules published by the Department on June 
27, 2002 and September 1, 2004. These changes result from over 1,000 
public comments received in response to the two interim rules; State 
agencies' and the Department's experience in implementing the changes 
in these two rules over several years; and the Department's conduct of 
an extensive data collection and analysis (the Child Care Assessment 
Project) designed to evaluate implementation of these two interim rules 
by family day care home sponsors and providers. This rule clarifies or 
modifies regulatory provisions relating to: State agency criteria for 
approving new and renewing institutions' applications; sponsoring 
organization requirements pertaining to the ``block claim'' edit check 
and review averaging; and State- and institution-level requirements 
pertaining to the serious deficiency process. The changes in this final 
rule are designed to further improve Program management and integrity 
and, where possible, to streamline and simplify Program requirements.

DATES: Effective date: This final rule is effective July 13, 2011.
    Approval date: The information collection requirements contained in 
this rule is subject to OMB approval. Once they have been approved, FNS 
will publish a separate action in the Federal Register announcing OMB's 
approval.

FOR FURTHER INFORMATION CONTACT: Ms. Julie Brewer or Ms. Tina Namian at 
3101 Park Center Drive, Room 634, Alexandria, VA 22302-1594, or by 
telephone at (703) 305-2590. A regulatory impact analysis was completed 
as part of the development of this final rule. Copies of this analysis 
may be requested from Ms. Brewer or Ms. Namian.

SUPPLEMENTARY INFORMATION:

Background

Evolution of the Two Interim Rules

    As noted in the SUMMARY, USDA has published two interim rules 
intended to improve Program management and integrity in the Child and 
Adult Care Food Program (CACFP), at 67 FR 43447 (June 27, 2002) and at 
69 FR 53501 (September 1, 2004).
    Section 243 of Public Law 106-224, the Agricultural Risk Protection 
Act of 2000 (ARPA), included a number of nondiscretionary provisions 
that amended section 17 of the Richard B. Russell National School Lunch 
Act ([NSLA], 42 U.S.C. 1766). Section 307 of Public Law 106-472, the 
Grain Standards and Warehouse Act of 2000, further amended one 
provision in Sec.  17 of the NSLA. These statutory changes were 
implemented in the CACFP regulations in the first interim rule, 
published on June 27, 2002. Simultaneously, the Department was working 
on a second rule. That rule was issued in proposed form on September 
12, 2000 (65 FR 55101). In response to State and Federal review 
findings of mismanagement and Program abuse and to audit findings and 
recommendations by the Department's Office of Inspector General (OIG), 
the rule proposed a series of changes to the CACFP regulations. After 
analyzing 548 public comments on the proposed rule, the Department 
modified some of its original proposals and published a second interim 
rule on September 1, 2004, that implemented additional discretionary 
changes to the CACFP regulations. Taken together, the changes 
implemented in the two interim rules were designed to improve Program 
management and accountability in the CACFP while also simplifying other 
requirements, where possible, in order to offset some of the 
administrative burden associated with the new requirements in those 
rules.

Why is the Department publishing this final rule? Didn't the two 
interim rules already implement those changes?

    Yes, interim rules have the force and effect of law upon the stated 
effective date. The changes in these two interim rules are fully 
implemented. However, the Department anticipated the need to make 
additional modifications to the provisions of the interim rules, based 
on Federal, State, and institution experience in operating the Program 
under the new rules and comments received on the interim rules. To that 
end, the Department provided an extended comment period for both rules, 
which gave State agencies and institutions adequate time to fully 
implement the provisions. In addition, since the publication of the 
second interim rule, the Department has undertaken an extensive data 
collection and analysis, known as the Child Care Assessment Project 
(CCAP). The CCAP was designed to evaluate implementation of the new 
regulatory requirements by family day care home sponsors and providers.
    During the comment period, the Department provided National 
training on each of the interim rules and issued extensive guidance 
designed to address implementation issues. The Department believes that 
the National training and the guidance it provided have fully addressed 
a number of the commenters' questions and concerns about the two 
interim rules. Many of those comments were submitted prior to the 
provision of the training and the guidance. For that reason, the 
preamble will not address all of the comments received. The regulatory 
language set forth at the end of this rulemaking is limited to the 
changes to the two interim rules being made by this final rule.

Can you provide a list of the previously-published implementation 
guidance?

    Yes. In order to help State agencies implement ARPA's provisions 
and the two interim rules, the Department issued the following 
guidance:
     July 20, 2000--``Implementing Statutory Changes to the 
CACFP Mandated by the Agricultural Risk Protection Act of 2000 (Pub. L. 
106-224)'';
     October 16, 2000--``Monitoring Requirements for Sponsoring 
Organizations in the CACFP'';
     October 17, 2000--Letter to State agency directors on 
termination of institutions and day care homes;
     April 12, 2001--``Effects of the Agricultural Risk 
Protection Act, Public Law 106-224, on termination of the agreements of 
day care home providers in the CACFP'';
     March 1, 2002--``Use of `stop payments' in the CACFP'';
     February 21, 2003--``Implementation of Interim Rule: 
Monitor Staffing Standards in the CACFP'';
     January 27, 2004--``CACFP Memorandum 1-04: 
Sponsor Monitoring Requirements in the CACFP'';
     September 1, 2004--``Implementing Changes to the CACFP in 
Interim Rule entitled, `Child and Adult Care Food Program: Improving 
Management and Program Integrity ''';
     December 23, 2004--``Additional Guidance on the CACFP 
Second Interim Rule'';

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     March 11, 2005--``CACFP Policy 02-05: Collection 
of Required Enrollment Information by Child Care Centers and Day Care 
Homes'';
     March 29, 2005--``Transfer of Data Related to the CACFP 
and the Food Stamp Program'';
     July 1, 2005--``CACFP Policy 03-05: Documenting 
Reasons for Block Claims by Child Care Centers and Day Care Homes'';
     September 23, 2005--``CACFP Policy 06-2005: 
Questions and Answers Regarding Institution Applications from Training 
on the Second Interim Rule'';
     September 23, 2005--``CACFP Policy 07-2005: 
Conducting a Five-Day Reconciliation in Centers Participating in the 
CACFP'';
     November 7, 2005--``CACFP Policy 03-2006: 
Questions and Answers on the Serious Deficiency Process in the CACFP'';
     February 23, 2006--``CACFP Policy 07-2006: 
Questions and Answers on State Agency Oversight Tools, Sponsor 
Oversight Tools, and Training and Other Operational Issues in the 
CACFP'';
     May 23, 2006--``CACFP 12-2006: Issues Relating to 
Block Claims Submitted by Sponsored Child Care Centers and Family Day 
Care Homes'';
     January 26, 2007--``CACFP 01-2007: Retention of 
records relating to institutions, responsible principals or responsible 
individuals, and family day care homes on the National Disqualified 
List; retention of records relating to serious deficiencies''; and
     August 27, 2007--``CACFP 15-2007: Documentation 
of Block Claims Submitted by Sponsored child Care Centers and Family 
Day Care Homes''.
    All of these guidance memorandums are available on the FNS Web site 
at http://www.fns.usda.gov/cnd/Care/Regs-Policy/Policy/Memoranda.htm.

Can you describe in more detail the CACFP management improvement 
training provided by the department before and after publication of the 
two interim rules?

    In the fall and winter of 1999-2000, the Department trained State 
agencies on management improvement techniques that had been presented 
in comprehensive management improvement guidance (MIG). In 2001, the 
Department provided training on FNS Instruction 796-2,\1\ revision 3, 
to State agencies. Training on the MIG and FNS Instruction 796-2 was 
crucial to addressing the CACFP financial and administrative management 
problems that had been uncovered by State and Federal reviewers and 
auditors.
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    \1\ FNS Instruction 796-2 may be found at http://www.fns.usda.gov/cnd/care/Management/79-2.pdf.
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    Finally, after publishing each of the interim rules, the Department 
developed extensive training related to each specific component of the 
two interim rules. These training sessions were conducted in 2002-2003 
and 2004-2005 at workshops around the country. Staff from each State 
agency attended the trainings. The curricula and materials for each 
training session on the interim rules were then re-formatted and 
distributed to State agencies, so that State agencies could use them to 
train participating institutions.

How, if at all, does this final rule differ from the two interim rules?

    This final rule refines the wording of some provisions previously 
implemented in the two interim rules and the implementation guidance, 
mostly to clarify regulatory intent, but in several places, to make 
changes to previous requirements. The preamble discussion will make 
clear which provisions from the two interim rules have had wording 
changed for clarification, and which have been changed in a substantive 
manner.

In total, how many comments did the department receive on the two 
interim rules?

    We received a total of 1,009 comment letters or electronic 
submissions on the two rules--747 on the first interim rule and 262 on 
the second interim rule.

Who commented on the rules?

    Of the 1,009 comments received on the two rules: 40 were from State 
agencies; 448 were from individuals associated with institutions 
participating in CACFP (either independent centers or sponsoring 
organizations of homes or centers); 455 were from family day care home 
providers participating in the Program; 39 were from State or National 
CACFP or children's advocacy organizations; and 27 were from parents, 
students, nutritionists, or other interested individuals whose 
institutional affiliation could not be determined. In addition, in 
writing this final rule, the Department also took into account the many 
comments and suggestions made by participants in the training sessions 
held in 2002-2003 and 2004-2005.

What issues raised by commenters will not be addressed in this 
preamble?

    Because of the extended comment period and the timing of the two 
interim rules' publication, some public comments were submitted before 
the provisions were fully implemented, or before training on the two 
interim rules was provided. Therefore, as previously stated, a number 
of the issues raised by commenters have already been addressed and 
resolved in guidance or training, and do not require discussion in this 
preamble.
    In addition, the Department received a number of suggestions from 
commenters concerning the terminology and definitions used in the two 
interim rules. Although the Department believes that some of these 
suggestions have merit, we have decided that, in order to avoid 
confusion, we will not make any changes to terminology in this final 
rulemaking, unless absolutely necessary to clarify the meaning of 
specific regulatory terms. The Department may consider making changes 
to regulatory terminology and format in the future. Readers should 
assume that provisions from the two interim rules that are not 
specifically discussed in this rulemaking preamble have not been 
modified in this final rule. This rulemaking will specifically identify 
those provisions being clarified or modified in the final rule in order 
to improve the efficiency or effectiveness of the Program.

How is the remainder of this preamble organized?

    The preamble is divided into four parts, and is organized in a 
manner similar to the interim rules published in 2002 and 2004. The 
four parts of this final rule are as follows:

    I. Institution Eligibility Criteria and State Agency Review and 
Approval of Institutions' Applications; the Serious Deficiency 
Process for Institutions
    II. State Agency and Institution Review and Oversight 
Requirements;
    III. Training and Other Operational Requirements; and
    IV. Non-Discretionary Changes Required by the Personal 
Responsibility and Work Opportunities Reconciliation Act, the 
Healthy Meals Act, and the Goodling Act

Part I. Institution Eligibility Criteria and State Agency Review and 
Approval of Institutions' Applications; the Serious Deficiency Process 
for Institutions

A. Institution Eligibility Criteria and State Agency Review and 
Approval of Institutions' Program Applications

    Sections 243(a) and (b) of ARPA added a number of statutory 
requirements that affected institution eligibility and the institution 
application process. These changes were designed to improve Program 
management and integrity by ensuring that the information in an 
application being submitted by a new or renewing

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institution (i.e., by an independent center or a sponsoring 
organization of day care homes and/or centers) demonstrates that it is 
fully capable of administering the Program in accordance with the 
regulations. These changes not only required institutions to 
demonstrate their ability to administer the Program, both before they 
begin operations (in their initial applications) and at certain 
intervals thereafter (in their renewal applications); they were also 
intended to ensure that State agencies periodically assess and re-
assess each institution's potential ability to perform, based on a 
thorough review of the institution's Program application.
    The Department received public comments on five aspects of the two 
interim rules relating to basic institution eligibility criteria and 
the State agency's review of an institution's application to 
participate in CACFP, as follows:
     The reorganization of the institution application 
requirements at Sec. Sec.  226.6(b) and 226.6(f);
     The requirements relating to an institution's 
documentation of its past performance in the Program application;
     The requirement for all new and renewing institutions to 
demonstrate ``VCA'' (financial viability, administrative capability, 
and accountability) in their Program applications;
     The procedures State agencies must follow when they deny 
an application submitted by a new or renewing institution; and
     The requirement that several institution principals must 
submit their dates of birth as part of the institution's Program 
application.
    Comments relating to the last issue--the submission of dates of 
birth--are addressed in Part III(C) of this preamble. The four 
remaining issues listed above are addressed in the preamble discussion 
that follows.
(1) Reorganization of the Institution Application Requirements at 
Sec. Sec.  226.6(b) and 226.6(f)
    The second interim rule reorganized Sec. Sec.  226.6(b) and 
226.6(f), so that Sec.  226.6(b) includes the broad requirements for 
institution applications and Sec.  226.6(f) specifies the frequency at 
which an institution is required to update the information contained in 
its original application. The second interim rule also consolidated or 
cross-referenced application requirements previously found at 
Sec. Sec.  226.6(b), 226.6(f), 226.7(g), 226.15(b), 226.16(b) and 
226.23(a) into Sec.  226.6(b), so that State agencies and institutions 
could more easily refer to them during the application process.
    Two commenters stated that the rule was well written, clearly 
presented and easy to read; seven other commenters felt that Sec.  
226.6 was too complex and should be rewritten in a briefer and simpler 
format. Other commenters made specific suggestions for changes in the 
terminology used in, or the structure of, Sec.  226.6(b). In addition, 
forty commenters expressed their concern that the new application 
criteria were potentially too complex, and might prove to be a barrier 
to applicants. These commenters recommended that, in order to minimize 
the potential barrier, State agencies increase their outreach and 
training efforts and streamline their application processes in the ways 
permitted by the interim rules.
    The Department acknowledges that the structural and other changes 
made to Sec.  226.6 have added complexity and length to the rule. When 
adding those new application requirements--many of which were mandated 
by ARPA--the Department also attempted to find ways to reduce other 
administrative burdens. For example, the option for State agencies to 
take renewal applications on a three-year cycle, and to enter into 
permanent agreements with all types of institutions, will offset some 
of the administrative burden resulting from the new requirements added 
in the two interim rules. Furthermore, the current length and structure 
of this portion of the rules is the result of our more specific 
delineation of application requirements for new and renewing 
institutions. If State agencies fully implement these optional 
provisions, administrative time and effort will be lessened, for them 
and for institutions. Any further changes to the rule's organization 
will be considered in the future, and the organization of this section 
will remain as set forth in the second interim rule.
(2) Application Requirements Relating to an Institution's Past 
Performance
    The first interim rule implemented a series of ARPA provisions 
designed to prohibit institutions and their principals from 
participating in CACFP if they had been:
     Determined ineligible to participate in any publicly 
funded program due to violating these programs' requirements;
     Disqualified from CACFP; or
     Convicted of any activity that indicated a lack of 
business integrity.
    In order to fully implement these statutory requirements, the first 
interim rule required that an institution's application list all 
publicly funded programs in which the institution and its principals 
had participated in the past seven years. The rule also required an 
institution to certify in its application that neither the institution, 
nor any of its principals, is ineligible to participate in such 
programs due to violating those programs' requirements during the 
seven-year period. In lieu of submitting this certification, the 
interim rule permitted an institution to submit documentation that the 
institution or principal previously determined ineligible was later 
reinstated, or was again eligible to participate in, the publicly 
funded program, and had paid all debts owed to that program. The rule 
also required institution applications to include a certification 
concerning the criminal backgrounds of the institution and its 
principals.
    As part of these certification requirements, the first interim rule 
included language stating that institutions and principals providing 
false certifications would be placed on the National Disqualified List 
(NDL). This language was intended to deter the submission of 
applications by ineligible institutions and principals, and to provide 
them with notice regarding the consequences of submitting false 
certifications. The rule also required that, when reviewing an 
institution's application, the State agency check the NDL to ensure 
that the institution is not on the NDL and is, therefore, eligible to 
participate. Finally, the rule prohibited State agencies from approving 
an institution's application if the institution or any of its 
principals had been convicted of any activity indicating a lack of 
business integrity during the past seven years.
    Thirteen comments were received from eleven State agencies and two 
advocates regarding several aspects of these ``past performance'' 
requirements. Two State agency commenters suggested that past 
performance requirements be eliminated. This cannot be done, since 
these are statutory requirements. The Department believes that 
capturing this information on an institution's application is an 
effective and efficient means of complying with this requirement.
    In addition, five State agency commenters made suggestions which 
they felt would reduce the administrative burden associated with 
meeting the past performance requirements. One State agency commented 
that requiring a new institution to list all publicly funded programs 
in which it participated for the last seven years is burdensome, and 
that an institution's submission of a ``certification of non-
disqualification'' should suffice. However, the Department believes it 
is important to require the new institution to submit

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both the certification of non-disqualification and the list of publicly 
funded programs. The certificate of non-disqualification establishes a 
clear basis for removal from the CACFP (submission of false 
information) if the institution conceals a prior termination from a 
publicly funded program. The Department also believes that it is 
important for the State agency to have a list of publicly funded 
programs in which the institution previously participated, because it 
allows the State agency to verify the accuracy of the non-
disqualification certification if it chooses.
    However, the Department agrees with, and will make, the change 
suggested by another State agency. The comment suggested that the 
burden associated with reporting on past performance could be minimized 
by allowing a renewing institution to include on its application only 
those new publicly funded programs in which it had begun to participate 
since its last application was submitted. The Department believes that 
this suggestion will lower administrative burden while still meeting 
the intent of the law. Therefore, this regulation will allow a renewing 
institution to update the list of programs that it submitted in its 
last application, rather than provide the full list of programs in 
which it participated for the past seven years. This will minimize 
unnecessary ``re-reporting'' of information, which could be especially 
burdensome for institutions that regularly receive grants or have many 
other sources of public funding.
    Two State agencies commented that an institution should only be 
required to submit information about programs in which it participated 
during the past three years, since a three-year record retention 
requirement is standard in most publicly funded programs. Although the 
Department agrees that most publicly funded programs require an 
institution to retain records for a period of three years (or longer if 
there are outstanding review or audit findings), we do not believe that 
requiring the principals of an institution to know and document their 
performance, and the institution's performance, for a seven-year period 
will pose any special hardship. The principals charged with managing 
the institution should know the institutions' and all of the 
principals' record of performance over the past seven years.
    One State agency suggested that, if an institution's participation 
in a publicly funded program has been terminated, and the institution 
has taken action to correct the deficiency that caused the termination, 
the State agency should be able to approve the institution's 
participation in the CACFP, even if the institution had not been 
formally ``reinstated'' to eligibility in the other program. This 
statutory change ensures that only institutions with records of sound 
performance in other publicly funded programs be permitted to 
participate in CACFP. Having the CACFP State agency assess an 
institution's performance in another publicly funded program does not 
meet that intent. Only if the institution has been reinstated to 
participation by the other publicly funded program can the State agency 
be assured that all corrective actions have been fully implemented, and 
all debts fully repaid.
    Finally, four State agencies and two advocacy groups commented 
that, if the State agency was required to consult the NDL when 
reviewing an institution's application, the NDL must be web-based and 
searchable, and must include all the necessary information concerning 
institutions, principals, and family day care home providers on the 
list. The Department agrees that the NDL must be accessible and 
complete if State agencies are to effectively comply with the 
regulatory requirement to exclude institutions and individuals who are 
on the List. To that end, the Department has made the NDL available to 
State agencies. Although privacy issues initially made it impossible 
for the Department to provide access to the NDL to institutions, they 
have been able to obtain the information they need about providers and 
principals from their State agency, and we anticipate being able to 
make the NDL directly accessible to institutions in the near future.
    Accordingly, the only change made to past performance requirements 
in this final rule is the modification of Sec.  226.6(b)(2)(iii) to 
permit renewing institutions to list in their applications only those 
publicly funded programs in which they have begun to participate since 
the submission of their last application.
(3) Application Requirements Relating to an Institution's ``VCA'' 
(Financial Viability, Administrative Capability, and Internal Controls 
To Ensure Accountability)
    The first interim rule implemented the requirement set forth in 
section 243(b) of ARPA that, in order to participate, an institution 
must demonstrate in its Program application that it meets three 
performance standards now included in section 17(d)(1) of the Richard 
B. Russell National School Lunch Act (NSLA). These standards require 
the institution to be financially viable; to be administratively 
capable; and to have in place internal controls to ensure the 
accountability of Program funds and compliance with Program 
requirements. Sections 226.6(b)(1)(xviii) and 226.6(b)(2)(vii), which 
were added to the regulations by the first interim rule, require State 
agencies to evaluate all applicant institutions against these three 
performance standards, in order to assess their ability to properly 
administer the Program, and to deny the application of any institution 
which does not demonstrate conformance with these performance standards 
or any other requirements set forth in Sec.  226.6(b). In addition, the 
rule required ongoing compliance with the VCA standards by defining as 
a serious deficiency a participating institution's ``[f]ailure to 
operate the Program in conformance with the performance standards * * 
*'' (Sec.  226.6(c)(3)(ii)(C))
    A total of 325 comments were received concerning the VCA 
performance standards. Of these comments, 263 dealt with the 
requirement at Sec. Sec.  226.6(b)(1)(xviii)(A)(2) and 
226.6(b)(2)(vii)(A)(2) that an institution demonstrate in its 
application that it has adequate financial resources to operate the 
CACFP and ``adequate sources of funds to withstand temporary 
interruptions in Program payments and/or fiscal claims against the 
institution.'' Many commenters suggested eliminating this language, 
because they thought that it required family day care home sponsors to 
pay claims to providers during periods when, for reasons beyond their 
control, CACFP funding was delayed or unavailable.
    The Department understands that, if CACFP reimbursements were 
temporarily unavailable, few if any sponsors would have the resources 
to pay provider claims. The regulatory wording was intended to address 
a different situation, involving the State agency's establishment of an 
overclaim against an institution, or its denial of a portion of the 
institution's claim for administrative reimbursement.
    Many commenters stated their belief that CACFP is intended to be 
``self-sufficient''; in other words, they believe that all the 
resources needed to operate CACFP should come from Program 
reimbursements. While this belief is largely accurate, there are a 
number of one-time and recurring expenses for which Program funds may 
not be used, including the costs of incorporation, the preparation of 
annual IRS-990 reports, fines and penalties, and some other general 
business costs. Furthermore, once an institution incurs any

