[Federal Register Volume 76, Number 117 (Friday, June 17, 2011)]
[Rules and Regulations]
[Pages 35301-35318]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-14926]



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  Federal Register / Vol. 76, No. 117 / Friday, June 17, 2011 / Rules 
and Regulations  

[[Page 35301]]



DEPARTMENT OF AGRICULTURE

Food and Nutrition Service

7 CFR Part 210

RIN 0584-AE11


National School Lunch Program: School Food Service Account 
Revenue Amendments Related to the Healthy, Hunger-Free Kids Act of 2010

AGENCY: Food and Nutrition Service, USDA.

ACTION: Interim rule.

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

SUMMARY: This rule amends National School Lunch Program (NSLP) 
regulations to conform to requirements contained in the Healthy, 
Hunger-Free Kids Act of 2010 (Pub. L. 111-296) regarding equity in 
school lunch pricing and revenue from nonprogram foods sold in schools. 
This rule requires school food authorities (SFAs) participating in the 
NSLP to provide the same level of financial support for lunches served 
to students who are not eligible for free or reduced price lunches as 
is provided for lunches served to students eligible for free lunches. 
This rule also requires that all food sold in a school and purchased 
with funds from the nonprofit school food service account, other than 
meals and supplements reimbursed by the Department of Agriculture, must 
generate revenue at least equal to the cost of such foods.

DATES: Effective date: This rule is effective on July 1, 2011.
    Comment dates: Comments on rule provisions: Mailed comments on the 
provisions in this rule must be postmarked on or before September 15, 
2011; e-mailed or faxed comments must be submitted by 11:59 p.m. on 
September 15, 2011; and hand-delivered comments must be received by 5 
p.m. September 15, 2011 to be assured of consideration.
    Comments on Paperwork Reduction Act requirements: Comments on the 
information collection requirements associated with this rule must be 
received by August 16, 2011.

ADDRESSES: The Food and Nutrition Service (FNS) invites interested 
persons to submit comments on this interim rule. Comments may be 
submitted by any of the following methods:
     Federal eRulemaking Portal: Go to http://www.regulations.gov. Follow the online instructions for submitting 
comments.
     Fax: (703) 305-2879, attention Julie Brewer.
     Mail: Julie Brewer, Chief, Policy and Program Development 
Branch, Child Nutrition Division, Food and Nutrition Service, 
Department of Agriculture, 3101 Park Center Drive, Room 640, 
Alexandria, Virginia 22302-1594.
     Hand Delivery or Courier: Deliver comments to 3101 Park 
Center Drive, Room 640, Alexandria, Virginia 22302-1594, during normal 
business hours of 8:30 a.m.-5 p.m.
    All submissions received in response to this interim rule will be 
included in the record and will be available to the public. Please be 
advised that the substance of the comments and the identity of the 
individuals or entities submitting comments will be subject to public 
disclosure. FNS may also make the comments publicly available by 
posting a copy of all comments on http://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Julie Brewer, Chief, Policy and 
Program Development Branch, Child Nutrition Division, Food and 
Nutrition Service, 3101 Park Center Drive, Alexandria, Virginia 22302, 
or by telephone at (703) 305-2590.

SUPPLEMENTARY INFORMATION:

I. Discussion of Interim Rule

    This interim rule promulgates the provisions from sections 205 and 
206 of Public Law 111-296, the Healthy, Hunger-Free Kids Act of 2010 
(the Act). Section 205 amended section 12 of the Richard B. Russell 
National School Lunch Act (NSLA) (42 U.S.C. 1760) by adding a new 
subsection (p), ``Price for a Paid Lunch'' which addresses, for the 
first time, requirements for SFAs in establishing prices for paid 
reimbursable lunches (hereinafter called paid lunches). The amendments 
made by Section 205 provide SFAs with some flexibility in phasing-in 
any increases in paid lunch prices and in using non-Federal funds to 
supplement paid lunch revenue to enable them to maintain lower prices 
for paid lunches. There is also a requirement in section 205 requiring 
the Department of Agriculture (USDA) to establish procedures to 
annually collect and publish the paid lunch prices charged by SFAs. 
These provisions do not apply to the revenue from or prices charged for 
either afterschool snacks or for school breakfasts offered in 7 CFR 
part 220.
    Section 206 of Public Law 111-296 amended section 12 of the NSLA by 
adding a paragraph (q), ``Nonprogram Food Sales.'' This provision 
addresses food sold in schools outside of reimbursable meals and meal 
supplements, which is purchased with funds from the nonprofit school 
food service account. Included are foods sold in competition with the 
reimbursable meal programs as provided in section 10 of the Child 
Nutrition Act (42 U.S.C. 1779). The law now requires that the 
proportion of total school food service revenue provided by the sale of 
nonprogram foods to the total revenue of the school food service 
account be equal to or greater than the proportion of total food costs 
associated with obtaining nonprogram foods to the total costs 
associated with obtaining program and nonprogram foods from the 
account.
    FNS currently has no regulatory requirements regarding pricing of 
paid lunches, the amount of revenue generated by paid lunches or on the 
revenue generated by selling nonprogram foods. Following is a 
discussion of the Act's provisions and the conforming regulatory 
amendments being made in response. In addition to this interim rule, 
USDA will issue guidance and provide technical assistance as needed to 
assist SFAs and State agencies in complying with these new provisions.

Reimbursement Levels

    There are three levels of Federal cash reimbursement for lunches, 
breakfasts, and meal supplements served to children in schools that 
participate in the NSLP and the School Breakfast Program (SBP). Schools 
receive the highest amount of reimbursement for meals served to 
students certified

[[Page 35302]]

eligible for free meals, a lesser amount of reimbursement for students 
certified eligible for reduced price meals, and the lowest 
reimbursement for meals served to students who are not certified 
eligible for free or reduced price meals (i.e., paid meals).
    Children in families with income at or below 130 percent of the 
income poverty guidelines prescribed by the U.S. Department of Health 
and Human Services are eligible for free meals. In addition, children 
who are categorically eligible because they receive other assistance 
(for example, receipt of Supplemental Nutrition Assistance Program 
benefits or enrollment in Head Start) are eligible for free meals. 
Children in families with income between 130 and 185 percent of the 
income poverty guidelines are eligible for reduced price meals. The 
maximum charge for a reduced price lunch is established in section 
9(b)(9) of the NSLA and cannot exceed 40 cents. A maximum reduced price 
charge is also established for afterschool snacks and school 
breakfasts. Any child not certified for a free or reduced price meal 
must pay the meal price set by the school food authority.

Revenue From Paid Lunches

    The Act defines the term paid lunch as a reimbursable lunch served 
to students who are not certified to receive free or reduced price 
meals. NSLP regulations at 7 CFR 210.2 are amended to incorporate this 
definition.
    The Act requires SFAs to evaluate the prices they charge for paid 
lunches in relation to the Federal paid and free reimbursement rates. 
For each school year, beginning July 1, 2011, SFAs must annually 
establish paid meal prices in accordance with the procedures in the 
Act. Those procedures are contained in a new paragraph (e) added to 
Sec.  210.14. In addition, Sec.  210.19(a)(2) is amended to require 
each State agency administering the NSLP to ensure that SFAs comply 
with the procedures. FNS developed a fact sheet to help schools 
understand the procedures. The Equity in School Lunch Pricing Fact 
Sheet can be found at http://www.fns.usda.gov/cnd/Governance/Legislation/Pricing_Equity_Facts.pdf. A summary of the procedures 
follows.
    The Act requires SFAs to determine the average price charged for 
paid lunches in the previous school year (for the school year beginning 
July 1, 2011, the previous school year is the school year beginning 
July 1, 2010). The school food authority must determine the average 
price charged based on the total number of paid lunches claimed at each 
price in the school food authority for the month of October of the 
prior school year. October data is used because it conforms to current 
data collection practices in the NSLP and is representative of the 
number of days of operation and number of meals served. Choosing a 
later month in the school year could unnecessarily delay pricing 
decisions by SFAs.
    Calculating the average lunch price based on the number of meals 
claimed at each price across the school food authority most accurately 
indicates the revenue generated from paid lunches, which is the intent 
of Section 205. Requirements for determining the average paid lunch 
price are in Sec.  210.14(e).
    Once this average is determined, the school food authority must 
calculate the difference between the free lunch per meal reimbursement 
rate and the paid lunch per meal reimbursement rate in effect for the 
previous school year (the ``reimbursement difference''). The lunch 
reimbursement rates used in this calculation must be those received by 
the school food authority (e.g., taking into account locality 
(contiguous United States, Alaska or Hawaii) and additional Federal per 
meal reimbursement when 60 percent of lunches served in the second 
preceding year were served free or reduced price).
    If a school food authority's average price of a paid lunch is equal 
to or greater than the reimbursement difference, the school food 
authority is not required to make any adjustments in lunch prices or to 
add revenue as long as it continues to charge an average price that is 
not less than the amount of the reimbursement difference. Further, the 
school food authority has the option to round the average price down to 
the nearest five cents. A school food authority may reduce its average 
price of a paid lunch if an equivalent amount of financial support is 
added from non-Federal sources of funds (other than in-kind 
contributions). These provisions are added by this rule at Sec.  
210.14(e)(2), (e)(4) and (e)(5).
    If a school food authority's average price of a paid lunch is less 
than the reimbursement difference, the school food authority must 
increase prices for paid lunches, as described in Sec.  210.14(e)(3), 
or add financial support from non-Federal sources to the school food 
service account. To determine the price increase, the school food 
authority must establish an average price for a paid lunch that is not 
less than the price charged in the previous school year as adjusted by 
a percentage equal to the sum obtained by adding two percent and the 
percentage change in the Consumer Price Index for All Urban Consumers 
(food away from home index) used to increase the Federal reimbursement 
rate, as set forth in the annual notice announcing adjustments to the 
national average payments issued by USDA in the Federal Register on or 
about July 1 of each year. SFAs should refer to the Federal Register 
notice from the prior July to obtain the Consumer Price Index. For 
determining increases required for the school year beginning July 1, 
2011, SFAs should use the notice published on July 19, 2010 (75 FR 
41796, ``National School Lunch, Special Milk, and School Breakfast 
Programs, National Average Payments/Maximum Reimbursement Rates'').
    Section 205 of the Act amended the NSLA to permit SFAs to round the 
adjusted average price for a paid lunch down to the nearest five cents 
following that calculation. Additionally, SFAs are not required to 
raise prices more than 10 cents annually. SFAs may, at their 
discretion, increase prices for paid lunches by more than 10 cents. In 
lieu of increasing prices, a school food authority may reduce the 
average price of a paid lunch if an equivalent amount of financial 
support is added from non-Federal sources of funds (other than in-kind 
contributions). These provisions are found at Sec.  210.14(e)(4) and 
(e)(5).
    If a school food authority chooses to contribute financial support 
from non-Federal sources in lieu of raising prices for paid lunches, 
Section 12(p) of the NSLA specifically excludes in-kind contributions 
and revenue from foods sold in competition with reimbursable meals from 
qualifying as support from non-Federal sources for this purpose. This 
rule codifies those prohibitions in Sec.  210.14(e)(5)(ii). In 
addition, Sec.  210.14(e)(5)(iii) requires that financial support from 
non-Federal sources must be cash for direct support for paid lunches, 
including but not limited to per-lunch reimbursements for paid meals 
provided by States, counties, school districts and others; funds 
provided by organizations, such as school-related or community groups 
to support paid lunches; any portion of State revenue matching funds 
that exceeds the minimum requirement established in 7 CFR 210.17 and is 
provided for paid lunches; and a proportion attributable to paid 
lunches from direct payments made from school district funds to support 
the lunch service. Some examples of unallowable non-Federal support 
would include any payments, including additional per-meal 
reimbursements, provided to the school food authority for support of 
the SBP or other Child Nutrition Program; any payments, including 
additional per-meal reimbursements, provided

[[Page 35303]]

specifically to support free and reduced price meals; and any in-kind 
contributions converted to direct cash expenditures after July 1, 2011.
    In recognition of the short timeframes for implementation, this 
interim rule allows SFAs to count any non-Federal cash contribution, 
except for in-kind contributions and revenues from foods sold in 
competition with reimbursable meals, for School Year 2011-2012 only. 
This limited allowance is established by this rule in Sec.  
210.14(e)(6)(iii). In addition, State agencies should focus their 
efforts in the initial year of implementation to providing SFAs with 
technical assistance to ensure compliance.
    We also recognize that this rule was published after many SFAs have 
made pricing decisions for School Year 2011-2012. Therefore, those SFAs 
that can demonstrate that they raised their prices and met the non-
Federal cash contribution allowance described above for School Year 
2011-2012, may count any non-Federal cash contribution, except for in-
kind contributions and revenues from foods sold in competition with 
reimbursable meals, toward the revenue requirements for School Year 
2012-2013. FNS will issue guidance on how adjustments to the School 
Year 2012-2013 requirement will be determined in these situations.
    If an SFA with an average price lower than the reimbursement 
difference is not required in any school year to increase its average 
price, due to low-inflation and rounding rules, the school food 
authority must use the unrounded average price as the basis for 
calculations for the next school year. This approach helps ensure that 
over time the appropriate additional revenues are provided to support 
paid lunches. Also, if a school food authority has an average price 
lower than the reimbursement difference and chooses in any school year 
to increase paid lunch prices more than is required, the amount 
attributable to the SFAs discretionary additional increase may be 
carried forward to the next school year(s) to meet the paid lunch 
pricing requirements. SFAs must keep sufficient records to document and 
carry forward the average price calculations. These requirements are 
established by this interim rule in Sec.  210.14(e)(6)(i) and 
(e)(6)(ii).
    As amended by Section 205 of the Act, Section 12(p) of the NSLA 
also requires that USDA establish procedures to annually collect and 
publish the paid meal prices charged by SFAs. While the statute refers 
to the collection of paid meal prices, this interim rule requires that 
SFAs report only paid lunch prices. This approach minimizes reporting 
burden on SFAs and State agencies, and is consistent with the other 
requirements of Section 205, which all pertain to paid lunches. USDA 
invites commenters to provide input on whether this approach is 
appropriate, or whether reporting should be expanded to include prices 
charged for paid breakfasts. The new reporting requirements for SFAs 
and State agencies, respectively, are contained in amendments to Sec.  
210.15(a) and Sec.  210.20(a) made by this rule. This annual report 
would coincide with other reporting for the month of October.

