# Child Nutrition Program Integrity > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2023-17992 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** August 23, 2023 - **Citation:** 88 FR 57792 ## Text DEPARTMENT OF AGRICULTURE Food and Nutrition Service 7 CFR Parts 210, 215, 220, 225, 226, and 235 [FNS-2016-0040] RIN 0584-AE08 Child Nutrition Program Integrity AGENCY: Food and Nutrition Service (FNS), U.S. Department of Agriculture (USDA). ACTION: Final rule. SUMMARY: This action implements statutory requirements and policy improvements to strengthen administrative oversight and operational performance of the Child Nutrition Programs. DATES: Effective date: The provisions of this rulemaking are effective September 22, 2023. Compliance dates: This rulemaking consists of multiple provisions. Compliance for each provision is referenced in the SUPPLEMENTARY INFORMATION section of this final rule and detailed in the section-by-section analysis. FOR FURTHER INFORMATION CONTACT: Megan Geiger, Senior Technical Advisor, Program Monitoring and Operational Support Division—4th floor, USDA Food and Nutrition Service, 1320 Braddock Place, Alexandria, VA 22314 or at megan.geiger@usda.gov. SUPPLEMENTARY INFORMATION: Outline: I. Child Nutrition Program Integrity Proposed Rule A. Background B. Public Comments C. Section-By-Section Discussion of the Regulatory Provisions 1. Fines for Violating Program Requirements 2. Reciprocal Disqualification in All Child Nutrition Programs 3. Serious Deficiency Process and Disqualification in SFSP and CACFP 4. State Agency Review Requirements in CACFP 5. State Liability for Payments to Aggrieved Child Care Institutions 6. CACFP Audit Funding 7. Financial Review of Sponsoring Organizations in CACFP 8. Informal Purchase Methods for CACFP 9. School Food Authority Contracts With Food Service Management Companies 10. Annual NSLP Procurement Training II. CACFP Amendments A. Background B. Codifying the CACFP Amendments 1. Elimination of the Annual Application for Institutions 2. Timing of Unannounced Reviews 3. Standard Agreements Between Sponsoring Organizations and Sponsored Child Care Centers 4. Collection and Transmission of Household Income Information 5. Calculation of Administrative Funding for Sponsoring Organizations of Day Care Homes 6. Carryover of Administrative Funding for Sponsoring Organizations of Day Care Homes III. Simplifying Monitoring in NSLP and SBP A. Background B. Streamlining the Administrative Review Process 1. Return to a 5-Year Review Cycle 2. Substitution of Local-Level Audits 3. Completion of Review Requirements Outside of the Administrative Review 4. Framework for Integrity-Focused Process Improvements 5. Assessment of Resource Management Risk 6. Buy American Area of Review 7. Discretion in Taking Fiscal Action for Meal Pattern Violations C. Reducing Performance-Based Reimbursement Reporting IV. Miscellaneous Amendments A. State Administrative Expense (SAE) Funds B. FNS Contact Information C. Program Application Requirements V. Procedural Matters I. Child Nutrition Program Integrity Proposed Rule A. Background FNS cannot accomplish its mission to provide access to food, a healthful diet, and nutrition education in ways that inspire public confidence without a strong and sustained effort to ensure that integrity is always a priority in the administration of the Child Nutrition Programs. On March 29, 2016, FNS published a proposed rule, Child Nutrition Program Integrity, 81 FR 17564, https://www.fns.usda.gov/cn/fr-032916, to address criteria and procedures to strengthen administrative oversight and operational performance of the National School Lunch Program (NSLP), School Breakfast Program (SBP), Special Milk Program (SMP), Summer Food Service Program (SFSP), Child and Adult Care Food Program (CACFP), and State Administrative Expense Funds (SAE). Many of the modifications proposed by FNS were based on amendments to the Richard B. Russell National School Lunch Act (NSLA), 42 U.S.C. 1751 et seq., https://www.fns.usda.gov/nsla-amended-pl-117-328, mandated by the Healthy, Hunger-Free Kids Act of 2010, Public Law 111-296, https://www.fns.usda.gov/pl-111-296, including: • Implementation of fines; • Prohibition of participation of any terminated entity or terminated individual in any Child Nutrition Program; • Termination and disqualification of SFSP sponsors and unaffiliated CACFP centers through extension of the serious deficiency process; • Termination of permanent agreements of SFSP sponsors and CACFP institutions and facilities; • More frequent reviews of CACFP institutions that are at risk of having serious management problems; • State agency liability for payments when hearings for CACFP institutions are delayed; and • Additional State agency funding for audits of CACFP institutions. These provisions were added to the NSLA to strengthen the administration of Child Nutrition Programs, at all levels, through enhanced oversight and enforcement tools. They were designed to help FNS and State administering agencies reduce program error of all types, resulting in more efficient operations and improved compliance with program requirements. The proposed rule also incorporated recommendations from the USDA Office of Inspector General (OIG), including management decisions from audits— National School Lunch Program—Food Service Management Company Contracts, published January 2013, https://usdaoig.oversight.gov/reports/audit/national-school-lunch-program-food-service-management-company-contracts, and Review of Management Controls for the Child and Adult Care Food Program, published November 2011—and FNS management evaluations of State agency administration of NSLP, SBP, SFSP, and CACFP. The recommendations address improvements to contract management, adherence to Federal procurement standards, and financial oversight to further enhance program integrity. This final rule adds strong integrity safeguards to a variety of aspects of the Child Nutrition Programs. The provisions codified in this rulemaking are designed to increase program operators' accountability and operational efficiency, while improving the ability of FNS and State agencies to address severe or repeated violations of program requirements. This rulemaking also provides States and program operators with targeted flexibilities which allow oversight efforts to be tailored to specific program circumstances. These provisions will be effective on September 22, 2023. However, each provision has a separate compliance date for implementation, which is explained in the section-by-section analysis. Although the proposed rule required implementation for most provisions 90 days after publication of the final rule, numerous respondents requested a 1-year delay in implementation, and FNS agrees that additional time is needed to implement this rulemaking. The extended implementation period gives State agencies time to make necessary systems changes, and gives FNS time to provide technical assistance and develop resources to support successful implementation. FNS intends each of the provisions of this rule to be severable. Were a court to stay or invalidate any provision of this rule, or to hold a provision unlawful as applied in certain factual circumstances, FNS would intend that all other provisions set forth in this rule remain in effect to the maximum possible extent. B. Public Comments FNS received 5,659 comments from a cross section of stakeholders during a 90-day comment period, which was extended to July 7, 2016. Of these, 3,261 responses were from 11 form letter campaigns, 2,266 responses were unique, and an additional 108 were unique responses that contained particularly substantive comments on specific aspects of FNS' proposed implementation of the statutory and discretionary requirements. The letter campaigns were organized primarily by the Freedom Works Foundation (2,652), the Food Research and Action Center (377), and the National CACFP Sponsors Association (147). Many of the comments expressed general opposition to Federal oversight policies, citing issues of government overreach. FNS is not responding to those comments, because they did not provide feedback on provisions that were specifically proposed for revisions as part of this rulemaking. Moreover, many of the requirements addressed in the proposed rule are based on statutory provisions in the NSLA and, therefore, cannot be removed through the rulemaking process. Responses were generated from State administering agencies (21) and a wide variety of child nutrition program stakeholders, including those who identified as parents and private citizens (5,472), school food authorities (37), advocates (34), schools and educational institutions (9), community and faith-based organizations (7), food service management companies (7), health and child care professional associations (6), food banks (4), and students (2). Only 15 respondents unconditionally favored the proposed rule. Respondents expressed wide support for implementing robust integrity practices and valuable suggestions for improvement. However, the vast majority of respondents (4,769) expressed general opposition to the penalties that FNS proposed. Of the remaining 875 comments, 687 were mixed and 188 were either out of scope (164) or duplicative (24). The comments (5,599) are posted at http://www.regulations.gov under docket ID FNS-2016-0040, Child Nutrition Program Integrity. C. Section-by-Section Discussion of the Regulatory Provisions 1. Fines for Violating Program Requirements Section 22(e)(1)(A) of the NSLA, 42 U.S.C. 1769c(e), requires the Secretary to establish criteria by which a State agency or the Secretary may impose a fine against any school food authority (SFA) or school administering a Child Nutrition Program. Section 22(e)(2)(A) requires the Secretary to establish criteria by which the Secretary may impose a fine against any State agency administering a Child Nutrition Program. In both cases, the statute states that a fine may be imposed if it is determined that the SFA, school, or State agency has: • Failed to correct severe mismanagement of the program; • Disregarded a program requirement of which the SFA, school, or State has been informed; or • Failed to correct repeated program violations. Current regulations require State agency and FNS oversight to ensure program compliance, improve management, and promote integrity. The regulations at 7 CFR 210.26 provide FNS the authority to penalize individuals or entities for criminal violations, such as theft or fraud. However, existing regulations do not include a strong enforcement mechanism to protect Federal funds and maintain program integrity when an exceptional, non-criminal circumstance arises. FNS proposed a process to