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administrative cost, there is always the possibility that the State 
agency may later determine that the institution's use of Federal funds 
for that expense is unallowable.
    If Program reimbursements have already been used to pay a 
contractor or supplier for an expense later deemed unallowable by the 
State agency, the sponsor's repayment cannot come from Program funds, 
because it is impermissible to use Program funds to repay debts to the 
government. Therefore, every sponsor must have a source of ``non-
Program'' funds out of which such a claim can be paid. The Department 
does not expect sponsors to reimburse providers if Federal 
reimbursement is unavailable. However, a sponsor must still have a 
source of non-Program funds with which to compensate its employees and 
pay its suppliers.
    In short, if the sponsor does not have a source of non-Program 
funds in these instances, it runs the risk of going out of business, 
due to its inability to repay the State agency, or to pay its employees 
or suppliers. The Department would not advise a State agency to deny an 
institution's application solely because it lacked a source of non-
Program revenue. However, the institution itself should be eager to 
have such funds on hand, since its existence as a viable entity, and 
its continued ability to provide Program benefits to children, may 
depend on it.
    To further clarify this regulatory language's intent, the 
Department has made some minor modifications to the wording of 
Sec. Sec.  226.6(b)(1)(xviii)(A)(2) and 226.6(b)(2)(vii)(A)(2). The 
phrase, ``has adequate sources of funds to withstand temporary 
interruptions in Program payments and/or fiscal claims against the 
institution'' has been changed to read, ``has adequate sources of funds 
to continue to pay employees and suppliers during periods of temporary 
interruptions in Program payments and/or to pay debts when fiscal 
claims have been assessed against the institution.'' This language more 
clearly delineates the situations in which the institution would need 
to have non-Program funding. In addition, the Department has added to 
the introductory language at Sec. Sec.  226.6(b)(1)(xvii) and 
226.6(b)(2)(vii) a sentence that reads, ``In ensuring compliance with 
these performance standards, the State agency should use its discretion 
in determining whether the institution's application, in conjunction 
with its past performance in CACFP, establishes to the State agency's 
satisfaction that the institution meets the performance standards.''
    A related question was submitted by another State agency, which 
suggested that an institution's budget should only be required to 
address its planned expenditure of Program reimbursements, not its 
planned use of non-Program funds. In fact, if the institution does not 
plan to use non-CACFP funds to support some required CACFP functions, 
there is no requirement that non-Program funds be addressed in the 
budget. In that case, the only information needed in the budget or 
management plan is the institution's source of non-Program funds that 
could be used to pay overclaims or other costs identified in the 
preceding paragraph.
    However, if the institution plans to use any non-Program resources 
to meet CACFP requirements, then these funds should be accounted for in 
the institution's budget. For example, many multi-purpose sponsoring 
organizations that operate the CACFP devote some non-Program resources 
to the performance of critical CACFP functions like training or 
monitoring. Similarly, an independent center may plan to rely on a 
portion of the parent fees it collects to perform a required CACFP 
function. In these cases, the institution's budget must account for 
those non-Program funds that will be devoted to Program administration, 
so that the State agency has a full understanding of how the 
institution will fund its performance of all required Program 
functions.
    Accordingly, Sec.  226.7(g) is amended to specify the ways in which 
``non-program funds'' must be addressed in the institution's budget.
    In addition, commenters made a number of other suggestions for 
changing or clarifying various aspects of the performance standards. 
Forty-seven (47) commenters expressed concern that at-risk afterschool 
care centers would have great difficulty meeting the performance 
standards, and should not be held to the same standards as larger 
Program operators like sponsoring organizations of centers or family 
day care homes. During our training on the interim rules, we urged 
State agencies to take into account an institution's size and 
sophistication when examining different types of organizations' 
applications. In fact, an entire session of our training on the second 
interim rule was devoted to a discussion of how State agencies should 
apply the regulatory language when examining applications submitted by 
independent child care centers, as opposed to sponsoring organizations 
of hundreds (or in some cases, thousands) of facilities. We recommend 
that State agencies apply a ``rule of reason'' when reviewing materials 
submitted by different types of institutions, with different levels of 
Program reimbursement and, in many cases, different levels of 
managerial sophistication.
    One State agency suggested that sponsored centers, as well as 
institutions, should be required to demonstrate compliance with the VCA 
standards. We carefully considered the possibility of requiring 
sponsored centers to comply with the VCA standards, but ultimately 
rejected it. Even if a sponsored center has, in the past, operated as 
an independent center in the CACFP, once a sponsoring organization 
enters into an agreement with that center, the center becomes a 
sponsored facility, and assumes a different Program relationship with 
the State agency. As a result of the rule, a sponsoring organization 
(not each sponsored center) now has primary responsibility for ensuring 
that the CACFP is operated in accordance with the performance standards 
in all of its sponsored facilities. That is why we so strongly 
recommended in training that State agencies take extra care in 
evaluating a sponsoring organization's compliance with the performance 
standards, since the sponsor must be able to demonstrate that it can 
adequately monitor, train, and provide technical assistance to all of 
the facilities that it sponsors.
    Finally, one other State agency requested that the final rule add a 
definition of ``board of directors'' or ``governing board of 
directors.'' Based on questions we have received since the publication 
of the first interim rule, and based on the data collected in CCAP, we 
agree that there is a need for further clarification of the regulatory 
requirements pertaining to institution boards of directors.
    When the first interim rule incorporated performance standards in 
the CACFP regulations, Sec. Sec.  226.6(b)(1)(xviii)(C)(1) and 
226.6(b)(2)(vii)(C)(1) specified that an institution must demonstrate 
``adequate oversight of the Program by its governing board of 
directors.'' At the time, the Department was reluctant to specify what 
constitutes ``adequate oversight,'' since many States have their own 
laws concerning the qualifications, structure, and responsibilities of 
boards of directors. However, in the years since the first interim rule 
took effect, the questions submitted to the Department by State 
agencies and others have convinced us of the need to specifically 
address two recurring issues concerning boards of directors in this 
final rule.

[[Page 34547]]

    First, we have been asked repeatedly how this requirement applies 
to for-profit centers participating in the CACFP. Although large, 
publicly-held for-profit corporations have boards of directors, there 
may be some smaller for-profit entities that do not. In a small, for-
profit center, it is quite possible that there will be an owner, but no 
formally-designated governing board. This rule clarifies this point in 
a new definition of an ``independent governing board of directors'', 
which will apply to any non-profit or for-profit organization that is 
required by law to have a board of directors.
    Second, we have received numerous questions concerning what 
constitutes an ``independent'' governing board of directors. Although 
some States' laws define the characteristics of board independence, 
others do not. Therefore, this rule will delineate the characteristics 
of ``independent governing boards of directors'' that are necessary to 
assure the adequate oversight of CACFP operations. This final rule 
requires--in a new definition at Sec.  226.2-- that an ``institution's 
governing board of directors'' must: (1) Meet on a regular basis; and 
(2) have the authority to hire and fire the institution's executive 
director (i.e., the board must be independent of the executive 
director's control).
    Based on State agencies' input and on the information gathered by 
the CCAP data collection, it appears that some private nonprofit 
organizations currently participating in CACFP do not have a governing 
board of directors that fully meets this definition because of lack of 
independence,'' The CCAP assessment determined that 36 percent (18 of 
50) of the sponsors assessed included sponsor officials or family 
members serving on their governing boards of directors. In fact, in 
almost 20 percent of the sponsors assessed (9 of 46), the board of 
director's chairperson was a sponsor official or family member. 
Although the current regulations do not directly address this aspect of 
board independence, it is a critical aspect of a board's ability to 
provide ``adequate oversight of the Program'', as described in the 
Management Improvement Guidance (MIG). The MIG guidance and training 
emphasized that governing boards of directors which include the CACFP 
director, other sponsor officials, and/or members of their families 
cannot perform the type of independent oversight required for the 
sponsor's successful operation of the CACFP. One of the critical 
hallmarks of a governing board of directors' independence--the board's 
ability to hire and fire the organization's executive director--is 
limited when sponsor officials or their families serve on the board. We 
encourage State agencies to work closely with institutions 
participating in CACFP to ensure that such boards are in place, and 
that this requirement is fully met, as quickly as possible.
    Accordingly, this final rule modifies the introductory language to 
Sec. Sec.  226.6(b)(1)(xviii) and 226.6(b)(2)(vii), and has made some 
minor modifications to Sec. Sec.  226.6(b)(1)(xviii)(A)(2) and 
226.6(b)(2)(vii)(A)(2), to clarify the requirement that institutions 
have ``adequate sources of funds'' in order to be determined 
financially viable, as discussed above. In addition, this final rule 
includes in Sec. Sec.  226.6(b)(1)(xviii)(C)(1) and 
226.6(b)(2)(vii)(C)(1) new language concerning the minimum Program 
requirements for an ``independent board of directors'', and adds to 
Sec.  226.2 a new definition of ``independent board of directors.''
(4) State Agencies' Denial of Institution Applications
    The Department received three public comments concerning State 
agencies' denial of applications submitted by new or renewing 
institutions. In addition, we received numerous, detailed questions 
concerning this subject when we conducted training on the two interim 
rules.
    Two State agency commenters requested a change to the language 
governing State agencies' denial of applications. Sections 
226.6(c)(1)(i) and 226.6(c)(2)(i) require the State agency to deny an 
application if it does not meet all of the requirements set forth at 
Sec. Sec.  226.6(b), 226.15(b) and 226.16(b). These commenters 
suggested that this portion of the regulations should instead state 
that an application is considered incomplete, and that the State agency 
does not have to formally deny the application, if it does not contain 
all of the information required by Sec. Sec.  226.6(b), 226.15(b) and 
226.16(b).
    The Department cannot agree with this suggested change, because it 
would prevent some institutions from ever having the opportunity to 
appeal the State agency's denial of their applications. If a State 
agency does not have to deny an ``incomplete application'', and no 
application is considered to be ``complete'' unless it is approvable, 
then the State agency will never have to formally deny any 
institution's application. While we recognize that it is often 
necessary for a State agency to request more information from an 
institution before it can determine whether the institution's 
application is approvable, the process of requesting this information 
must have an end date, or the institution will, de facto, lose its 
opportunity to appeal the State agency's action. Likewise, if there is 
no end to the process of collecting additional information, a renewing 
institution could continue participating indefinitely while it submits 
additional information to the State agency.
    For these reasons, the Department strongly recommends that State 
agencies develop written policy governing the maximum amount of time it 
will take to review an institution's new or renewal application, 
including any time for the State agency to request additional 
information from the institution. If, however, a State agency returns 
an application to an institution because it was incomplete, and the 
institution fails to submit more information, the State agency is under 
no obligation to deny the application. In this instance, by not 
submitting timely the additional required information, the institution 
has effectively withdrawn its application from consideration. The only 
time that the Department would require the State agency to take formal 
action on an ``incomplete application'' before the State-established 
deadline for submitting information is in the rare case where the State 
agency discovers a serious deficiency when reviewing the institution's 
application. In those instances, in accordance with Sec. Sec.  
226.6(c)(1)(i) and 226.6(c)(1)(ii), the State agency would be required 
to deny the institution's application and to declare the institution 
seriously deficient.
    Readers of this preamble should note that, although this final rule 
continues to refer to ``renewal applications'' at Sec.  226.6(b)(2), 
enactment of Public Law 111-296, the Healthy, Hunger-Free Kids Act of 
2010, made substantial changes to the process by which participating 
institutions verify their continuing compliance with Program 
requirements. These changes were addressed in implementing guidance 
issued on April 8, 2011 (``CACFP 19-2011, ``Child Nutrition 
Reauthorization 2010: CACFP Applications''), as well as in in 
forthcoming proposed and final rulemaking actions.

B. The Serious Deficiency Process for Institutions

    Section 243(c) of ARPA added a number of provisions to section 
17(d)(5) of the NSLA which modified the serious deficiency process for 
institutions. As a result, several important aspects of the serious 
deficiency process were changed in the first interim rule, including: 
the content of the notice received by an

[[Page 34548]]

institution when it is notified that its performance is ``seriously 
deficient;'' the time given the institution to correct its serious 
deficiency and, if the serious deficiency is not corrected, the content 
of the notice issued by the State agency informing the institution of 
its intent to terminate and disqualify the institution and those 
principals and/or individuals responsible for the serious deficiency; 
and the process for suspending an institution's Program payments when 
it has engaged in conduct that poses an imminent threat to children's, 
or the public's, health or safety. In addition, Section 307(c) of the 
Grain Standards and Warehouse Improvement Act of 2000 (Pub. L. 106-472, 
November 9, 2000) further amended section 17(d)(5) of the NSLA by 
prescribing a specific process for suspending an institution's CACFP 
participation due to the submission of a false or fraudulent claim. 
[Note: as used in this preamble, the phrase ``serious deficiency 
process'' refers to all actions taken by a State agency after it 
declares an institution seriously deficient, including the 
institution's appeal and its placement on the National Disqualified 
List (NDL).]
    The most significant change to the serious deficiency process made 
by ARPA was the requirement that, until the conclusion of the appeal 
process and the termination of its agreement, an institution will 
continue to receive Program payments for valid claims submitted. Prior 
to this, a State agency terminated an institution's agreement and 
discontinued Program payments at the same time that it declared the 
institution seriously deficient. Only then did the institution have an 
opportunity to appeal the State agency's adverse action. Thus, prior to 
ARPA, the institution received no Program payments (even if it incurred 
valid Program costs) until its appeal was resolved, and would then 
receive payments only if it prevailed on appeal. This approach resulted 
in two undesirable outcomes: (1) An institution could go out of 
business while its appeal was pending (due to its inability to pay 
legitimately-incurred costs), even if it later prevailed on appeal; and 
(2) many State agencies were reluctant to require an institution to 
improve program management, since the initiation of the serious 
deficiency process carried with it the simultaneous termination of the 
institution's agreement and the discontinuation of its Program 
payments.
    Part I (B) of this preamble discusses questions about the serious 
deficiency process for institutions which were raised by commenters and 
by those who attended the Department's training on the two interim 
rules. As in Part I (A) of this preamble, the training and written 
guidance provided by the Department have already addressed many of the 
questions raised. Therefore, this portion of the preamble will discuss 
only those aspects of the serious deficiency process that require 
additional clarification, as well as any changes being made in this 
final rule.
(1) General Questions About the Serious Deficiency Process for 
Institutions
    As a result of the statutory changes enacted in ARPA, the first 
interim rule established more specific requirements governing each 
stage of the serious deficiency process for institutions, including: 
the State agency's issuance of a serious deficiency notice; the amount 
of time given to an institution for corrective action; the appeal 
process; the termination of the institution's agreement; and the 
placement of the institution and its ``responsible principals and 
individuals'' on the NDL. The Department received numerous written 
comments, as well as questions during its training sessions, regarding 
these changes to the serious deficiency process for institutions.
    Several training attendees raised questions about the maximum 
amount of time that may elapse between the State agency's discovery of 
an institution's serious deficiency and its issuance of a serious 
deficiency notice. Attendees also raised a related question: whether an 
institution can terminate its agreement for convenience after the State 
agency has discovered a serious deficiency, but prior to the time that 
the serious deficiency notice is issued.
    Once a State agency has discovered a serious deficiency, the first 
interim rule's intent was that the serious deficiency process would be 
completed (i.e., either corrective action would be taken or the 
institution's agreement would be terminated), even if the institution 
terminated its agreement ``for convenience'' before a formal notice of 
serious deficiency was issued. The Department anticipated that, once a 
serious deficiency had been discovered, a State agency would move 
quickly to issue a serious deficiency notice. Therefore, the first 
interim rule stated at Sec. Sec.  226.6(c)(2)(iii)(A)(6) and 
226.6(c)(3)(iii)(A)(6) that, after a State agency has issued a notice 
of serious deficiency, the institution could not voluntarily terminate 
its agreement as a means of avoiding formal termination ``for cause'' 
and placement on the NDL; the serious deficiency process would still 
proceed. However, during our training on the interim rules, it became 
apparent that these questions arose because some State agencies do not, 
in fact, issue a formal notice for months after discovering the serious 
deficiency.
    In some of these cases, the institution has been told at a review's 
``exit conference'' that it is seriously deficient. However, if the 
institution does not promptly receive a formal notice of serious 
deficiency, the institution may decide that it is preferable to 
terminate its agreement and withdraw from the Program, rather than go 
through the serious deficiency process, and possibly be placed on the 
NDL. Allowing institutions to leave CACFP before correcting their 
serious deficiencies is very detrimental to the Program, because the 
institution has neither corrected the serious deficiency nor been 
placed on the NDL, thus making it more possible for the institution and 
its responsible principals to re-enter the program later. Without 
having issued a formal serious deficiency notice which defines the 
institution's required corrective action, any State agency's ability to 
deny the institution's future re-application is diminished. In 
addition, if the issuance of a serious deficiency notice is delayed, 
the institution may assume that there was, in fact, no real serious 
deficiency, and no need for the institution to correct its management 
practices.
    For these reasons, it is critical that, once a State agency 
discovers a serious deficiency, the institution promptly receive formal 
notice of that finding. By definition, a serious deficiency involves 
very serious Program management issues. The State agency must take 
prompt action, including issuing the formal notice of serious 
deficiency, to ensure that the institution corrects the serious 
deficiency, or has its agreement terminated for cause, as expeditiously 
as possible. Furthermore, if prompt action does not occur and the 
institution subsequently appeals a proposed notice of intent to 
terminate and disqualify, a hearing official may question the 
``seriousness'' of the deficiency if the State agency took months to 
issue a written notice.
    The Department will not establish in this rule a maximum amount of 
time for the State agency to issue a serious deficiency. We understand 
that State agencies have different procedures for handling serious 
deficiencies. There may be a need for supervisory clearance of a 
reviewer's findings and conclusions, and there may be multiple internal 
clearances of the written serious deficiency notice before it is 
issued.
    However, we strongly encourage State agencies to take steps to 
minimize the amount of time that elapses between a

[[Page 34549]]

review and the issuance of a serious deficiency notice. Such steps 
might include: Training State reviewers to ensure that they do not 
exceed their authority in describing findings to an institution during 
an exit conference; whenever possible, including on a review team a 
person capable of speaking on behalf of the State agency concerning 
serious deficiency determinations; and/or establishing internal 
policies and procedures which ensure that an institution receives 
timely notice of its serious deficiency. Once these steps are taken, 
there should be no reason for a State agency to take more than two to 
six weeks to issue the notice, after the discovery of the serious 
deficiency.
    A second general question raised in training sessions concerned a 
State agency's determination of which institution employee(s) should be 
named in a serious deficiency notice (i.e., which persons should be 
named as ``responsible principals and individuals''). Since then, we 
have observed instances in which either too many or too few principals 
and individuals were named as responsible. The former approach will 
slow the appeal process considerably, as hearing officials attempt to 
discern whether every person named in the notice is truly responsible 
for the serious deficiency and, therefore, should be disqualified from 
Program participation. On the other hand, if the State agency fails to 
name all of the responsible persons in the notice, it increases the 
risk that these persons (who will not be placed on the NDL) will 
continue to participate in CACFP as principals in other institutions.
    There is, of course, no ``magic number'' of responsible principals 
or individuals that should be named in every serious deficiency. The 
regulations require that, in every instance, both the chairperson of 
the institution's board of directors, as well as the executive director 
or other person responsible for CACFP, receive the notice of serious 
deficiency, as well as any other principals or individuals named as 
``responsible'' for the institution's serious deficienc(ies). Although 
it is not specifically stated in the regulations, typically the 
executive director, owner, or other person with overall responsibility 
for the CACFP within the institution would be named as ``responsible'' 
for the institution's serious deficiency. In general, the State agency 
should name as ``responsible principals'' those organization officials 
who, by virtue of their management position, bear responsibility for 
the institution's serious deficiency. These management officials also 
bear responsibility for the poor performance of non-supervisory 
employees which may have caused the serious deficiency. Non-supervisory 
employees, including contractors and unpaid staff, should be named 
``responsible individuals'' only when they have been directly involved 
in egregious acts, such as filing false reports or actively 
participating with institution principals in a scheme to defraud the 
Program.
    A third general comment made by five State agency commenters was 
that the first interim rule was burdensome in requiring State agencies 
to provide FNSROs with a copy of each notice they issued relating to an 
institution's serious deficiency. The Department included this language 
in the first interim rule as a means of ensuring that FNSROs would be 
able to provide State agencies with immediate feedback and technical 
assistance on the State agency's implementation of the serious 
deficiency process, and that FNSROs could detect trends across States 
in the types of regulatory non-compliance leading to determinations of 
serious deficiency.
    Initially, the Department was favorably disposed to reducing this 
paperwork and requiring only one or two submissions from the State 
agency to the FNSRO during the course of the serious deficiency 
process. However, after analyzing the data collected in the CCAP, and 
after finding a number of flawed State agencies' serious deficiency 
processes during our conduct of management evaluations, we will not 
make any change to this aspect of the serious deficiency process. We 
believe that the most important benefit of maintaining these 
requirements will be to enable FNSROs to carefully review each document 
for regulatory compliance as soon as it is issued. If errors are 
discovered, the FNSRO can then advise the State agency to issue a 
revised notice to the institution, before the defects of the original 
notice undermine the State agency's ability to prevail in a later 
administrative review hearing. Thus, the final rule will make no change 
to the requirement that the State agency notify its FNSRO at each stage 
of the serious deficiency process.
    Finally, one State agency commenter noted technical errors at 
226.6(c)(3)(iii)(B)(1)(ii) and 226.6(c)(3)(iii)(B)(2)(iii), where 
references to a ``renewing'' institution should instead read, 
``participating'' institution. Accordingly, this final rule makes the 
corrections.
(2) The Serious Deficiency Process as it Relates to Applications 
Submitted by New or Renewing Institutions
    The first interim rule added definitions of ``new institution'' and 
``renewing institution'' to the CACFP regulations, and established new 
requirements for State agencies' handling of Program applications, as 
described in Part I(A) of this preamble. A number of attendees at 
training raised three different questions concerning the interaction of 
the serious deficiency process and the revised application process. All 
three of the questions relate to changes made by ARPA to the serious 
deficiency process. Each statutory change was structured to ensure that 
an institution be provided with the opportunity for an administrative 
review (``appeal'') before its agreement is terminated and the 
institution and its responsible principals and individuals are 
disqualified.
    The first question asked whether a new institution could appeal a 
State agency's denial of its application, if the denial was based on 
the State agency's determination that either the institution and/or one 
of its principals is on the NDL. The regulations at Sec. Sec.  
226.6(c)(7)(ii) and 226.6(c)(7)(iv) make clear that no institution 
which is on the NDL, and no institution having one or more of its 
principals on the NDL, is eligible to participate in CACFP. Given this 
requirement, the commenter saw no reason to offer the institution an 
appeal, since the regulations clearly forbid the institution's 
participation.
    However, the regulations at Sec.  226.6(k)(2)(i) also state that, 
whenever a new or renewing institution's application is denied, the 
institution must be given the opportunity to appeal the denial. This is 
true regardless of whether the new or renewing institution has 
submitted false information on its application (e.g., a false 
certification concerning the institution's or principals' eligibility 
to participate in a publicly funded program), or whether the 
application included the information that demonstrated the 
institution's ineligibility (e.g., the applicant stated on the 
application that the institution or one of its principals was 
ineligible to participate by virtue of its past performance).
    To handle situations like this, the first interim rule established 
new procedures for an ``abbreviated'' appeal, as described in Sec.  
226.6(k)(9). The abbreviated appeal must be used when the institution 
appears to be ineligible by virtue of submitting false information on 
its application or due to any of three types of past performance issues 
(presence on