Revenue From Nonprogram Foods

    NSLP regulations are amended by this interim rule to include the 
new statutory definition of nonprogram food in a new paragraph at Sec.  
210.14(f). Section 12(p) of the NSLA as amended by the Act defines 
nonprogram food as ``food sold in a participating school other than a 
reimbursable meal provided'' under the NSLA or the Child Nutrition Act 
of 1966 (42 U.S.C. 1771 et seq.) and which is ``purchased using funds 
from the nonprofit school food service account of the school food 
authority * * *.'' The definition also specifically identifies as 
nonprogram food ``food that is sold in competition with a program 
established under'' the NSLA or the Child Nutrition Act of 1966. 
Nonprogram beverages are also considered nonprogram food.
    Effective July 1, 2011, Section 12(q) of the NSLA, as amended by 
Section 206 of the Act, requires that the proportion of total school 
food service revenue provided by the sale of nonprogram foods to the 
total revenue of the school food service account shall be equal to or 
greater than the proportion of total food costs associated with 
obtaining nonprogram foods to the total costs associated with obtaining 
program and nonprogram foods from the account. The Act also amended the 
NSLA to require that all revenue from the sale of nonprogram foods 
accrue to the nonprofit school food service account of a participating 
SFA. These revenue and accrual requirements are incorporated into NSLP 
regulations in this interim rule by adding a new paragraph (f) to Sec.  
210.14.

Technical Amendments

    The definition of ``Nonprofit school food service account'' in 
Sec.  210.2 is revised by adding references to the new procedures in 
Sec.  210.14(e) and (f) regarding revenue. In addition, the 
requirements in Sec.  210.9(b) for the agreement between the State 
agency and SFAs are amended by adding a reference to these new 
provisions. Other amendments are made to Sec.  210.15(b) and Sec.  
210.20(b) (for SFAs and State agencies, respectively) to provide for 
the records that must be retained to document compliance with the newly 
established provisions in Sec.  210.14(e) and (f).

II. Procedural Matters

Issuance of an Interim Rule and Date of Effectiveness

    USDA, under the provisions of the Administrative Procedure Act at 5 
U.S.C. 553(b)(B), finds for good cause that use of prior notice and 
comment procedures for issuing this interim rule is impracticable. 
Sections 205 and 206 of the Healthy, Hunger-Free Kids Act of 2010, 
Public Law 111-296, enacted on December 13, 2010, requires 
implementation of those provisions on July 1, 2011. USDA concludes that 
there is insufficient time to issue a proposed rule prior to the 
statutory implementation deadline. As a result, this interim rule is 
necessary to comply with the requirements of Sections 205 and 206 of 
Public Law 111-296 and ensure that those provisions are implemented and 
effected by State agencies and SFAs on July 1, 2011.
    For the same reason of impracticability due to the statutory 
implementation deadline, under the provisions of the Congressional 
Review Act at 5 U.S.C. 808(2), USDA for good cause is issuing this rule 
with an effective date of July 1, 2011, which is less than the latest 
of the 60-day delay in effective date prior to, either the submission 
of a report to Congress, or after publication of the rule in the 
Federal Register, as required under section 801(a)(3)(A) of the 
Congressional Review Act.
    USDA invites public comment on this interim rule. USDA will 
consider amendments to the rule based on comments submitted during the 
90-day comment period. The agency will address comments and affirm or 
amend the interim rule in a final rule.

Executive Order 12866 and Executive Order 13563

    Executive Orders 12866 and 13563 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

[[Page 35304]]

quantifying both costs and benefits, of reducing costs, of harmonizing 
rules, and of promoting flexibility.
    This interim rule has been designated an ``economically significant 
regulatory action'' under section 3(f) of Executive Order 12866. 
Accordingly, the rule has been reviewed by the Office of Management and 
Budget.

Regulatory Impact Analysis

    As required for all rules that have been designated as significant 
by the Office of Management and Budget, the following Regulatory Impact 
Analysis (RIA) was developed for this interim rule: It is included as 
Appendix A at the end of this document.

Initial Regulatory Impact Analysis

Title: National School Lunch Program: School Food Service Account 
Revenue Amendments Related to the Healthy, Hunger-Free Kids Act of 
2010
Nature of Action: Interim Rule

    Need for Action: Codifies provisions of Section 205 and 206 of 
the Healthy, Hunger-Free Kids Act of 2010 in regulation for the 
National School Lunch Program (NSLP) and the School Breakfast 
Program (SBP). These provisions set requirements for student 
payments or other non-Federal revenues to ensure that the paid meals 
and [agrave] la carte foods generate a level of total revenue for 
local schools that is comparable to the revenue generated by USDA 
payments for free meals. In the aggregate, these requirements 
provide additional revenue to support nutritious and healthful meals 
for all students.
    Affected Parties: Those involved in the operation and 
administration of the NSLP and SBP, including State education 
agencies, local school food authorities, schools, students, and the 
food production, distribution and service industry.

    Background
    The National School Lunch Program (NSLP) is available to over 50 
million children each school day; an average of 31.6 million 
children per day ate a reimbursable lunch in fiscal year (FY) 2010. 
The School Breakfast Program (SBP) served an average of 11.6 million 
children daily. Schools that participate in the NSLP and SBP receive 
Federal reimbursement and USDA Foods (donated commodities) for 
lunches and breakfasts that meet program requirements.
    The level of Federal support provided varies by the household 
income of the participating child, with the highest payments for 
meals provided free to the children with incomes below 130 percent 
of poverty, a lower amount for meals provided at reduced price to 
those with incomes between 130 percent and 185 percent of poverty, 
and a small amount for meals provided to higher-income students 
(paid meals). Recent data on the number of participating students in 
each category is presented in Table 1.

                             Table 1--NSLP/SBP Average Daily Participation, FY 2010
----------------------------------------------------------------------------------------------------------------
                                                                 Children (millions) receiving
                                             -------------------------------------------------------------------
                   Program                                      Reduced-price
                                                 Free meals         meals          Paid meals         Total
----------------------------------------------------------------------------------------------------------------
NSLP........................................             17.4              3.0             11.1             31.6
SBP.........................................              8.7              1.0              1.9             11.6
----------------------------------------------------------------------------------------------------------------

    While USDA subsidizes paid meals to cover part of the cost of 
production, local communities and State governments cover the 
remainder of production costs, and have the flexibility to do so 
from any non-Federal source--student payments, State subsidies, or 
local funds. Most schools depend on student payments for paid school 
meals for a part of their revenue. Based on data collected by USDA 
from a national sample of schools the full price of lunch for school 
year 2004-05 was $1.60 on average, and the most common (modal) price 
was $1.50. The full price ranged from $0.65 to $3.00; on average, it 
was higher in secondary schools than in elementary schools, and 
higher in large schools than in smaller ones. The full price was 
also higher in suburban and lower-poverty schools than in schools 
not in those categories.\1\
---------------------------------------------------------------------------

    \1\ U.S. Department of Agriculture, Food and Nutrition Service 
(2007). School Nutrition Dietary Assessment Study-III (multiple 
volumes), Table II.11. (SNDA-III) Report prepared by Mathematica 
Policy Research. Available at www.fns.usda.gov/ora/.
---------------------------------------------------------------------------

    However, the revenue received by schools for paid meals is often 
too low to cover the cost of those meals. An examination of school 
meal production costs shows that it cost about $2.28 to produce a 
school lunch in school year 2005-06.\2\ While USDA's reimbursement 
for a free meal ($2.50), including cash and commodity foods, was 
about 9 percent higher than reported production costs, total 
revenues from a paid meal--including the price charged to families 
($1.60), USDA's cash reimbursement ($0.21), and the commodity 
entitlement ($0.175)--was 13 percent less. Total revenue from a paid 
meal represented only 80 percent of the value of Federal support for 
a free meal. Funding paid meals below the cost of their production 
effectively shifts Federal subsidies designed for the lowest-income 
children to others. It can negatively affect all children by 
limiting the funds available to provide nutritious meals.
---------------------------------------------------------------------------

    \2\ U.S. Department of Agriculture, Food and Nutrition Service 
(2008). School Lunch and Breakfast Cost Study-II p. ii. (SLBCS-II) 
Report prepared by Abt Associates, Inc. Available at 
www.fns.usda.gov/ora/.
---------------------------------------------------------------------------

    Schools are also authorized to prepare and sell non-program 
foods and meals during the meal period, as long as the revenue is 
provided to the food service program account. Revenues from non-
reimbursable foods fell short of the cost of producing them by an 
average of about 29 percent in SY 2005-06.\3\ Combining reimbursable 
meals and other foods, reported costs were essentially equal to 
revenues (101 percent). The average SFA used revenues from 
reimbursable meals to offset the cost of producing [agrave] la carte 
and other non-reimbursable food items.
---------------------------------------------------------------------------

    \3\ School Lunch and Breakfast Cost Study-II. The conclusion 
that schools price [agrave] la carte foods below their cost may seem 
counter intuitive. Some school meal providers may see [agrave] la 
carte food sales as a source of additional revenue for relatively 
little added cost. Many schools attribute overhead and labor costs 
primarily to reimbursable meal production and do not recognize that 
such costs support all meal services, and should be allocated in 
accordance with generally accepted accounting principles. The 
research cited here allocates the shared cost of overhead and labor 
that supports both reimbursable and [agrave] la carte meal 
production proportionately across these services.
---------------------------------------------------------------------------

    The provisions in Section 205 and 206 of the Healthy, Hunger-
Free Kids Act of 2010 set requirements for student payments or other 
non-Federal revenues to ensure that the paid meals and [agrave] la 
carte foods generate a level of total revenue for local schools that 
is comparable to the revenue generated by USDA payments for free 
meals. In the aggregate, these requirements provide additional 
revenue to support nutritious and healthful meals for all students.

I. Summary of Requirements

    This interim rule would codify non-discretionary aspects of the 
following provisions of the Healthy, Hunger-Free Kids Act (Pub. L. 
111-296; the Act) under 7 CFR Part 210:
     Section 205 of the Act requires school food authorities 
(SFAs) participating in the NSLP to establish a price for paid 
lunches that is on average equal to the difference between free 
lunch reimbursement and paid lunch reimbursement--the Section 11 
reimbursement.\4\ An SFA charging less than

[[Page 35305]]

the required amount is required to gradually increase the paid lunch 
price. The maximum annual average required price increase is limited 
to not more than 10 cents for any SFA. In lieu of increasing the 
paid lunch price, an SFA may choose to cover the difference in 
revenue with non-Federal funds. The Act requires the Secretary to 
develop regulations to carry out this section, including collecting 
and publishing the prices that SFAs charge for paid meals annually.
---------------------------------------------------------------------------

    \4\ Federal reimbursement for NSLP lunches is the sum of the 
values specified in Section 4 and Section 11 of the Richard B. 
Russell National School Lunch Act (NSLA). A Section 4 reimbursement 
is distributed to schools for all program lunches. Lunches served to 
students eligible for free or reduced-price school meals receive 
both a Section 4 and a Section 11 reimbursement. SFAs must charge 
students a price equal to the Federal Section 11 rate (or contribute 
an equivalent sum from State or local sources) for total per meal 
revenue from paid meals to match total per meal revenue from free 
meals. In school year 2010-11, schools earned $2.72 for each free 
meal, $2.32 for each reduced price meal, and $0.26 for each paid 
meal.
---------------------------------------------------------------------------

     Section 206 of the Act requires that all food sold in a 
school and purchased with funds from the nonprofit school food 
service, other than a reimbursable meal provided under the National 
School Lunch and School Breakfast Programs, must generate revenue at 
least equal to the cost of such foods.
     The Act makes these provisions effective on July 1, 
2011.

II. Cost/Benefit Assessment

A. Summary of Anticipated Impacts

    While the rule will have little or no direct impact on Federal 
expenditures, it will require the contribution of additional funds 
to the non-profit school meals program account of participating 
SFAs:
     For the Section 205 provisions, these funds could be 
derived from a combination of sources, including program 
participants who receive paid lunches and State and local 
governments. State agencies administering the NSLP and SFAs have 
flexibility to determine which of these sources will contribute 
revenues to meet the requirements, and in what proportion.
     For the Section 206 provisions, funds will derive from 
increased prices for [agrave] la carte foods and beverages, and thus 
will all be contributed by the families of school children who 
choose to purchase these products.
     School food authorities will be required to incur 
additional administrative costs to implement the rule, reflecting 
the need to review food costs and revenue records, adjust [agrave] 
la carte prices, and report the prices charged for paid meals.