implement the statutory authority to establish fines, referred to as “assessments” in the proposed rule. FNS expected assessments to serve as a new accountability measure to address severe or repeated program violations that seriously threaten the integrity of Child Nutrition Programs, but do not meet the threshold for criminal action. The proposed rule: • Identifies violations that warrant assessments, as specified in statute; • Allows FNS to establish assessments against State agencies and to direct State agencies to establish assessments against SFAs, sponsors, or institutions; • Allows State agencies to establish assessments against SFAs, schools, sponsors, or institutions; • Identifies the calculations used to determine the first, second, and subsequent assessments; • Requires assessments to be paid from non-Federal funds; • Requires the State agency to notify FNS at least 30 days prior to establishing an assessment; • Provides the ability to appeal any assessment through existing processes; • Provides FNS and State agencies the authority to suspend or terminate for cause the participation of an entity, if the established assessment is not paid; and • Requires implementation one school year after the publication of the final rule. Public Comments Of the comments that discussed assessments or fines, 6 were supportive, 3,955 were opposed, and 23 were mixed. Of the 3,955 responses in opposition, 3,132 were form letters. Many were opposed to the idea of government fines in general, citing issues of government overreach. Proponents noted this provision would give State agencies an additional mechanism to address program violations and strengthen accountability. One stated that fines would be a useful compliance tool in exceptional situations and supported extending this provision to all Child Nutrition Programs. Opponents argued that fines are unnecessary and punitive, and voiced concern that the risk of fines would discourage Child Nutrition Program operators from seeking technical assistance. They cited the potential for inconsistent application of fines across States, and expressed concern about bribery, collusion, and abuse. Opponents also disputed FNS authority to establish fines against non-school operators, and suggested State agencies have adequate accountability tools in SFSP and CACFP. FNS Response As required by statute, this final rule codifies the criteria and procedures that FNS has developed for State agencies to use to establish fines for program violations. Although the proposed rule used the term “assessment,” FNS has opted to use the term “fine” in this final rule for clarity and for consistency with statute. A fine is commonly known to be a monetary penalty for a prohibited act. This change responds to concerns that terms used in the proposed rule created confusion. Consistent with the statute and the proposed rule, the criteria that warrant fines include: • Failure to correct severe program mismanagement; • Disregard of a program requirement of which an SFA or State agency has been informed; or • Failure to correct repeated violations of program requirements. FNS stresses that fines will be applied under exceptional, not routine, circumstances. For example, fines may be warranted to address a serious violation, such as the intentional destruction of records or the intentional misappropriation of program funds. Fines would not be warranted for routine problems, such as a menu planning or meal pattern violation or a recordkeeping or resource management error, which can be corrected with State agency oversight and technical assistance. A fine would never replace established technical assistance, corrective action, or fiscal action measures to solve commonplace or unintentional problems. Rather, the assessment of fines provides a new accountability tool for FNS and State agencies to use when there are severe or repeated non-criminal violations—the types of programs abuses that seriously threaten the integrity of Federal funds or significantly impair the delivery of service to eligible students. Each situation is different, and FNS and State agencies, in consultation with their legal counsel, will carefully consider whether a fine is the appropriate response. As required by statute, this final rule allows fines to be established against SFAs and State agencies in the operation of any Child Nutrition Program, including the issuance of fines against SFA sponsors in SFSP and SFA institutions in CACFP. This is a change from the proposed rule, which would have extended fines to all types of SFSP sponsors and CACFP institutions. FNS has decided to pursue a separate rulemaking to propose amendments to SFSP and CACFP regulations that would strengthen the serious deficiency processes to safeguard Federal funds and program integrity against mismanagement, abuse, and fraud. This final rule allows State agencies to suspend or terminate the participation of an SFA, if the established fine is not paid, and provides the ability to appeal any fine through existing processes at 7 CFR 210.18(p), 225.13, 226.6(k), and 235.11(f). Fines must be paid using non-Federal funds, as required by statute, which may include State revenue funds in excess of the 30 percent required match for NSLP, other State appropriated funds, and local contributions to support the programs. All fines, and any interest charged, must be remitted to FNS and then transmitted to the United States Treasury. These funds cannot be used by FNS. This final rule clarifies FNS expectations regarding the calculation and timeframe for the payment of fines. As required by section 22(e)(1)(A) of the NSLA, 42 U.S.C. 1769c(e), this rulemaking adds new paragraphs to identify maximum thresholds for first, second, and subsequent fines at 7 CFR 210.26(b)(3), 215.15(b)(3), 220.18(b)(3), 225.18(k)(3), 226.25(j)(3), and 235.11(c)(2). For State agency fines, FNS will calculate the maximum thresholds using all SAE allocations made available to the State agency in the most recent fiscal year for which full year data is available. For SFA fines, the State agency will calculate the maximum thresholds using program meal reimbursements from the most recent fiscal year for which full year data ( i.e., closeout data) is available. FNS and State agencies may calculate a fine below the maximum thresholds. For example, a State agency may target a fine only to certain school sites, or only to meal reimbursements earned by an SFA during a certain timeframe. Consistent with the proposed rule, State agencies must notify FNS at least 30 days prior to fining an SFA. FNS approval of the State agency's action is not required. States agencies have discretion to determine the due date for a fine, and may consult with FNS to determine an appropriate due date. FNS strongly recommends State agencies also consult with their legal counsel prior to fining an SFA. FNS is mindful of respondents' concerns about the potential for fines to be established against State agencies for local program violations. This final rule clarifies that State agencies may only be fined for severe or repeated program violations at the State level, including lack of proper oversight, but not for singular, specific program violations that occur at the local level. This final rule maintains FNS authority to direct the State agency to establish a fine against an SFA. In most cases, Child Nutrition Program operators work together to build a culture of compliance. State agencies and SFAs that follow fundamental program requirements, and those that work to resolve compliance issues, will not be impacted by this provision, as fines will only be levied in cases of severe or repeated program violations. FNS expects fines to be imposed only after State agencies and SFAs have been informed of program violations—and provided opportunity to correct them—through existing processes, such as direct technical assistance, corrective action, or fiscal action. For less severe violations, for single violations, and for unintentional violations, technical assistance, corrective action, and, if necessary, fiscal action will remain appropriate courses of action. However, when existing processes do not adequately address program violations, the assessment of a fine will support efforts to ensure State agencies and SFAs comply with program regulations and use Federal funds for their intended purposes. FNS recognizes the importance of preserving public trust in the Child Nutrition Programs by holding State agencies and SFAs accountable for severe or repeated violations. In those exceptional circumstances, fines will be an important tool to bring State agencies and SFAs into compliance with Federal regulations and protect the integrity of the Child Nutrition Programs. Accordingly, this final rule amends 7 CFR 210.18(p) and 235.11(c) and adds new paragraphs to 210.26(b), 215.15(b), 220.18(b), 225.18(k), and 226.25(j) to provide authority to FNS and to State agencies to establish fines in cases of severe or repeated program violations. The compliance date is August 23, 2024. 2. Reciprocal Disqualification in All Child Nutrition Programs Section 12(r) of the NSLA, 42 U.S.C. 1760(r), states that any school, institution, service institution, facility, or individual that is terminated from any Child Nutrition Program and that is on a list of institutions and individuals disqualified from participation in SFSP or CACFP may not be approved to participate in or administer any Child Nutrition Program. Current CACFP regulations include procedures for disqualification of institutions and day care homes. An institution or individual remains on the National disqualified list (NDL) until each serious deficiency is corrected, or until 7 years have passed. In all cases, all debts owed must be repaid prior to removal from the NDL. State agencies are required to consult the NDL when reviewing any program application, and must deny the application if the institution, or any of its responsible principals, is on the NDL. Although the statute authorizes an NDL for SFSP, currently, CACFP is the only Child Nutrition Program with an NDL. FNS proposed requiring State agencies to deny the application for any Child Nutrition Program if the applicant has been terminated for cause from any Child Nutrition Program or the applicant is on the NDL for CACFP or SFSP. This process is called “reciprocal disqualification.” The proposed rule: • Applies reciprocal disqualification to all applicants in any Child Nutrition Program; • Specifies that either termination for cause or placement on an NDL would be the basis for reciprocal disqualification; • Identifies an entity as any school, SFA, institution, service institution, facility, sponsoring organization, site, child