[[Page 34550]]

the NDL, termination from another publicly-funded program, or 
conviction for an offense related to business integrity). Consistent 
with ARPA, the abbreviated appeal ensures that the institution has an 
opportunity to contest the State agency's adverse action before it 
occurs, but shortens the appeal process by not permitting oral 
presentations before a hearing official. The abbreviated appeal gives 
the institution an opportunity to claim that the State agency had made 
an error, perhaps by confusing the names of the applicant institution 
or a principal with another, similarly-named, institution or person. 
Therefore, any applicant institution--whether new or renewing--must be 
given the opportunity for a regular or an abbreviated appeal, 
regardless of the circumstances.
    The second question was whether a new institution could evade the 
potential consequences of a serious deficiency by withdrawing its 
application for Program participation. Although the regulations at 
Sec. Sec.  226.6(c)(2)(iii)(A)(6) and (c)(3)(iii)(A)(6) clearly state 
that a renewing or participating institution's voluntary termination of 
its Program agreement does not put an end to the serious deficiency/
disqualification process, similar language is lacking with regard to 
new institutions at Sec.  226.6(c)(1)(iii)(A). The omission of similar 
language in the first interim rule was an oversight. That oversight is 
corrected by the addition of a new paragraph in this final rule, at 
Sec.  226.6(c)(1)(iii)(A)(7), which clarifies that, after receiving a 
notice of serious deficiency, a new institution may not evade the 
potential consequences of its serious deficiency by withdrawing its 
application to participate.
    Finally, the third question involves the State agency's conduct of 
the application or agreement renewal process when either occurs after 
an institution has been declared seriously deficient. Because all State 
agencies must require institutions to submit renewal applications no 
less frequently than every three years, an institution's application 
must sometimes be renewed while it is in the midst of the serious 
deficiency process. Similarly, depending on the State agency's policy 
regarding the duration of a Program agreement, the institution's 
Program agreement may also expire while it is in the midst of the 
serious deficiency process. When situations like these have arisen in 
the past, some State agencies have mistakenly believed that they were 
required to take no action on a renewal application, or that they were 
required to deny the institution's renewal application, because the 
institution has already been declared seriously deficient. Although 
these issues have been partially addressed in training and in guidance 
issued on November 7, 2005 (``CACFP Policy 03-2006: Questions 
and Answers on the Serious Deficiency Process in the Child and Adult 
Care Food Program''), they occur often enough to merit further 
discussion in this preamble, and further clarification in this final 
rule.
    When a renewing institution's agreement expires during the serious 
deficiency process, the first interim rule at Sec.  
226.6(c)(2)(iii)(D)(1) made clear that the State agency must 
temporarily extend the institution's agreement until the conclusion of 
the serious deficiency process (whether the ``conclusion'' of the 
process comes as a result of successful corrective action, the 
institution's failure to appeal, or the end of the administrative 
appeal process). Extending the agreement facilitates continued payment 
of the valid claims submitted by the renewing institution during the 
resolution of its serious deficiency. However, the first interim rule 
did not explicitly state that the same principle would apply to a 
``participating institution'' (i.e., an institution whose serious 
deficiency is discovered during a review or audit) whose agreement 
expired while the institution was in the midst of the serious 
deficiency process. In fact, as with a ``renewing institution,'' the 
participating institution's agreement must be extended through the 
conclusion of the serious deficiency process in order to facilitate the 
payment of valid claims submitted during the serious deficiency 
process. This final rule will revise Sec.  226.6(c)(3)(iii)(D) to 
clarify this point.
    In the case of a participating institution that is renewing its 
application during the serious deficiency process State agencies have 
several options for how to handle the institution's renewal 
application. First, the State agency may temporarily defer 
consideration of the renewal application. If the State agency makes 
this choice, it must continue to pay any valid claims submitted, based 
on the institution's most recent approved budget (and, in the case of a 
sponsoring organization, its management plan). Second, the State agency 
may choose to temporarily approve the institution's budget and/or 
management plan (provided, of course, that any unallowable costs cited 
in the serious deficiency notice were handled appropriately in the 
budget and/or management plan), pending the outcome of corrective 
action. If the State agency decides to temporarily approve the 
institution's budget and/or management plan, the institution would be 
permitted to provide legitimate cost-of-living increases to employees, 
and to make purchases approved in the new budget/management plan. In 
this situation, the State agency must carefully review the 
institution's renewal application (especially any proposed changes to 
the institution's budget/management plan) to ensure that the 
institution will continue to perform all of its required Program 
responsibilities while it is seriously deficient. In some cases, there 
may be compelling reasons for the State agency to approve portions of 
the proposed budget, or even the proposed budget as a whole, especially 
if the proposed budget shows that the institution will better perform 
its Program responsibilities by reallocating funds among several budget 
categories.
    However, even if the State agency determines that timely and 
permanent corrective action was not taken by the institution, and 
denies the renewal application for that reason, it still needs to 
extend the institution's agreement and make payments for valid claims, 
based on the institution's most recent approved budget (and, in the 
case of a sponsoring organization, its management plan) until any 
pending administrative appeal is resolved. The most-recently approved 
budget would be used as the basis for determining claims payments until 
the end of the serious deficiency process. Therefore, this final rule 
further revises Sec.  226.6(c)(3)(iii)(D) to clarify that, if a 
participating institution's renewal application must be submitted 
during the serious deficiency process, the State agency may either use 
the most recently-approved budget/management plan as the basis for 
determining the amount of valid claims to be paid, or it may approve 
part or all of the institution's proposed renewal budget. Of course, 
the State agency should only pursue this latter course if it is 
convinced that the institution will be capable of carrying out all of 
its Program responsibilities using the proposed budget.
    Accordingly, this final rule will add a new paragraph, at Sec.  
226.6(c)(1)(iii)(A)(7), which clarifies that, after receiving a notice 
of serious deficiency, a new institution may not evade the potential 
consequences of its serious deficiency by withdrawing its application 
to participate. It also revises Sec.  226.6(c)(3)(iii)(D) to clarify 
that a participating institution's agreement must be extended through 
the conclusion of the serious deficiency

[[Page 34551]]

process, in order to facilitate the payment of valid claims submitted 
during the serious deficiency process, and to clarify that, if a 
participating institution's application must be renewed during the 
serious deficiency process, the State agency may base valid claim 
payments on either the institution's most recently-approved budget/
management plan or the budget/management plan submitted with the 
institution's renewal application. Finally, this final rule also 
revises Sec.  226.6(c)(2)(iii)(D) to make this same clarification 
regarding the State agency's payment options when a renewing 
institution is declared seriously deficient.
(3) Corrective Action
    The Department received three questions about the first interim 
rule's changes regarding a seriously deficient institution's obligation 
to take corrective action after being declared seriously deficient.
    First, one commenter asked the Department to add regulatory 
language clarifying that an institution may not appeal the State 
agency's decision that the institution's corrective action is not 
complete and permanent. The Department agrees, and will add this 
clarification to the final rule. An institution must have one 
opportunity to complete corrective action and, failing that, must 
receive one opportunity to appeal the State agency's notice of intent 
to terminate and disqualify the institution and its responsible 
principals and individuals. If, in fact, the State agency errs in 
determining that the institution's corrective action was unsuccessful, 
the hearing official will overturn the State agency's notice of intent 
to terminate. In addition, the institution experiences no adverse 
effect, since it will continue to receive payment for valid claims 
submitted during its appeal. Appeal of the notice of intent to 
terminate and disqualify is the one and only appeal allowed during the 
serious deficiency process, unless the institution has been suspended 
(see Part I(B)(xx) of this preamble regarding a ``suspension review''). 
Therefore, Sec.  226.6(k)(3) will be amended to add to the list of 
actions that may not be appealed the State agency's determination that 
corrective action was not complete and permanent.
    The Department will also act on a request from one State agency 
commenter and several training attendees that the regulatory language 
be modified where it states that, if the State agency deems the 
institution's corrective action permanent and complete, it must 
``rescind'' its notice of serious deficiency. The intent of the first 
interim rule was that, if the State agency later discovered that the 
institution's corrective action was not permanent (e.g., the 
institution failed to continue taking the actions which the State 
agency determined were necessary to completely and permanently correct 
the serious deficiency), the State agency could resume the serious 
deficiency process for that institution by immediately issuing a notice 
of intent to terminate and disqualify.
    We have learned, however, that the word ``rescind'' is being 
interpreted by some hearing officials to preclude the possibility of 
``re-starting'' the same serious deficiency process at the point of 
issuing a notice of intent to terminate. Instead, hearing officials 
have sometimes interpreted the word ``rescind'' to mean that, even if 
the institution's ``corrective action'' lasts for only a week, the 
State agency must begin the entire process over again. This could 
expose the government to additional loss if, for example, an 
institution was charging the Program for unallowable administrative 
expenses.
    To rectify this, the Department will remove the word ``rescind'' at 
Sec. Sec.  226.6(c)(1)(iii)(B)(1)(i), 226.6(c)(2)(iii)(B)(1)(i), 
226.6(c)(3)(iii)(B)(1)(i), and 226.6(c)(6)(ii)(C)(1) and replace it 
with the words ``temporarily defer.'' In addition, the Department will 
add new paragraphs at Sec. Sec.  226.6(c)(1)(iii)(B)(3), 
226.6(c)(2)(iii)(B)(3), 226.6(c)(3)(iii)(B)(3), and 
226.6(c)(6)(ii)(C)(3) to state clearly that, if the State agency 
accepts the institution's corrective action, but later determines that 
the corrective action was not permanent or complete, the State agency 
must then move to the next step in the serious deficiency process, 
without re-starting the serious deficiency process.
    Finally, in response to questions raised by training attendees, the 
Department will also amend the current regulatory language to help 
ensure that State agencies are able to submit all required information 
to FNS if an individual has been disqualified and is to be placed on 
the NDL. The current regulations at Sec. Sec.  226.6(b)(1)(xv) and 
226.6(b)(2)(v) require that, when it applies to participate, an 
institution's application must include the dates of birth of the 
executive director and the chairperson of the board of directors. 
However, in many instances, State agencies are disqualifying additional 
principals or individuals whose date of birth the State does not 
possess. The date of birth is the only means by which the Department 
will later be able to differentiate between disqualified individuals 
with the same or similar names. [Note to readers: Comments on the 
requirement to collect the dates of birth of institution officials and 
of family day care home providers are addressed in Part III of this 
preamble.]
    To facilitate the collection of a date of birth for all responsible 
principals and individuals, this final rule further amends Sec. Sec.  
226.6(c)(1), 226.6(c)(2), and 226.6(c)(3) by adding new paragraphs 
Sec. Sec.  226.6(c)(1)(iii)(A)(8), 226.6(c)(2)(iii)(A)(7), and 
226.6(c)(3)(iii)(A)(7) to state that, if the State agency does not 
possess the date of birth for any individual named as a ``responsible 
principal or individual'' in the serious deficiency notice, it must 
make the submission of that person's date of birth a condition of 
corrective action for the institution and/or individual. Then, if that 
person is later disqualified and placed on the NDL, the State agency 
will be able to forward the person's date of birth to the Department at 
the time of disqualification.
    Accordingly, this final rule will amend Sec.  226.6(k)(3) to add to 
the list of actions that an institution may not appeal the State 
agency's determination that corrective action was not complete and 
permanent. It will also remove the word ``rescind'' at Sec. Sec.  
226.6(c)(1)(iii)(B)(1)(i), 226.6(c)(2)(iii)(B)(1)(i), 
226.6(c)(3)(iii)(B)(1)(i), and 226.6(c)(6)(ii)(C)(1) and replace it 
with the words ``temporarily defer''. The final rule also adds new 
paragraphs at Sec. Sec.  226.6(c)(1)(iii)(B)(3), 
226.6(c)(2)(iii)(B)(3), 226.6(c)(3)(iii)(B)(3), and 
226.6(c)(6)(i)(C)(3) to state that, if the State agency accepts the 
institution's corrective action, but later determines that the 
corrective action was not permanent or complete, the State agency must 
then issue a notice of intent to terminate and disqualify the 
institution and its responsible principals and individuals, without re-
starting the serious deficiency process. Finally, the final rule will 
amend Sec. Sec.  226.6(c)(1)(iii)(A), 226.6(c)(2)(iii)(A), and 
226.6(c)(3)(iii)(A) to state that, if the State agency does not possess 
the date of birth for any individual named as a ``responsible principal 
or individual'' in the serious deficiency notice, it must make 
submission of that individual's date of birth a condition of corrective 
action for the institution and/or individual.
(4) Administrative Reviews (``Appeals'')
    The Department received ten comments (from nine State agencies and 
one advocacy group) regarding the

[[Page 34552]]

changes made to the institution appeals process in the first interim 
rule. All of these commenters believed that the 60-day timeframe for 
completing an institution's appeal (see Sec.  226.6(k)(5)(ix) of the 
regulations) was too short, and suggested timeframes ranging from 90 to 
180 days. Readers of this preamble should note that the 60-day 
timeframe begins when the State agency receives the institution's 
request for an appeal, which occurs after the State agency has sent the 
institution a notice of intent to terminate and disqualify, or has 
taken another adverse action against the institution, as set forth at 
Sec.  226.6(k)(2). These commenters were especially concerned that, in 
States where an agency other than the State agency employs or contracts 
for the administrative review official, the State agency will be unable 
to comply with the 60-day timeframe.
    The Department understands the difficulties faced by many State 
agencies in meeting the 60-day timeframe. However, ``due process'' is 
prompt process for this purpose. Institutions and responsible 
principals and individuals should be provided with a resolution of 
their proposed termination and disqualification as expeditiously as 
possible in the best interests of the Program. In addition, once an 
institution's attempt to correct a serious deficiency has been judged 
inadequate by the State agency, the Department has an obligation to 
minimize the possibility that public funds will continue to be 
improperly utilized. Although a State agency is expected to engage in a 
more meticulous review of an institution's claim once it has been given 
a notice of intent to terminate and disqualify, there will inevitably 
be increased risks of improper expenditures during this period. 
Therefore, this final rule does not alter the 60-day timeframe for 
completing an institution's appeal.
(5) Suspension of an Institution's Program Participation
    As previously noted, section 17(d)(5) of the NSLA sets forth a 
specific process for suspending an institution's CACFP participation 
based on the institution's knowing submission of a false or fraudulent 
claim. Thus, although the law establishes procedural safeguards to 
ensure that institutions continued to receive payment for valid claims 
submitted, it also clarifies that there are two circumstances under 
which an institution may be prohibited from receiving Program payments 
from the outset of the serious deficiency process.
    First, ARPA stated that, when an institution's conduct posed an 
imminent threat to the health or safety of children or the public 
(e.g., when a child care center has been cited by State or local health 
or licensing officials for serious health or safety violations), the 
State agency must suspend the institution's CACFP participation. 
Second, Sec.  307 the Grain Standards and Warehouse Inspection Act 
specified that, when a State agency determines that an institution has 
submitted false or fraudulent claims, it may suspend the institution's 
Program participation, subject to a suspension review that would 
precede the normal administrative review process. The Department 
received 11 written comments from State agencies concerning various 
aspects of the new suspension requirements for institutions.
    A number of these commenters asked us to reconsider aspects of 
implementation that are mandated by law. For example, one State agency 
commenter recommended that States be permitted to offer a suspension 
review to institutions that had been suspended due to conduct that 
posed an imminent threat to public health or safety. However, this is 
inconsistent with ARPA's intent regarding suspension of an institution 
for conduct that poses an imminent threat to the health or safety of 
children or the public. When the State agency suspends an institution 
for conduct that poses an imminent threat to public health or safety, 
ARPA permits the institution to have only one appeal. In these 
circumstances, the institution's single appeal before a hearing 
official will involve all of the facts surrounding the State agency's 
suspension action and its notice of intent to terminate and disqualify 
the institution and its responsible principals and individuals.
    Another commenter suggested that there be only one combined appeal 
of the proposed suspension and the notice of intent to terminate when 
the reason for suspension was the State agency's determination that the 
institution had knowingly submitted a false or fraudulent claim. 
However, in the case of a State agency's proposed suspension of an 
institution for knowing submission of a false or fraudulent claim, 
section 17(d)(5)(D)(ii)(II) of the NSLA clearly establishes that the 
suspension of payments and participation may only occur after a 
separate suspension review has occurred. In that review, the suspension 
review official must determine, based on a preponderance of evidence, 
whether the State agency's proposed suspension was appropriate. Thus, 
the Department is constrained by the NSLA to maintain the suspension 
procedures set forth in the first interim rule.
    Similarly, another State agency commenter recommended that the 
Department add additional circumstances (e.g., failure to address 
review findings, failure to attend mandatory training) under which a 
State agency would be permitted to suspend an institution's Program 
participation, including payments. However, this suggestion also 
contradicts the law. The ARPA specifically limited State agencies' 
ability to suspend an institution's program payments, prior to the 
resolution of its appeal, to two circumstances: conduct that poses an 
imminent threat to children's or the public's health or safety; and the 
State agency's determination that an institution knowingly submitted a 
false or fraudulent claim.
    Two State agency commenters suggested that the Department lengthen 
the amount of time permitted by the interim rule during various stages 
of the suspension review process. The commenters suggested that 
institutions have 20 days (instead of 10 days, as specified at Sec.  
226.6(c)(5)(ii)(B)(5)) to submit materials to a suspension review 
official, and that suspension review officials have 30 days (instead of 
10 days, as specified at Sec.  226.6(c)(5)(ii)(C)(3)) during which to 
consider their decision to uphold or overturn the State agency's 
proposed suspension. However, the Department carefully considered these 
timeframes when developing the first interim rule, and will not modify 
them in this final rule. Because the institution receiving the 
suspension review has been suspended due to the State agency's 
determination that it knowingly submitted a false or fraudulent claim, 
the Department concluded that it is essential that the proposed 
suspension be resolved quickly, in order to minimize the institution's 
possible misuse of additional Program funds.
    Two State agency commenters suggested that the first interim rule's 
requirement for the State agency to ``take action'' prior to the formal 
revocation of the institution's license may be unlawful in some States. 
The Department carefully considered this possibility as well when 
drafting the first interim rule. That is why Sec.  226.6(c)(5)(i) 
requires the State agency to take different actions, depending on 
whether or not State or local licensing or health officials have 
``cited an institution for serious health or safety violations.''
    If a citation has been issued by health or licensing officials for 
conduct posing an ``imminent threat'' to children's health or safety, 
the regulations require the State agency immediately to