In addition, we expect that the rule will have Federal budgetary 
effects as a result of indirect impacts on participation in the 
school meals programs. To the extent that the Section 205 provisions 
result in increased prices for paid meals, NSLP participation may be 
lower than otherwise projected as students choose not to eat, to 
bring lunch from home, or to acquire it from other sources, 
resulting in Federal savings in paid reimbursements. To the extent 
that price increases for [agrave] la carte foods result from Section 
206 provisions, school children and their families could choose to 
substitute reimbursable school meals for purchases of [agrave] la 
carte foods, resulting in increased participation and higher Federal 
meal reimbursements.
    Estimates of the overall impacts of the rule, including both 
changes in SFA revenues and Federal costs, are presented in Table 2. 
For purposes of this analysis, the rule is assumed to take effect on 
July 1, 2011, the start of school year (SY) 2011-2012.
---------------------------------------------------------------------------

    \5\ SFA revenues derive from increases in student payments for 
paid lunches and [agrave] la carte foods, additional contributions 
to SFA accounts from State or local governments, and higher USDA 
reimbursements for an expected increase in participation in the 
reimbursable meals programs.

                                        Table 2--Projected Impact of Rule
                                            [All figures in millions]
----------------------------------------------------------------------------------------------------------------
                                                                        Fiscal year
                                         -----------------------------------------------------------------------
                                             2011        2012        2013        2014        2015        Total
----------------------------------------------------------------------------------------------------------------
SFA Revenues: \5\
    Section 205.........................           *          $9         $66        $104        $144        $323
    Section 206 (non-reimbursable food           175       1,148       1,237       1,320       1,443       5,324
     sales).............................
    Section 206 (reimbursable meal                64         416         466         484         510       1,939
     sales).............................
    Administrative Costs................          -5          -9         -10         -10         -10         -44
                                         -----------------------------------------------------------------------
        Net SFA Revenues................        $234      $1,564      $1,760      $1,898      $2,086      $7,542
Federal Costs:
    Section 205 (NSLP)..................           *           *         -$3         -$7        -$10        -$20
    Section 206 (NSLP)..................          46         297         338         348         362       1,392
                                         -----------------------------------------------------------------------
        Total Federal Cost..............         $46        $297        $335        $342        $352      $1,372
Participation Effects:
    Net change in number of lunches               25         155         151         146         143         620
     served.............................
    Net change in number of reimbursable          **          **          **          **          **          **
     breakfasts served..................
    Baseline Federal Cost of NSLP.......     $11,521     $12,049     $12,300     $12,415     $12,534     $60,819
        Number of lunches...............       5,387       5,465       5,531       5,586       5,631      27,600
    Baseline Federal Cost of SBP........      $3,115      $3,338      $3,470      $3,557      $3,629     $17,108
        Number of breakfasts............       2,091       2,187       2,253       2,298       2,332      11,160
----------------------------------------------------------------------------------------------------------------
* Equals less than $500,000.
* Small increase.


    Note: Entries in tables throughout this analysis may not sum to 
totals due to rounding.

B. SFA Impacts

1. Revenue from Paid Lunches (Section 205)

    Section 205 directs SFAs to take steps to equalize the per meal 
revenue generated by reimbursable paid lunches and free lunches, 
thus targeting SFAs whose non-Federal per meal revenue is less than 
the Section 11 reimbursement for lunches (or $2.46 for school year 
2011-12). It permits State and local governments to share, or assume 
fully, the direct economic impact. Although we cannot anticipate how 
States, local governments, and SFAs will share the responsibility 
for raising per-meal receipts for paid lunches, we have estimated 
the total amount of non-Federal revenue needed to meet the 
requirements compared to the latest observed levels.
    We identified schools whose paid meal prices fell short of the 
Section 11 reimbursement in school year 2004-2005 using data 
collected in the third School Nutrition Dietary Assessment Study 
(SNDA-III).\6\ This study collected data from a nationally 
representative sample of 129 SFAs, 398 schools in those SFAs, and 
2,314 children attending those schools (and their parents) in School 
Year 2004-05. SFA directors provided information on district-wide 
policies (such as menu-planning

[[Page 35306]]

systems) and operations (such as food purchasing). As part of the 
study, school foodservice managers provided information regarding 
their school's foodservice operations, including paid meal prices, 
and policies on competitive foods available in or near the 
foodservice area.
---------------------------------------------------------------------------

    \6\ Because paid lunch price is a school-level variable on the 
SNDA-III dataset rather than an SFA-level variable, we perform our 
analysis at the school level. We developed our estimate as though 
the responsibility for raising paid lunch prices or finding 
alternate non-federal revenue rests with individual schools. In 
practice, Section 205 provides SFAs the flexibility to set prices at 
individual schools however they see fit, as long as the weighted 
average price across the SFA meets the Section 205 target. For 
purposes of an aggregate cost estimate, a school-level analysis and 
a weighted average SFA-level analysis should give comparable 
results.
---------------------------------------------------------------------------

    To estimate the number of schools that charge less than the 
Section 11 reimbursement in FY 2011, we assumed that the schools' 
paid meal prices kept pace with inflation adjustments in the lunch 
reimbursement since SY 2004-2005. For this analysis, the schools 
whose prices fall short of the Section 11 rate today are the schools 
that would have fallen short of a comparable regulatory target in SY 
2004-2005.\7\
---------------------------------------------------------------------------

    \7\ It is worth noting that the observed relationship between 
paid lunch and free lunch revenue is relatively stable across the 
three SNDA studies, which collected data from school years 1991-92, 
1998-99, and 2004-05:
     In SY 1991-92, revenue for a paid meal was 79.9 percent 
of Federal revenue for a free meal.
     In SY 1998-99, revenue for a paid meal was 80.3 percent 
of Federal revenue for a free meal.
     In SY 2004-05, revenue for a paid meal was 82.2 percent 
of Federal revenue for a free meal.
---------------------------------------------------------------------------

     Throughout the forecast period we assume annual 
increases in the Section 11 rate equal to the projected growth in 
the Food Away From Home series of the Consumer Price Index.\8\ We 
also assume that baseline paid meal prices would have matched the 
annual growth in the Section 11 rate. These baseline prices 
represent what schools would have charged for reimbursable paid 
meals in the absence of the interim rule.
---------------------------------------------------------------------------

    \8\ The NSLA provides for annual increases in the Section 11 
rate equal to growth in the CPI-U's Food Away From Home series. We 
use projections in the series prepared by OMB for use in the 2012 
President's Budget.
---------------------------------------------------------------------------

     The interim rule requires annual price increases (or 
equivalent non-Federal revenues) of 2 percent above the inflation 
rate until prices meet the Section 11 target. The rule also allows 
for annual rounding of adjusted prices to the next lower 5 cents and 
limits required price increases to no more than 10 cents. SFAs and 
schools need not round prices down, nor are they prohibited from 
imposing annual increases above the 10 cent cap. For this estimate, 
however, we assume that schools take advantage of both provisions: 
we assume uniform rounding and no optional price increases above 10 
cents in any year.
     The interim rule allows SFAs to contribute financial 
support from non-Federal sources in lieu of part or all of required 
paid lunch price increases. It requires that financial support from 
non-Federal sources must be cash for direct support for paid 
lunches, and may not be in-kind contributions or revenue from foods 
sold in competition with reimbursable meals. For the first school 
year of implementation (school year 2011-12), the interim rule 
allows SFAs to count any non-Federal cash contribution, except for 
cash revenues from foods sold in outside of reimbursable meals, as 
an offset for paid lunch price increases. While the most recent 
analysis of school meals costs and revenues suggests that State and 
local authorities contribute substantial non-Federal cash revenues 
to food service accounts, data is not available to determine the 
extent to which these revenues represent direct support for paid 
lunches. For the purpose of this analysis, we assume that SFAs will 
be able to use existing contributions to meet all of the required 
paid meal revenue increase to meet the rule's requirements for 
school year 2011-12, and to meet 25 percent of the requirements for 
subsequent years.
     We assume that increases in paid meal prices above the 
2 percent annual inflation rate reduce student consumption of paid 
meals.\9\ We model this reduction with evidence collected in SNDA-
III, which showed that over a range of paid meal prices typical of 
those charged in SY 2004-2005, student participation rate was lower 
by 0.11 percent for each additional cent in paid lunch prices.\10\ 
In addition to impacts on SFA revenues, this participation effect 
also implies Federal savings; this is discussed further under 
Federal Budgetary Impacts, below.
---------------------------------------------------------------------------

    \9\ We expect that students that no longer consume paid lunches 
because of price increases will either bring food from home, choose 
not to eat during school hours, or acquire food from other sources. 
We do not have data that allows us to estimate the relative 
frequency of these different responses.
    \10\ Over the price range examined in SNDA-III, this is an 
elasticity of -0.30. SNDA-I estimated an elasticity of -0.25 over a 
range of prices from $1.20 to $1.60 in SY 1991-1992. (Table VII.3, 
p. 137) U.S. Department of Agriculture, Food and Nutrition Service 
(1993). The School Nutrition Dietary Assessment Study. Report 
prepared by Mathematica Policy Research. Available at 
www.fns.usda.gov/ora/
---------------------------------------------------------------------------

    The results of this analysis are presented in Table 3:

                Table 3--Non-Federal Revenue Required To Meet Paid Meal Revenue Equity Provision
----------------------------------------------------------------------------------------------------------------
                                                                           Fiscal year (millions)
                                                          ------------------------------------------------------
                                                             2011     2012     2013     2014     2015     Total
----------------------------------------------------------------------------------------------------------------
Required non-Federal revenue increase based on current          $8      $56      $87     $138     $192      $481
 estimated paid meal student payments....................
Existing non-Federal, non-student payment contributions         -8      -47      -21      -35      -48      -158
 that offset required increase...........................
                                                          ------------------------------------------------------
Net required non-Federal revenue increase................        *        9       66      104      144       323
----------------------------------------------------------------------------------------------------------------

    Not all school districts will benefit from this revenue 
increase. We estimate, based on the distribution of paid lunch 
prices in SY 2004-05 found in SNDA-III, that about 6,000 of 102,000 
schools will not have to increase paid meal prices at all in SY 
2011-12 to comply with Section 205 because they already charge 
prices above the $2.46 target for SY 2011-12. An additional 19,000 
schools have prices so low (no greater than $1.59) that the 3.14 
percent increase required for SY 2011-12 results in an increase of 
less than 5 cents, and thus in almost all cases rounds down to 
zero.\11\ Almost all of the remaining schools would have only a 5 
cent required increase in SY 2011-12.
---------------------------------------------------------------------------

    \11\ These schools would face no required price increase in SY 
2011-12 if their SY 2010-11 baseline prices were rounded to an even 
5 cent increment. As we note above, this analysis relies on the 
school-level SNDA-III dataset. Because SNDA-III data indicate that 
nearly all schools charged prices in 5 cent increments in SY 2004-
05, our analysis assumes that all prices in SY 2010-11 are likewise 
rounded to the nearest 5 cents.
---------------------------------------------------------------------------

    Because the provision limits the increase to no more than 10 
cents per lunch per year, we anticipate that increases in SFAs with 
the largest difference between paid lunch prices and the Section 11 
rate will continue gradually over many years, with about half of all 
schools reaching the requirements of the rule in 13 years, and many 
continuing to work towards paid meal revenue parity for 20 years or 
more.\12\
---------------------------------------------------------------------------

    \12\ We estimate that the ``revenue gap'' between free 
reimbursement and paid meal revenue levels would be reduced 28 
percent by FY 2015, the end of the accounting period for this 
analysis. The gap would continue to shrink in future years.
---------------------------------------------------------------------------

    SFAs have the option of meeting the revenue requirements by 
adding funds to the school food service account. However, to the 
extent that SFAs choose instead to raise paid meal prices, the 
change will affect students (and their families) whose income 
exceeds the statutory thresholds for free or reduced price meals. 
While this spares families with the lowest incomes from the revenue 
raising objective of the provision, there may be some concern that 
higher paid meal prices will fall disproportionately on children 
with incomes relatively close to the upper threshold for reduced 
price benefits. Table 4 presents a distribution of school-aged 
children by level of family income: \13\
---------------------------------------------------------------------------

    \13\ The data in Table 4 reflect special tabulations of Current 
Population Survey data prepared by Mathematica Policy Research for 
FNS.