care institution, day care center, day care home, responsible principal, or responsible individual; • Applies suspension or termination procedures when it is determined that an entity currently participating in a Child Nutrition Program is terminated for cause from another Child Nutrition Program; • Requires each State agency to develop a process to share information about disqualified entities within the State with other agencies administering Child Nutrition Programs or the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC), which must be approved by FNS; • Maintains disqualification until deficiencies are corrected, or until 7 years have passed, so that an entity will remain ineligible until all debts owed under the program are repaid; • Establishes that the decision to deny an application is final and not subject to further administrative or judicial review; and • Requires implementation 90 days after the publication of the final rule. Public Comments FNS received 127 comments about reciprocal disqualification. Of these, 7 were supportive, 105 were opposed, and 15 were mixed. Proponents stated that this provision promotes integrity across all Child Nutrition Programs. They agreed that if an entity is disqualified from one Child Nutrition Program, it should not be permitted to participate in another. Some responses supported the proposal but requested more guidance for successful implementation. Opponents were primarily concerned about the impact this provision could have on SFSP and CACFP participation. They asserted that SFAs may be reluctant to sponsor SFSP or CACFP if it puts their NSLP participation at risk and suggested limiting this provision to entities that are terminated for cause and placed on an NDL. FNS Response This provision supports integrity when it is determined that an entity currently participating in a Child Nutrition Program is terminated for cause from another Child Nutrition Program and placed on an NDL, as required by statute. It aligns with FNS' efforts to preserve public trust in the programs by preventing further abuse and severe mismanagement. However, before the reciprocal disqualification process may be applied to program regulations, FNS recognizes that additional attention needs to be given to the NDL before it is expanded to SFSP. FNS intends to publish a separate rulemaking to propose improvements to the serious deficiency process that will also address the legal requirements for records maintained on individuals in the NDL, including independent verification and the opportunity to contest matches on the list. This separate rulemaking will allow FNS to address additional requirements, further consider respondents' concerns about termination for cause and disqualification and provide an opportunity for the public to comment on the changes. FNS is committed to publishing new regulations. Accordingly, this final rule will not codify any regulatory amendments related to the reciprocal disqualification process at this time. 3. Serious Deficiency Process and Disqualification in SFSP and CACFP Section 13(q) of the NSLA, 42 U.S.C. 1761(q), requires the Secretary to establish procedures for the termination of SFSP sponsors for each State agency to follow. The procedures must include a fair hearing and prompt determination for any sponsor aggrieved by any action of the State agency that affects its participation or claim for reimbursement. The Secretary is also required to maintain a list of disqualified sponsors and individuals that will be available to State agencies to use in approving or renewing sponsor applications. In order to implement section 13(q), along with the reciprocal disqualification requirement under section 12(r) of the NSLA, 42 U.S.C. 1760(r), the proposed rule included amendments expanding the serious deficiency process in CACFP and extending it to SFSP. This integrity-focused process has provided a systematic way for CACFP State agencies and sponsoring organizations to correct serious management problems, and when that effort fails, protect the program through due process. Current SFSP regulations include provisions addressing corrective action, termination, and appeals. The regulations under 7 CFR part 225: • Specify criteria State agencies must consider when approving sites for participation; • Provide authority for the State agency to terminate sponsor participation; • List the types of program violations that would be grounds for application denial or termination; • Require State agencies to terminate participation of sites or sponsors for failure to correct program violations within timeframes specified in a corrective action plan; and • Establish procedures for sponsors to appeal adverse actions, including termination of a sponsor or site and denial of an application for participation. However, SFSP current regulations do not provide authority to FNS or State agencies to disqualify sponsors. Serious deficiency, termination, and disqualification procedures already exist for institutions, day care homes, responsible principals, and responsible individuals in CACFP under section 17(d)(5) of the NSLA, 42 U.S.C. 1766(d)(5), and codified in regulations at 7 CFR 226.6(c) and 226.16(l). These procedures provide seriously deficient institutions and facilities with the opportunity to correct the serious deficiency. They are intended to ensure that institutions and day care homes that had failed to take satisfactory corrective action, within the allotted period of time, have had their program agreement terminated, been disqualified, and placed on the NDL. FNS proposed applying these existing requirements to establish a serious deficiency process for sponsors and sites in SFSP and unaffiliated centers in CACFP, which is essential to fulfilling the intent of section 12(r) of the NSLA. The proposed rule includes amendments to: • Establish a serious deficiency process for unaffiliated child care centers and unaffiliated adult day care centers in CACFP; • Modify termination procedures and establish a serious deficiency process in SFSP; • Establish an NDL for SFSP that FNS would maintain and make available to all State agencies; • Require each SFSP State agency to establish a list of sponsors, responsible principals, and responsible individuals declared seriously deficient; • Require each SFSP State agency to provide appeal procedures to sponsors, annually and upon request; and • Specify the types of adverse actions that cannot be appealed in SFSP. Public Comments FNS received 236 comments addressing application of the serious deficiency process in SFSP—104 (including a form letter campaign) were supportive, 8 were opposed, and 124 were mixed. Several respondents requested additional definitions and clarification of the terms that are used to describe the serious deficiency process. Multiple respondents suggested alternatives that would extend the timeframe for corrective action, adapt the amount of time for corrective action to specific types of serious deficiencies, and allow State agencies to approve long-term corrective action plans. They also asked FNS to consider delaying implementation to allow time for updating automated systems. Out of 532 comments regarding amendments to the serious deficiency process in CACFP, 11 were supportive, 47 (including 38 form letters) were in opposition, and 474 (including 462 form letters) were mixed. Many of the respondents voiced general concern about using the current CACFP serious deficiency process as a model for establishing procedures in other Child Nutrition Programs. They suggested that FNS further investigate and attempt to address potential inconsistencies in implementation among States. FNS Response FNS agrees that modifications are needed to improve the serious deficiency process to ensure its application is fair and fully implemented. Consequently, FNS published a notice, Request for Information: The Serious Deficiency Process in the Child and Adult Care Food Program , in the Federal Register , at 84 FR 22431, on May 17, 2019, https://www.fns.usda.gov/cacfp/fr-051719 , to gather information to help FNS understand the firsthand experiences of State agencies and program operators. FNS received 580 comments in response to this request for information. An analysis of the responses has convinced FNS to delay the expansion of the serious deficiency process and related changes. To better serve State agencies and program operators, important modifications are needed to make the application of the serious deficiency process consistent and effective, in line with current statutory requirements. To allow FNS to respond to the concerns and challenges that resonated in the public comments, FNS intends to publish a separate rulemaking to propose improvements to the serious deficiency process and provide an opportunity for the public to comment on the changes. FNS is committed to publishing new regulations to address a serious deficiency determination, corrective action, termination for cause, and disqualification, prior to extending these requirements to unaffiliated centers in CACFP and SFSP sponsors. This separate rulemaking will establish a serious deficiency process for SFSP, with provisions for disqualification and placement on the NDL. It will also address the legal requirements for records maintained on individuals on the NDL. State agencies will continue to have discretion to apply their own processes for addressing seriously deficient performance by unaffiliated centers in CACFP and sponsors in SFSP, during this period of rulemaking development. Implementation of State agency processes does not require a State agency request for FNS approval of additional requirements. FNS will continue to provide technical assistance as needed to support such implementation. To eliminate ambiguity, this rulemaking also includes a definition of “Termination for convenience” to clarify that an agreement may be terminated for convenience when a sponsor, institution, facility, or State agency chooses to permanently end program participation, due to considerations unrelated to its performance of program responsibilities. If an entity decides to apply to participate in SFSP or CACFP, at a future date, a new agreement is required. However, if the service of meals is temporarily interrupted, due to considerations unrelated to program performance, the State agency or sponsoring organization, as applicable, must be notified in writing that meals will not be claimed for that period of time. The agreement remains in effect. Termination for convenience, particularly by the State agency, may be an infrequent occurrence. The regulations maintain that the State agency, sponsor, institution, or facility cannot terminate for convenience to avoid implementing the serious deficiency process. Any entity that voluntarily terminates its agreement after receiving a notice of intent to terminate will be terminated for cause and disqualified. Accordingly, this final rule amends 7 CFR 225.2, 225.6(i), 226.2, and 226.6(b)(4) to define “Termination for convenience” and address the cessation of program activities in SFSP and CACFP for reasons that are unrelated to performance. The compliance date is August 23, 2024. FNS will propose additional State agency provisions for establishing a serious deficiency process to address termination for cause, disqualification, and other administrative actions for program violations in a separate rulemaking. 