[[Page 34553]]

suspend the institution's CACFP participation. If ARPA had intended 
CACFP State agencies to wait until an institution's license was 
revoked, the wording of section 17(d)(5)(C)(ii) of the NSLA would have 
been meaningless, since unlicensed institutions are ineligible to 
participate in CACFP. Instead, the law gave the Secretary the authority 
to write regulations that required ``the immediate suspension of 
operation of the program by an entity * * * , if the State agency 
determines that there is an imminent threat to the health or safety'' 
of children or the public. We concluded that this wording recognizes a 
difference between State laws or regulations governing an institution's 
license to provide child care, and the Department's rules for 
participation in CACFP. The law expects--and the regulations at Sec.  
226.6(c)(5)(i)(B) require--that when an institution is cited by health 
or licensing officials for an offense that constitutes an ``imminent 
threat'' to children's or the public's health or safety, a State agency 
will immediately declare the institution seriously deficient, suspend 
the institution's CACFP participation, and provide notice of its intent 
to terminate and disqualify the institution and its responsible 
principals and individuals.
    However, the Department realized that it might not be appropriate 
to take the same immediate actions if the State agency, rather than 
health or licensing officials, had discovered the conditions that might 
constitute an ``imminent threat'' to public health or safety. State 
agency staff are not trained licensors or health inspectors. For that 
reason, the first interim rule established a different standard for 
State agency conduct when the State agency--not the licensing or health 
department--discovered the potential threat to health and safety. 
Section 226.6(c)(5)(i) of the first interim rule requires the State 
agency to ``notify the appropriate State or local licensing and health 
authorities and take action that is consistent with the recommendations 
and requirements of those authorities.'' The wording recognizes that, 
in this circumstance, it may be inadvisable for the State agency to 
take action related to the institution's CACFP participation until it 
has conferred with the appropriate health or licensing authorities and 
obtained their input.
    In addition, three State agency commenters recommended that, if a 
suspension review official upheld the State agency's determination that 
a sponsoring organization's program payments be suspended for knowing 
submission of a false claim, the State agency should have the authority 
to suspend all Program payments, and not just the sponsor's 
administrative reimbursements. These commenters feared that, if 
facility meal payments continued to flow through a sponsoring 
organization that had submitted a false claim, there was a strong 
possibility that the sponsor would fail to provide full payment to 
providers, since its own administrative funding had been discontinued.
    The first interim rule at Sec.  226.6(c)(5)(ii)(E) required that, 
when a sponsor was suspended for submission of a false claim, the State 
agency must ``ensure that sponsored facilities continue to receive 
reimbursement for eligible meals served.'' This language is based on 
section 17(d)(5)(D)(ii)(III)(ee) of the NSLA, which requires State 
agencies to ensure that payments for eligible meals served by 
facilities continue to be made during the period of their sponsor's 
suspension. The Department urges State agencies to make meal payments 
directly to sponsored facilities during the period of their sponsor's 
suspension, and invites State agencies to contact FNS for guidance in 
situations like these. However, if there is no other way to provide 
facilities with earned meal reimbursements than by passing payments 
through the sponsor, then the law requires these payments to continue. 
Such circumstances further underscore the need for State hearing 
officials to provide prompt determinations to CACFP appellants in these 
cases.
    Finally, one State agency requested that the final rule clarify 
that a suspended institution may still operate, that only CACFP payment 
is suspended. As the previous discussion makes clear, the program 
``operation'' of an institution must cease as soon as it is suspended, 
regardless of whether the institution is still licensed to provide 
child care. For example, if an independent center is suspended based on 
a licensing citation for an ``imminent threat'', it will receive no 
program payments for meals served during the period of suspension, 
regardless of whether the licensing citation resulted in the State's 
suspension of the center's license to operate. If an administrative 
review officer (hearing official) later rules in favor of the 
institution and overturns the State agency's proposed termination and 
disqualification, the institution could then submit claims for 
properly-documented meals served that met meal pattern requirements 
throughout the period of suspension.
    If, on the other hand, a sponsoring organization is suspended for 
submission of false claims, it will not receive administrative 
reimbursement for the period of its suspension. If an administrative 
review officer (hearing official) later rules in favor of the sponsor 
and overturns the State agency's proposed termination and 
disqualification, the sponsor could then submit claims for properly-
documented and allowable program administrative costs incurred during 
the period of suspension.
(6) National Disqualified List (NDL)
    In the first interim rule, the Department developed new procedures 
and requirements for a ``National Disqualified List'', or NDL. These 
new requirements were designed to ensure that an institution or a day 
care home which failed to correct its serious deficiencies--as well as 
any principals and individuals responsible for the institution's or 
home's serious deficiencies--would not participate in the program for 
the next seven years (or longer if a Program debt remained 
unsatisfied). (Note to readers: the serious deficiency process for day 
care homes is dealt with in Part III of this preamble). The first 
interim rule also provided that, if an institution or a responsible 
principal or individual implements corrective action which, in the 
judgment of both the State agency and FNS, permanently and completely 
resolved the serious deficienc(ies), the institution or individual 
could be removed from the NDL. The Department received eight State 
agency comments concerning the process for placing institutions and 
responsible principals and individuals on the NDL, and/or for removing 
them from the NDL after successful corrective action.
    Four State agencies commented on various aspects of the process by 
which an institution may re-enter the Program after having been placed 
on the NDL. Two of these commenters believed that placement on the NDL 
should completely remove an institution, responsible principal, or 
responsible individual's opportunity to re-enter CACFP for a period of 
seven years. When drafting the regulations to implement ARPA, the 
Department carefully considered various options regarding the length of 
time that an institution or responsible principal or individual would 
remain on the list and what opportunity, if any, they would have to be 
removed from the NDL. Like these commenters, the Department does not 
want institutions or responsible principals or individuals to routinely 
be removed from the NDL prior to the end of the seven-year 
disqualification period (or longer if they owe a debt to the Program). 
If such removals were to

[[Page 34554]]

become routine, it would partially undermine the premise stated in Part 
I(B)(3) of the preamble: That the period designated by the State agency 
for corrective action in its initial notice of serious deficiency 
provides the institution and its responsible principals and individuals 
with its primary opportunity to completely and permanently correct its 
serious deficiencies, prior to having its agreement terminated for 
cause and being placed on the NDL.
    Nevertheless, the Department is also aware that, on occasion, an 
otherwise capable institution might fail to correct serious 
deficiencies in a timely manner due to the deficiencies of its current 
managers. Once these managers are removed from Program participation, 
it might be possible for the institution's board of directors to re-
organize management in a way that would permit the institution to again 
provide Program benefits to children in a manner consistent with all 
Program requirements. It must also be stressed, as another State agency 
commenter noted, that if the institution takes these actions after it 
has been terminated and disqualified, the institution is in no way 
``entitled'' to again participate in CACFP. The institution would again 
be required to re-apply for participation as a ``new institution,'' and 
to meet all of the requirements for approval set forth at Sec.  
226.6(b)(1) of the regulations. The State agency must consider the 
institution's entire application and must find that the institution is 
fully capable of operating the Program in accordance with all 
requirements. It is possible that the institution's correction of its 
prior serious deficiencies will not, by itself, make its new 
application to participate approvable.
    In addition, another State agency commenter requested that the 
Department emphasize that the decision to remove an institution or a 
responsible principal or individual from the NDL is a two-part process. 
The State must first determine that the corrective action taken after 
placement on the NDL has completely and permanently corrected the 
serious deficiencies that led to the disqualification. Then, FNS must 
concur with the State agency's decision. Furthermore, once an 
institution or a responsible principal or individual is placed on the 
NDL, it has forfeited its right to appeal the State agency or FNS's 
decision that its corrective action is inadequate. To underscore this 
point, this final rule will further amend Sec.  226.6(k)(3) to clarify 
that an institution may not appeal the State agency's or FNS's 
determination that its corrective action is insufficient to justify 
removal from the NDL.
    Another State agency commenter requested that the final regulation 
include stronger language to clarify the State agency's responsibility 
when an institution on the NDL submits an application to participate. 
In this situation, the State agency has only one responsibility: to 
determine whether the institution knowingly submitted false information 
on its application (in which case, consistent with Sec.  226.6(c)(1), 
the State agency must initiate a serious deficiency process with an 
abbreviated appeal, so that the expiration of the institution's seven-
year disqualification can be extended). Otherwise, the State agency may 
simply return the application, stating that the institution is not 
eligible to have its application considered until it has been removed 
from the NDL. To underscore this point, this final rule further amends 
Sec.  226.6(k)(3) to state that an institution on the NDL may not 
appeal the State agency's refusal to consider its application to 
participate until the institution has been removed from the NDL, nor 
may an institution appeal if the State agency refuses to consider an 
application submitted on behalf of a sponsored facility that is on the 
NDL.
    Finally, this final rule amends Sec. Sec.  226.6(b)(1)(xii), 
226.6(b)(2)(ii), and 226.6(c)(7) to modify current regulatory language 
stating that the State agency must ``deny the application'' of an 
institution or sponsored facility on the NDL, and that such institution 
``may not submit'' an application for itself or on behalf of a 
sponsored facility on the NDL. Several State agency commenters 
correctly noted that it is impossible to prohibit any entity from 
``submitting'' an application. The changes to the regulatory wording we 
are making in this final rule will more appropriately focus on the 
State agency's responsibility to not approve the application, and the 
institution's absence of appeal rights, in this circumstance.
    Accordingly, this final rule further amends Sec.  226.6(k)(3) by 
adding Sec.  226.6(k)(3)(vi) to state that an institution may not 
appeal the State agency or FNS's decision that an institution's 
corrective action is inadequate to be removed from the NDL, and by 
adding Sec.  226.6(k)(3)(vii) to state that an institution on the NDL 
may not appeal the State agency's refusal to consider an application to 
participate until it, or a sponsored facility on whose behalf the 
institution has applied, has been removed from the NDL. In addition, 
this final rule amends Sec. Sec.  226.6(b)(1)(xii), 226.6(b)(2)(ii), 
and 226.6(c)(7) to modify current regulatory language stating that the 
State agency must ``deny the application'' of an institution or 
facility on the NDL, and that such institution and facility ``may not 
submit'' an application. Instead, the regulatory language will be 
amended to state that the State agency may not approve an application 
submitted by an institution on the NDL, or an application submitted by 
an institution on behalf of a sponsored facility that is on the NDL, 
and that a State agency's refusal to consider an application in this 
circumstance is not subject to administrative review.

Part II. State Agency and Institution Review and Oversight Requirements

Introduction
    Sections 243(a) and (b) of ARPA added three statutory requirements 
which affected the regulatory requirements for State agency monitoring 
of institutions and sponsoring organizations' monitoring of their 
sponsored facilities. These changes were designed to improve Program 
management and integrity by strengthening the requirements affecting 
the review and oversight functions performed by State agencies and 
sponsoring organizations participating in the CACFP. These three 
changes were discussed in Part II of the interim rule published on June 
27, 2002, which implemented all of the changes mandated by ARPA in the 
CACFP regulations.
    In addition, a number of additional regulatory changes affecting 
State agency and sponsor monitoring and oversight were suggested by the 
``Operation Kiddie Care'' report, issued by the United States 
Department of Agriculture's Office of Inspector General (OIG) in August 
of 1999. On September 12, 2000, the Department issued a proposed rule 
that addressed most of the changes to review and oversight requirements 
suggested in the Kiddie Care report. After analyzing public comments on 
this proposed rule, the Department published a second interim rule on 
September 1, 2004, which implemented these changes to State and sponsor 
review and oversight requirements in the CACFP regulations. These 
changes were addressed in Part II of the second interim rule, published 
on September 1, 2004.
    In total, the two interim rules addressed twelve different aspects 
of CACFP review and oversight requirements, as follows:
     Unannounced reviews conducted by sponsoring organizations 
and State agencies;

[[Page 34555]]

     The minimum number of sponsor organization staff devoted 
to performance of the monitoring function;
     The frequency of State agency reviews of institutions 
(referred to as ``the State agency review cycle'');
     Enrollment form requirements for children participating in 
CACFP facilities;
     The minimum content of State agency reviews of 
institutions (referred to as ``State agency review elements'');
     The minimum content of sponsor reviews of facilities 
(referred to as ``sponsoring organization review elements'');
     Requirements for monthly State agency and sponsoring 
organization edit checks of meal claims submitted by institutions and 
facilities;
     Requirements for sponsoring organizations and State 
agencies to conduct ``household contacts'' to the families of children 
participating in CACFP;
     The frequency of facility reviews conducted by sponsoring 
organizations (referred to as ``the sponsoring organization review 
cycle'');
     State agency disallowance of fraudulent or otherwise 
unlawful facility meal claims;
     The rules governing audits of institutions participating 
in CACFP; and
     Requirements concerning family day care home providers who 
qualify for tier I reimbursements on the basis of their receipt of 
benefits under the Supplemental Nutrition Assistance Program (SNAP), 
formerly known as the Food Stamp Program.
    The Department received public comments on all but two of the above 
items: State agency disallowance of fraudulent or otherwise unlawful 
facility meal claims, and the changes to the Department's rules 
governing audits at 7 CFR Part 3052. On several other items, comments 
focused solely on one aspect of the new requirements (e.g., all 
comments concerning edit checks had to do with the Department's 
requirement that sponsoring organizations implement an edit check that 
would identify ``block claims'' submitted by their facilities). As in 
Part I of this preamble, a number of the issues raised by commenters 
have already been addressed in guidance or training, and do not require 
extensive discussion in this preamble.

A. Unannounced Reviews

    Prior to the issuance of the first interim rule, the CACFP 
regulations required that most sponsoring organizations make three 
reviews of each of their facilities each year, but did not specify 
whether these reviews should be announced or unannounced. Common 
practice, prior to the first interim rule, was to make most provider 
reviews announced (i.e., the sponsor would schedule the review with the 
provider in advance). However, the OIG's ``Operation Kiddie Care'' 
report strongly recommended that sponsor reviews be unannounced, and 
Section 243(b)(2) of ARPA amended section 17(d)(2) of the NSLA by 
requiring that some State agency and sponsor reviews be unannounced. 
Consequently, the first interim rule continued to require that each 
sponsor conduct three reviews per facility per year, but added the 
requirements that two of the three reviews be unannounced, and that one 
of the unannounced reviews include a review of a meal service. The 
first interim rule encouraged State agencies to conduct unannounced 
reviews of problem-prone institutions, and required that, when 
conducting a review of a sponsoring organization, at least 15 percent 
of the facility reviews conducted by State agency staff must be 
unannounced.
    Furthermore, the rule established certain requirements for 
notifying facilities of these new requirements, and for sponsor staff 
to have photo identification--to demonstrate that they are sponsor 
employees--when conducting unannounced reviews. Finally, in response to 
sponsor concerns that unannounced reviews would increase costs due to a 
provider's absence at the time of the review, the Department also added 
a requirement that providers must notify sponsors in advance whenever 
the provider planned to be out of the home with the children in care 
during a scheduled period of meal service.
    The Department received 366 comments regarding the required 
frequency of unannounced sponsor reviews of facilities. Of these, 320 
were from family day care home providers, 37 from institutions, four 
from State agencies, four from advocacy groups, and one with no 
identifiable affiliation. Twelve (12) commenters supported the 
provision as written. The remaining commenters offered a wide variety 
of alternative suggestions for the frequency with which unannounced 
reviews must be conducted. The most common alternative suggested (by 
306 commenters) was that the Department should require one unannounced 
and two announced reviews of each facility each year. Seventeen 
providers opposed any requirement that sponsors conduct unannounced 
reviews, while the remaining 31 commenters suggested ways in which the 
Department could either lower the total number of required reviews 
below three per year and/or permit sponsors to focus more reviews on 
providers with suspicious claiming patterns.
    Based on the results of the CCAP, the Department remains convinced 
that the requirement for two unannounced reviews per facility per year 
is appropriate. The results of the CCAP report suggested that, although 
there has been improvement in some areas of program management 
following publication of the two interim rules, significant problems 
still remain with regard to the accuracy of family day care home 
provider meal counts. There are two CCAP findings which relate directly 
to this issue. First, of all visits completed during CCAP, over one-
fourth of providers' meal and/or menu records were not up-to-date at 
the time of the assessment team's visit. Unfortunately, this problem 
was not confined to particular sponsors: for over 80 percent of the 
sponsors assessed, more than 20 percent of homes lacked up-to-date meal 
and/or menu records on the day of the CCAP assessment. Second, on other 
days of the month in which the CCAP was conducted, more than 40 percent 
of providers' meal counts were, on average, one or more meals higher 
than the number of meals observed for the same meal service on the day 
of the assessment team's visit.
    While these findings do not prove the existence or frequency of 
misreporting on provider claims, taken together, they suggest that meal 
count integrity is in need of improvement among family day care homes 
participating in CACFP. Unannounced sponsor reviews should be an 
excellent tool for identifying these issues. Therefore, the rule 
continues to require that two unannounced reviews must be made to each 
facility each year, as set forth in the first interim rule. In 
addition, as discussed further in Part II(H), commenters should note 
that the second interim rule did provide a new approach to ``review 
averaging,'' which provides sponsoring organizations with greater 
flexibility to focus their review efforts on new or ``problem'' 
facilities.
    In addition, the Department received 671 comments concerning the 
requirement that providers notify sponsors in advance whenever the 
provider planned to be claim a meal served outside of the home to 
children in care during a scheduled period of meal service. A total of 
278 comments (from 240 institutions, 22 advocates, one provider, four 
State agencies, and 11 commenters with no clear affiliation) 
recommended that the requirement be made optional, at the discretion of 
the sponsoring organization. Some of the sponsor commenters felt that 
they

[[Page 34556]]

already had reasonable provider ``call-in'' requirements in place, and 
that such requirements needed to be individualized for each sponsor. A 
total of 386 other commenters (361 providers, 16 institutions, one 
State agency, one advocacy group, and seven with no organizational 
affiliation) were opposed to the requirement, and believed it should 
not be addressed at all in the Federal regulations governing CACFP. 
These commenters felt it would be difficult for providers to remember 
the requirement when they were preparing the children to leave the 
home.
    The Department wishes to correct a misunderstanding that has 
frequently been expressed about this requirement--namely, that it 
requires a CACFP provider to call the sponsor any time she leaves her 
home with the children in her care. In fact, providers are required to 
contact the sponsor only if they plan to be out of the home during a 
scheduled meal service. This provision was promulgated as a way to 
address the issue of inflated meal counts. Often, sponsors would report 
that their unannounced visits were unsuccessful because providers were 
not at home during the specified time of meal service. These same 
providers would often claim that reimbursable meals were served at 
another location (e.g., a nearby park) during the same time of meal 
service. Sponsors were frustrated by their inability to address 
suspicious meal claims in these circumstances.
    Thus, the regulatory language that required providers to notify the 
sponsor when they would be out of the home and provide a reimbursable 
meal to enrolled children was intended to give sponsors the clear 
authority to disallow meal claims when the provider had not given such 
notification. In addition, it was hoped that the call-in requirement 
would minimize sponsors' costs in instances where sponsor monitors had 
to travel a great distance to conduct an unannounced review, and where 
providers were so geographically dispersed that the monitor might find 
it difficult to return to an absent provider's home on the same day. 
Removing the call-in requirement would impair our ongoing efforts to 
improve the integrity of provider meal counts, and might place a 
special hardship on sponsors of day care homes that are widely 
dispersed and located in rural areas.

B. Sponsoring Organization Monitoring Staff (``Monitor-Staff Ratio'')

    Section 243(a)(8) of ARPA amended section 17(a)(6) of the NSLA to 
require that, in order to be eligible to participate in CACFP, a 
sponsoring organization must employ an appropriate number of monitoring 
staff, based on the number and type of facilities it sponsors. Based on 
that statutory language, the first interim rule established different 
ratios of facilities to full-time monitor staff that sponsors of homes 
or centers must employ. The rule provided a range of facilities (50 to 
150 for day care homes, 25 to 150 for sponsored centers) which the 
State agency could use in determining whether the sponsor's management 
plan documented employment of enough staff to properly monitor the 
number and type of homes it administered. Establishing ranges was 
intended to provide State agencies with the flexibility to take into 
account such factors as whether the sponsor's facilities were rural or 
urban, the facilities' geographic dispersion, and the monitors' 
proximity to the facilities. It is the Department's understanding that 
few if any State agencies have taken advantage of this opportunity to 
``customize'' the staff-monitor ratio for sponsors with differing 
circumstances, opting instead to determine only whether the sponsoring 
organization's management plan documents that the sponsor meets or 
exceeds the ratio of one full-time equivalent monitor for each 150 
facilities administered. The Department required sponsors to comply by 
July 29, 2003, one year after the effective date of the first interim 
rule, but later extended the deadline to October 1, 2003.
    A total of 772 comments (including multiple comments about 
different aspects of this requirement) were received from 435 
institutions, 298 providers, 17 State agencies, 8 advocates, and 14 
others with no clear organizational affiliation. One group of 240 
respondents focused their comments on the numerical range of facilities 
(50-150 homes or 25-150 centers) for which Sec.  226.16(b)(1) requires 
a sponsor to employ one ``full-time equivalent'' staff. These 
commenters suggested that the high end of the range of facilities per 
monitor should be raised (to 200, 250, or even 300), that the 
requirement should be abolished, or that the rule should only be 
applied ``for cause,'' when sponsoring organizations were found to have 
serious monitoring problems.
    The regulatory requirement cannot be abolished, since it is based 
on the previously-mentioned statutory language describing the minimum 
requirements for sponsor eligibility. The Department has concluded that 
this provision is not restricted to sponsors with documented monitoring 
problems. The provision's greatest value may be to prevent the 
development of serious monitoring problems, by ensuring that each 
sponsor devotes adequate human resources to the monitoring function.
    Furthermore, we are concerned that many of these comments may have 
been developed without benefit of the information provided in the 
extensive implementation guidance for this provision that was issued on 
February 21, 2003. That guidance established procedures for State 
agencies to use to request a waiver for the upper limit of facilities 
per monitor, if the State agency determined that a sponsor that did not 
meet the upper limit was effectively monitoring and managing the CACFP, 
and was already devoting a reasonable portion of its budget to 
monitoring. The Department implemented this waiver policy well before 
the monitor-staff requirements became effective on October 1, 2003, but 
has not received any requests for waivers. A second group of 259 
comments focused on the methods State agencies must use to calculate 
whether a sponsor employs sufficient staff to meet the monitor-staff 
standards specified at Sec.  226.16(b) of the regulations. Of these, 
226 commenters reminded the Department that staff persons with the 
title of ``monitor'' also perform other functions, and that these 
functions should also be counted towards the sponsor's fulfillment of 
the monitor-facility ratio.
    This issue was thoroughly addressed in the guidance issued by the 
Department on February 21, 2003. It clarified that not every duty 
performed by an employee with the title of ``monitor'' is monitoring-
related, but that monitoring-related functions performed by any 
employee, regardless of title, should be counted towards the sponsor's 
number of full-time monitoring equivalents. For example, that portion 
of clerical staff time devoted to the preparation of monitoring-related 
correspondence, or that portion of supervisory staff time dedicated to 
quality control or other oversight of monitors and reviews, should also 
be counted in calculating the sponsor's full-time monitoring 
equivalents. The 2003 guidance contained a list of the tasks that 
should and should not be counted as ``monitoring-related,'' and readers 
are urged to consult this guidance whenever questions arise.
    Another group of commenters questioned the number of hours that the 
Department used in estimating the time necessary to perform three 
reviews for one facility over the course of a year. In the preamble to 
the first interim rule, the Department estimated that a sponsor would 
need to devote 12 to 15 hours per

[[Page 34557]]

facility to conduct all monitoring-related activities for that 
facility. Thirty-three commenters stated that the Department had 
greatly overestimated the amount of time spent by monitors on a typical 
review. However, as explained in the 2003 guidance, that per-facility 
estimate included not only the time a reviewer spends conducting three 
onsite reviews (adjusted upward to account for new regulatory 
requirements such as unannounced reviews, five-day reconciliations, 
annual enrollment updates, and other monitoring-related functions), but 
also all of the other aspects of the monitoring process, including 
travel time, planning, follow-up report writing, the time needed to 
conduct household contacts and, if necessary, the time required to 
conduct the serious deficiency process established for day care homes 
in the first interim rule.
    Finally, 273 providers submitted comments questioning why the 
Department was ``micro-managing'' sponsors' program management. The 
Department implemented a statutory requirement that a sponsor employ 
adequate staff to perform all of the monitoring-related activities that 
are now required following publication of the two interim rules. 
Responsibility for the implementation is not, therefore, ``micro-
managing''.These commenters are also reminded that ARPA required the 
Department to establish a method of determining whether sponsors 
employed enough staff to perform adequate monitoring, taking into 
account the number and type of facilities in which the sponsor 
administered the Program. The Department chose this particular approach 
after considering a number of other alternatives, as fully explained in 
the preamble to the first interim rule.