[[Page 35307]]



                                Table 4--Children by Age and Family Income, 2008
----------------------------------------------------------------------------------------------------------------
                                                                                               Percent of total
                                                       Children age 5-18                        ineligible for
        Family income as a percent of poverty            Years (000s)      Percent of total      free/ reduced
                                                                                                     meals
----------------------------------------------------------------------------------------------------------------
<= 100%.............................................              10,428                18.1  ..................
100% to 130%........................................               3,865                 6.7  ..................
130% to 185%........................................               6,686                11.6  ..................
185% to 200%........................................               1,559                 2.7                4.3%
200% to 225%........................................               2,638                 4.6                 7.2
225% to 250%........................................               2,762                 4.8                 7.6
250% to 300%........................................               4,988                 8.7                13.7
> 300%..............................................              24,571                42.7                67.3
                                                     -----------------------------------------------------------
    Total...........................................              57,496               100.0               100.0
----------------------------------------------------------------------------------------------------------------

    The number of school age children with family incomes just over 
the limit for school meal benefits is substantial in absolute terms; 
nearly 1.6 million school age children had family incomes between 
185 percent and 200 percent of the Federal poverty threshold in 
2008. But this group represents roughly 4 percent of all children 
whose incomes place them among potential paid meal participants.

2. Revenue From Non-Program Foods (Section 206)

a. Direct Impacts on [agrave] la Carte Sales

    The interim rule requires that, to the extent that SFA revenues 
from [agrave] la carte foods fall short of the rule's cost-based 
target, SFAs must take positive action to either raise [agrave] la 
carte prices or invest additional sums in program meals.

Required SFA Revenue Increase

    We estimate the SFA-level effects of this provision with data 
collected as part of an examination of school meal production costs 
(School Lunch and Breakfast Cost Study-II (SLBCS-II)). The SLBCS-II 
examined school year 2005-2006 revenue and expense data for a 
nationally representative sample of 120 school food authorities, and 
a representative sample of 356 schools within those SFAs. Financial 
statements, meal production records, recipes, invoices, and other 
documents were reviewed. Data collected from those SFAs include the 
revenue generated from program meals, the revenue generated from 
non-program foods that accrued to the school foodservice account, 
and the cost of producing those meals and food items, allocated 
between program and non-program foods using generally-accepted 
accounting practices. Data from interviews with SFA and school 
district officials were used to calculate unreported costs and 
allocate labor costs among SFA activities. Samples of meals taken by 
students were observed to obtain data on menu items sold in 
reimbursable and nonreimbursable meals.\14\
---------------------------------------------------------------------------

    \14\ One limitation of the SLBCS-II for this analysis is that 
SFAs were not asked to provide separate program and non-program 
costs. Developing an estimate of the split between program and non-
program costs was one of the objectives of the study. Trained 
observers recorded the foods selected by a sample of students and 
identified those meals as reimbursable or non-reimbursable. The 
study then estimated the cost of individual food items based on SFA 
records of food prices, the value of USDA Foods, school recipe 
records, and school menus. With this information, the study 
estimated the share of total food costs attributable to non-program 
meals. That percentage was applied to non food costs to estimate the 
overall split between program and non-program costs.
---------------------------------------------------------------------------

    We use these data to compute the following two key statistics, 
specified by the rule, for each of the study's sampled SFAs:
[GRAPHIC] [TIFF OMITTED] TR17JN11.014

    Program foods are the Federally reimbursable lunches, 
breakfasts, and snacks served in the NSLP and SBP. For purposes of 
the interim rule, non-program foods are [agrave] la carte and other 
items offered to students other than NSLP or SBP meals.\15\ As 
presented in the estimate, the costs for these foods reflect the 
allocation of food costs across program meals and non-program foods 
as required under generally accepted accounting principles, 
including those ingredients and food components that might be 
purchased and used to support both reimbursable meal service and 
[agrave] la carte service.
---------------------------------------------------------------------------

    \15\ An additional limitation of the SLBCS-II data for this 
analysis is that financial data for [agrave] la carte foods are 
combined with the data for adult meals, some vending, and catering. 
Because we cannot isolate [agrave] la carte's contribution to these 
broader measures of cost and revenue we overstate the cost and 
revenue ratios for some SFAs.
---------------------------------------------------------------------------

    The sum of program revenue and non-program revenue in the second 
ratio is all revenue in the SFA account. SFA revenue includes 
Federal subsidies for reimbursable meals, USDA food assistance, 
student payment for program meals, revenue from [agrave] la carte 
and other non-reimbursable food sales, State and local contributions 
to the SFA account, and a small amount from other sources such as 
interest on deposits and the sale of equipment.
    The interim rule requires SFAs to generate at least as great a 
share of total revenue from non-program foods as non-program foods 
contribute to total food costs. That is, SFAs must ensure that their 
revenue ratio is at least as great as their food cost ratio. With 
SLBCS-II data, adjusted for growth in student participation and 
school food prices, we estimate that [agrave] la carte revenues fall 
short of the amount necessary to balance SFA food cost and revenue 
ratios as required by the interim rule by almost $2.4 billion for 
the full 2011 fiscal year.\16\
---------------------------------------------------------------------------

    \16\ For this analysis we assume that baseline demand for 
[agrave] la carte foods grows at a rate comparable to the growth in 
student consumption of reimbursable paid lunches. We recognize the 
limitations of paid meal participation as a proxy for [agrave] la 
carte consumption. Our assumption of comparable growth is intended 
to reflect changes in the size of the student population that 
chooses to consume school foods but is ineligible for free or 
reduced price meals.

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

[[Page 35308]]

Impacts of Price Changes on Student Purchase of [agrave] la Carte 
Foods

    The revenue increase required to balance SFAs' food and revenue 
ratios for FY 2011 is about 70 percent above projected baseline 
[agrave] la carte receipts.\17\ For years beyond 2011, adjustments 
are needed not only for price inflation, but for changes in demand 
for [agrave] la carte foods as a result of price increases, absent 
other action by school or SFA administrators.
---------------------------------------------------------------------------

    \17\ This is the targeted revenue increase prior to a price-
induced drop in demand for [agrave] la carte foods.
---------------------------------------------------------------------------

     In the absence of a direct measure of student 
sensitivity to price increases in [agrave] la carte foods, we use 
the same price elasticity estimate that we applied to our Section 
205 analysis of paid lunches.\18\ For each one cent increase in paid 
meal prices, SNDA-III estimated a -0.11 percent decrease in 
participation, a price elasticity of about -0.30.\19\
---------------------------------------------------------------------------

    \18\ We find the estimated price elasticity for paid lunches 
from SNDA-III to be a reasonable substitute for this analysis of 
[agrave] la carte consumption given that it measures student 
response to price increases in a school setting where available 
substitutes are comparably limited.
    \19\ For FY 2011, we estimate that SFAs will need to raise 
prices to generate $357 million in increased revenue for the period 
July 1--September 30. This would require, on average, a 71 percent 
increase in [agrave] la carte prices. We then apply a 3.0 percent 
reduction in student purchases of [agrave] la carte foods for each 
10 percent increase in price, estimating that total revenue from 
[agrave] la carte sales will fall by about 21 percent ($182 
million). Net SFA revenues thus will increase $175 million, rather 
than the $357 million that would be raised under an assumption of 
constant sales.
---------------------------------------------------------------------------

     Following the initial price adjustment to comply with 
the rule in 2011, we assume that growth in prices charged for and 
demand for [agrave] la carte foods matches growth in the aggregate 
Federal reimbursement for paid lunches, using the same assumptions 
for growth in paid lunch participation and reimbursement rates 
reflected in the FY 2012 President's Budget.\20\
---------------------------------------------------------------------------

    \20\ This means that we assume SFA prices charged for [agrave] 
la carte foods keep pace with increases in the broader market prices 
of food and labor reflected in the CPI's ``food away from home'' 
index.
---------------------------------------------------------------------------

     It is plausible to image that, over time, the effect of 
increased prices in reducing demand will decay, as consumers grow 
accustomed to the higher prices. We have not factored this into our 
analysis, but to the extent that it occurs, we would expect to see 
demand increase and overall SFA revenue grow.
    Through FY 2015, we estimate that SFA revenues for [agrave] la 
carte foods will increase as a result of the interim rule by the 
amounts in Table 5.

                        Table 5--Increased SFA Revenue From [agrave] la Carte Foods \21\
----------------------------------------------------------------------------------------------------------------
                                                                     Fiscal year (millions)
                                               -----------------------------------------------------------------
                                                   2011       2012       2013       2014       2015      Total
----------------------------------------------------------------------------------------------------------------
Baseline [agrave] la carte revenue............       $500     $3,279     $3,533     $3,769     $4,119    $15,200
Revenue increase due to price increase........        357      2,342      2,524      2,693      2,942     10,858
Revenue decrease due to reduced demand........       -182     -1,194     -1,286     -1,372     -1,499     -5,534
                                               -----------------------------------------------------------------
Total adjusted [agrave] la carte revenue......        675      4,427      4,770      5,090      5,561     20,524
                                               =================================================================
Net projected increase in [agrave] la carte           175      1,148      1,237      1,320      1,443      5,324
 revenue......................................
----------------------------------------------------------------------------------------------------------------

    It should be noted that this estimate assumes that the mix of 
[agrave] la carte foods remains equally popular among students 
relative to price as the foods sold in SY 2004-05 (when the most 
recent data on [agrave] la carte foods was collected), and that 
schools make no effort to adjust their [agrave] la carte offerings 
to increase their popularity. To the extent that schools make such 
adjustments, the net revenue increase of the rule would grow.
---------------------------------------------------------------------------

    \21\ Reflects a drop in demand following the initial [agrave] la 
carte price increase.
---------------------------------------------------------------------------

    In addition, the Healthy, Hunger-Free Kids Act of 2010 requires 
USDA to promulgate nutrition standards for all foods sold in school. 
Because these standards have not yet been proposed, we did not 
factor them into this analysis. To the extent that these standards 
ultimately require schools to eliminate popular items, they could 
cause a net reduction in demand for [agrave] la carte foods, and 
reduce the revenues generated by this rule.

b. NSLP Participation Impact

    We would expect that some portion of the reduced demand for 
[agrave] la carte foods due to price increases would be redirected 
as additional demand for and participation in the school meals 
programs.
     We assume that roughly 46 percent of lost demand for 
[agrave] la carte foods due to price increases would be redirected 
as additional demand for and participation in the school meals 
programs.\22\ For simplicity, and because the consumption of 
[agrave] la carte foods at breakfast is relatively low compared to 
the consumption of [agrave] la carte foods at lunch, we model the 
shift from [agrave] la carte to program foods as one that takes 
place at lunchtime only.\23\ We expect that students that do not 
choose to participate in school meals or purchase higher-priced 
[agrave] la carte foods will either bring food from home, choose not 
to eat during school hours, or acquire food from other sources. We 
do not have data that allows us to estimate the relative frequency 
of these different responses.
---------------------------------------------------------------------------

    \22\ SNDA-III estimates that participation in the reimbursable 
lunch program is 4.6 percentage points higher in schools that 
disallow the sale of non-program foods during meal times than in 
schools that allow non-program food sales (SNDA-III, vol. 2, p. 
117). SNDA-I found that 10 percent of students who consumed meals at 
school purchased their food from [agrave] la carte lines, vending 
machines, or school stores (Table VII.1, p. 131). An overall program 
participation increase of 4.6 percent from the 10 percent of 
students who purchase competitive foods implies that 46 percent of 
students who purchase competitive foods will turn to reimbursable 
meals if competitive food sales are suspended. For this analysis we 
assume that the percentage increase in program participation by 
students who stop purchasing competitive foods due to price is the 
same as the percentage increase in program participation by students 
whose competitive food option is eliminated entirely.
    \23\ SNDA-III found that competitive foods were consumed by 29 
percent of NSLP non-participants during the lunch period in SY 2004-
2005 (Vol. 2, Table VI.9, p. 196), but that competitive foods were 
consumed by just 5 percent of SBP non-participants during the 
breakfast period (SNDA-III, Vol. 2, Table VII.9, p. 264).
---------------------------------------------------------------------------

     Data is not available about the income distribution of 
students who purchase [agrave] la carte. We make the assumptions 
that (1) low-income children are less-frequent consumers of these 
foods that higher-income children and (2) they are more likely than 
higher-income children to reduce purchases in response to price 
increases. We therefore assume that [agrave] la carte sales 
reductions are distributed across school meal eligibility levels in 
proportion to their share of total program participation.\24\
---------------------------------------------------------------------------

    \24\ We assume that 55 percent of children who stop purchasing 
[agrave] la carte foods in response to higher prices are eligible 
for free school meals, 10 percent are eligible for reduced price 
meals, and 35 percent are eligible for paid meals. This is the 
distribution of NSLP participants in FY 2010. If the children who 
currently purchase [agrave] la carte foods are more likely to be 
eligible for paid meals, estimated revenues would be less than 
estimated here, especially in the years before the full effect of 
Section 205 are realized.
---------------------------------------------------------------------------

    Our estimate of the increase in SFA revenues that derives from 
Federal reimbursements and student payments for a larger number of 
NSLP meals served through FY 2015 as a result of the interim rule is 
shown in Table 6. This reflects an increase of about 2.9 percent in 
lunches over the Federal baseline, or about 92 million free lunches, 
16 million reduced-price lunches, and 58 million paid lunches in 
2015. In

[[Page 35309]]

addition to impacts on SFA revenues, this participation effect is 
reflected in increased Federal costs discussed further under Federal 
Budgetary Impacts, below. (The amounts shown in Table 6 include the 
Federal costs shown in Table 10, plus additional amounts derived 
from student payments or other non-Federal revenue sources for non-
free meals.)