4. State Agency Review Requirements in CACFP Monitoring is an essential tool for ensuring integrity and reducing program abuse. Section 17(d)(2)(C) of the NSLA, 42 U.S.C. 1766(d)(2)(C), directs the Secretary to develop policies under which each State agency must conduct at least one scheduled site visit, at not less than 3-year intervals, to identify and prevent management deficiencies, fraud, and abuse, and to improve CACFP operations. The statute mandates more frequent reviews of any institution that: • Sponsors a significant share of the facilities participating in CACFP; • Conducts activities other than those expressly related to the administration and delivery of CACFP; • Has had prior reviews that detected serious management problems; • Is at risk of serious management problems; or • Meets other criteria as defined by the Secretary. Current regulations require State agencies to annually review at least a third (33.3 percent) of all institutions participating in the CACFP in each State. Independent centers must be reviewed at least once every 3 years. Sponsoring organizations with up to 100 facilities must also be reviewed at least once every 3 years. Sponsoring organizations with more than 100 facilities must be reviewed at least once every 2 years. New sponsoring organizations with five or more facilities must be reviewed within the first 90 days of operation. As part of each required review of a sponsoring organization, the State agency must select a sample of facilities. For sponsoring organizations of less than 100 facilities, the State agency must review 10 percent of the facilities. For sponsoring organizations of more than 100 facilities, the State agency must review 5 percent of the first 1,000 facilities, and 2.5 percent of the facilities in excess of 1,000. Consistent with the statutory mandate under section 17(d)(2)(C) of the NSLA, FNS proposed criteria for State agencies to use in selecting institutions for more frequent reviews. Under the proposed rule, selected institutions must be reviewed at least once every 2 years. FNS did not propose any changes to the requirements for reviews of sponsored facilities. Public Comments FNS received 137 comments, of which 4 responses were supportive, 10 were opposed, and 123 were mixed. A large form letter campaign requested FNS to provide additional criteria to describe institutions that are at risk of having serious management problems. Multiple State agencies did not agree that conducting activities other than those related to CACFP would increase the risk of abuse, citing the participation of numerous types of child care, social service, tribal, and other multi-purpose organizations that engage in activities outside of CACFP. They observed that virtually all sponsoring organizations conduct activities other than those related to CACFP and that there is greater risk for abuse by institutions that have little outside funding and rely almost exclusively on CACFP funds. They also asked FNS to clarify how State agencies should incorporate additional reviews into the current 3-year review cycle. Respondents expressed concern that compliance with the proposed rule would require additional State agency funding and staffing to address the substantial increase in burden. They recommended alternatives, such as requiring in depth financial reviews of all institutions; applying this requirement only to sponsoring organizations that do not provide child or adult care services, beyond CACFP; or excluding institutions that receive monitoring through their participation in other Federal programs, such as SFAs in NSLP. FNS requested specific comments addressing the frequency and number of reviews State agencies would be required to perform under the provisions of the proposed rule. Four State agencies responded. They projected that 26 to 64 percent of sponsoring organizations would require additional reviews. They voiced concern that the additional audit funds now available to State agencies would not sufficiently cover the increased costs of monitoring. FNS Response This final rule establishes additional priorities and criteria for State agencies to use in selecting institutions for review. As required by statute, it requires State agencies to conduct at least one review every 2 years of institutions that: • Sponsor more than 100 facilities, as currently required; • Engage in any activities other than those related to CACFP; • Have received findings from a recent review that detected serious management problems; or • Are at risk of having serious management problems. In developing this rulemaking, FNS recognizes that a more frequent schedule of reviews will require State agencies to also prioritize funding and staffing resources. Comments from State agencies and other respondents stress this point. However, FNS has found that some States are not making full use of SAE and CACFP audit funds that are available to support the performance of reviews, audits, and other oversight activities. That is why FNS continues to encourage all State agencies to make wider use of these funds. Full use of these funds will help ease any potential burden. SAE and CACFP audit funds are available to State agencies for specific purposes. SAE supports allowable expenses associated with the administration of the Child Nutrition Programs and related Food Distribution Programs; the employment of additional personnel to supervise, improve management, and give technical assistance to institutions; and other allowable uses described under 7 CFR 235.6. When some State agencies cannot fully use their allotment of SAE funds, FNS reallocates them to other States that can ensure they are used. CACFP audit funds may be used to pay for the CACFP portion of institution audits and for conducting program-specific audits of institutions. The State agency may use these funds to support CACFP-related audits and subsequent audit resolution activities. The funds may also be used for reviews of CACFP institutions, provided that all required program-specific audits have been performed. The State agency may choose to retain all of its allocation, provide some of its audit funds to institutions, or use any remaining audit funds for other monitoring activities purposes. Section I-C-6 of this preamble provides additional information about the allocation and usage of audit funds for State agencies. The comments also point out concerns about the criteria State agencies must use in selecting institutions for review. As required by statute, institutions must receive more frequent monitoring if they sponsor more than 100 facilities, engage in any activities other than those related to CACFP, have had serious management problems, or are at risk of having serious management problems. These criteria are specified under section 17(d)(2)(C) of the NSLA. They underscore the importance of prioritizing State monitoring resources to achieve the most effective program oversight. FNS characterizes serious management problems as the types of administrative weaknesses that affect an institution's ability to meet CACFP performance standards—financial viability, administrative capability, and accountability. A sponsoring organization that operates a variety of community programs may be prone to serious management problems if it has inadequate staffing to support CACFP operations or may be devoting too small of a share of administrative resources to CACFP. Routine allocation of a disproportional amount of a sponsoring organization's budget to its other activities should raise a red flag about its ability to properly manage CACFP. More frequent monitoring by the State agency would help improve CACFP operations by identifying and addressing these weaknesses. Excluding Head Start centers, SFAs, and other types of institutions that receive monitoring through their participation in other Federal programs from this requirement would be inconsistent with the statutory requirement and would not support efforts to identify and correct serious management problems in CACFP. FNS expects State agencies to prioritize reviews to ensure that institutions do not divert CACFP resources to other activities. However, FNS is open to considering alternative approaches for determining review priorities, identifying institutions with a high number of risk factors, and ensuring effective monitoring on a case-by-case basis. State agencies should work with FNS to determine how they can design their monitoring policies to comply with statutory requirements. A State agency with a proposed alternative approach should consult with FNS. The proposed rule cites examples of factors that may expose an institution's risk, including changes in ownership, significant staff turnover, new licensing status, complaints about a sponsoring organization, sizable differences in the number of claims or the amount of claims submitted by an institution, or large increases in the number of sponsored centers or day care homes. The State agency should also consider its ongoing evaluation of the performance standards that demonstrate the institution's ability to effectively operate the program. For example, institutions that have lost other sources of funding are at risk, as they may be incapable of meeting their financial obligations if there were an interruption in CACFP payments. Accordingly, as required by statute, this final rule amends 7 CFR 226.6(m)(6) to require the State agency to schedule reviews at least once every 2 years of institutions that sponsor more than 100 facilities, engage in activities other than CACFP, have had serious management problems in previous reviews, or are at risk of having serious management problems. The compliance date is August 23, 2024. 