C. State Agency Review Cycle

    Section 243(b)(2) of ARPA amended the requirements at section 
17(d)(2) of the NSLA for State agency reviews of institutions (i.e., 
independent centers and sponsoring organizations). Prior to ARPA, State 
agencies were required to review all institutions no less than once 
every four years. As a result of the change made by ARPA, State 
agencies were required to review each institution no less frequently 
than once every three years, in order to ``identify and prevent 
management deficiencies and fraud and abuse under the Program.''
    The Department implemented these required changes at Sec.  
226.6(m)(4) of the first interim rule. In addition, consistent with the 
amendment's requirement to identify and prevent fraud and abuse, the 
Department added a requirement at Sec.  226.6(m)(2) that, in 
establishing its review priorities, State agencies must target for more 
frequent review those institutions in which the prior review had 
included a finding of serious deficiency. Finally, the Department 
elected to modify one other aspect of the former State agency review 
requirements in the first interim rule, by requiring that all sponsors 
of more than 100 facilities (the threshold had previously been 200 
facilities) be reviewed by the State agency no less than every other 
year.
    The Department received five comments on these changes, four from 
State agencies and one from an advocacy group. Three commenters 
believed that State agencies would be unable to increase their reviews 
from once every four years to once every three years. However, this 
change was required by ARPA, and may only be altered by amendment to 
Federal law. Two other commenters believed that, in order to meet the 
amendment's minimum requirements, the Department should simply require 
that each State agency review one-third of all participating 
institutions each year. Although this would provide a simple way of 
meeting the law's numerical requirements for institution reviews, the 
Department strongly believes that the large percentage of Program 
expenses utilized by sponsors of over 100 facilities justifies the 
requirement that State agencies review them every other year.

D. Updating Children's Enrollment in CACFP and Other Enrollment-Related 
Requirements

    The CACFP regulations have always required that, in order for meals 
to be reimbursed under the Program, the children receiving the meals 
must be ``enrolled for child care'' in a day care facility that meets 
the licensing or approval requirements set forth at Sec.  226.6(d) of 
the regulations. Prior to the publication of the Kiddie Care report, 
the frequency of collecting enrollment forms and the content of those 
forms were not addressed in the regulations. Enrollment requirements 
were established by each State's licensing agency, and thus were 
specific to each State.
    Although these State licensing requirements for children's 
enrollment remain in effect, the findings of the Kiddie Care audits 
showed that, in order to ensure the integrity of Program funds, the 
Department needed to establish CACFP-specific enrollment requirements 
that established minimum requirements for all States. Specifically, the 
Kiddie Care audits uncovered instances in which enrolled children were 
being claimed for meal reimbursement long after the child had left the 
CACFP facility. To address these improper claims, OIG recommended that 
the Department establish requirements regarding the updating and 
content of children's enrollment forms.
    In response, the second interim rule established the requirement 
that children's enrollment forms must be updated annually, and that the 
form must be signed by a parent or guardian. These changes were 
primarily made to help sponsor monitors, quickly identify ``old'' 
enrollments for children no longer in care, and to reduce the number of 
improperly claimed meals by having parents or guardians annually update 
the form.
    In addition, the second interim rule required that the enrollment 
form indicate each child's days and hours of care and the meals the 
child normally receives while in care. For example, a toddler in care 
might normally be present five days a week and receive breakfast, 
lunch, and an AM snack each day, whereas a child attending a pre-
kindergarten program would normally have different hours and receive 
different meals for those days on which he/she attended preschool. 
School-age children would usually have the same schedule of care every 
day, but might normally be in care only after school and receive a PM 
snack only. Requiring that the enrollment form include information on 
each child's normal days and hours of care and the meals he/she 
received was intended to help sponsors determine the validity of 
facility claims, and especially to assist sponsor monitors in 
conducting five-day reconciliations, which the second interim rule 
required to be conducted as a part of each facility review (see Part 
II(E) of this preamble).
    To facilitate this provision's implementation, the Department 
included several accommodating provisions in the second interim rule 
and in guidance. First, to accommodate larger sponsors (some of which 
handle many thousands of enrollment forms every year), full 
implementation of this requirement was delayed until April 1, 2005, so 
that sponsors could phase in the requirement over a period of time. 
This delay permitted larger sponsors to ``stagger'' the end date of 
enrollments and to spread their enrollment workload over a longer 
period of time. In addition, although new enrollment forms collected on 
or after April 1, 2005 were required to comply, the Department 
permitted the enrollments of then currently-participating children to 
be

[[Page 34558]]

updated later (by no later than September 30, 2005).
    Second, in response to concerns from States in which only the State 
licensing agency could make changes to the State-required enrollment 
form, the delayed implementation gave State agencies more time to 
coordinate with their counterparts in the State licensing agency 
concerning these changes. In addition, if it proved impossible for 
State licensing to effect these changes by the required deadline, 
guidance issued with the second interim rule provided State agencies 
with the option of capturing this ``enrollment'' information on a CACFP 
income eligibility form.
    Third, in response to concerns expressed by State agencies in 
States where parents were required by licensing to sign children in and 
out of care each day, the Department issued guidance on March 11, 2005, 
which relieved such States of the requirement to collect each child's 
days and hours of care on the enrollment form, since the child's 
presence or absence at the facility is clearly documented on the sign-
in/sign-out sheet. Finally, recognizing that not all States require 
enrollment for children in all types of facilities that participate in 
CACFP, the second interim rule exempted outside-school-hours care 
centers, at-risk afterschool snack programs, and emergency shelters 
from the child enrollment requirement. Of course, if State licensing 
rules require any of these types of facilities to be licensed, the 
facilities would have to be licensed in order to be eligible to 
participate in CACFP.
    The Department received 156 comments on the enrollment form 
requirements promulgated in the second interim rule, from 141 
institutions, seven advocacy groups, four State agencies, and four 
providers. Eight commenters fully approved of the changes to enrollment 
requirements, and 17 opposed them, either partially or in their 
entirety. Among other commenters, 88 asked for flexibility in 
permitting sponsors to ``stagger'' the due dates of enrollment forms 
throughout the year. As noted above, this flexibility was addressed in 
guidance issued on December 23, 2004, and in the training the 
Department conducted on the interim rule in 2005.
    In addition, 43 commenters suggested that the Department permit 
enrollments to be updated every 14 months, to avoid the possibility 
that providers or centers would lose reimbursement for families that 
were late in turning in their enrollment forms. The Department 
recognizes that, for any number of reasons, enrollment forms may not be 
updated exactly on a 12-month cycle. This was addressed in guidance 
(questions and answers) issued on February 23, 2006, which permitted 
State agencies to allow a ``rule of reason'' about the enrollment 
deadline. Although that guidance did not specify a maximum period of 
time that could elapse between enrollments, it did provide the example 
of an enrollment form first collected on September 7, 2005, which could 
be considered valid through the end of September 2006. The Department 
expects State agencies and ``sponsoring organizations'' to use this 
flexibility responsibly, consistent with the regulatory requirement at 
Sec. Sec.  226.15(e)(2) and (e)(3), 226.17(b)(7), and 226.18(e) to 
collect enrollment forms ``annually.''

E. Required State Agency and Sponsor Review Elements

    The second interim rule established specific requirements for the 
content of sponsoring organization reviews of facilities and State 
agency reviews of institutions. Prior to this, the CACFP regulations 
had simply mandated the timing and number of facility and institution 
reviews to be conducted, not their content.
    The changes were initially presented in a proposed rule issued on 
September 12, 2000, and implemented in the second interim rule. These 
proposed changes elicited widespread support, and were adjusted only 
slightly in the second interim rule, based on comments submitted in 
response to the Department's proposed rule of September 12, 2000. 
Comments were received on two aspects of the interim rule's State and 
sponsor review elements: The requirement that both State agencies and 
sponsoring organizations conduct a ``five-day reconciliation'' as a 
part of each facility review they conducted; and, the requirements 
pertaining to the State agency's conduct of unannounced reviews of a 
meal service.
    The second interim rule required that every State agency review of 
a sponsor (which also includes reviews of a representative sample of 
the sponsor's facilities), and every sponsor review of facilities must 
include a ``five-day reconciliation.'' Five-day reconciliation 
requirements were included as a sponsor review element in the second 
interim rule as a means for a sponsor to ``spot check'' the accuracy of 
facility claims. They were required to be included in State agency 
reviews of sponsors' facilities in order to again check the accuracy of 
the facility's meal counts, and to ``spot check'' the effectiveness of 
the sponsor reviewers' conduct of five-day reconciliations.
    The theory and practice of five-day reconciliations is simple. 
Reviewers must check enrollment, attendance and meal counts in the 
facility for a five-day period to see if they match, or ``reconcile.'' 
If they do, it is more likely that the facility is keeping accurate 
enrollment and attendance records and is accurately reporting the 
number of meals served each day. If they do not, the reviewer must 
attempt to determine the reason(s) for the discrepancies, and decide 
whether an overclaim should be established.
    Nine comments were received on the five-day reconciliation 
requirement implemented in the second interim rule: Four from 
institutions; four from State agencies, and one from an advocacy group. 
One State agency commenter suggested that meal counts be reconciled to 
enrollment only, while the other eight commenters suggested that meal 
counts be reconciled to attendance alone. The regulations at Sec. Sec.  
226.15(e)(2), (3), and (4), and at Sec.  226.18(e) require that all 
participating facilities have both types of records, except in those 
types of facilities in which enrollment forms are not required 
(outside-school-hours care centers, at-risk afterschool programs, and 
emergency shelters). Thus, the Department believes that comparing both 
enrollment and attendance records to five days of facility meal counts 
will ensure that the meal claimed was served to a child who was 
enrolled for care and who was in attendance at the time of the meal 
service.
    In order to minimize the possibility of future misunderstanding of 
these requirements, the Department will make one minor change in this 
final rule to the language governing five-day reconciliations at 
Sec. Sec.  226.6(m)(4) and 226.16(d)(4)(ii). As currently written, 
Sec.  226.6(m)(4) states that State agency facility reviews must 
compare ``available'' enrollment and attendance records to five days of 
meal counts. The current language at Sec.  226.16(d)(4)(ii) states that 
sponsor reviews must compare five days of facility meal counts to 
``enrollment and/or attendance'' records. In both cases, the wording 
was meant to recognize the previously-mentioned exception to formal 
enrollment requirements for outside-school-hours care centers, at-risk 
afterschool programs, and emergency shelters. However, the Department 
is concerned that this language might be misconstrued to provide 
sponsors with the option to use either enrollment or attendance 
records, rather than both, even in facilities where

[[Page 34559]]

both types of records are required, and in outside-school-hours care 
centers, where the free and reduced price application form is often 
used as a type of ``enrollment'' form and can be compared to attendance 
records.
    Finally, the Department will make one technical correction to the 
second interim rule's regulatory language governing the five-day 
reconciliation. In instructing sponsors on how to conduct a five-day 
reconciliation in a sponsored facility, Sec.  226.16(d)(4)(ii) states 
in part that ``For each day examined, reviewers must use enrollment 
and/or attendance records to determine the number of children in care * 
* *,'' and later refers to ``children in care.'' Although the five-day 
reconciliation is a required part of all facility reviews conducted by 
all sponsors, the use of the words ``children in care'' could be 
misread to limit this provision to child care centers only, when in 
fact it applies to adult day care centers as well. This final rule will 
amend Sec.  226.16(d)(4)(ii) to substitute the word ``participants'' 
for the word ``children'' both times it occurs.
    Accordingly, this final rule amends Sec. Sec.  226.6(m)(4) and 
226.16(d)(4)(ii) to further clarify that five-day reconciliations must 
include a comparison of meal counts to both attendance and enrollment 
records, except in those facilities (outside-school-hours care centers, 
at-risk afterschool programs, and emergency shelters) in which 
enrollments are not required by the CACFP regulations. It also 
substitutes the word ``participant'' for the word ``children'' both 
times it occurs at Sec.  226.16(d)(4)(ii).
    The second aspect of these requirements about which we received 
comment involved State agency observations of meal services during 
reviews. The second interim rule at Sec.  226.6(m)(3)(vii) required 
that each State agency review of an independent center include an 
observation of the center's meal service. By contrast, the second 
interim rule did not require that each State agency review of a 
sponsored facility (i.e., a review conducted of a sponsored center or a 
family day care as part of the State agency's review of a sponsoring 
organization) include the observation of a meal service. Three 
commenters (two State agencies and one advocacy organization) suggested 
an expansion of the required State agency review elements, to require 
that each State agency review of a sponsored facility include an 
observation of a meal service.
    The apparent logic behind this suggestion is sound: The Department 
requires State agencies to conduct five-day reconciliations when 
reviewing sponsored facilities, in part as a means of checking on the 
adequacy of the sponsoring organization's conduct of five-day 
reconciliations. The State agency's observation of a meal service would 
be a means of checking the adequacy of the sponsor monitors' review of 
the facilities' meal service.
    Ideally, the Department would like each State agency review of a 
facility to cover every aspect of the facility review conducted by the 
sponsor, including the observation of a meal service. However, the 
Department was reluctant to add too many requirements to the content of 
State reviews of facility. The State agency's primary responsibility, 
in reviewing a sponsor, is determining the adequacy of the sponsor's 
policies, procedures, and internal controls to ensure effective 
operation of the program and compliance with program requirements by 
both the sponsors and its facilities. We strongly encourage State 
agencies to observe a meal service whenever possible when conducting 
facility reviews. However, in this final rule, we will not require that 
a meal service observation always take place, as we do for State agency 
reviews of independent centers, where no other entity reviews the 
center's meal service for program compliance.
    Finally, the Department will make one technical correction 
pertaining to sponsor review elements in this final rule. The second 
interim rule clarified at Sec.  226.15(e)(4) that meal counts may be 
recorded at the end of the day in family day care homes, as opposed to 
centers, which are required to record the meal count at the ``time of 
service.'' However, Sec.  226.11(c)(1) still implies incorrectly that 
all meals must be recorded at the time of the meal service.
    Accordingly, this final rule amends Sec.  226.11(c)(1) to clarify 
that reimbursements to day care home providers are calculated based on 
daily meal counts, as opposed to time of service meal counts.

F. State Agency and Sponsor Edit Checks, Including Block Claim Edit 
Check

    The second interim rule amended the CACFP regulations to require 
that both State agencies and sponsoring organizations establish monthly 
edit checks to improve the accuracy of claims payments to institutions 
and facilities, respectively. Prior to this time, the regulations did 
not require either State agencies or sponsoring organizations to have 
particular monthly edit checks built into their payment systems. 
Nevertheless, most State agencies and sponsoring organizations already 
had some monthly edit checks in place in their payment systems, and 
OIG's suggestion to add two specific edit checks to the CACFP 
regulations generated little controversy after being proposed in 
September of 2000.
    The one edit check that did generate opposition was that requiring 
sponsoring organizations to identify ``block claims,'' defined in the 
second interim rule as any claim submitted by a facility on which the 
number of meals claimed, for one or more meal type, is identical for 15 
consecutive days within a claiming period (generally one calendar 
month). In addition, the rule required that, once a facility submitted 
a block claim, a sponsoring organization must conduct an unannounced 
review of that facility within the next 60 days. In order to provide 
adequate time for sponsoring organizations to modify their edit checks 
and review protocols, the Department delayed implementation for 13 
months, until October 1, 2005.
    In most cases, the Department concluded that this requirement would 
result in sponsors conducting an additional (fourth) review of a 
facility during a review year. If the monitor could document a 
compelling reason for the block claim, no further ``60-day follow-up 
reviews'' would be required for the remainder of the review year. In 
addition, since sponsors were already required to conduct three reviews 
per year, at least two of which were unannounced, the Department 
anticipated that the largest impact of this provision--and one that was 
entirely desirable, from the Department's standpoint--was that 
sponsoring organizations would need to regularly re-adjust their review 
schedules, offsetting some sponsors' tendency to conduct reviews of the 
same facility on approximately the same schedule every year. The 
Department received 397 comments about the definition of a block claim 
added to Sec.  226.2 by the second interim rule, and 443 additional 
comments concerning the requirement that sponsors conduct an 
unannounced follow-up review within 60 days of a block claim's 
submission.
    Of the 397 comments received concerning the definition of a block 
claim, 361 were submitted by sponsoring organizations, 14 by providers, 
and 11 each by State agencies and advocacy groups. All 397 commenters 
suggested some type of change(s) to the regulatory definition, with 
most suggesting that the period of the block claim either be revised 
from 15 days to one full month of claiming the same number of one or 
more meal types, or that a block claim be defined

[[Page 34560]]

as the submission of identical meal counts for all meal services 
(instead of one or more meal services) over a 15-day period.
    Of the 443 comments received concerning the unannounced follow-up 
review requirement, 417 were from institutions, 18 from advocacy 
groups, 6 from providers, and 2 from others with no clear affiliation. 
Four ideas for changing the provision were made in these comments:
     149 commenters suggested that the time allowed for the 
conduct of an unannounced followup review should be extended to 90 days 
following the block claim's submission;
     94 commenters suggested that, after block claims were 
identified, sponsors should be required to review a sample of 10 
percent of the facilities identified as having submitted such claims 
(as opposed to reviewing all facilities submitting block claims within 
60 days);
     42 commenters suggested that block claims identified by a 
monitor during a facility review could be verified during a review, as 
opposed to requiring a separate follow-up visit (which the Department 
permitted in guidance issued on July 1, 2005 and May 23, 2006, and made 
permanent on August 27, 2007); and
     136 suggested the permanent implementation of a temporary 
policy permitted by the Department in guidance issued on July 1, 2005 
and May 23, 2006, which stated that block claims verified during the 
last two months of the current review year would eliminate the need to 
conduct any unannounced followup reviews in the next review year (the 
Department made this change permanent on August 27, 2007).
    Based on the CCAP results, the Department remains very concerned 
about meal claim integrity in the CACFP. However, based on feedback we 
have received in comments on the second interim rule and through 
feedback in other forums, we are now convinced that this particular 
approach to improving claim integrity has been ineffective. It appears 
that, when questioning providers about the submission of a block claim 
after the fact, sponsor monitors do not have enough information to 
confirm or refute the providers' explanations of the reasons for their 
block claims. Therefore, this final rule eliminates all reference to 
block claims and unannounced follow-up reviews at Sec. Sec.  226.2 and 
226.10(c)(3). The Department will continue to explore more effective 
means of monitoring erroneous meal claims, especially in the family day 
care home portion of the CACFP. Readers of this preamble should note 
that this change is consistent with section 331(b) of Public Law 111-
296, the Healthy, Hunger-Free Kids Act of 2010, which was enacted on 
December 13, 2010.
    Accordingly, this final rule removes the definition of ``block 
claim'' at Sec.  226.2 of the CACFP regulations and all of Sec.  
226.10(c)(3), which described the block claim edit check and the 60-day 
follow-up review requirement. However, readers should note that, given 
the evidence in CCAP that a substantial minority of providers continue 
to be out of compliance with recordkeeping and daily meal counting 
requirements, the Department will continue to try to develop an 
efficient and effective means of identifying improper payments by 
family day care homes and sponsored centers. Ultimately, the Department 
is required by the Improper Payments Information Act of 2002 to 
establish a means of measuring facility error in CACFP. If our efforts 
indicate the need for sponsors to take other actions to minimize 
improper facility claims, the Department will issue a proposed 
rulemaking at that time.

G. Household Contacts

    Based on the results of the Kiddie Care report, the Department 
proposed in 2000 to require that sponsors make ``household contacts'' 
if they detected block claims submitted by their providers. Commenters 
on the proposed rule were strongly opposed to this, and in the second 
interim rule published in 2004, requirements pertaining to both block 
claims and household contacts were quite different than what had been 
proposed in 2000. Commenters' responses to the block claim edit check 
requirements promulgated in the second interim rule were discussed in 
Part II(F) of this preamble. This part of the preamble addresses 
commenters' responses to the new household contact requirements 
established in the second interim rule.
    After having attempted, in the proposed rule published in 2000, to 
provide detailed guidance on when and how household conducts should be 
made, the Department adopted a very different approach in the second 
interim rule. We still believed that the OIG report had presented a 
compelling case for the use of household contacts as an oversight 
tool--whether by sponsoring organizations, State agencies, or both--as 
a means of confirming children's attendance at and enrollment for child 
care, which is critical to ensuring the integrity of facility meal 
counts in CACFP. However, we adopted commenters' suggestion that the 
Department should not attempt to describe and require all of the 
elements of a household contact system. Instead, the second interim 
rule required State agencies to develop (by April 1, 2005) a system 
which defined the circumstances under which the State agency and 
sponsoring organizations would be required to make household contacts. 
State agencies were also required to review and evaluate sponsors' 
implementation of the State agency's system during every review of the 
sponsor.
    The Department received 213 comments on this aspect of the second 
interim rule. Ninety-eight (98) commenters (93 institutions, 4 advocacy 
groups, and one State agency) stated that sponsors should have the 
flexibility to define their own household contact systems, rather than 
having the State agency develop a household contact system for all 
sponsors in the State. The Department made a deliberate choice to 
provide this authority to State agencies, rather than sponsors. 
Although we expected and wanted State agencies to consult with sponsors 
in developing these systems, the Department believed it would be 
inappropriate to permit sponsoring organizations to define the way this 
oversight tool would be used, since it would have a direct impact on 
their workload and, if not properly established and implemented, would 
not yield meaningful results.
    In addition, 15 provider commenters expressed concern that 
vindictive parents could abuse a household contact system, by 
deliberately providing false information to the sponsor or State 
representative making the contact. While we acknowledge that this is a 
possibility, the Department believes that it is a remote possibility. 
Parents who are dissatisfied with their child's day care home provider 
tend to change providers, making it less likely that a ``vindictive'' 
parent would deliberately provide false information. Meanwhile, in our 
training on this provision, we emphasized that sponsors should consider 
multiple sources of information when attempting to discern whether 
their providers were submitting accurate meal counts. A household 
contact is one way--but certainly not the only way--of establishing the 
accuracy and integrity of provider meal counts.
    Finally, 98 commenters (93 institutions, 4 advocacy groups, and one 
State agency) stated that State agencies' household contact systems 
should never link the submission of block claims to the requirement to 
conduct a household

[[Page 34561]]

contact. The Department notes that, although this final rule removes 
all Federal requirements pertaining to block claims, it does not affect 
a State agency's ability to link household contact requirements to 
block claims. Each State agency will have its own approach to defining 
the circumstances under which sponsors must conduct household contacts, 
and the Department will not attempt to limit State agencies' options in 
this regard. We expect that, in establishing and modifying household 
contact systems, a State agency will devise a system that it believes 
is best suited to the particular management challenges to proper 
implementation of CACFP in their State.