            Table 6--Increased SFA Revenue Due to Shift From [agrave] la Carte to NSLP Participation
----------------------------------------------------------------------------------------------------------------
                                                            Fiscal year (millions)
                                      -----------------------------------------------------------------
                                          2011       2012       2013       2014       2015      Total
-------------------------------------------------------------------------------------------------------
Projected increase in SFA revenue            $64       $416       $466       $484       $510     $1,939
 from [agrave] la carte/NSLP shift...
----------------------------------------------------------------------------------------------------------------

3. SFA Administrative Cost

    There are no current regulatory requirements regarding pricing 
of paid lunches, the amount of revenue generated by paid lunches or 
the revenue generated by selling non-program foods. The interim rule 
would thus entail new administrative tasks, requiring school food 
authorities to use information on paid lunch prices, food costs, and 
revenue records to determine the price changes needed for these 
meals and [agrave] la carte foods.
    The rule also requires State agencies and school food 
authorities to annually provide and report to USDA the paid meal 
prices charged by school food authorities. We estimate that this 
will require, in aggregate, roughly 323,000 hours in additional work 
for States and SFAs each year, increasing administrative costs by 
about $10 million per year.\25\ However, it is important to 
recognize that, to the extent States and SFAs make use of options to 
add other non-Federal sources to the school food service account in 
place of part of all of the price increase, additional 
administrative costs could result from the need to account for these 
other revenue sources and amounts. In either case, most additional 
administrative cost occurs at the SFA level.
---------------------------------------------------------------------------

    \25\ Based on estimated recordkeeping and reporting requirements 
for 57 State agencies and nearly 21,000 SFAs. These requirements are 
expected to impose a burden of about 15 hours per year per 
respondent (valued at about $30 per hour). We estimate that just 
half of a full year's worth of these administrative expenses will be 
incurred in FY 2011.
---------------------------------------------------------------------------

    Projected administrative costs are shown in Table 7:

                                          Table 7--Administrative Costs
----------------------------------------------------------------------------------------------------------------
                                                                           Fiscal year (millions)
                                                          ------------------------------------------------------
                                                             2011     2012     2013     2014     2015     Total
----------------------------------------------------------------------------------------------------------------
Administrative Costs.....................................       $5       $9      $10      $10      $10       $44
----------------------------------------------------------------------------------------------------------------

C. Federal Budgetary Impacts

    We estimate that the interim rule has some impacts on Federal 
expenditures as well. While no measurable direct Federal costs for 
the implementation of this provision are anticipated, the impact of 
the pricing and revenue provisions on participation in the NSLP and 
SBP will change Federal costs for these programs.
    To the extent that the Section 205 provisions result in 
increased prices for paid meals, NSLP participation may be 
marginally lower than otherwise projected, resulting in Federal 
savings in paid reimbursements. We model this reduction with SNDA-
III data which suggests that the student participation rate was 
lower by 0.11 percent for each additional cent in paid lunch prices 
in SY 2004-05. We anticipate that average daily participation by 
students receiving paid meals will change as a result of this 
provision as follows:

                        Table 8--Fewer Children Consuming Paid Meals Due to Higher Prices
----------------------------------------------------------------------------------------------------------------
                                                                           Fiscal year
                                                ----------------------------------------------------------------
                                                     2011         2012         2013         2014         2015
----------------------------------------------------------------------------------------------------------------
Change in number of children consuming paid                *       -7,000      -55,000      -88,000     -124,000
 meals due to higher prices....................
----------------------------------------------------------------------------------------------------------------

    To the extent that price increases for [agrave] la carte foods 
result from Section 206 provisions, this could lead to substitution 
of NSLP/SBP participation for purchases of these foods, resulting in 
a marginal participation increase and Federal costs for meal 
reimbursements. We anticipate that average daily program 
participation will increase among students switching from [agrave] 
la carte to program meals as a result of this provision as follows:

              Table 9--More Children Consuming Program Meals Due to Higher [agrave] la Carte Prices
----------------------------------------------------------------------------------------------------------------
                                                                              Fiscal year
                                                     -----------------------------------------------------------
                                                         2011        2012        2013        2014        2015
----------------------------------------------------------------------------------------------------------------
Children shifting from [agrave] la carte to free          76,000     482,000     494,000     499,000     509,000
 meals..............................................
Children shifting from [agrave] la carte to reduced       13,000      83,000      85,000      86,000      88,000
 price meals........................................
Children shifting from [agrave] la carte to paid          48,000     306,000     313,000     316,000     322,000
 meals..............................................
                                                     -----------------------------------------------------------
    Total newly-participating children..............     137,000     871,000     892,000     901,000     919,000
----------------------------------------------------------------------------------------------------------------


[[Page 35310]]

    The impacts of these effects on Federal expenditures are shown 
in Table 10.

                                       Table 10--Federal Budgetary Impacts
----------------------------------------------------------------------------------------------------------------
                                                                     Fiscal year (millions)
                                               -----------------------------------------------------------------
                                                   2011       2012       2013       2014       2015      Total
----------------------------------------------------------------------------------------------------------------
Section 205--NSLP participation...............         $0          *        -$3        -$7       -$10       -$20
Section 206--NSLP participation...............         46       $297        338        348        362      1,392
                                               -----------------------------------------------------------------
    Total.....................................         46        297        335        342        352      1,372
----------------------------------------------------------------------------------------------------------------
* Less than $500,000.

D. Uncertainties

    No regulatory requirements currently exist regarding the prices 
of paid lunches or non-program foods, and limited data are available 
to estimate the cost and participation impacts of the interim rule's 
provisions. Therefore, we made several simplifying assumptions in 
developing this cost estimate, reflecting gaps in available data and 
evidence. In this section, we describe the impact of several 
alternative assumptions on the estimate. The effects of these 
alternatives on our primary estimates are presented in Table 11.

1. More Rapid Increase in Paid Lunch Prices

    As noted above, Section 205 directs SFAs charging less than the 
required paid meal price to gradually increase revenue per paid 
lunch until the requirement is met, with an annual average increase 
limited to not more than 10 cents. However, schools may choose to 
raise prices more rapidly than required, and thus generate 
additional revenue to support their operations.
    While our main estimate assumes that schools make only the 
increases required by the interim rule, Table 11, Section A shows 
the estimated impact if schools with low paid meal prices raise 
prices 5 percent above the rate of inflation each year until the 
requirement is met. This assumption results in an additional $287 
million in revenue over five years relative to the main estimate in 
Table 3.

2. Alternative Participation Effects Increased Paid Lunch Prices

    Our main estimate of the participation impact of paid lunch 
price increases relies on data from SNDA-III, which suggests that 
over a 50 cent range in paid meal prices (from $1.50 to $2.00 in SY 
2004-05) participation was 0.11 percent lower for each one cent 
increase in price.
    We have modeled two alternative assumptions here:
     Table 11, Section B shows the estimated impact if 
participation decreases at a higher rate--0.25 percent for each one 
cent increase in price. This assumption results in a reduction of 
$160 million in revenue over five years relative to the main 
estimate in Table 3.
     Table 11, Section C shows the estimated impact if 
participation decreases at a lower rate--0.05 percent for each one 
cent increase in price. This would result in $69 million in 
additional revenue over five years relative to the main estimate in 
Table 3.

3. Alternative Assumptions for Reductions in [agrave] la Carte Food 
Sales

    Our main estimate assumes that a 10 percent increase in prices 
for [agrave] la carte foods will reduce purchase and consumption of 
those foods by 3.0 percent.
    Two alternative assumptions about the price elasticity of demand 
for [agrave] la carte foods are presented here:
     Table 11, Section D shows the estimated impact if a 10 
percent increase in prices for [agrave] la carte food sales relative 
to food costs reduces purchase and consumption of those foods by 5.0 
percent. This assumption results in a reduction of $3.8 billion in 
revenue over five years relative to the main estimate from Table 5.
     Table 11, Section E shows the estimated impact if a 10 
percent increase in prices for [agrave] la carte food sales relative 
to food costs reduces purchase and consumption of those foods by 1.0 
percent. This assumption results in $3.7 billion in additional 
revenue over five years relative to the main estimate from Table 5.

4. Alternative Levels of NSLP/SBP Participation as a Substitution for 
[agrave] la Carte Sales

    Our main estimate assumes that 46 percent of lost demand for 
[agrave] la carte foods due to price increases would be redirected 
as additional school meals program participation. Two alternative 
assumptions about this substitution effect are presented:
     Table 11, Section F shows the estimated impact if 20 
percent of lost demand was substituted as school meals program 
participation. This assumption results in a reduction of $787 
million in revenue over five years relative to the main estimate in 
Table 10.
     Table 11, Section G shows the estimated impact if 60 
percent of lost demand was substituted as school meals program 
participation. This assumption results in an increase of $424 
million in revenue over five years relative to the main estimate in 
Table 10.

E. Benefits

    The primary social benefits of the statute as implemented by 
this interim rule are to ensure that school pricing policies and 
other non-Federal contributions increase the revenue available to 
local school food service operations to support production of 
healthful school meals that are consistent with Federal nutrition 
standards. It does this by eliminating two unintended Federal 
subsidies--for paid meals and [agrave] la carte foods--that are 
drawn from payments to support free meals for the lowest-income 
children. The diversion of these funds negatively affects all 
children by limiting the funds available to provide nutritious 
meals.
     USDA's research shows that it cost about $2.28 to 
produce a school lunch in SY 2005-06.\26\ While USDA's reimbursement 
for a free meal ($2.50), including cash and commodity foods, was 
about 9 percent higher than reported production costs, total 
revenues from a paid meal--including the price charged to families 
($1.60), USDA's cash reimbursement ($0.21), and the commodity 
entitlement ($0.175)--was 13 percent less. Total revenue from a paid 
meal was only 80 percent of the value of Federal support for a free 
meal.
---------------------------------------------------------------------------

    \26\ SLBCS-II, p. ii.
---------------------------------------------------------------------------

     Research also shows that revenues in SY 2005-06 from 
non-reimbursable foods fell short of the cost of producing them by 
an average of about 29 percent.\27\ The average SFA used revenues 
from reimbursable meals to offset the cost of producing [agrave] la 
carte and other non-reimbursable food items.
---------------------------------------------------------------------------

    \27\ See SLBCS-II.
---------------------------------------------------------------------------

    The provision of additional revenue to the non-profit food 
service account will provide important financial support to improve 
the quality of all reimbursable meals. USDA has estimated that the 
cost of compliance with its proposed rule updating nutrition 
standards for school meals based on recommendations from the 
Institute of Medicine (IOM) (RIN 0584-AD59, published January 13, 
2011) would increase total costs by roughly 12 percent when fully 
implemented. The estimated impact of this regulation could increase 
revenues sufficiently to cover those increased costs,

[[Page 35311]]



                               Table 11--Cost of Rule Under Alternate Assumptions
----------------------------------------------------------------------------------------------------------------
                                                                           Fiscal year
                                               -----------------------------------------------------------------
                                                   2011       2012       2013       2014       2015      Total
----------------------------------------------------------------------------------------------------------------
                               Section A. More Rapid Increase in Paid Lunch Prices
----------------------------------------------------------------------------------------------------------------
Net required non-Federal revenue increase.....         $0        $19       $138       $197       $256       $610
----------------------------------------------------------------------------------------------------------------
Increase Over Primary Estimate................          0         10         72         93        112        287
----------------------------------------------------------------------------------------------------------------
                       Section B. Greater Sensitivity of Paid Meal Participation to Price
----------------------------------------------------------------------------------------------------------------
Net required non-Federal revenue increase.....         $0         $5        $36        $52        $69       $163
----------------------------------------------------------------------------------------------------------------
Decrease From Primary Estimate................          0         -4        -30        -51        -76       -160
----------------------------------------------------------------------------------------------------------------
                        Section C. Lesser Sensitivity of Paid Meal Participation to Price
----------------------------------------------------------------------------------------------------------------
Net required non-Federal revenue increase.....         $0        $11        $79       $126       $177       $392
----------------------------------------------------------------------------------------------------------------
Increase Over Primary Estimate................          0          2         13         22         32         69
----------------------------------------------------------------------------------------------------------------
                    Section D. Greater Price Elasticity of Demand for [agrave] la Carte Foods
----------------------------------------------------------------------------------------------------------------
SFA [agrave] la Carte Revenue.................        $51       $335       $360       $385       $420     $1,551
----------------------------------------------------------------------------------------------------------------
Decrease From Primary Estimate................       -124       -814       -877       -936     -1,022     -3,773
----------------------------------------------------------------------------------------------------------------
                    Section E. Lesser Price Elasticity of Demand for [agrave] la Carte Foods
----------------------------------------------------------------------------------------------------------------
SFA [agrave] la Carte Revenue.................       $296     $1,941     $2,091     $2,231     $2,438     $8,997
----------------------------------------------------------------------------------------------------------------
Increase Over Primary Estimate................        121        792        854        911        995      3,673
----------------------------------------------------------------------------------------------------------------
            Section F. Lesser Substitution of School Meals Participation for [agrave] la Carte Sales
----------------------------------------------------------------------------------------------------------------
USDA Paid Meal Reimbursements.................        $20       $129       $147       $151       $158       $605
----------------------------------------------------------------------------------------------------------------
Decrease From Primary Estimate................        -26       -168       -191       -197       -205       -787
----------------------------------------------------------------------------------------------------------------
            Section G. Greater Substitution of School Meals Participation for [agrave] la Carte Sales
----------------------------------------------------------------------------------------------------------------
USDA Paid Meal Reimbursements.................        $59       $388       $441       $454       $473     $1,816
----------------------------------------------------------------------------------------------------------------
Increase Over Primary Estimate................         14         91        103        106        110        424
----------------------------------------------------------------------------------------------------------------

support full consistency with existing standards, and ease the path 
to rapid and full compliance with strengthened nutrition standards, 
including (1) increased servings of fruits and vegetables, (2) 
replacement of refined-grain foods with whole-grain rich foods, and 
(3) replacement of higher-fat dairy products with low-fat 
varieties.\28\ The increased funding to support these meals could 
not only improve their nutritional quality, but also their appeal to 
students, leading to further NSLP-SBP participation increases.\29\ 
This in turn would further increase the impact of the proposed 
standards described above. (It would also increase the SFA revenue 
and Federal cost that could result from this rule.)
---------------------------------------------------------------------------