5. State Liability for Payments to Aggrieved Child Care Institutions Section 17(e) of the NSLA, 42 U.S.C. 1766(e), directs the Secretary to promulgate CACFP regulations to ensure that State agencies use a fair and timely hearing process to reduce the amount of time between a State agency's action and the child care institution's hearing. This provision only applies to payments to child care institutions. It shifts the responsibility for payments from aggrieved child care institutions to State agencies and works as a deterrent to prevent State agencies from failing to issue administrative review decisions within the required timeframe. It requires State agencies to pay, from non-Federal sources, all valid claims for reimbursement, from the end of the regulatory deadline for providing the hearing to the date a decision is made. Under current regulations at 7 CFR 226.6(k), the State agency must acknowledge an institution's request for an administrative review within 10 days of its receipt of the request. Within 60 days of the State agency's receipt of the request, the administrative review official must inform the State agency, the institution's executive director, chair of the board of directors, responsible principals, and responsible individuals of the administrative review's outcome. During this period, all valid claims for reimbursement must be paid to the institution and the facilities of the institution, unless there is an allegation of fraud or a serious health or safety violation against the institution. The claims are paid from Federal funds. FNS proposed amending the regulations to establish the State agency's liability to pay all valid claims if the State agency fails to meet the required timeframe for providing a fair hearing and a prompt decision. A State agency that fails to issue administrative review decisions within 60 days must pay, from non-Federal sources, all valid claims for reimbursement to the aggrieved institution, beginning on the 61st day and ending on the date on which the decision is made. Public Comments FNS asked respondents to the proposed rule to address the financial implications of this provision, and suggest appropriate milestones that FNS could require of State agencies during implementation. FNS specifically requested comments to consider alternatives to the 60-day timeframe and any modifications which would meet State needs, without compromising integrity or the demand for a timely decision for the aggrieved institution. Out of 132 comments, 10 responses were supportive, 10 responses (including 2 form letters) were opposed, and 112 responses (including 99 form letters) were mixed. Although the comments did not highlight any financial impacts, multiple respondents offered alternatives or improvements to the 60-day timeframe. They cited numerous factors outside of the State agency's control that may delay the State agency's ability to issue administrative review decisions within a 60-day deadline, including: • Delays caused by the hearing official's schedule; • Voluminous stacks of paperwork requiring the hearing official to take additional time for review; • Additional time needed by the hearing official to render and fully document the legal basis for the decision; • Continuances requested by the State agency to gather evidence; and • The aggrieved institutions' needs for additional time to secure counsel, build their cases, or schedule hearings. Thirteen of the comments were from State agencies administering CACFP that are directly responsible for adhering to the timeframe for issuing an administrative review decision under 7 CFR 226.6(k)(5)(ix). One State agency proposed changing the deadline for completion of the administrative review to 90 days, citing the results of Targeted Management Evaluations. During Fiscal Years 2010 and 2011, FNS conducted in-depth reviews of compliance with serious deficiency requirements and found that more than half of State agencies in the Targeted Management Evaluation sample needed up to 90 days to complete the administrative review process. Another State agency proposed changing the deadline to 120 days, which would conform with NSLP appeal procedures for SFAs under 7 CFR 210.18(p). A form letter campaign proposed extending the appeals timeline from 60 to 90 days and extending the timeframe from 60 to 120 days before the State agency is responsible for paying valid claims from non-Federal sources. The respondents asked FNS not to hold the State agency accountable for delays due to an institution's actions or, alternatively, they asked FNS to allow an exemption from liability when the delays are outside the State agency's control. They also requested that FNS include a step in the process that would elevate appeals of State agency review findings for FNS mediation, as recommended in the August 2015 Report to Congress, Reducing Paperwork in the Child and Adult Care Food Program, https://fns.usda.gov/sites/default/files/cacfp/CACFP_Paperwork_Report.pdf . FNS Response Consistent with statute, this final rule requires State agencies to provide fair and timely hearings through the serious deficiency process. It also requires a State agency to pay all valid claims for reimbursement, from non-Federal sources, if the 60-day timeframe for the fair hearing is not met. Historically, some CACFP operators have come under scrutiny for a lack of program integrity in affording due process and ensuring payment accuracy, resulting in the need for the current regulatory framework featuring tighter regulations and deadlines. In order to minimize the exposure of program funds to waste or abuse, State agencies must be able to resolve problems quickly and train hearing officials to meet the FNS deadline to promptly complete the appeals process. In developing this rulemaking, FNS recognizes the concerns of State agencies and other respondents about exceptional circumstances that may require additional time and flexibility. They argued that, despite all reasonable efforts to keep administrative processes moving quickly and to overcome administrative law procedures that challenge the CACFP timelines, delays may arise from any number of exceptional circumstances. In response to these comments, this final rule allows FNS to approve, on a case-by case basis, a written request for an exception to the 60-day deadline. FNS is committed to working with individual State agencies to establish milestones to implement this provision and minimize potential financial burdens. Suppose a State agency is unable to meet the deadline due to an isolated administrative issue at the State level. The State agency may seek a reduction in its liability, a reconsideration of its liability, or an exception to the 60-day deadline in this specific case by submitting a request to FNS that includes information regarding any mitigating circumstances. In this example, the State agency would explain the specific administrative issue it is facing, why the issue prevents the State agency from meeting the deadline, and how the issue will be remedied to ensure that it does not continue in the future. To determine if the request should be approved, FNS would review the State agency's information and consider the mitigating circumstances. For approval, FNS would also have to weigh factors, such as how many times the State agency has failed to meet the deadline, or how much of a risk to the integrity of Federal funds would the delay or inaction by the State agency cause. Accordingly, as required by statute, this final rule amends 7 CFR 226.6(k) to establish State liability for payments to aggrieved child care institutions. It requires the State agency to pay all valid claims with non-Federal funds if the State agency fails to meet the required timeframe for providing a fair hearing and a prompt determination, unless FNS grants an exception. To further support the State agency's ability to ensure timely resolution of administrative reviews, FNS intends to provide technical assistance materials on developing processes for tracking and notifying State agencies when they would become liable for payments and best practices for working with hearing officials to emphasize the importance of adhering to a timeline in rendering their decisions. The compliance date is August 23, 2024. 6. CACFP Audit Funding Program audits are an integral component of CACFP, allowing State agencies to monitor funding and operations to ensure that sponsoring organizations and centers operate CACFP as required by law. Section 17(i)(2)(B) of the NSLA, 42 U.S.C. 1766(i)(2)(B), allows additional funding to State agencies to conduct audits. The Secretary may increase the amount of funds to any State agency that demonstrates that it can effectively use the funds to improve program management, under criteria established by the Secretary. In previous fiscal years, each State agency has received up to 1.5 percent of the program funds used by the State during the second preceding fiscal year for the purpose of conducting CACFP audits. Beginning in Fiscal Year 2016, and each fiscal year thereafter, FNS began accepting requests from State agencies to increase their audit funding from 1.5 percent to a maximum of 2 percent of the CACFP funds used by each State. Public Comments Out of 381 comments, 10 were supportive and 371 (including 354 from 2 form letter campaigns) were mixed. The majority of responses supported increasing the amounts of audit funds available to State agencies, just not the need to have to apply for them. Multiple respondents requested greater flexibility to use audit funds to support integrity-related expenses, such as purchases of improved technology or travel for training purposes. They also recommended that FNS: • Make it easier for State agencies to use additional audit funds to support the permanent or ongoing costs that are necessary for completing audits and maintaining program integrity; • Ensure that State agencies can still pass through audit funds to institutions if they have audit funds available to do so; and • Allow unspent audits funds to be used to improve CACFP, instead of returning them to the United States Treasury. FNS Response This final rule allows FNS to increase the amount of State audit funds if a State agency demonstrates that it can effectively use the funds to improve program management. This rulemaking codifies into CACFP regulations the procedures FNS has established for State agencies to apply for a higher allocation of audit funds. It also provides criteria for FNS to approve these requests. Additional CACFP audit funds are available to State agencies that demonstrate the need for an increase in resources to meet audit requirements under 7 CFR 226.8, fulfill monitoring requirements under 7 CFR 226.6(m), or effectively improve program management, under criteria established by the Secretary. FNS recognizes that the additional funds will be an incentive for State agencies to improve the effectiveness of their oversight activities and strengthen program integrity. FNS has established an equitable