H. Sponsoring Organization Review Cycle

    The second interim rule implemented several changes to the cycle 
for sponsoring organizations' conduct of facility reviews. Several 
small differences that previously existed between the review cycle for 
different types of facilities were eliminated in the interim rule, 
which now requires sponsors to review each facility (regardless of 
whether it is a home or any type of center) three times a year, with 
two of these visits being unannounced and at least one unannounced 
review being conducted of the facility's meal service. Having uniform 
review requirements for all types of facilities had been positively 
received by commenters on the original proposed rule issued in 2000, 
and no further comments on this aspect of the review cycle changes were 
received. The only aspect of the review cycle about which comments were 
received was the change made to the provisions governing sponsors' use 
of ``review averaging.''
    Prior to the second interim rule, sponsoring organizations could 
``average'' their facility reviews only with the approval of the State 
agency. ``Review averaging'' simply means that a sponsoring 
organization with 100 facilities, must still conduct 300 reviews, but 
does not have to review each of its 100 facilities three times each. 
This flexibility has always been intended to permit sponsoring 
organizations to devote more time reviewing facilities that are new, or 
that have a history of problems with program compliance.
    Given the two interim rules' emphasis on targeting problem 
institutions and facilities for more oversight, and given the number of 
new oversight requirements that sponsors would have to perform, the 
Department decided that sponsoring organizations should have the 
flexibility to decide (without prior State agency approval) whether or 
not to use review averaging as a management tool. In this way, sponsors 
would be able to review high-performing facilities less frequently and 
error-prone facilities more frequently.
    The second interim rule placed several limits on sponsors' use of 
review averaging. First, for those facilities not being reviewed three 
times in a review year, the Department required that sponsors still 
conduct two unannounced reviews. Second, no facility could be reviewed 
only two times in a review year if it was determined seriously 
deficient in one of the reviews, or if it submitted a block claim at 
any time during the review year. Finally, regardless of the sponsor's 
use of review averaging, individual facility reviews would have to 
occur no more than nine months apart from one another.
    The Department received 208 comments on its implementation of 
review averaging, including 195 from institutions, five from advocacy 
groups, one from a State agency, and seven from commenters whose 
affiliation could not be determined. These commenters asked for 
slightly more flexibility for sponsors in utilizing this provision. 
Specifically, they requested that the concept of ``averaging'' be 
extended from the total number of reviews to the averaging of 
unannounced reviews as well. In other words, the sponsor of 100 
facilities would still have to conduct 300 reviews, 200 of which would 
be unannounced, but could distribute the unannounced reviews in any 
manner it saw fit.
    The Department largely agrees with this proposal, but does want to 
ensure that each facility receives at least one unannounced review each 
year. This will give sponsors more flexibility than they currently have 
in targeting review resources to error-prone facilities, but will 
continue to ensure that each sponsored center or family day care home 
receives one or more unannounced reviews each year.
    Accordingly, the Department will make the appropriate changes to 
Sec.  226.16(d)(4)(iv), including the elimination of the last sentence, 
which previously limited the provision's applicability when a facility 
had submitted a block claim. Because the block claim requirements have 
been removed in this final rule, the last sentence of Sec.  
226.16(d)(4)(iv) is no longer relevant, and will be removed.

I. Requirements Pertaining to Family Day Care Home Providers Who 
Qualify for Tier I Reimbursements on the Basis of Their Receipt of 
Benefits Under the Supplemental Nutrition Assistance Program (SNAP)

    The second interim rule included new requirements for oversight of 
a family day care home provider who established eligibility for tier I 
meal reimbursements on the basis of the provider's household's 
participation in the Supplemental Nutrition Assistance Program (SNAP), 
formerly known as the Food Stamp Program. Our attention was called to 
this issue by the OIG's Kiddie Care report, which found that some of 
these providers were not revealing, or were understating, the amount of 
income they received as child care providers when applying for SNAP 
benefits. In so doing, the provider either received a larger SNAP 
allotment than she was entitled to receive, or was incorrectly 
determined eligible for SNAP. In some cases, a full accounting of 
household income would also have made the day care home provider 
ineligible to receive CACFP reimbursement for meals served to her own 
child(ren).
    To deal with this problem, the second interim rule required that 
sponsoring organizations provide to the CACFP State agency a list of 
day care home providers who qualified for tier I eligibility on the 
basis of the household's SNAP participation. The CACFP State agency, in 
turn, was required within 30 days to provide this information to the 
agency of State government responsible for administering SNAP. After 
receipt of the information, the SNAP State agency was required, 
consistent with 7 CFR Part 273.12(c), to consider this information in 
determining the household's SNAP eligibility.
    The Department received 138 comments on these provisions of the 
second interim rule. Of these, 92 commenters (88 institutions and 4 
advocacy groups) recommended that the Department monitor the impact of 
this provision to ensure that providers on the list were not ``unfairly 
targeted'' for investigation by State or local SNAP offices. Forty-six 
(46) other commenters (including 43 institutions, one State agency, and 
two advocacy groups) stated that the onus for gathering this 
information should be on State and local SNAP offices and not on the 
sponsors and State agencies responsible for administering the CACFP.
    As an agency, the FNS is responsible for administering both SNAP 
and the CACFP. While we encourage

[[Page 34562]]

participation by eligible individuals in both programs, we must also 
ensure that those receiving the programs' benefits meet the statutory 
requirements for eligibility. Specifically, we must ensure that 
providers accurately report their household income, including the 
income they receive for providing child care, in order to determine 
that accurate benefits are being provided under both CACFP and SNAP. 
The OIG report raised concerns about providers' self-employment income 
which FNS could not ignore, and we addressed these concerns in a way 
that would provide the information necessary to the State agencies 
responsible for administering these programs under agreements entered 
into with FNS. As stated in our implementation guidance of March 29, 
2005, the inclusion of a provider on this list does not demonstrate 
noncompliant activity, and State or local SNAP offices receiving the 
list would not use it to ``target'' individuals for inappropriate 
review.

Part III. Training and Other Operational Requirements

Introduction

    Sections 243(c), (d), (e), and (f) of ARPA added statutory 
provisions which affected various aspects of State agencies and 
sponsoring organizations' operation of the Program. These changes were 
designed to improve Program management and integrity by establishing 
requirements concerning:
     Center sponsors' use of administrative funds;
     Family day care homes' ability to transfer from one 
sponsor to another;
     State agencies' recovery of funds disbursed to 
institutions; and
     Serious deficiency, termination, and appeals procedures 
for family day care homes participating in the Program.
    The changes made to these aspects of Program operations were 
discussed in Part III of the interim rule published on June 27, 2002, 
which implemented all of the changes mandated by ARPA in the CACFP 
regulations. Comments were received on three of these changes, and are 
discussed below.
    As part of the discussion of the serious deficiency process for 
family day care homes, this section of the preamble will also include a 
discussion of the requirement that sponsors collect each provider's 
date of birth on the provider's Program application, and that the 
sponsor report the provider's date of birth to the Department whenever 
a provider is added to the NDL. As in Parts I and II of this preamble, 
a number of the issues raised by commenters have already been addressed 
in guidance or training, and do not require extensive discussion in 
this preamble.

A. Ceiling on Administrative Reimbursements for Sponsors of Centers

    Section 243(e) of ARPA established a fifteen (15) percent limit on 
the amount of meal reimbursement that sponsors of centers could retain 
to cover their administrative costs. This statutory limit grew out of 
OIG audit and State review findings that showed some sponsors of 
centers retaining 50 percent or more of the meal reimbursement for 
administrative costs. Because administrative costs for monitoring may 
be higher when a center sponsor administers CACFP in widely dispersed 
rural centers (especially if many of the children served in those 
centers do not qualify for free or reduced price meals), the law 
permitted a center sponsor to apply to the State agency for a waiver of 
the 15 percent ``ceiling,'' if warranted.
    The Department received 152 comments on these provisions from 7 
State agencies, 119 institutions, 19 advocates, and 7 commenters whose 
institutional affiliation could not be identified. Many of these 
commenters (106) believed that the ceiling on administrative costs 
would significantly increase administrative burden for center sponsors, 
and that administrative reimbursement rates should be adjusted 
accordingly. However, as there is no separate administrative 
reimbursement rate for sponsors of centers, it appears that these 
commenters may have been suggesting that the ``ceiling'' on the amount 
that sponsors of centers could retain for their administrative costs 
should be increased above 15 percent. Because the ceiling is set by 
law, the Department is not in a position to modify it. Furthermore, the 
Department believes that the 15 percent ceiling--which is roughly 
comparable to the separate administrative rate received by sponsors of 
family day care homes--is adequate to cover center sponsors' 
administrative expenses, especially since sponsors have the ability to 
request a waiver when unusual circumstances might cause them to exceed 
the 15 percent ceiling.
    Forty (40) other commenters stated that, in order to implement this 
provision more easily, center sponsors should simply receive 15 percent 
of their centers' total meal reimbursement, However, the Department 
reminds commenters that the law stated that center sponsors should be 
allowed to retain ``up to 15 percent'' of the meal reimbursement earned 
by their centers. This wording makes clear that Congress expected a 
sponsor with documented, Program-related administrative costs that 
totaled only 10 percent of its centers' meal reimbursements would 
receive that amount (10 percent), and not more. Even if the statute had 
not included the words ``up to,'' a system under which center sponsors 
simply received 15 percent of the meal reimbursements earned by their 
sponsored centers each month would potentially expose these sponsors to 
large overclaims. If the State agency later reviewed the sponsors' 
financial records and found inadequate documentation to support the 
reasonableness, necessity, and allowability of all administrative costs 
being charged to the program, the State agency would be required to 
establish an overclaim against the sponsor.
    Finally, six State agencies submitted other comments related to 
these provisions. Three State agencies stated that the provision should 
apply only to sponsors of ``unaffiliated'' centers (i.e., centers that 
are not owned by the sponsoring organization). As this idea has been 
explained to us in meetings, these State agencies believe that a for-
profit sponsor that owns sponsored centers can ``do what it pleases'' 
with regard to the funding that is targeted to the sponsored centers. 
While this may be true for other aspects of a for-profit sponsor's 
operation of the centers it owns, it is the Department's intent that 
all CACFP sponsors--regardless of whether they are nonprofit or for-
profit in nature--operate the program principally for the benefit of 
children. The law makes no distinction between affiliated and 
unaffiliated centers, and therefore requires us to apply the 15 percent 
ceiling to all center sponsors.
    One State agency recommended that the waiver option be removed, or 
that State agencies' decisions regarding a waiver not be subject to 
administrative appeal. The Department notes that section 
17(f)(2)(C)(ii) of the NSLA establishes these waivers, and the 
Department may not remove the waiver provision without a change to the 
law. Furthermore, section 17(e) of the law requires that institutions 
be provided with the opportunity for an administrative hearing whenever 
an action taken by the State agency affects the institution's claim for 
reimbursement.
    One State agency recommended that a higher rate be established for 
sponsors of centers located in rural areas. Again, there is no 
administrative ``rate,'' per se, for sponsors of centers. The law 
establishes a ``ceiling'' on the amount of the sponsored centers' meal 
reimbursement that the sponsor may retain for its Program-related 
administrative expenses. In describing

[[Page 34563]]

the waiver provision in the preamble to the first interim rule, the 
Department specifically discussed the possible need for waivers when 
sponsors operated CACFP in rural areas, especially when its rural 
centers were geographically dispersed and/or served large numbers of 
children whose meals were not eligible for free or reduced price 
reimbursement.
    Finally, one State agency recommended that the 15 percent ceiling 
apply only to sponsors of centers, and not to the individual centers 
being sponsored. As explained in the preamble to the first interim 
rule, the Department anticipates that centers choosing to be sponsored 
(as opposed to independent centers, which take responsibility for all 
aspects of Program operation and sign an agreement to do so with the 
State agency) do so only when they feel they are not capable of taking 
on the administrative challenges of CACFP and, therefore, anticipate 
that their sponsor will handle all Program-related administrative 
tasks. The Department believes that requiring the sponsor to account 
separately for administrative tasks performed by sponsored centers is 
necessary to discourage center sponsors that might be tempted to pass 
some Program-related administrative responsibilities to their sponsored 
centers, but still retain 15 percent of the centers' meal 
reimbursement.

B. Procedures for Recovering Funds Disbursed to Institutions

    Section 243(d) of ARPA added provisions to the NSLA affecting the 
recovery of funds already disbursed to institutions. The statute 
amended section 17(f)(1)(B) of the NSLA to permit State agencies to 
establish ``payment schedules'' that allowed institutions to repay 
claims over a period of one or more years; clarified that institutions 
may not repay Program claims out of funds intended for meal 
reimbursement; and underscored that institutions must be provided the 
opportunity to appeal when claims were established. Despite permitting 
payment schedules, the law did not waive normal debt collection 
procedures, and the Department added language in the first interim rule 
to clarify that, when claims were not repaid promptly, interest would 
accrue on the outstanding debt until it was paid in full.
    The Department received eight State agency comments on its 
implementation of these provisions in the first interim rule. All of 
these comments concerned the inclusion of regulatory language regarding 
the collection of interest from institutions owing a debt to the 
government. Commenters stated that the collection of interest in CACFP 
imposed a special burden unlike other child nutrition programs. They 
also requested instructions on how to calculate interest owed and 
suggested that interest be calculated as of 30 days from the due date, 
not from the date of the claim notice.
    Calculation of interest follows the annually-update ``current value 
of funds rate,'' which is available at http://www.fms.treas.gov/cvfr/index.html. However, the Department does believe that it erred in 
promulgating regulatory language stating that ``the State agency must 
assess interest beginning with the initial demand for remittance.'' 
This language will be amended in this final rule, to require the 
collection of interest if the debt is not paid by the date stipulated 
in the State agency's demand letter, or 30 days after the date of the 
demand letter, whichever date is later.
    Accordingly, Sec.  226.14(a) is amended to include the change to 
the language regarding the assessment of interest as described 
immediately above.

C. The Serious Deficiency Process for Family Day Care Homes (FDCH)

    As mentioned above, ARPA added to the NSLA a requirement that the 
Department establish a serious deficiency process for FDCH providers. 
Prior to this, some State agencies had established their own serious 
deficiency processes for providers, and had compiled lists of providers 
whose Program participation had been terminated for cause. Section 
243(c) of ARPA amended section 17(d)(5) of the NSLA to require that the 
Department establish a nationwide serious deficiency process for 
providers and that, if disqualified from CACFP, these providers would 
be placed on the NDL, just like institutions that failed to correct 
their serious deficiencies.
    The Department received 595 comments on its implementation of 
ARPA's provision establishing a serious deficiency process for 
providers. The vast majority of these comments (487) were submitted by 
institutions. Other comments came from advocacy groups (55), State 
agencies (2), providers (2), and persons for whom an institutional 
affiliation could not be determined (49).
    Of these, 40 commenters stated that they were pleased with the 
change to the statute and the way that FNS implemented the law's 
provisions in the first interim rule. Another 278 commenters (236 
institutions, 22 advocates, one provider, and 19 ``others'') believed 
that the regulatory language used in the interim rule was not specific 
enough. Most of these (273 of 278) believed that the regulatory 
language should be changed to require that a sponsor declare a provider 
seriously deficient only when the provider, in the words of ARPA, 
``substantially fails to fulfill the terms of its agreement.'' These 
commenters believed that, as written, the second interim rule would 
force sponsors to declare providers seriously deficient whenever an 
error was made, regardless of the frequency or severity of the error.
    Since that time, the Department has provided extensive training to 
State agencies on implementing the first interim rule and State 
agencies, in turn, have provided extensive training to sponsoring 
organizations. Throughout its training on the serious deficiency 
process for providers, the Department has emphasized that, in 
determining whether a declaration of serious deficiency is warranted, 
sponsoring organizations should assess the frequency and severity of 
the errors committed by providers. In the years since the first interim 
rule was published, the Department has encountered few, if any, 
instances of sponsoring organizations interpreting the regulations too 
narrowly, and declaring providers seriously deficient for minor 
clerical errors. In fact, the CCAP report more strongly suggests that 
too many sponsors may be slow to require providers to implement 
meaningful corrective action when serious problems with meal counting 
occur, and overly-reluctant to employ the serious deficiency process.
    In addition, the Department received 275 comments concerning the 
amount of time given providers to resolve serious deficiencies. All but 
one of these commenters stated that providers should be given more than 
30 days to correct a serious deficiency. In the first interim rule, 
institutions were given varying lengths of time to resolve such issues, 
depending on the nature of the serious deficiency. Providers, on the 
other hand, always have a maximum of 30 days to fully correct any 
serious deficiency. The Department understands that this disparity may 
appear to be detrimental or unfair to providers. However, giving 
institutions and providers different periods of time to correct a 
serious deficiency is necessary because of the nature of sponsors' 
monitoring of providers and the financial incentives that sponsors have 
to retain providers in the Program.
    Sponsors conduct three reviews of each provider each year, two of 
which are unannounced. Unless the monitor finds an egregious problem 
involving intentional over-claiming of meals or serious non-compliance 
with the

[[Page 34564]]

Program meal pattern, the sponsor usually does not declare the provider 
seriously deficient when the problem is first discovered. More 
typically, the monitor requires that the provider take corrective 
action without finding the provider seriously deficient, then returns 
for the next review three to four months later to determine whether the 
provider has fully implemented the corrective action. Unfortunately, 
even if a monitor continues to find serious problems with the 
provider's operation of the Program, some sponsors are still very 
reluctant to issue a declaration of serious deficiency unless there is 
clear proof that the provider has falsified its meal claims. By the 
time a serious deficiency is declared, almost all providers will have 
already had one or more chances (in other words, given the interval 
between the monitor's reviews of that provider, three to nine months) 
to implement effective corrective action. Once a sponsor reaches the 
point of issuing a notice of serious deficiency to a provider, then it 
is imperative that the sponsor require the provider to quickly correct 
the deficiency, knowing that if the provider does not, the sponsor will 
propose to terminate Program participation in 30 days or less.
    Two State agency commenters also made suggestions for changes to 
the first interim rule. One suggested that the State agency option to 
hear provider appeals be removed; the other suggested that sponsors of 
centers should also be required to establish a serious deficiency 
process for their sponsored centers. After consideration, we concluded 
that it is unnecessary to remove an option that a small number of State 
agencies have chosen to exercise. If the State agency in question 
wishes to decline hearing provider appeals, it may do so. It should 
assist sponsors in establishing a sponsor-level appeals process, and 
then turn the process over to sponsors once it is in place.
    With regard to a serious deficiency process for centers, the 
Department has taken every opportunity to recommend that State agencies 
or center sponsors establish a serious deficiency and appeals process 
for sponsored centers. Section 17(d)(5) of the NSLA requires the 
process to be established for institutions (and by extension, those 
responsible principals and individuals from institutions that are 
proposed for disqualification) and for family day care home providers, 
but does not mention sponsored centers. Therefore, the requirement for 
such a process for sponsored centers was not included in the first 
interim rule. Nevertheless, we believe that establishing such a process 
for sponsored centers is an excellent management practice. We again 
urge State agencies or sponsors to establish a serious deficiency 
process for sponsored centers, and we will consider proposing such a 
change, and soliciting public comment, in future rulemakings.
    Finally, the Department received 264 comments concerning the first 
interim rule's requirement at 226.18(b) that a provider must submit her 
date of birth as part of the sponsor's agreement with the provider. 
[Please note that the first interim rule also required that the 
executive director and the chairperson of the institution's board of 
directors must submit their dates of birth on the institution's 
application. Several of the comments discussed below pertain to that 
requirement, as opposed to the provider date of birth requirement.] 
Most of these comments (223) requested more time to implement this 
requirement, which now has been fully implemented. Among the other 41 
comments, 25 (6 State agencies, 9 institutions, 7 providers, and 3 
advocates) stated that the date of birth requirement should be 
eliminated because it was not verifiable and because it is an 
``invasion of privacy.'' Three other State agencies believed that the 
provision of a date of birth made providers on the National 
Disqualified List (NDL) more likely to be the victims of identity 
theft.
    In order to ensure that those using the NDL could differentiate 
between multiple individuals with the same name, the Department needed 
to include a unique identifier for each name on the list. This was 
especially important after the law expanded the number of names that 
could be placed on the list by including FDCH providers. Although the 
Department is permitted by law to collect Social Security Numbers on 
household applications for child nutrition benefits, ARPA law did not 
provide such authority as part of requiring that providers be placed on 
the NDL. Therefore, the Department needed to obtain an identifier that 
would differentiate between persons with the same name who appear on 
the NDL. The Department is very sensitive to Program participants' 
concerns regarding identity theft, and has allowed access to the NDL 
only to those Program personnel who must determine institution or 
provider eligibility. Therefore, we are convinced that the provider's 
date of birth is the best identifier available for this purpose.
    Six other State agency staff suggested that collection of the date 
of birth be optional; that State agencies should be allowed to make 
exceptions to these requirements for good cause; or that it be required 
only after a provider or institution is determined seriously deficient. 
Because, as explained above, the Department determined that this is the 
best identifier available for this purpose, none of these changes will 
be made.
    The Department received two comments from State agencies on the 
collection of a date of birth from an institution's executive director 
or board chair. One commenter suggested that the date of birth should 
be collected from all ``responsible staff'' at the time of the 
institution's application; the other suggested that the owners of for-
profit independent centers (who are neither the ``executive director'' 
nor the ``board chair'' of their organization) should also be required 
to submit their date of birth.
    With regard to the first comment, the Department will not expand 
the date of birth requirement beyond the executive director and board 
chair in this final rule. We do wish to point out, however, that 
consistent with Sec.  226.25(b), any State agency wishing to require 
that more dates of birth for additional personnel be collected on an 
institution's application may establish that requirement. With regard 
to the second comment, the Department will clarify in this final rule 
that the regulation at Sec. Sec.  226.6(b)(1)(xv) and 226.6(b)(2)(v) 
should be construed to require that State agencies collect dates of 
birth from owners of for-profit independent centers at the time of the 
center's application.
    Accordingly, this final rule amends Sec. Sec.  226.6(b)(1)(xv) and 
226.6(b)(2)(v) to clarify that for-profit owners, and other individuals 
with overall responsibility for an institution's management of the 
CACFP, regardless of title, must submit a date of birth on the 
institution's Program application.
    Finally, to clarify the word ``rescind,'' as was done in Part I(B) 
of the preamble, the Department will remove the word ``rescind'' at 
Sec.  226.16(l)(3)(ii) and replace it with the words ``temporarily 
defer.'' In addition, the Department will add a new sentence to Sec.  
226.6(l)(3)(ii) to state clearly that, if the sponsor accepts the 
provider's corrective action, but later determines that the corrective 
action was not permanent or complete, the sponsor must then move to the 
next step in the serious deficiency process (i.e., proposed termination 
and disqualification), without re-starting the serious deficiency 
process.
    Accordingly, this final rule makes the changes to Sec.  
226.16(l)(3)(ii) described in the preceding paragraph.