    \28\ The regulatory impact analysis for 0584-AD59 estimates the 
cost of reaching full compliance with improved nutrition standards 
at $6.8 billion over fiscal years 2012-2016.
    \29\ The IOM report recommending changes to school meals 
standards identifies factors in their recommendations that may 
increase and decrease student acceptance, but also points to efforts 
in a number of localities in which efforts to improve the 
nutritional quality of school meals have resulted in increased 
participation. See Institute of Medicine (2010). School Meals: 
Building Blocks for Healthy Children. Washington, DC: The National 
Academies Press, chapter 9, especially pp. 272-275.
---------------------------------------------------------------------------

    As documented in the IOM recommendations, the proposed changes 
in school meals standards correspond to inconsistencies between the 
typical diets of school-aged children in the United States and the 
Dietary Guidelines/MyPyramid recommendations. In particular, the 
report cited an analysis of National Health and Nutrition 
Examination Survey data for 1999-2002 that showed:
     Total vegetable intake was only about 40 percent of the 
MyPyramid levels, with intake of dark green and orange vegetables 
less than 20 percent of MyPyramid levels.
     Total fruit intake was about 80 percent of the 
MyPyramid levels for children ages 5-8, with far lower levels for 
older children.
     Intake of whole grains was less than one-quarter of 
MyPyramid levels, although total grain intake was at or above 
MyPyramid levels.
     Intake of dairy products varied by age, with the 
intakes of the youngest children exceeding MyPyramid levels, while 
those of older children were below those levels. However, most dairy 
consumed contained 2 percent or more milk fat, while the Dietary 
Guidelines recommend fat-free or low-fat dairy products.\30\
---------------------------------------------------------------------------

    \30\ Institute of Medicine (2010). School Meals: Building Blocks 
for Healthy Children. Washington, DC: The National Academies Press, 
pp. 49-53.
---------------------------------------------------------------------------

    The kinds of changes in school meals that this additional 
revenue will support will promote diets more consistent with the 
Guidelines among program participants. Such diets, in turn, are 
useful behavioral contributors to health and well-being. As the 
report of the 2010 Dietary Guidelines Advisory Committee notes, 
``evidence is accumulating that selecting diets that comply with the 
Guidelines reduces the risk of chronic disease and promotes 
health.'' \31\ The report describes and synthesizes the evidence 
linking diet and different chronic disease

[[Page 35312]]

risks, including cardiovascular disease and blood pressure, as well 
as the effects of dietary patterns on total mortality.
---------------------------------------------------------------------------

    \31\ Dietary Guidelines Advisory Committee (2010). Report of the 
Dietary Guidelines Advisory Committee on the Dietary Guidelines for 
Americans, 2010, to the Secretary of Agriculture and the Secretary 
of Health and Human Services. U.S. Department of Agriculture, 
Agriculture Research Service, Washington, DC, p. B1-2.
---------------------------------------------------------------------------

    Children are a subpopulation of particular focus for the 
Committee; the report emphasizes the increasing common evidence of 
chronic disease risk factors, such as glucose intolerance and 
hypertension, among children, and explains that ``[e]vidence 
documents the importance of optimal nutrition starting during the 
fetal period through childhood and adolescence because this has a 
substantial influence on the risk of chronic disease with age.'' 
\32\
---------------------------------------------------------------------------

    \32\ Dietary Guidelines Advisory Committee, pp. B1-2, B1-3.
---------------------------------------------------------------------------

    In response, the report notes improvements in food at schools as 
a critical strategy to prevent obesity, and related health risks, 
among children. Indeed, the Committee recommends ``[i]mprov[ing] 
foods sold and served in schools, including school breakfast, lunch, 
and after-school meals and competitive foods so that they meet the 
recommendations of the Institute of Medicine and the key findings of 
the 2010 Dietary Guidelines Advisory Committee. This includes all 
age groups of children, from preschool through high school.'' \33\
---------------------------------------------------------------------------

    \33\ Dietary Guidelines Advisory Committee, p. B3-6.
---------------------------------------------------------------------------

III. Alternatives

    Most aspects of the interim rule are non-discretionary, and tie 
to explicit, specific requirements of Section 205 and 206 of the 
Act. Because of the mandatory effective date of July 1, 2011, USDA 
has chosen to use the plain language of the law to the extent 
possible and focus exclusively on mandatory requirements in this 
interim rule. However, the Department made several choices to 
clarify expectations and requirements for program operators. These 
are described briefly below.

Section 205: Funding From Non-Federal Sources

    The law allows SFAs to add ``funding from non-Federal sources'' 
in lieu of raising paid meal prices. The law explicitly excludes in-
kind contributions and revenue from competitive foods from counting 
toward a non-Federal contribution, but does not otherwise define the 
parameters of these contributions. USDA considered the following 
alternatives defining the scope of allowable funding:
     Apart from in-kind contributions and revenue from 
competitive foods, allow any other cash funding from a non-Federal 
source to count. Because funds contributed to the school food 
service account are provided for a wide variety of purposes, this 
broad interpretation could result in few, if any, SFAs receiving 
additional funds that could support the meal service, potentially 
undermining the intent of this provision.
     Count only new sources of contributions after July 1, 
2011, the effective date of the provision. This ``maintenance of 
effort'' approach would maximize new revenue, but could also 
penalize SFAs and States that have historically contributed 
significant non-Federal revenues by requiring them to contribute 
additional revenue.
     Allow those non-Federal contributions that provide 
direct support for paid lunches. This seemed to cleave most closely 
to the intent of the law.\34\ However, the need to identify and 
potentially augment such funding sources could be difficult to 
implement by the July 1 effective date.
---------------------------------------------------------------------------

    \34\ Senate Report 111-178 on the Healthy Hunger Free Kids Act 
(page 37) notes: ``School districts that charge at least the 
difference between the free lunch reimbursement rate and the paid 
lunch reimbursement rate for paid meals must adjust their prices on 
an annual basis by the inflation adjustment factor used for federal 
reimbursement rates. Participating school food authorities may 
reduce the average price of a paid lunch required under this section 
if the State agency ensures that sufficient funding from non-Federal 
sources (other than in-kind contributions) is added to the nonprofit 
school food service account to compensate for the reduction 
(emphasis added).''
---------------------------------------------------------------------------

    The Department chose to allow any non-Federal contribution to 
the school food service account to count towards the requirement in 
school Year 2011-12, but for subsequent years to limit contributions 
to those that are for direct support for paid lunches, in order to 
balance achieving the intent of the law as soon as possible with 
enabling implementation in the first year.

Section 205: Calculating the Average Paid Meal Price

    To determine the required level of non-Federal revenue, SFAs 
must calculate the average paid meal price across all paid NSLP 
lunches served in the district. USDA considered the following 
alternatives in defining the average price:
     Average price per lunch: This method requires SFAs to 
multiply the number of paid lunches served by the price for each 
across all schools, add these figures together, and divide by the 
total number of lunches served in the district for the period. This 
approach most accurately reflects the total revenue derived from 
student payments for paid lunches. Because it requires the use of 
meal counts, it is somewhat more burdensome than the alternative 
described below.
     Average price per school): This would entail SFAs to 
determine a simple average of prices by school--adding the prices 
charged at each school and dividing by the total number of schools. 
This is a simpler calculation, but does not appropriately factor in 
the number of meals served at each school, or at different price 
points.
    The Department chose the average price per lunch approach, as it 
most accurately reflects the payments made by families in support of 
paid lunches, while requiring only limited additional calculation, 
and no information that is not readily available to schools and 
SFAs.

IV. Accounting Statement

    Table 12 contains the FY 2011 present values of the figures in 
Table 2 using a 7 percent discount rate. Table 13 contains present 
values under an alternate 3 percent discount rate. The rightmost 
columns of Tables 12 and 13 contain the annualized effects of the 
rule.

                Table 12--Present Value of SFA Revenue and Federal Cost: 7 Percent Discount Rate
----------------------------------------------------------------------------------------------------------------
                                                                    Fiscal year
                                  ------------------------------------------------------------------------------
                                                                                           Total FY   Annualized
                                      2011       2012       2013       2014       2015     2011-15      amount
----------------------------------------------------------------------------------------------------------------
Transfers (from non-Federal             $193     $1,193     $1,252     $1,278     $1,331     $5,247       $1,280
 sources to SFA).................
Transfers (from Federal                   46        278        293        279        269      1,164          284
 Government to SFA)..............
Costs............................          5          9          9          8          8         38            9
----------------------------------------------------------------------------------------------------------------


                Table 13--Present Value of SFA Revenue and Federal Cost: 3 Percent Discount Rate
----------------------------------------------------------------------------------------------------------------
                                                                    Fiscal year
                                  ------------------------------------------------------------------------------
                                                                                           Total FY   Annualized
                                      2011       2012       2013       2014       2015     2011-15      amount
----------------------------------------------------------------------------------------------------------------
Transfers (from non-Federal             $193     $1,239     $1,352     $1,433     $1,550     $5,767       $1,259
 sources to SFA).................
Transfers (from Federal                   46        288        316        313        313      1,276          279
 Government to SFA)..............
Costs............................          5          9          9          9          9         41            9
----------------------------------------------------------------------------------------------------------------



[[Page 35313]]

    Note: This Analysis will not be codified in the Code of Federal 
Regulations.

Appendix B to 7 CFR 210 Initial Regulatory Flexibility Analysis

Initial Regulatory Flexibility Analysis Interim Rule: National 
School Lunch Program: School Food Service Account Revenue 
Amendments Related to the Health Hunger-Free Kids Act of 2010

[RIN 0584-AE11]

    AGENCY: Food and Nutrition Service, USDA
    BACKGROUND: The Regulatory Flexibility Act (RFA) requires 
agencies to consider the impact of their rules on small entities and 
to evaluate alternatives that would accomplish the objectives of the 
rules without unduly burdening small entities when the rules impose 
a significant economic impact on a substantial number of small 
entities. Inherent in the RFA is Congress' desire to remove barriers 
to competition and encourage agencies to consider ways of tailoring 
regulations to the size of regulated entities.
    The RFA does not require that agencies necessarily minimize a 
rule's impact on small entities if there are significant legal, 
policy, factual, or other reasons for the rule's having such an 
impact. The RFA requires only that agencies determine, to the extent 
feasible, the rule's economic impact on small entities, explore 
regulatory alternatives for reducing any significant economic impact 
on a substantial number of such entities, and explain the reasons 
for their regulatory choices.

Reasons That Action Is Being Considered

    Sections 205 and 206 of Public Law 111-296, the Healthy, Hunger-
Free Kids Act of 2010 (December 13, 2010), amended the Richard B. 
Russell National School Lunch Act (NSLA) to address revenue from 
paid lunches and nonprogram foods (foods and beverages sold by 
schools outside of the reimbursable meals programs). Beginning July 
1, 2011, school food authorities (SFAs) that participate in the 
National School Lunch Program (NSLP) must assess the prices charged 
for lunches served to students not eligible for free or reduced 
prices meals (i.e., paid lunches) and ensure sufficient funds are 
provided to the nonprofit school food service account in relation to 
the difference between the higher reimbursement that the Federal 
government provides for free lunches and the lower reimbursement 
provided for paid lunches. These funds may come in the form of 
limited increases in paid lunch prices or by providing additional 
sources of non-Federal funding to support paid lunches. Section 206 
requires SFAs to assure that the proportion of total revenue from 
the sale of nonprogram foods to the total revenue be equal to or 
greater than the proportion of total food costs associated with 
obtaining nonprogram foods to the total costs associated with 
obtaining program and nonprogram foods from the account.

Objectives of, and Legal Basis for, the Interim Rule

    Section 12 of the NSLA was amended by adding paragraphs (p) and 
(q) which, respectively, address the requirements for revenue from 
paid reimbursable school lunches and from sale of nonprogram foods. 
These provisions are intended to ensure sufficient funds are 
provided to the nonprofit school food service account for meals 
served to students not eligible for free or reduced price meals and 
for the cost of obtaining nonprogram foods.
    Historically, there have been three main sources of funds 
provided to nonprofit school food service accounts: Federal 
reimbursements, paid meal revenues, and State and local funding. 
Research indicates that average prices charged for paid meals--meals 
served to students not certified to receive free or reduced price 
meals--are too low to cover the cost of producing those meals. 
Pricing paid meals below the cost of their production effectively 
increases federal subsidies for higher income children at the 
expense of low income children and negatively affects children 
across all income levels by limiting the funds available to provide 
nutritious meals. This same rationale applies to the requirement for 
assuring that the cost of obtaining nonprogram foods. These 
provisions will ensure that schools have funding available to 
support serving nutritious meals to all students.