process, outlined below, to authorize these funds to those State agencies that submit a written request justifying the need for an increase in CACFP audit funds. Prior to the beginning of each new fiscal year, FNS announces the opportunity to increase CACFP audit funding levels from 1.5 to 2 percent. The announcement includes a spreadsheet calculating the State agency-by-State agency funding levels at the 1.5 and 2 percent levels to illustrate the maximum amounts available. Each State agency may request any amount within the 1.5 to 2 percent range of funds. Funding above 1.5 percent will be available only if the State agency can demonstrate it will effectively use the funds to improve program management. This action does not change the formula used to calculate CACFP audit funds. It only changes the maximum amount of assistance available for some State agencies. The amount of assistance provided to a State agency for this purpose, in any fiscal year, may not exceed the State's expenditures for conducting audits as permitted under 7 CFR 226.4 and 226.8. CACFP audit funds are not reallocated and may not be carried over into another fiscal year. The funds must be used for: • Funding of the CACFP portion of organization-wide audits and the resulting audit resolution activities; • Conducting, handling, and processing CACFP-related audits and performing the resulting audit resolution activities; and • Conducting monitoring of CACFP institutions, provided that all required program-specific audits have been performed. FNS approval of requests for additional CACFP audit funds is based on the State agency's demonstrated need for additional funds to meet audit or monitoring requirements or effectively improve program management. To be funded, costs must be incurred strictly to meet the audit requirements under 7 CFR 226.8 and the monitoring requirements under 7 CFR 226.6(m). Allowable costs include, but are not limited to, salaries of auditors and monitors and travel expenses incurred to conduct audits and monitoring. State agencies may use their allocation of CACFP audit funds to pay for the CACFP portion of institution audits or conduct program-specific audits of institutions, as specified under 7 CFR 226.8(b) and (c), respectively. The State agency may choose to retain all of its allocation, provide some of its audit funds to institutions, or use any remaining audit funds for other monitoring activities. For example, after the completion of program-specific audits, the State agency may use the remaining funds to cover costs incurred in evaluating financial viability, administrative capability, and accountability at the time of application. The review of budgets to ensure that costs are allowable and the purchase of mapping software for determining the accuracy of area eligibility determinations for day care homes are also examples of allowable uses of remaining funds. Accordingly, this final rule amends 7 CFR 226.4(j) to allow additional CACFP audit funds for State agencies. FNS now considers requests to increase audit funding from 1.5 percent to a cumulative maximum of 2 percent of CACFP funds used by the State agency during the second preceding fiscal year for the purpose of conducting program audits. The additional funds must be used to meet program oversight and audit requirements under 7 CFR 226.6(m) and 226.8, respectively, or to improve program management under criteria established by the Secretary. The compliance date is September 22, 2023. 7. Financial Review of Sponsoring Organizations in CACFP The proposed rule includes modifications in program policy resulting from the reports of findings from OIG's audit, Review of Management Controls for the Child and Adult Care Food Program, issued in November 2011, and FNS management evaluations of State agency administration of CACFP. These inquiries found that the misuse of funds was often an indicator of a sponsoring organization's systemic program abuse that State agency financial reviews were unable to detect. The reports recommended improvements that would be effective at uncovering and preventing the misuse of funds, including the following requirements for State agencies to review: • CACFP bank account activity to verify that sponsoring organization transactions meet program requirements; and • Program expenditures and the amount of meal reimbursement funds sponsoring organizations retain from unaffiliated centers for administrative costs. Current regulations require State agencies to review and approve budgets for sponsoring organizations of centers to ensure that CACFP funds are used only for allowable expenses. The portion of the administrative costs to be charged to CACFP must not exceed 15 percent of the meal reimbursements estimated to be earned during the budget year unless a waiver is granted. All administrative costs, whether incurred by the sponsoring organization or by its sponsored centers, must be taken into account. If a sponsoring organization intends to use any non-program resources to meet CACFP requirements, its budget must identify a source of non-program funds that could be used to pay overclaims or other unallowable costs. To determine if CACFP funds are solely used for the operation or improvement of the nonprofit food service, an evaluation of the financial trail of source documents, ledgers, bank account statements, canceled checks, electronic deductions and transfers, and other financial records is required. A thorough review of the sponsoring organization's financial records is vital in ensuring program integrity. The sponsoring organization must produce accurate, current, and complete disclosure of the financial results of each Federal award or program. Additionally, the records must identify the source and application of funds for federally-funded activities. However, the State agency's ability to monitor a sponsoring organization's use of CACFP funds is limited. While sponsoring organizations must submit annual budgets, which detail expenditures by cost category, they are not currently required to report actual expenses or fully account for their disbursement of CACFP funds. To rectify these weaknesses, FNS proposed requiring State agencies to establish processes to verify that sponsoring organizations' financial transactions comply with CACFP regulations by requiring sponsoring organizations to report program expenditures. The proposed rule would require the State agency to annually review and compare at least 1 month of a sponsoring organization's bank account activity with documents to demonstrate that the transactions meet program requirements. The State agency must reconcile reported expenditures with CACFP payments to ensure that funds are accounted for fully. The proposed rule would also require the State agency to annually review sponsoring organization reports of actual expenditures of program funds and the amount of meal reimbursement funds retained from their unaffiliated centers for administrative costs. If the State agency identifies any expenditures that have the appearance of violating program requirements, the State agency must refer the sponsoring organization's bank account activity to an auditor or other appropriate State authority for verification. Public Comments Out of 589 comments, 4 were supportive, 67 (including 53 form letters) were opposed, and 518 (including 486 from 3 form letter campaigns) were mixed. Many respondents argued that completing annual financial reviews, particularly annual bank account reviews, would create an administrative burden for State agencies. Respondents were concerned that a review of a single month of bank account activity would not be an effective use of program resources. They asserted that bank account statements would not provide useful information because there is no requirement for sponsoring organizations to have separate bank accounts for Federal funds. Multiple responses suggested that State agencies change review priorities to tie invoices to bank account statements in a targeted edit check of bank, invoice, and accounting records during the review process. The responses also included recommendations for adopting a risk-based approach to ensure that organizations at risk of misusing Federal funds are reviewed annually; coordinating the financial review with the review cycle; or adding a requirement that sponsoring organizations maintain timely financial reports onsite so that these reports would be available for review at any time. FNS Response This final rule requires State agencies to annually verify bank account activity and actual expenditures by sponsoring organizations in CACFP. The State agency must select and compare 1 month of a sponsoring organization's CACFP bank account activity with other documents that are adequate to support that the financial transactions meet program requirements. This rulemaking also requires State agencies to annually review CACFP expenditures reported by sponsoring organizations of unaffiliated centers. Sponsoring organizations must annually report the amount of program expenditures of program funds and the amount of meal reimbursement funds retained from their unaffiliated centers for administrative costs. While comments to the proposed rule included a number of alternatives that may offer a small reduction in burden, FNS believes that an annual review of bank account activity will more effectively uncover and prevent the misuse of funds than a less frequent review cycle. The review of bank account activity provides the most reliable and effective means to verify and document costs. Unlike receipts that show the reviewer who is owed the payments, statements of bank account activity inform the reviewer of who actually received the payments. Bank account statements and supporting documents are utilized as tools to conduct edit checks on compliance requirements associated with the receipt and use of CACFP reimbursement. Edit checks can be conducted electronically and remotely, once the necessary supporting financial documentation is received by the State agency reviewer. For example, to confirm that a sponsoring organization's invoices for CACFP expenses are legitimate and correctly paid, the State agency reviewer would compare the invoices to the actual bank statement. If discrepancies were found, the sponsoring organization would have the opportunity to present documentation to resolve them. The State agency reviewer would expand the review to examine additional months of bank statements, as warranted, to determine if the discrepancies are part of a systemic problem. If any expenditures have the appearance of violating program requirements, the State agency reviewer must attempt to verify the bank account activity. If the