[[Page 34565]]

D. Technical Corrections

    This final rule also corrects five technical errors relating to the 
regulations dealing with training and other operational requirements, 
and updates the mailing address for the Agency's Western Regional 
Office in 7 CFR parts 210, 215, 220, 225, 226, and 245.
    First, the second interim rule included language at Sec.  
226.16(l)(3)(i)(F) that states that a day care home will be terminated 
``by the State institution.'' This should instead read, ``by the 
sponsor.'' The final rule also clarifies references to the 
``institution'' in Sec. Sec.  226.16(l)(3)(i)(E) and (F) by 
substituting the words ``sponsoring organization.''
    Second, the regulations at Sec.  226.15(e)(2) state that, because 
of the nature of care provided, outside-school-hours care centers, 
emergency shelters, and at-risk after-school care centers are exempt 
from the requirement to enroll each child in care, and maintain and 
update annually documentation of that enrollment. However, the 
definition of ``claiming percentage'' at Sec.  226.2 still states that 
a claiming percentage is calculated based on the number of ``enrolled'' 
participants. This final rule amends the definition by adding a second 
sentence describing how outside-school-hours care centers may calculate 
a claiming percentage.
    Third, when printing the CFR, errors were made in transcribing the 
amended text of Sec. Sec.  226.18(a)(1), 226.18(a)(2), 226.18(b)(1), 
and 226.18(b)(2) as it was submitted in the first interim rule. This 
final rule corrects the errors, which will result in a corrected text 
in the CFR.
    Fourth, in amending the regulations at Sec.  226.15(e)(14), the 
second interim rule did not make clear that sponsor monitors are to be 
trained annually. Even though Sec.  226.16(d)(3) stated that all of a 
sponsor's ``key staff'' must be trained annually, we believe that Sec.  
226.15(e)(14) should be amended to make clear that monitors are among 
the ``key staff'' who must be trained annually.
    Fifth, this final rule corrects an error in the first sentence of 
Sec.  226.23(d) by inserting two words (``public release'') 
inadvertently dropped from that sentence in a previous rule.
    Finally, this rule updates the address of the FNS's Western 
Regional Office in Sec. Sec.  210.30(e), 215.17(f), 220.21(e), 225.19 
(g), and 226.26(g).
    Accordingly, this final rule makes changes to Sec.  
226.16(l)(3)(i)(F); the definition of ``claiming percentage'' at Sec.  
226.2; Sec. Sec.  226.18(a)(1), 226.18(a)(2), 226.18(b)(1), 
226.18(b)(2); Sec.  226.15(e)(14); Sec.  226.23(d); and Sec. Sec.  
210.30(e), 215.17(f), 220.21(e), 225.19 (g), and 226.26(g), as 
described immediately above.

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

    In addition to the changes discussed in parts I-III of this 
preamble, the second interim rule also included a number of 
nondiscretionary changes from statutes other than ARPA. Non-
discretionary changes are those that are specifically mandated by 
Congress, and, therefore, must be included in the Program regulations. 
Although nondiscretionary changes may be issued without first 
soliciting public comment, we included these provisions in the second 
interim rule both as a matter of convenience and as a means of 
gathering comments on the manner in which we implemented the 
provisions.
    The Department received public comments on three of the non-
discretionary changes included in part IV of the preamble to the second 
interim rule: the issuance of advances to institutions participating in 
CACFP; the provision of information on the WIC Program; and the 
provision of audit funding to State agencies. We received no comment on 
any other changes made in part IV of the preamble of the second interim 
rule and, therefore, all of those provisions are adopted without change 
in this final regulation.

A. Issuance of Advances to Institutions Participating in the CACFP

    Prior to passage of the Public Law 104-193, the Personal 
Responsibility and Work Opportunity Reconciliation Act (PRWORA), State 
agencies were required to issue advance payments to CACFP institutions 
that requested them. Section 708(f) of the PRWORA, however, amended 
section 17(f) of the NSLA (42 U.S.C. 1766(f)) to make the issuance of 
advances optional. To implement this statutory requirement, the second 
interim rule amended the Program regulations to make clear that 
issuance of advances is at the discretion of the State agency. In the 
preamble to that rule, and in previous guidance issued in 1997, we had 
clarified that State agencies may elect to issue advances to all 
institutions, no institutions, specific types of institutions, or 
institutions with records of adequate Program administration. Only when 
a State agency denies an advance to an institution based on the 
institution's Program performance is it necessary to offer an appeal of 
the State agency's decision.
    We received a total of 133 comments on this provision. Of those, 88 
sponsors and 2 advocacy groups recommended that we encourage State 
agencies to continue issuing advances. The comments suggested that 
denying advance payments would have a negative impact on participation 
in CACFP. Additionally, 38 sponsors and 4 advocacy groups urged us to 
request that Congress eliminate the State agency option with regard to 
administrative advances and, instead, reinstate the requirement that 
State agencies make administrative advances available to all sponsors 
upon request. One State agency submitted a comment in support of the 
proposed changes.
    Congress has required that the issuance of advances be at the 
discretion of the States. We have provided States with guidelines on 
the appropriate means for providing advances should they decide to do 
so. It would be inappropriate for us to encourage or discourage 
advances when Congress clearly left this decision up to the States. 
Accordingly, the final regulation is unchanged.

B. Provision of Information on the WIC Program

    Section 107(i) of Public Law 105-336, the William F. Goodling Child 
Nutrition Reauthorization Act (Goodling Act), required the Department 
to provide information to State agencies regarding the Special 
Supplemental Nutrition Program for Women, Infants, and Children (WIC) 
Program. In the interim rule, we amended Sec.  226.6(r) to require that 
State agencies distribute this information to each participating 
institution and Sec.  226.15(n) to require that institutions make this 
information available to parents of enrolled children. (Since the 
publication of the interim rule, additional revisions have been made to 
Sec.  226.15, and the provision relating to providing WIC information 
is now located at Sec.  226.15(o).)
    We received six comments on this provision. One sponsor and one 
advocacy organization recommended that the WIC notification be a one-
time requirement when a family enrolls in CACFP. However, the statute 
requires the State agency to ensure that participating family and group 
day care homes and child care centers receive periodic updates of WIC 
information and that the information is provided to parents of enrolled 
children. Therefore, WIC information must be provided to parents upon 
enrollment, and additional updates must be provided when there are 
changes to the way in which households may obtain information

[[Page 34566]]

about WIC or when there are changes to the WIC Program's eligibility 
rules.
    Of the remaining comments, one State agency and two sponsors 
suggested that the WIC State agency bear the cost of the WIC 
notification materials, rather than the sponsors, and one sponsor 
suggested that WIC agencies be required to distribute CACFP outreach 
materials. These requirements were not included in the legislation and 
may not be imposed through this final rule.
    Finally, this regulation makes technical corrections to the WIC 
provision in the interim rule. In our prior implementation of this 
statutory requirement, Sec.  226.6(r) requires State agencies to 
provide WIC information to ``participating institutions,'' which would 
include all institutions participating in CACFP. Additionally, Sec.  
226.15(n) [now Sec.  226.15(o)] required institutions to provide 
information to the parents of all ``enrolled children.'' However, the 
statutory language limited this provision to family and group day care 
homes and child care centers and specifically excluded institutions 
providing care to school children outside school hours. Therefore, the 
regulation should have exempted from this requirement those 
institutions participating in CACFP as outside school hours care 
centers, at-risk afterschool snack programs, homeless shelters, and 
adult day care centers.
    Accordingly, this final regulation is amended at Sec. Sec.  
226.6(r) and 226.15(o) to clarify that WIC information must only be 
distributed to the parents of children enrolled in family and group day 
care homes and in traditional child care centers.

C. Audit Funding for State Agencies

    Section 107(e) of the Goodling Act amended section 17(i) of the 
NSLA (42 U.S.C. 1766(i)) by reducing the amount of audit funding 
available to State agencies. Prior to this change, State agencies 
received an amount equal to two percent of Program expenditures during 
the second preceding fiscal year in order to conduct program audits. In 
1999, this was reduced to one and one-half percent of Program 
expenditures and to one percent for fiscal years 2005 to 2007. In the 
interim rule, we amended Sec.  226.4(h) to include these reductions. 
(Since the publication of the interim rule, additional revisions have 
been made to Sec.  226.4, and the provision relating to audit funds is 
now located at Sec.  226.4(j).)
    We received 136 comments on this provision, all of which supported 
the restoration of State audit funds to the two percent level. Because 
the Goodling Act called for the reduction, the final regulation 
incorporates the reduction to the one and one-half percent level. 
However, the reference in the interim rule to the one percent level of 
funding for fiscal years 2005 to 2007 is no longer necessary as this 
period has expired and the funding level has returned to one and one-
half percent.
    Accordingly, Sec.  226.4(j) is amended in the final regulation to 
remove the reference to the one percent funding level for fiscal years 
2005 to 2007.

Part V. Procedural Matters

Executive Order 12866 and Executive Order 13563

    Executive Orders 13563 and 12866 direct agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). Executive 
Order 13563 emphasizes the importance of quantifying both costs and 
benefits, of reducing costs, of harmonizing rules, and of promoting 
flexibility. This rule has been designated a ``significant regulatory 
action'' although not economically significant, under section 3(f) of 
Executive Order 12866. Accordingly, the rule has been reviewed by the 
Office of Management and Budget.

Regulatory Flexibility Act

    This final 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.
    The CACFP is administered by State agencies and by over 21,000 
institutions (sponsoring organizations and independent centers) in over 
194,000 facilities (independent and sponsored centers and family day 
care homes). The vast majority of institutions and facilities 
participating in CACFP are ``small entities''. Nevertheless, the 
changes implemented in this rule will not have a significant economic 
impact on most of them. This rule finalizes requirements in the two 
interim rules that institutions seeking to operate CACFP provide in 
their applications information related to past performance, financial 
viability, administrative capability, and internal controls to ensure 
accountability, and some additional recordkeeping and reporting 
requirements. These represented marginal increases in the application 
burden for almost all of these institutions.
    This rule finalizes requirements that primarily affect the 
procedures used by State agencies in reviewing institutions' 
applications to participate in CACFP and in monitoring participating 
institutions' performance. These changes will have a major impact on 
institutions which are unable to operate CACFP under the new 
application requirements, or on institutions and facilities which are 
terminated from CACFP participation as a result of improved monitoring 
procedures by the State agency or sponsoring organization. However, 
this occurred for only a small proportion (roughly 2 percent or less) 
of CACFP institutions and facilities when the requirements were 
implemented under the interim rules.
    In short, there will be little or no adverse impact on those 
entities administering the CACFP in accordance with Program 
requirements, since almost all of these changes were implemented in the 
two previously-issued interim rules in order to improve compliance with 
existing regulations and in accordance with statutory changes to 
Program operations.

Regulatory Impact Analysis

    A regulatory impact analysis was completed as part of the 
development of this final rule. Copies of this analysis may be 
requested from Ms. Julie Brewer or Ms. Tina Namian at 3101 Park Center 
Drive, Room 634, Alexandria, VA 22302-1594, or by telephone at (703) 
305-2590.
    This final rule implements a number of clarifications and changes 
to existing Program regulations, as implemented in the two interim 
rules published at 67 FR 43447 (June 27, 2002) and at 69 FR 53501 
(September 1, 2004). These changes will affect all entities involved in 
administering the CACFP. Those most affected will be State agencies, 
institutions, and facilities.
    Despite the conduct of numerous OIG audits, State and FNS reviews, 
and the Department's own Child Care Assessment Project (CCAP), there is 
no Nationally-representative information available on the prevalence of 
meal counting or other errors that impact CACFP integrity. OIG reports 
have focused on purposely-selected institutions and facilities. Reviews 
conducted by State agencies and ``management evaluations'' conducted by 
FNS are not designed to capture information for the purpose of 
developing Nationally valid estimates of fraud or mismanagement. The 
CCAP data collection was limited to family

[[Page 34567]]

day care home sponsors operating CACFP in 200 or more homes.
    While all of these reports indicate that there are weaknesses in 
parts of the Program, and that there have been significant weaknesses 
in oversight by some State agencies and sponsoring organizations, none 
of these reports can fully estimate the prevalence or magnitude of 
Program errors. This lack of information makes it difficult for us to 
estimate with any precision the amount of CACFP reimbursement lost due 
to fraud, abuse, or mismanagement.
    Nevertheless, we are confident that the overall impact of this 
final rule will be to strengthen program management and integrity in 
the CACFP:
     By helping to ensure that service providers with 
inadequate administrative capacity or financial controls or serious 
management deficiencies are prevented from participating in the 
program, the rule eliminates important risks of erroneous payments;
     By increasing and improving State oversight of sponsors 
and providers, the rule helps to ensure that integrity risks are 
identified and addressed early; and
     By increasing reporting of negative findings by States to 
USDA, the rule strengthens the Department's ability to identify problem 
trends and emerging issues and take action.

While the CCAP findings demonstrated that some State and local Program 
administrators have not fully implemented all of the provisions in the 
first and second interim rules, they also demonstrated that the rules 
have helped to eliminate some of the worst types of program fraud 
uncovered by the Department's Office of Inspector General in the late 
1990s. This final rule's further refinement of some of the provisions 
in those interim rules will continue to improve safeguards against 
fraud, waste, and abuse, and will result in the more efficient use of 
Program funds.

Executive Order 12372

    The Child and Adult Care Food Program is listed in the Catalog of 
Federal Domestic Assistance under No. 10.558. For the reasons set forth 
in the final rule in 7 CFR Part 3015, subpart V and related Notice 
published at 48 FR 29114, June 24, 1983, this Program is included in 
the scope of Executive Order 12372, which requires intergovernmental 
consultation with State and local officials.

Executive Order 13132

    Executive Order 13132 requires Federal agencies to consider the 
impact of their regulatory actions on State and local governments. 
Where such actions have ``federalism implications,'' agencies are 
directed to provide a statement for inclusion in the preamble to the 
regulation describing the agency's considerations in terms of the three 
categories enumerated in Sec.  6(a)(B) of Executive Order 13132:

Prior Consultation With State Officials

    Prior to drafting this final rule, the Department analyzed more 
than 1,000 comments submitted in response to the two interim rules. In 
addition, the Department receives a great deal of ongoing input from 
State and local agencies.
    Since the CACFP is a State administered, Federally funded program, 
our regional offices regularly have formal and informal discussions 
with State and local officials regarding Program implementation and 
performance. This allows State and local agencies to contribute input 
that may inform our rulemaking, the implementation of statutory 
provisions, and even our own Departmental legislative proposals. In 
addition, over the past fourteen years, our headquarters staff has 
informally consulted with State administering agencies, Program 
sponsors, and CACFP advocates on ways to improve Program management and 
integrity in the CACFP. Discussions with State agencies took place in 
the joint Management Improvement Task Force meetings held between 1995 
and 2000; in seven biennial National meetings of State and Federal 
Program administrators (Seattle in 1996, New Orleans in 1998, Chicago 
in 2000, New York in 2002, Madison, Wisconsin, in 2004, Orlando in 
2006, and Phoenix in 2008); at the December 1999 meeting of the State 
Child Nutrition Program administrators in New Orleans, and in a variety 
of other small- and large-group meetings. Discussions with Program 
advocates and sponsors occurred in the Management Improvement Task 
Force meetings held in 1999-2000; in annual National meetings of The 
Sponsors Association, the CACFP Sponsors Forum, and the Western 
Regional Office-Child Care Food Program Roundtable from 1995 to the 
present; and in a variety of other small- and large-group meetings.

Nature of Concerns and Need To Issue this Rule

    The issuance of a regulation is necessary to improve Program 
management and, more specifically, to respond to management problems 
identified by State and local Program administrators and by OIG. Many 
of the interim rule's provisions were discussed in the meetings with 
State and local cooperators mentioned above. The Department attempted 
to address in this final rule many of the concerns expressed by 
commenters on the two interim rules.

Extent to Which We Meet Those Concerns

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

Unfunded Mandates Reform Act

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

Executive Order 12988

    This rule has been reviewed under Executive Order 12988, Civil 
Justice Reform. This rule is intended to have preemptive effect with 
respect to any State or local laws, regulations, or

[[Page 34568]]

policies which conflict with its provisions or which would otherwise 
impede its full implementation. This rule is not intended to have 
retroactive effect unless so specified in the DATES section of the 
preamble of the final rule. All available administrative procedures 
must be exhausted prior to any judicial challenge to the provisions of 
this rule or the application of its provisions. This includes any 
administrative procedures provided by State or local governments. In 
the CACFP, the administrative procedures are set forth at: (1) 
Sec. Sec.  226.6(k), 226.6(l), and 226.16(l) which establish 
administrative review procedures for institutions, individuals, and day 
care homes; and (2) Sec.  226.22 and 7 CFR parts 3016 and 3019, which 
address administrative review procedures for disputes involving 
procurement by State agencies and institutions.

Civil Rights Impact Analysis

    FNS has reviewed this final rule in accordance with Department 
Regulation 4300-4, ``Civil Rights Impact Analysis,'' to identify any 
major civil rights impacts this rule might have on children on the 
basis of age, race, color, national origin, sex, or disability. A 
careful review of the rule revealed that the rule's intent does not 
affect the participation of protected individuals in CACFP.

Executive Order 13175

    USDA will undertake, within 6 months after this rule becomes 
effective, a series of Tribal consultation sessions to gain input by 
elected Tribal officials or their designees concerning the impact of 
this rule on Tribal governments, communities and individuals. These 
sessions will establish a baseline of consultation for future actions, 
should any be necessary, regarding this rule. Reports from these 
sessions for consultation will be made part of the USDA annual 
reporting on Tribal Consultation and Collaboration. USDA will respond 
in a timely and meaningful manner to all Tribal government requests for 
consultation concerning this rule and will provide additional venues, 
such as webinars and teleconferences, to periodically host 
collaborative conversations with Tribal leaders and their 
representatives concerning ways to improve this rule in Indian country.

Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. Chap. 35, see 5 CFR 
1320) requires that OMB approve all collections of information by a 
Federal agency from the public before they can be implemented. 
Respondents are not required to respond to any collection of 
information unless it displays a current valid OMB control number. This 
final rule incorporates into the Child and Adult Care Food Program 
regulations modifications, clarifications, and technical changes to the 
two interim rules published by the Department on June 27, 2002 and 
September 1, 2004. Interim rules have the force of law, and the changes 
in these two interim rules are fully implemented. Thus, information 
collection requirements for this final rule were included in the 
renewal of OMB No. 0584-0055 and were approved by OMB on August 3, 
2010, with an expiration date of August 31, 2013. During the renewal of 
OMB No. 0584-0055, information collection requirements were adjusted 
from the previously reported collection requirements to reflect changes 
in the number of respondents, time required to respond due to 
automation and technology enhancements by respondents and removal of 
obsolete or erroneous burdens listings.
    This final rule contains information collection requirements that 
are subject to review and approval by OMB. FNS will publish a document 
in the Federal Register once these requirements have been approved. The 
recordkeeping and reporting burden contained in this final rule have 
been previously reviewed by OMB, as discussed above. The final rule 
removes the requirement at 226.10(c)(3) that, ``If block claiming is 
detected, the sponsoring organization must not include that facility 
among those facilities receiving less than three reviews during the 
current year, in accordance with Sec.  226.16(d)(4), and must ensure 
that any facility submitting a block claim receives an unannounced 
review within 60 days of the discovery of the block claim. If, in the 
course of conducting this review, the sponsoring organization 
determines that there is a logical explanation for the facility to 
regularly submit a block claim, the sponsoring organization must note 
this in the facility's review file and is not required to conduct an 
unannounced visit after other block claims detected during the current 
year.'' The deletion of this provision results in a reduction of 
23,498.40 hours in the reporting and 2,937.30 hours in the 
recordkeeping burden hours in the currently approved OMB No. 0584-0055, 
with an expiration date of August 31, 2013. No burden hours were 
assigned to the State agency since this is primarily a sponsor 
requirement. FNS is decreasing the burden hours from 7,032,870.18 to 
7,006,434.482.
Reporting
    Estimated number of respondents: 2,200,066.
    Estimated Number of Responses per Respondent: 2.229056
    Estimated Number of Annual Responses: 4,904,071
    Estimated hours per response: 1.279542
    Estimated Total Annual Response: 6,274,963.604
Recordkeeping
    Estimated number of respondents: 183,120
    Estimated Number of Responses per Respondent: 3.586
    Estimated Number of Annual Responses: 656,731
    Estimated hours per response: 1.11381
    Estimated Total Annual Response: 731,470.878

E-Government Act Compliance

    FNS is committed to compliance 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.