Number of Small Entities to Which the Interim Rule Will Apply

    This rule directly regulates the 55 State education agencies and 
2 State Departments of Agriculture (SAs) that operate the NSLP and 
SBP pursuant to agreements with USDA's Food and Nutrition Service 
(FNS); in turn, its provisions apply to entities that prepare and 
provide NSLP and SBP meals to students. While SAs are not small 
entities under the RFA as State populations exceed the 50,000 
threshold for a small government jurisdiction, many of the service-
providing institutions that work with them to implement the program 
do meet definitions of small entities:
    There are currently about 19,000 School Food Authorities (SFAs) 
participating in NSLP and SBP. More than 99 percent of these have 
fewer than 50,000 students.\35\ About 26 percent of SFAs with fewer 
than 50,000 students are private. However, private school SFAs 
account for only 3 percent of all students in SFAs with enrollments 
under 50,000.\36\
---------------------------------------------------------------------------

    \35\ FNS 742 School Food Verification Survey, School Year 2009-
2010. This number is approximate, not all SFAs are required to 
submit the 742 form.
    \36\ Ibid. RCCIs include but are not limited to juvenile 
detention centers, orphanages, and medical institutions. We do not 
have information on the number of children enrolled in these 
institutions.
---------------------------------------------------------------------------

    Nearly 102,000 schools and residential child care institutions 
participate in the NSLP. These include more than 90,000 public 
schools, 6,000 private schools, and about 5,000 residential child 
care institutions (RCCIs).\37\ We focus on the impact at the SFA 
level in this document, rather than the school level, because SFAs 
are responsible for the administration of the NSLP and the SBP.
---------------------------------------------------------------------------

    \37\ FNS program data for FY 2010.
---------------------------------------------------------------------------

    Food service management companies (FSMCs) that prepare school 
meals or menus under contract to SFAs are affected indirectly by the 
interim rule. Thirteen percent of public school SFAs contracted with 
FSMCs in school year (SY) 2004-2005.\38\ Of the 2,460 firms 
categorized as ``food service contractors'' under NAICS code 72231, 
96 percent employ fewer than 500 workers.\39\
---------------------------------------------------------------------------

    \38\ U.S. Department of Agriculture, Food and Nutrition Service, 
Office of Research, Nutrition and Analysis, School Nutrition Dietary 
Assessment Study-III, Vol. I, 2007, p. 34 http://www.fns.usda.gov/ora/MENU/Published/CNP/FILES/SNDAIII-Vol1.pdf
    \39\ Ibid.
---------------------------------------------------------------------------

Projected Reporting, Recordkeeping and Other Compliance 
Requirements

    The analysis below covers only those organizations impacted by 
the interim rule that were determined to be small entities.

School Food Authorities (SFA)/Schools

     Under the interim rule, school food authorities must 
ensure that schools that participate in the NSLP generate revenue 
for paid reimbursable lunches that is comparable to Federal free 
lunch revenue. Schools must evaluate and gradually adjust the price 
of paid reimbursable lunches or use non-Federal funding to ensure 
that the school foodservice account receives sufficient revenue to 
cover this level.
    To the extent that schools increase prices rather than use other 
non-Federal revenues to meet the rule's requirements, and these 
increases reduce demand for paid lunches, NSLP participation could 
decrease in these schools. However, USDA estimates that this impact 
will be small--about 0.11 percent for each additional cent in paid 
lunch prices.
     Under the interim rule, school food authorities must 
also ensure that revenue from nonprogram foods cover the cost of 
obtaining those foods. We estimate that this requirement will result 
in substantial increases in prices charged for nonprogram foods in 
some schools, and in turn decrease demand for these foods, leading 
some students to increase consumption of NSLP/SBP meals, and others 
to acquire food from other sources. (This is described in more 
detail in Appendix A.
     Finally, the interim rule will require SFAs to report 
their paid lunch prices to USDA on an annual basis. We have 
estimated a small increase in reporting burden for SFAs.
    While we recognize that these changes may in some cases increase 
burden on schools and school food authorities, they are explicit 
requirements of the Healthy, Hunger Free Kids Act of 2010, and will 
serve the important intent of that law to ensure that schools have 
funding available to support serving nutritious meals to all 
students.

Federal Rules That May Duplicate, Overlap or Conflict With the 
Interim Rule

    FNS is unaware of any such Federal rules or laws.

Significant Alternatives

    The law provides for various ways that SFAs can comply with 
these requirements. The law allows SFAs to limit the increase in the 
price to a maximum of ten cents annually, although the SFA may 
choose to

[[Page 35314]]

raise the price higher. Further, in lieu of a price increase, the 
SFA may add non-Federal funds to the school food service account in 
the amount of revenue required to meet the requirement. This interim 
rule allows SFAs to carry-over any increase above the minimum over 
subsequent school years. This allows the SFA the flexibility to 
choose to have price increases only periodically, rather than 
annually. The law also provides flexibility in establishing how to 
account for adequate revenue for the cost of obtaining foods sold 
outside of the school meals programs. Once SFAs determine the 
proportionate revenue needed for nonprogram foods, it may choose to 
increase the price of certain items to provide the additional 
revenue, may do an across the board increase or may choose to add 
funds from sources outside of the school food service account.

Regulatory Flexibility Act

    This rule has been reviewed with regard to the requirements of the 
Regulatory Flexibility Act of 1980 (5 U.S.C. 601-612). It has been 
certified that this rule will have a significant economic impact on a 
substantial number of small entities. A Regulatory Flexibility Analysis 
(RFA) was developed for this interim rule and is included as Appendix B 
at the end of this document.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Public 
Law 104-4, establishes requirements for Federal agencies to assess the 
effects of their regulatory actions on State, local, and Tribal 
governments and the private sector. Under section 202 of the UMRA, the 
Department generally must prepare a written statement, including a 
cost/benefit analysis, for proposed and final rules with Federal 
mandates that may result in expenditures to State, local, or Tribal 
governments, in the aggregate, or to the private sector, of $100 
million or more in any one year. When such a statement is needed for a 
rule, section 205 of the UMRA generally requires the Department to 
identify and consider a reasonable number of regulatory alternatives 
and adopt the least costly, more cost-effective or least burdensome 
alternative that achieves the objectives of the rule. This rule does 
not contain Federal mandates (under the regulatory provisions of Title 
II of the UMRA) that impose costs on State, local, or Tribal 
governments or to the private sector of $100 million or more in any one 
year. This rule is, therefore, not subject to the requirements of 
sections 202 and 205 of the UMRA.

Executive Order 12372

    The NSLP is listed in the Catalog of Federal Domestic Assistance 
under No. 10.555. For the reasons set forth in the final rule in 7 CFR 
part 3015, Subpart V and related notice (48 FR 29115, June 24, 1983), 
this program is 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 regulations 
describing the agency's considerations in terms of the three categories 
called for under section (6)(b)(2)(B) of Executive Order 13132. USDA 
has considered the impact of this rule on State and local governments 
and has determined that this rule does not have federalism 
implications. This rule does not impose substantial or direct 
compliance costs on State and local governments. Therefore, under 
Section 6(b) of the Executive Order, a federalism summary impact 
statement is not required.

Executive Order 12988

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

Civil Rights Impact Analysis

    FNS has reviewed this rule in accordance with Departmental 
Regulations 4300-4, ''Civil Rights Impact Analysis'', and 1512-1, 
``Regulatory Decision Making Requirements.'' After a careful review of 
the rule's intent and provisions, FNS has determined that this rule is 
not intended to limit or reduce in any way the ability of protected 
classes of individuals to receive benefits on the basis of their race, 
color, national origin, sex, age or disability nor is it intended to 
have a differential impact on minority owned or operated business 
establishments, and woman-owned or operated business establishments 
that participate in the Child Nutrition Programs.

Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. Chap. 35; see 5 CFR 
part 1320), requires that the Office of Management and Budget (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 is a new collection. The new provisions 
in this rule, which do increase burden hours, affect information 
collection requirements that will be merged into the NSLP, OMB Control 
Number 0584-0006, expiration date 5/31/2012. The current 
collection burden inventory for the NSLP is 12,257,764. These changes 
are contingent upon OMB approval under the Paperwork Reduction Act of 
1995. When the information collection requirements have been approved, 
FNS will publish a separate action in the Federal Register announcing 
OMB's approval.
    Comments on the information collection in this interim rule must be 
received by August 16, 2011.
    Send comments to the Office of Information and Regulatory Affairs, 
OMB, Attention: Desk Officer for FNS, Washington, DC 20503. Please also 
send a copy of your comments to Lynn Rodgers-Kuperman, Program Analysis 
and Monitoring Branch, Child Nutrition Division, 3101 Park Center 
Drive, Alexandria, VA 22302. For further information or for copies of 
the information collection requirements, please contact Lynn Rodgers-
Kuperman at the address indicated above. Comments are invited on: (1) 
Whether the proposed collection of information is necessary for the 
proper performance of the Agency's functions, including whether the 
information will have practical utility; (2) the accuracy of the 
Agency's estimate of the proposed information collection burden, 
including the validity of the methodology and assumptions used; (3) 
ways to enhance the quality, utility and clarity of the information to 
be collected; and (4) ways to minimize the burden of the collection of 
information on those who are to respond, including use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology.
    All responses to this request for comments will be summarized and 
included in the request for OMB approval. All comments will also become 
a matter of public record.

[[Page 35315]]

    Title: National School Lunch Program: School Food Service Account 
Revenue Amendments Related to the Healthy, Hunger-Free Kids Act of 
2010.
    OMB Number: 0584-NEW.
    Expiration Date: Not Yet Determined.
    Type of Request: New Collection.
    Abstract: This interim rule promulgates the provisions from 
sections 205 and 206 of Public Law 111-296, the Healthy, Hunger-Free 
Kids Act of 2010 (the Act). Section 205 amended section 12 of the 
Richard B. Russell National School Lunch Act (NSLA) (42 U.S.C. 1760) by 
adding a new subsection (p), ``Price for a Paid Lunch'' which 
addresses, for the first time, requirements for SFAs on establishing 
prices for paid reimbursable lunches (hereinafter called paid lunches). 
Section 205 provided SFAs with some flexibility in phasing-in any 
increases in paid lunches and in using non-Federal funds to supplement 
paid lunch revenue in order to keep the price of a paid lunch lower. 
These provisions do not apply to the revenue from or prices charged for 
either afterschool snacks or for school breakfasts offered in 7 CFR 
part 220. There is also a requirement in section 205 requiring USDA to 
establish procedures to annually collect and publish the paid lunch 
prices charged by SFAs.
    Section 206 of Public Law 111-296 amended section 12 of the NSLA by 
adding a paragraph (q), ``Nonprogram Food Sales.'' This provision 
addresses food in schools outside of the reimbursable meal and meal 
supplements, which are purchased with funds from the nonprofit school 
food service account. Included are foods sold in competition with these 
reimbursable meal programs as provided in section 10 of the Child 
Nutrition Act (42 U.S.C. 1779). The law now requires that the revenue 
from the sale of nonprogram foods be proportionate to the total revenue 
generated by such food.
    These changes are effective July 1, 2011.
    Those respondents participating in the SBP also participate in the 
NSLP, thus the burden associated with the SBP will be carried in the 
NSLP. The average reporting and recordkeeping burden per response and 
the annual burden hours are explained below and summarized in the 
charts which follow.
    Respondents for this Interim Rule: State Agencies (57) and School 
Food Authorities (20,858).
    Estimated Number of Respondents for this Interim Rule: 20,915.
    Estimated Number of Responses per Respondent for this Interim Rule: 
3.991824.
    Estimated Total Annual Responses: 83,489.
    Estimated Total Annual Burden on Respondents for this Interim Rule: 
322,827.