discrepancies cannot be verified, or if they are significant, the State agency reviewer must refer the sponsoring organization's bank account activity to appropriate State authorities, such as the State auditing division or the State Bureau of Investigation. The State agency has discretion to obtain statements of bank account activity with the annual budget submission, as part of the application renewal, or through a monitoring review. No changes were made to the review content, application procedures, or budget approval requirements at 7 CFR 226.6. The review of bank account activity is easier if funds are not comingled. Although FNS does not require it in CACFP, maintaining a separate bank account for Child Nutrition Program funds is a recommended practice. Personal or non-Child Nutrition Program funds should be held in a separate bank account. Accordingly, this final rule amends 7 CFR 226.7(b) to require the State agency to have procedures in place for annually reviewing at least 1 month of the sponsoring organization's bank account activity against other associated records to verify that the financial transactions meet program requirements. The State agency must also have procedures for annually reviewing a sponsoring organization's actual expenditures of CACFP funds and the amount of meal reimbursement funds retained from unaffiliated centers to support the sponsoring organization's administrative costs. The State agency must reconcile reported expenditures with program payments to ensure that funds are accounted for fully. This final rule makes a corresponding change to 7 CFR 226.10(c) to require sponsoring organizations of unaffiliated centers to annually make available to the State agency the amount of program expenditures of program funds and the amount of meal reimbursement funds retained from their centers for administrative costs. FNS will work closely with State agencies to develop resources and provide technical assistance to sponsoring organizations to ensure successful implementation of these requirements. The compliance date is August 23, 2024. 8. Informal Purchase Methods for CACFP Informal purchase methods ( i.e., micro-purchases and small purchases) for procurements under Federal awards are covered in the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, published by the Office of Management and Budget at 2 CFR part 200 and adopted by USDA at 2 CFR part 400. This guidance sets the dollar threshold and degree of informality that characterizes micro-purchases and small purchases. Current practices allow CACFP institutions to use the micro-purchase method for transactions in which the aggregate cost of the items purchased does not exceed $10,000, the current Federal threshold. Institutions may use the small purchase method for purchases below the Federal simplified acquisition threshold, currently set at $250,000. States and local agencies may specify lower micro-purchase and simplified acquisition thresholds, and local agencies may set a higher micro-purchase thresholds in line with 2 CFR part 200.320(a)(1)(iv-v). FNS would like to note that when the Child Nutrition Program Integrity rule was initially proposed and open to public comment, the dollar amounts quoted for the micro-purchase threshold and the small purchase threshold aligned with the 2016-time frame. Due to the passage of time and inflationary adjustments the above-mentioned micro-purchase and small purchase thresholds align with the current federal thresholds. CACFP regulations set out procedures that are intended to prevent fraud, waste, and program abuse in contracts and purchasing. However, operational provisions addressing food service management companies (FSMC) and procurement standards under 7 CFR 226.21 and 226.22, respectively, do not align with existing practices. Current regulations set the Federal threshold for small purchases at $10,000. There is no mention of micro-purchases. FNS proposed amending the regulations to expand the availability of informal purchase methods and align the applicable Federal dollar thresholds with future adjustments that may be made for inflation. Public Comments and FNS Response Of the comments addressing changes to informal purchase methods, three were supportive and one was mixed. One respondent requested that FNS define a range for informal purchases. This final rule updates procurement standards and guidelines and makes the values of the Federal micro-purchase threshold and Federal simplified acquisition threshold consistent with current guidance on informal purchase methods under 2 CFR part 200. This modification eliminates the need to revise CACFP regulations each time the thresholds are adjusted for inflation. This rulemaking also streamlines CACFP procurement standards and provides clarity by removing outdated or duplicative provisions of the regulations that have been replaced by 2 CFR part 200. For example, institutions must comply with procurement procedures for micro-purchases, small purchases, sealed bids, competitive proposals, and non-competitive proposals. The text at 7 CFR 226.22(i) is replaced with cross-references to the procedures at 2 CFR part 200 and USDA regulations under 2 CFR parts 400 and 415. This modification ensures that CACFP requirements are consistent with the streamlined regulations, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, that the Office of Management and Budget first published at 78 FR 78589, on December 26, 2013, https://www.federalregister.gov/documents/2013/12/26/2013-30465/uniform-administrative-requirements-cost-principles-and-audit-requirements-for-federal-awards, and USDA-specific requirements published at 79 FR 75871, on December 19, 2014, https://www.federalregister.gov/documents/2014/12/19/2014-28697/federal-awarding-agency-regulatory-implementation-of-office-of-management-and-budgets-uniform. Micro-purchase and small purchase procedures are relatively simple and informal methods that are appropriate for the procurement of goods and services for which the cost is below Federal, State, and local thresholds. Micro-purchase procedures are used when the transaction is below the current Federal threshold of $10,000 and prices are reasonable. Similarly, although State and local agencies may impose more restrictive procurement procedures, adopting the Federal simplified acquisition threshold for small purchases—up to the threshold set by 2 CFR 200.88, Simplified acquisition threshold —would streamline the procurement process for CACFP institutions. The Federal simplified acquisition threshold is currently set at $250,000. All procurement transactions, regardless of the amount, must be conducted in a manner that ensures free and open competition. To the extent practicable, CACFP institutions must distribute micro-purchases equitably among qualified suppliers. When purchases are below the current Federal simplified acquisition threshold, an institution may use small purchase procedures, sealed bids, or competitive proposals, which require prices to be solicited and documented from an adequate number of qualified sources. Depending on the value of the purchase, many of the required contract provisions in Appendix II to 2 CFR part 200, Contract Provisions for Non-Federal Entity Contracts Under Federal Awards, may apply. Accordingly, this final rule amends 7 CFR 226.21(a) to remove outdated language so that the values of the Federal micro-purchase threshold and Federal simplified acquisition threshold are linked to 2 CFR part 200. This final rule also makes technical changes to remove outdated or duplicative provisions of 7 CFR 226.22 and affirm that procurements by public or private non-profit institutions comply with the appropriate requirements under 2 CFR part 200. The compliance date is August 23, 2024. 9. School Food Authority Contracts With Food Service Management Companies Any school food authority (SFA) may contract with an FSMC to manage the food service operation at one or more of its schools. SFAs are required to monitor contractor performance to ensure that FSMCs comply with the terms, conditions, and specifications of their contracts. As required by 2 CFR 200.403, all costs must be reasonable, necessary, and allocable. SFAs are currently permitted to use “fixed-price” and “cost-reimbursable” FSMC contracts: • Under a fixed-price contract, the FSMC charges the SFA a fixed cost per meal or a fixed cost for a certain time period; and • Under a cost-reimbursable contract, the FSMC charges the SFA for food service operating costs, and also charges fixed fees for other services, such as labor. The proposed rule included a provision to eliminate the use of cost-reimbursable contracts for SFAs that contract with a FSMC. FNS proposed limiting FSMC contracts in NSLP and SBP to fixed-price contracts, either with or without economic price adjustments tied to a standard index and eliminating cost-reimbursable FSMC contracts in NSLP and SBP. The proposed rule also included two technical changes to align FSMC requirements under 7 CFR 210.16 with existing regulations under 7 CFR parts 210 and 250. These changes would have required State agencies to annually review and approve all contracts and contract amendments between any SFA and FSMC and require an FSMC to credit the value of USDA Foods to the respective SFA. Public Comments FNS received 107 comments about the proposed elimination of cost-reimbursable contracts. Of these, 15 were supportive, 80 were opposed (including 52 form letters), and 12 were mixed. Proponents agreed that the complexity of rebates, discounts, and credits in cost-reimbursable contracts make the contracts challenging to manage and to monitor. They suggested the elimination of cost-reimbursable contracts would reduce fraud, while creating more straightforward business dealings for SFAs. One food industry representative noted that in order to manage cost-reimbursable contracts effectively, SFAs must devote significant resources to review, monitor, and audit costs and billings. By contrast, another respondent suggested fixed-price contracts allow SFAs to focus on manageable program areas, such as contract compliance. The return of rebates, discounts, and credits is not required under a fixed-price contract, as these factors are considered when submitting the bid. One State agency noted that consistent with its authority in current regulations, all FSMC contracts in that State are already required to be fixed-price. Opponents were concerned that fixed-price contracts may cause FSMCs to focus on the lowest cost per meal, rather than food quality. They argued that cost-reimbursable contracts offer greater transparency that provides SFAs better management control over the program. For example, a joint comment from four