List of Subjects

7 CFR Part 210

    Children, Commodity School Program, Food assistance programs, 
Grants programs-social programs, National School Lunch Program, 
Nutrition, Reporting and recordkeeping requirements, Surplus 
agricultural commodities.

7 CFR Part 215

    Food assistance programs, Grant programs-education, Grant programs-
health, Infants and children, Milk, Reporting and recordkeeping 
requirements.

7 CFR Part 220

    Grant programs-education, Grant programs-health, Infants and 
children, Nutrition, Reporting and recordkeeping requirements, School 
breakfast and lunch programs

7 CFR Part 225

    Food assistance programs, Grant programs--health, Infants and 
children, Labeling, Reporting and recordkeeping requirements.

7 CFR Part 226

    Accounting, Aged, Day care, Food assistance programs, Grant 
programs, Grant programs--health, American

[[Page 34569]]

Indians, Individuals with disabilities, Infants and children, 
Intergovernmental relations, Loan programs, Reporting and recordkeeping 
requirements, Surplus agricultural commodities.

    Accordingly, 7 CFR parts 210, 215, 220, 225, and 226 are amended as 
follows:

PART 210--NATIONAL SCHOOL LUNCH PROGRAM

0
1. The authority citation for part 210 continues to read as follows:

    Authority: 42 U.S.C. 1751-1760, 1779.


Sec.  210.30  [Amended]

0
2. Section 210.30(e) is amended by removing the words ``550 Kearny 
Street, Room 400, San Francisco, California 94108'', and adding in 
their place the words ``90 Seventh Street, Suite 10-100, San Francisco, 
California 94103-6701''.

PART 215--SPECIAL MILK PROGRAM FOR CHILDREN

0
1. The authority citation for part 215 continues to read as follows:

    Authority:  42 U.S.C. 1772 and 1779.


Sec.  215.17  [Amended]

0
2. Section 215.17(f) is amended by removing the words ``550 Kearny 
Street, Room 400, San Francisco, California 94108'', and adding in 
their place the words ``90 Seventh Street, Suite 10-100, San Francisco, 
California 94103-6701''.

PART 220--SCHOOL BREAKFAST PROGRAM

0
1. The authority citation for part 220 continues to read as follows:

    Authority: 42 U.S.C. 1773, 1779, unless otherwise noted.


Sec.  220.21  [Amended]

0
2. Section 220.21 (e) is amended by removing the words ``550 Kearny 
Street, Room 400, San Francisco, California 94108'', and adding in 
their place the words ``90 Seventh Street, Suite 10-100, San Francisco, 
California 94103-6701''.

PART 225--SUMMER FOOD SERVICE PROGRAM

0
1. The authority citation for part 225 continues to read as follows:

    Authority:  Secs. 9, 13 and 14, Richard B. Russell National 
School Lunch Act, as amended (42 U.S.C. 1758, 1761 and 1762a)


Sec.  225.19  [Amended]

0
2. Section 225.19(g) is amended by removing the words ``550 Kearney 
Street, Room 400, San Francisco, California 94108-2518'', and adding in 
their place the words ``90 Seventh Street, Suite 10-100, San Francisco, 
California 94103-6701''.

PART 226--CHILD AND ADULT CARE FOOD PROGRAM

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

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


0
2. Section 226.2 is amended by removing the definition of Block Claim, 
amending the definition of Claiming percentage by adding a second 
sentence, and by adding a new definition of Independent board of 
directors.
    The revision and addition specified above read as follows:


Sec.  226.2  Definitions.

* * * * *
    Claiming percentage * * *. In the case of an outside-school-hours 
care center that is not required to collect enrollment forms from each 
participating child, a claiming percentage is the ratio of the number 
of children in each reimbursement category (free, reduced-price or 
paid) to the total number of children participating in the program in 
that center.
* * * * *
    Independent governing board of directors means, in the case of a 
nonprofit organization, or in the case of a for-profit institution 
required to have a board of directors, a governing board which meets 
regularly and has the authority to hire and fire the institution's 
executive director.
* * * * *


Sec.  226.4  [Amended]

0
3. Section 226.4(j) is amended by removing the second sentence.

0
4. Section 226.6 is amended as follows:
0
a. Revise paragraph (b)(1)(xii).
0
b. Amend paragraph (b)(1)(xv) by adding, after the words ``board of 
directors'', the words ``or, in the case of a for-profit center that 
does not have an executive director or is not required to have a board 
of directors, the owner of the for-profit center''.
0
c. Amend paragraph (b)(1)(xviii) introductory text by adding a sentence 
at the end.
0
d. Revise paragraphs (b)(1)(xviii)(A)(2), (b)(1)(xviii)(C)(1), 
(b)(2)(ii), and (b)(2)(iii)(B)(1).
0
e. Amend paragraph (b)(2)(v) by adding, after the words ``board of 
directors'', the words ``or, in the case of a for-profit center that 
does not have an executive director or is not required to have a board 
of directors, the owner of the for-profit center''.
0
f. Amend paragraph (b)(2)(vii) introductory text by adding a sentence 
at the end.
0
g. Revise paragraphs (b)(2)(vii)(A)(2) and (b)(2)(vii)(C)(1).
0
h. Amend paragraph (c)(1)(iii)(A)(5) by removing the word ``and'' after 
the semicolon and amend paragraph (c)(1)(iii)(A)(6) by removing the 
period at the end and adding in its place ``; and''.
0
i. Add paragraphs (c)(1)(iii)(A)(7) and (c)(1)(iii)(A)(8).
0
j. In paragraph (c)(1)(iii)(B)(1)(i), remove the word ``rescinded'' and 
add in its place the words ``temporarily defer''.
0
k. Add paragraph (c)(1)(iii)(B)(3).
0
l. Amend paragraph (c)(2)(iii)(A)(5) by removing the word ``and'' after 
the semicolon, and amend paragraph (c)(2)(iii)(A)(6) by removing the 
period at the end and adding in its place ``; and'';
0
m. Add new paragraph (c)(2)(iii)(A)(7).
0
n. In paragraph (c)(2)(iii)(B)(1)(i), remove the word ``rescinded'' and 
add in its place the words ``temporarily defer''.
0
o. Add paragraph (c)(2)(iii)(B)(3).
0
p-q. Revise paragraph (c)(2)(iii)(D).
0
r. Amend paragraph (c)(3)(iii)(A)(5) by removing the word ``and'' after 
the semicolon, and amend paragraph (c)(3)(iii)(A)(6) by removing the 
period at the end and adding in its place ``; and''.
0
s. Add new paragraph (c)(3)(iii)(A)(7).
0
t. In paragraph (c)(3)(iii)(B)(1)(i), remove the word ``rescinded'' and 
add in its place the words ``temporarily defer''.
0
u. In paragraphs (c)(3)(iii)(B)(1)(ii) and (c)(3)(iii)(B)(2)(iii), 
remove the word ``renewing'' and add in its place the word 
``participating''.
0
v. Add paragraph (c)(3)(iii)(B)(3).
0
w. Revise paragraph (c)(3)(iii)(D).
0
x. In paragraph (c)(6)(ii)(C)(1), remove the word ``rescinded'' and add 
in its place the words ``temporarily defer''.
0
y. Add paragraph (c)(6)(ii)(C)(3).
0
z. In paragraph (c)(7), remove the word ``deny'' and add in its place 
the words ``must not approve''.
0
aa. Redesignate paragraphs (k)(3)(iii) and (k)(3)(iv) as paragraphs 
(k)(3)(iv) and (k)(3)(v), respectively, and add a new paragraph 
(k)(3)(iii).
0
bb. In newly redesignated paragraph (k)(3)(iv), remove the word ``or'' 
after the semicolon; in newly redesignated paragraph (k)(3)(v), remove 
the period at the end and add in its place a semicolon;
0
cc. Add paragraphs (k)(3)(vi) and (vii).
0
dd. In paragraph (m)(4), remove the words ``available enrollment and

[[Page 34570]]

attendance records'' and add in their place the words ``enrollment and 
attendance records (except in those outside-school-hours care centers, 
at-risk afterschool care centers, and emergency shelters where 
enrollment records are not required''.
0
ee. In the first sentence of paragraph (r), add after the word 
``institution'' the words ``(other than outside-school-hours care 
centers, at-risk afterschool care centers, emergency shelters, and 
adult day care centers)''.
    The additions and revisions read as follows:


Sec.  226.6  State agency administrative responsibilities.

* * * * *
    (b) * * *.
    (1) * * *
    (xii) Presence on the National disqualified list. If an institution 
or one of its principals is on the National disqualified list and 
submits an application, the State agency may not approve the 
application. If a sponsoring organization submits an application on 
behalf of a facility, and either the facility or any of its principals 
is on the National disqualified list, the State agency may not approve 
the application. In accordance with paragraph (k)(3)(vii) of this 
section, in this circumstance, the State agency's refusal to consider 
the application is not subject to administrative review.
* * * * *
    (xviii) * * * In ensuring compliance with these performance 
standards, the State agency should use its discretion in determining 
whether the institution's application, in conjunction with its past 
performance in CACFP, establishes to the State agency's satisfaction 
that the institution meets the performance standards.
    (A) * * *
    (2) Fiscal resources and financial history. A new institution must 
demonstrate that it has adequate financial resources to operate the 
CACFP on a daily basis, has adequate sources of funds to continue to 
pay employees and suppliers during periods of temporary interruptions 
in Program payments and/or to pay debts when fiscal claims have been 
assessed against the institution, and can document financial viability 
(for example, through audits, financial statements, etc.); and
* * * * *
    (C) * * *.
    (1) Governing board of directors. Has adequate oversight of the 
Program by an independent governing board of directors as defined at 
Sec.  226.2;
* * * * *
    (2) * * *.
    (ii) Presence on the National disqualified list. If, during the 
State agency's review of its application, a renewing institution or one 
of its principals is determined to be on the National disqualified 
list, the State agency may not approve the application. If a renewing 
sponsoring organization submits an application on behalf of a facility, 
and the State agency determines that either the facility or any of its 
principals is on the National disqualified list, the State agency may 
not approve the application. In accordance with paragraph (k)(3)(vii) 
of this section, in this circumstance, the State agency's refusal to 
consider the application is not subject to an administrative review.
    (iii) * * *.
    (B) * * *.
    (1) A statement listing any publicly funded programs in which the 
institution and its principals have begun to participate since the 
institution's previous application; and
* * * * *
    (vii) * * * In ensuring compliance with these performance 
standards, the State agency should use its discretion in determining 
whether the institution's application, in conjunction with its past 
performance in CACFP, establishes to the State agency's satisfaction 
that the institution meets the standards.
    (A) * * *
    (2) Fiscal resources and financial history. A renewing institution 
must demonstrate that it has adequate financial resources to operate 
the CACFP on a daily basis, has adequate sources of funds to continue 
to pay employees and suppliers during periods of temporary 
interruptions in Program payments and/or to pay debts when fiscal 
claims have been assessed against the institution, and can document 
financial viability (for example, through audits, financial statements, 
etc.); and
* * * * *
    (C) * * *.
    (1) Governing board of directors. Has adequate oversight of the 
Program by an independent governing board of directors as defined at 
Sec.  226.2;
* * * * *
    (c) * * *
    (1) * * *
    (iii) * * *
    (A) * * *
    (7) That the institution's withdrawal of its application, after 
having been notified that it is seriously deficient, will still result 
in the institution's formal termination by the State agency and 
placement of the institution and its responsible principals and 
individuals on the National disqualified list; and
    (8) That, if the State agency does not possess the date of birth 
for any individual named as a ``responsible principal or individual'' 
in the serious deficiency notice, the submission of that person's date 
of birth is a condition of corrective action for the institution and/or 
individual.
    (B) * * *
    (3) If the State agency initially determines that the institution's 
corrective action is complete, but later determines that the serious 
deficiency(ies) has recurred, the State agency must move immediately to 
issue a notice of intent to terminate and disqualify the institution, 
in accordance with paragraph (c)(1)(iii)(C) of this section.
* * * * *
    (2) * * *
    (iii) * * *
    (A) * * *
    (7) That, if the State agency does not possess the date of birth 
for any individual named as a ``responsible principal or individual'' 
in the serious deficiency notice, the submission of that person's date 
of birth is a condition of corrective action for the institution and/or 
individual.
    (B) * * *
    (3) If the State agency initially determines that the institution's 
corrective action is complete, but later determines that the serious 
deficiency(ies) have recurred, the state agency must move immediately 
to issue a notice of intent to terminate and disqualify the 
institution, in accordance with paragraph (c)(2)(iii)(C) of this 
section.
* * * * *
    (D) Program payments. If the renewing institution's agreement 
expires before the end of the time allotted for corrective action and/
or the conclusion of any administrative review requested by the 
participating institution:
    (1) The State agency must temporarily extend its current agreement 
with the renewing institution and continue to pay any valid unpaid 
claims for reimbursement for eligible meals served and allowable 
administrative expenses incurred; and
    (2) During this period, the State agency may base administrative 
payments to the institution on the institution's previous approved 
budget, or may base administrative payments to the institution on the 
budget submitted by the institution as part of its renewal application; 
and
    (3) The actions set forth in paragraphs (c)(3)(iii)(D)(1) and 
(c)(3)(iii)(D)(2) of this section must be taken either until

[[Page 34571]]

the serious deficiency(ies) is corrected or until the institution's 
agreement is terminated, including the period of any administrative 
review;
* * * * *
    (3) * * *.
    (iii) * * *
    (A) * * *.
    (7) That, if the State agency does not possess the date of birth 
for any individual named as a ``responsible principal or individual'' 
in the serious deficiency notice, the submission of that person's date 
of birth is a condition of corrective action for the institution and/or 
individual.
    (B) * * *.
    (3) If the State agency initially determines that the institution's 
corrective action is complete, but later determines that the serious 
deficiency(ies) has recurred, the State agency must move immediately to 
issue a notice of intent to terminate and disqualify the institution, 
in accordance with paragraph (c)(1)(iii)(C) of this section.
* * * * *
    (D) Program payments and extended agreement. If the participating 
institution must renew its application, or its agreement expires, 
before the end of the time allotted for corrective action and/or the 
conclusion of any administrative review requested by the participating 
institution:
    (1) The State agency must temporarily extend its current agreement 
with the participating institution and continue to pay any valid unpaid 
claims for reimbursement for eligible meals served and allowable 
administrative expenses incurred; and
    (2) During this period, the State agency may base administrative 
payments to the institution on the institution's previous approved 
budget, or may base administrative payments to the institution on the 
budget submitted by the institution as part of its renewal application; 
and
    (3) The actions set forth in paragraphs (c)(3)(iii)(D)(1) and 
(c)(3)(iii)(D)(2) of this section must be taken either until the 
serious deficiency(ies) is corrected or until the institution's 
agreement is terminated, including the period of any administrative 
review;
* * * * *
    (6) * * *
    (ii) * * *
    (C) * * *
    (3) If FNS initially determines that the institution's corrective 
action is complete, but later determines that the serious 
deficiency(ies) has recurred, FNS will move immediately to issue a 
notice of intent to terminate and disqualify the institution, in 
accordance with paragraph (c)(6)(ii)(D) of this section.
* * * * *
    (k) * * *
    (3) * * *.
    (iii) State agency determination that corrective action is 
inadequate. A determination by the State agency that the corrective 
action taken by an institution or by a responsible principal or 
individual does not completely and permanently correct a serious 
deficiency;
* * * * *
    (vi) State agency or FNS decision regarding removal from the 
National disqualified list. A determination, by either the State agency 
or by FNS, that the corrective action taken by an institution or a 
responsible principal or individual is not adequate to warrant the 
removal of the institution or the responsible principal or individual 
from the National disqualified list; or
    (vii) State agency's refusal to consider an application submitted 
by an institution or facility on the National disqualified list. The 
State agency's refusal to consider an institution's application when 
either the institution or one of its principals is on the National 
disqualified list, or the State agency's refusal to consider an 
institution's submission of an application on behalf of a facility when 
either the facility or one of its principals is on the National 
disqualified list.
* * * * *

0
5. Section 226.7(g) is amended by adding a new fifth and sixth sentence 
to read as follows:


Sec.  226.7  State agency responsibilities for financial management.

* * * * *
    (g) * * * If the institution does not intend to use non-CACFP funds 
to support any required CACFP functions, the institution's budget must 
identify a source of non-Program funds that could be used to pay 
overclaims or other unallowable costs. If the institution intends to 
use any non-Program resources to meet CACFP requirements, these non-
Program funds should be accounted for in the institution's budget, and 
the institution's budget must identify a source of non-Program funds 
that could be used to pay overclaims or other unallowable costs. * * *
* * * * *


Sec.  226.10  [Amended]

0
6. Section 226.10(c) is amended in paragraph (c)(1) by adding the word 
``and'' after the semicolon at the end of the sentence, in paragraph 
(c)(2) by removing the semicolon and the word ``and'' and adding a 
period in their place, and by removing paragraph (c)(3).

0
7. Section 226.11(c)(1) is amended by removing the word ``institution'' 
both times it appears and by adding in its place the word ``center'', 
and by adding a new last sentence to read as follows:


Sec.  226.11  Program payments for centers.

* * * * *
    (c) * * *.
    (1) * * * In the case of a sponsoring organization of family day 
care homes, each State agency must base reimbursement to each approved 
family day care home on daily meal counts recorded by the provider.
* * * * *


Sec.  226.14  [Amended]

0
8. In Sec.  226.14, paragraph (a) introductory text is amended in the 
fourth sentence by removing the words ``with the initial demand for 
remittance'' and by adding in their place the words ``with the date 
stipulated in the State agency's demand letter, or 30 days after the 
date of the demand letter, whichever date is later''.


Sec.  226.15  [Amended]

0
9. Section 226.15 is amended in the first sentence of paragraph (e)(14) 
by adding the word ``annual'' after the word ``at'' and in paragraph 
(o) by adding the words ``(other than outside-school-hours care 
centers, at-risk afterschool care centers, emergency shelters, and 
adult day care centers)'' after the words ``Each institution''.

0
10. Section 226.16 is amended as follows:
0
a. Paragraph (d)(4)(ii) by removing the words ``enrollment and/or 
attendance records'' and adding in their place ``enrollment and 
attendance records (except in those outside-school-hours care centers, 
at-risk afterschool care centers, and emergency shelters where 
enrollment records are not required)'' and by removing the word 
``children'' both times it appears, and by adding the word 
``participants'' in its place.
0
b. Revise paragraph (d)(4)(iv).
0
c. Paragraph (l)(3)(i)(E) by removing ``institution's'' and adding in 
its place ``sponsoring organization''.
0
d. Paragraph (l)(3)(i)(F) by removing ``institution'' the first time it 
appears and adding in its place ``sponsoring organization'' and by 
removing the words ``State institution'' and adding in their place the 
words ``sponsoring organization''.
0
e. Paragraph (l)(3)(ii) by removing ``rescinded'' and adding in its 
place

[[Page 34572]]

``temporarily defer'' and by adding a new sentence to the end of the 
paragraph.
    The revision and addition read as follows:


Sec.  226.16  Sponsoring organization provisions.

* * * * *
    (d) * * *
    (4) * * *
    (iv) Averaging of required reviews. If a sponsoring organization 
conducts one unannounced review of a facility in a year and finds no 
serious deficiencies (as described in paragraph (l)(2) of this section, 
regardless of the type of facility), the sponsoring organization may 
choose not to conduct a third review of the facility that year, and may 
make its second review announced, provided that the sponsoring 
organization conducts an average of three reviews of all of its 
facilities that year, and that it conducts an average of two 
unannounced reviews of all of its facilities that year. When the 
sponsoring organization uses this averaging provision, and a specific 
facility receives two reviews in one review year, its first review in 
the next review year must occur no more than nine months after the 
previous review.
* * * * *
    (l) * * *
    (3) * * *
    (ii) Successful corrective action. * * *. However, if the 
sponsoring organization accepts the provider's corrective action, but 
later determines that the corrective action was not permanent or 
complete, the sponsoring organization must then propose to terminate 
the provider's Program agreement and disqualify the provider, as set 
forth in paragraph (l)(3)(iii) of this section.
* * * * *

0
11. Section 226.18 is amended by revising paragraphs (a)(1) and (b)(1) 
to read as follows:


Sec.  226.18  Day care home provisions.

* * * * *
    (a) * * *
    (1) It receives title XX funds for providing child care; or
* * * * *
    (b) * * *
    (1) The right of the sponsoring organization, the State agency, the 
Department, and other State and Federal officials to make announced or 
unannounced reviews of the day care home's operations and to have 
access to its meal service and records during normal hours of 
operation.
* * * * *


Sec.  226.23  [Amended]

0
12. Section 226.23 is amended by adding to the first sentence of 
paragraph (d) the words ``public release'' after the word ``a'' the 
first time it appears.


Sec.  226.26  [Amended]

0
13. Section 226.26 is amended in paragraph (g) by removing the words 
``550 Kearney Street, Room 400, San Francisco, California 94108'', and 
adding in their place the words ``90 Seventh Street, Suite 10-100, San 
Francisco, California 94103-6701''.

    Dated: May 25, 2011.
Kevin Concannon,
Under Secretary for Food, Nutrition, and Consumer Services.
[FR Doc. 2011-13623 Filed 6-10-11; 8:45 am]
BILLING CODE 3410-30-P