                                   Estimated Annual Burden for 0584-New, National School Lunch Program 7 CFR Part 210
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                             Estimated                        Average         Average
                                                       Section               number of     Frequency of       annual        burden per     Annual burden
                                                                            respondents      response        responses       response          hours
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        Reporting
--------------------------------------------------------------------------------------------------------------------------------------------------------
State agency (SA) consolidates paid         7 CFR 210.14(e)(7)..........              57               1              57              10             570
 reimbursable lunch prices reported by
 SFAs and submits to FNS.
SFA reports paid lunch prices for each      7 CFR 210.14(e)(7)..........          20,858               1          20,858            0.25           5,215
 NSLP school to the SA.
                                                                         -------------------------------------------------------------------------------
    Total Reporting for Interim Rule......  ............................          20,915               1          20,915          0.2766           5,785
                                                                         ===============================================================================
    Total Existing Reporting Burden for     ............................  ..............  ..............  ..............  ..............       2,981,464
     0584-0006, Part 210.
    Total Reporting Burden Increase with    ............................  ..............  ..............  ..............  ..............           5,785
     Interim Rule.
                                           -------------------------------------------------------------------------------------------------------------
        Total Reporting Burden for 0584-    ............................  ..............  ..............  ..............  ..............       2,987,249
         0006, Part 210 with Interim Rule.
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                      Recordkeeping
--------------------------------------------------------------------------------------------------------------------------------------------------------
SA maintains records of paid reimbursable   7 CFR 210.14(e)(7)..........              57             366          20,858             0.2           4,172
 lunch prices obtained from SFAs.
SFA maintains records of its calculation    7 CFR 210.14(e)(1)-(e)(5)...          20,858               1          20,858               5         104,290
 of the average price of paid reimbursable
 lunches and adjustments.
SFAs maintains records documenting the      7 CFR 210.14(f).............          20,858               1          20,858              10         208,580
 revenue generated from the sale of
 nonprogram foods.
                                                                         -------------------------------------------------------------------------------
    Total Recordkeeping for Interim Rule..  ............................          20,915            2.99          62,574         15.1586         317,042
                                                                         ===============================================================================
    Total Existing Recordkeeping Burden     ............................  ..............  ..............  ..............  ..............       9,276,300
     for 0584-0006, Part 210.
                                                                         -------------------------------------------------------------------------------

[[Page 35316]]

 
    Total Recordkeeping Burden for 0584-    ............................  ..............  ..............  ..............  ..............       9,593,342
     0006, Part 210 with Interim Rule.
--------------------------------------------------------------------------------------------------------------------------------------------------------


                Summary of Burden (OMB 0584-NEW)
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Total No. Respondents...................................          20,915
Average No. Responses per Respondent....................        3.991824
Total Annual Responses..................................          83,489
Average Hours per Response..............................          3.8667
Total Burden Hours for Part 210 With Interim Rule.......      12,580,591
Current OMB Inventory for Part 210......................      12,257,764
                                                         ---------------
    Difference (New Burden Requested With Interim Rule).         322,827
------------------------------------------------------------------------

    7 CFR 210.15 and 210.20 require that, in order to participate in 
the NSLP, SFAs and State agencies must maintain records to demonstrate 
compliance with Program requirements. 7 CFR 210.23 further requires 
that State agencies and SFAs maintain records for a period of three 
years.

E-Government Act Compliance

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

Executive Order 13175--Consultation and Coordination With Indian Tribal 
Governments

    Executive Order 13175 requires Federal agencies to consult and 
coordinate with Tribes on a government-to-government basis on policies 
that have Tribal implications, including regulations, legislative 
comments or proposed legislation, and other policy statements or 
actions that have substantial direct effects on one or more Indian 
Tribes, on the relationship between the Federal Government and Indian 
Tribes, or on the distribution of power and responsibilities between 
the Federal Government and Indian Tribes. In spring 2011, USDA engaged 
in a series of consultative sessions to obtain input by Tribal 
officials or their designees concerning the impact of this rule on the 
Tribe or Indian Tribal governments, or whether this rule may preempt 
Tribal law. Reports from these consultations 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 officials or 
their designees concerning ways to improve this rule in Indian country.

List of Subjects in 7 CFR Part 210

    Grant programs--education; Grant programs--health; Infants and 
children; Nutrition; Penalties; Reporting and recordkeeping 
requirements; School breakfast and lunch programs; Surplus agricultural 
commodities.

    Accordingly, 7 CFR part 210 is amended as follows:

PART 210--NATIONAL SCHOOL LUNCH PROGRAM

0
1. The authority citation for 7 CFR part 210 continues to read as 
follows:

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


0
2. In Sec.  210.2:
0
a. The definition of ``Nonprofit school food service account'' is 
amended by adding a sentence at the end;
0
b. The definition of ``Subsidized lunch (paid lunch)'' is removed; and
0
c. The definition of ``Paid lunch'' added.
    The additions read as follows:

Subpart A--General


Sec.  210.2  Definitions.

* * * * *
    Nonprofit school food service account * * * This account shall 
include, as appropriate, non-Federal funds used to support paid lunches 
as provided in Sec.  210.14(e), and proceeds from nonprogram foods as 
provided in Sec.  210.14(f).
* * * * *
    Paid lunch means a lunch served to children who are either not 
certified for or elect not to receive the free or reduced price 
benefits offered under part 245 of this chapter. The Department 
subsidizes each paid lunch with both general cash assistance and 
donated foods. The prices for paid lunches in a school food authority 
shall be determined in accordance with Sec.  210.14(e).
* * * * *

Subpart C--Requirements for School Food Authority Participation

0
3. In Sec.  210.9, paragraph (b)(1) is revised to read as follows:


Sec.  210.9  Agreement with State agency.

* * * * *
    (b) * * *
    (1) Maintain a nonprofit school food service and observe the 
requirements for and limitations on the use of nonprofit school food 
service revenues set forth in Sec.  210.14 and the limitations on any 
competitive school food service as set forth in Sec.  210.11;
* * * * *

0
4. In Sec.  210.14, new paragraphs (e) and (f) are added to read as 
follows:


Sec.  210.14  Resource management.

* * * * *
    (e) Pricing paid lunches. For each school year beginning July 1, 
2011, school food authorities shall establish prices for paid lunches 
in accordance with this paragraph.
    (1) Calculation procedures. Each school food authority shall:
    (i) Determine the average price of paid lunches. The average shall 
be determined based on the total number of paid lunches claimed for the 
month of October in the previous school year, at each different price 
charged by the school food authority.
    (ii) Calculate the difference between the per meal Federal 
reimbursement for paid and free lunches received by the school food 
authority in the previous school year (i.e., the reimbursement 
difference);
    (iii) Compare the average price of a paid lunch under paragraph 
(e)(1)(i) of this section to the difference between reimbursement rates 
under paragraph (e)(1)(ii) of this section.
    (2) Average paid lunch price is equal to/greater than the 
reimbursement difference.
    When the average paid lunch price from the prior school year is 
equal to or

[[Page 35317]]

greater than the difference in reimbursement rates as determined in 
paragraph (e)(1)(iii) of this section, the school food authority shall 
establish an average paid lunch price for the current school year that 
is not less than the difference identified in (e)(1)(iii) of this 
section; except that, the school food authority may use the procedure 
in paragraph (e)(4)(ii) of this section when establishing prices of 
paid lunches.
    (3) Average lunch price is lower than the reimbursement difference. 
When the average price from the prior school year is lower than the 
difference in reimbursement rates as determined in paragraph 
(e)(1)(iii) of this section, the school food authority shall establish 
an average price for the current school year that is not less than the 
average price charged in the previous school year as adjusted by a 
percentage equal to the sum obtained by adding:
    (i) 2 percent; and
    (ii) The percentage change in the Consumers Price Index for All 
Urban Consumers used to increase the Federal reimbursement rate under 
section 11 of the Act for the most recent school year for which data 
are available. The percentage to be used is found in the annual notice 
published in the Federal Register announcing the national average 
payment rates, from the prior year.
    (4) Price Adjustments. (i) Maximum required price increase. The 
maximum annual average price increase required under this paragraph 
shall not exceed ten cents.
    (ii) Rounding of paid lunch prices. Any school food authority may 
round the adjusted price of the paid lunches down to the nearest five 
cents.
    (iii) Optional price increases. A school food authority may 
increase the average price by more than ten cents.
    (5) Reduction in average price for paid lunches. (i) Any school 
food authority may reduce the average price of paid lunches as 
established under this paragraph if the State agency ensures that funds 
are added to the nonprofit school food service account in accordance 
with this paragraph.
    The minimum that must be added is the product of:
    (A) The number of paid lunches claimed by the school food authority 
in the previous school year multiplied by
    (B) The amount required under paragraph (e)(3) of this section, as 
adjusted under paragraph (e)(4) of this section, minus the average 
price charged.
    (ii) Prohibitions. The following shall not be used to reduce the 
average price charged for paid lunches:
    (A) Federal sources of revenue;
    (B) Revenue from foods sold in competition with lunches or with 
breakfasts offered under the School Breakfast Program authorized in 7 
CFR part 220. Requirements concerning foods sold in competition with 
lunches or breakfasts are found in Sec.  210.11 and Sec.  220.12 of 
this chapter, respectively;
    (C) In-kind contributions;
    (D) Any in-kind contributions converted to direct cash expenditures 
after July 1, 2011; and
    (E) Per-meal reimbursements (non-Federal) specifically provided for 
support of programs other than the school lunch program.
    (iii) Allowable non-Federal revenue sources. Any contribution that 
is for the direct support of paid lunches that is not prohibited under 
paragraph (e)(5)(ii) of this section may be used as revenue for this 
purpose. Such contributions include, but are not limited to:
    (A) Per-lunch reimbursements for paid lunches provided by State or 
local governments;
    (B) Funds provided by organizations, such as school-related or 
community groups, to support paid lunches;
    (C) Any portion of State revenue matching funds that exceeds the 
minimum requirement, as provided in Sec.  210.17, and is provided for 
paid lunches; and
    (D) A proportion attributable to paid lunches from direct payments 
made from school district funds to support the lunch service.
    (6) Additional considerations. (i) In any given year, if a school 
food authority with an average price lower than the reimbursement 
difference is not required by paragraph (e)(4)(ii) of this section to 
increase its average price for paid lunches, the school food authority 
shall use the unrounded average price as the basis for calculations to 
meet paragraph (e)(3) of this section for the next school year.
    (ii) If a school food authority has an average price lower than the 
reimbursement difference and chooses to increase its average price for 
paid lunches in any school year more than is required by this section, 
the amount attributable to the additional voluntary increase may be 
carried forward to the next school year(s) to meet the requirements of 
this section.
    (iii) For the school year beginning July 1, 2011 only, the 
limitations for non-Federal contributions in paragraph (e)(5)(iii) of 
this section do not apply.
    (7) Reporting lunch prices. In accordance with guidelines provided 
by FNS:
    (i) School food authorities shall report prices charged for paid 
lunches to the State agency; and
    (ii) State agencies shall report these prices to FNS.
    (f) Revenue from nonprogram foods. Beginning July 1, 2011, school 
food authorities shall ensure that the revenue generated from the sale 
of nonprogram foods complies with the requirements in this paragraph.
    (1) Definition of nonprogram foods. For the purposes of this 
paragraph, nonprogram foods are those foods and beverages:
    (i) Sold in a participating school other than reimbursable meals 
and meal supplements; and
    (ii) Purchased using funds from the nonprofit school food service 
account.
    (2) Revenue from nonprogram foods. The proportion of total revenue 
from the sale of nonprogram foods to total revenue of the school food 
service account shall be equal to or greater than:
    (i) The proportion of total food costs associated with obtaining 
nonprogram foods to
    (ii) The total costs associated with obtaining program and 
nonprogram foods from the account.
    (3) All revenue from the sale of nonprogram foods shall accrue to 
the nonprofit school food service account of a participating school 
food authority.

0
5. In Sec.  210.15:
0
a. Amend paragraph (a)(6) by removing the word ``and'' at the end of 
paragraph;
0
b. Amend paragraph (a)(7) by removing ``.'' at the end of the paragraph 
and adding ``; and'' in its place;
0
c. Add a new paragraph (a)(8);
0
d. Amend paragraph (b)(5) by removing ``.'' at the end of the paragraph 
and adding ``;'' in its place;
0
e. Add new paragraphs (b)(6) and (b)(7).
    The additions read as follows:


Sec.  210.15  Reporting and recordkeeping.

    (a) * * *
    (8) The prices of paid lunches charged by the school food 
authority.
    (b) * * *
    (6) Records to document compliance with the requirements in Sec.  
210.14(e); and
    (7) Records to document compliance with the requirements in Sec.  
210.14(f).

0
6. In Sec.  210.19, paragraph (a)(2) is amended by adding a sentence at 
the end to read as follows:

Subpart D--Requirements for State Agency Participation


Sec.  210.19  Additional responsibilities.

    (a) * * *
    (2) * * * Each State agency shall ensure that school food 
authorities comply with the requirements for

[[Page 35318]]

pricing paid lunches and nonprogram foods as required in Sec.  
210.14(e) and Sec.  210.14(f).
* * * * *

0
7. In Sec.  210. 20:
0
a. Amend paragraph (a)(7) by removing the word ``and'' at the end of 
paragraph;
0
b. Amend paragraph (a)(8) by removing ``.'' at the end of paragraph and 
adding ``; and'' in its place;
0
c. Add new paragraph (a)(9);
0
d. Amend paragraph (b)(11) by removing the word ``and'' at the end of 
paragraph;
0
e. Amend paragraph (b)(12) by removing ``.'' at the end of paragraph 
and adding ``;'' in its place;
0
f. Add new paragraphs (b)(13) and (b)(14).
    The additions read as follows:


Sec.  210.20  Reporting and recordkeeping.

    (a) * * *
    (9) The prices of paid lunches charged by each school food 
authority.
    (b) * * *
    (13) Records showing compliance with the requirements in Sec.  
210.14(e)(5) and records supplied annually by school food authorities 
showing paid meal prices charged as required by Sec.  210.14(e)(6); and
    (14) Records to document compliance with the requirements in Sec.  
210.14(f).

    Dated: June 3, 2011.
Kevin Concannon,
Under Secretary, Food, Nutrition and Consumer Services.
[FR Doc. 2011-14926 Filed 6-16-11; 8:45 am]
BILLING CODE 3410-30-P