food industry representatives noted that cost-reimbursable contracts allow flexibility for SFAs to incorporate local produce, switch to sustainable paper products, and adjust other associated costs during the contract term. FNS Response In this final rule, FNS is not eliminating the availability of cost reimbursable contracts as a type of FSMC contract SFAs may use in the NSLP and SBP. As noted in the proposed rule, audit findings, FNS management evaluations, and stakeholder feedback suggested that some SFAs have not been fully successful in conducting procurements or monitoring of cost-reimbursable contracts in the past. The ability of those SFAs to receive the full benefit of the contract terms and achieve administrative and nutritional compliance in the programs was negatively impacted, however given the mixed comments received on the proposed rule FNS has chosen not to finalize this provision as proposed. In response to the COVID-19 public health emergency and consistent with legislative directives, FNS, State partners, and SFAs developed new approaches that offered unprecedented flexibilities to school meal service and program management, through nationwide waivers. The fundamental goal for each of the waivers was to provide substantive support promoting access to nutritious meals to all children during the COVID-19 pandemic. In 2020, FNS issued guidance, Nationwide Waiver of Food Service Management Contract Duration in the National School Lunch Program and Summer Food Service Program, https://www.fns.usda.gov/cn/covid-19-child-nutrition-response-19, which waived contract duration requirements for all State agencies, SFAs, and SFSP sponsors. SFAs in States opting to use this waiver could extend contracts with FSMCs beyond the fourth extension year, without undertaking new competitive procurements. The waiver relieved SFAs and FSMCs of the burden of competitive procurements and enabled full focus on preparing and providing nutritious school meals. In 2021, when FSMCs and schools experienced supply chain disruptions that impacted food, packaging components, and transportation demands, FNS offered States and SFAs flexibilities, resources, and support to compensate for the unpredictability of the supply chain and the new uncertainties in accessing foods and supplies essential for school food service. Despite that, stakeholders provided compelling information indicating that even those contracts which included a price adjustment tied to a standard index—such as the Consumer Price Index—were not flexible enough to fully offset the contract price to adjust during the COVID-19 pandemic supply chain-related market volatility. In a few instances, FSMCs concluded that withdrawal from the SFA market was in their best interest, leaving affected SFAs with few options in providing school meal service. As a result of the lessons learned during COVID-19 and in response to the negative and mixed comments received during the comment period when this provision was proposed this final rule does not eliminate cost-reimbursable contracts in NSLP and SBP regulations. In responding to the demands of the COVID-19 pandemic, FNS gained deeper insight into the contractual relationships between SFAs and FSMCs, the financial aspects of those contracts, the impact on school food service workers, and the opportunities FNS may have to support and improve school food service. FNS has concluded that the proposed rule's elimination of cost reimbursable contracting would not be in the best interest of the programs at this time. FNS intends to assess the options and resources which may improve administrative and nutritional compliance, through stakeholder outreach, consultation, and analysis of the data reported as part of the COVID-19 waiver process. As with the proposed rule, this final rule amends NSLP regulations to require each State agency to annually review and approve each contract and contract amendment between any SFA and FSMC. This final rule also amends NSLP and SBP regulations to require the value of USDA Foods to accrue only to the benefit of the SFA's nonprofit school food service. The proposed rule did not extend these provisions to SBP. However, FNS is correcting this oversight in this final rule. FNS recognizes the importance of consistency and administrative streamlining of Child Nutrition Program and USDA Food regulations. Current NSLP and SBP regulations define cost-reimbursable contract. Finally, for clarity, this final rule adds a definition for fixed-price contract to NSLP and SBP regulations. Fixed-price contract means a contract that charges a fixed cost per meal, or a fixed cost for a certain time period. Fixed-price contracts may include an economic price adjustment tied to a standard index. Current NSLP and SBP regulations define cost-reimbursable contract as a contract that provides for payment of incurred costs to the extent prescribed in the contract, with or without a fixed fee. FNS recognizes that SFAs value flexibility in their contracts. For example, a contract that includes an economic price adjustment tied to a standard index—such as the Consumer Price Index—allows the contract price to adjust during market volatility. The SFA may also include a clause to account for changes in labor cost, such as a minimum wage increase. Additionally, qualitative factors—such as specifications relating to product appeal to students—are allowable evaluation factors that may be published in solicitations, as long as cost is the primary factor. SFAs may also include provisions that penalize an FSMC if meal quality is an issue. FNS recommends that SFAs consult with counsel during the procurement process to ensure that the contract terms are consistent with Federal law and any pertinent State and local laws. Accordingly, this final rule amends 7 CFR 210.2 and 220.2 to define fixed-price contract in NSLP and SBP. The rulemaking also amends 7 CFR 210.19(a)(5) to require each State agency to annually review—and approve—each contract and contract amendment between any SFA and FSMC, for consistency with 7 CFR 210.16(a)(10). Finally, this rulemaking adds 7 CFR 210.16(c)(4) and 220.7(d)(3)(iv) to require the value of USDA Foods to accrue only to the benefit of the SFA's nonprofit school food service, to align with 7 CFR 210.16(a)(6). The compliance date is August 23, 2024. 10. Annual NSLP Procurement Training Section 7(g)(2) of the Child Nutrition Act of 1966, 42 U.S.C. 1776(g)(2), requires training for school food service personnel on certain administrative practices and gives USDA discretion to require other appropriate training topics to address critical issues, such as integrity concerns. Current regulations at 7 CFR 210.30(b), (c), and (d) outline the professional standards training requirements for school nutrition program directors, management, and staff, respectively. Current regulations at 7 CFR 235.11(g)(3) outline the training requirements for State directors of school nutrition programs and distributing agencies. The specific annual training requirements vary, but for each position, FNS may identify other training topics, as needed. There are no specific regulatory requirements related to NSLP procurement training. As discussed in the proposed rule, FNS released a guidance memo strongly encouraging periodic training for State Agency and SFA staff tasked with procurement responsibilities and has taken a number of steps to share information about proper procurement methods. However, State agencies and SFAs continue to face challenges implementing Federal procurement requirements. Helping State agencies and SFAs better understand procurement responsibilities through adequate training is one way to ensure Federal funds are used appropriately in NSLP. To improve compliance of these important requirements, the proposed rule requires annual procurement training for State agency and SFA staff tasked with procurement responsibilities, with an effective date 90 days after publication of the final rule. The proposed rule also requires State agencies and SFAs to retain records to document compliance with this provision. Public Comments FNS received 15 comments about NSLP procurement training. Of these, 2 were supportive, 4 were opposed, and 9 were mixed. Proponents described this provision as important and necessary, and stated that annual procurement training would ensure the school nutrition programs use Federal funds efficiently. Some respondents asked for clarification about the implementation of this requirement, including the number of annual training hours required. Regarding the proposal to document training, one respondent noted this would be an important step in assuring accountability. Opponents were concerned that this provision would increase program costs and create burden. They argued that annual procurement training is duplicative or excessive, unless it is necessary to resolve a review finding. One respondent argued that annual trainings in general lose value and become tedious. FNS Response This final rule requires State directors of school nutrition programs, State directors of distributing agencies, and school nutrition program directors, management, and staff who work on NSLP procurement activities to complete procurement training annually. FNS modified the language in this final rule to align with the school nutrition professional standards. This final rule also amends 7 CFR 210.30 and 235.11 to clarify that NSLP procurement training is subject to professional standards monitoring and recordkeeping requirements and may count towards the professional standards training requirements. This change from the proposed rule streamlines monitoring, recordkeeping, and training requirements. FNS is mindful of respondents' concerns that NSLP procurement training will not be relevant to all program staff. FNS recognizes that school nutrition program personnel have a variety of job responsibilities, which may or may not include procurement. FNS does not intend to require all personnel to complete annual procurement training, nor to take time away from other relevant training topics. This requirement only applies to State directors and school nutrition program directors, management, and staff who work on NSLP procurement activities. FNS will not require a specific number of annual training hours. For personnel with minimal involvement, a brief refresher course may be sufficient. Personnel who are new to NSLP procurement, who are assigned new procurement tasks, or who use more complex procurement methods, such as sealed bids and competitive proposals, may require a full day of training. FNS encourages the training plan that best supports each staff member's job-specific training needs and experience. Consistent with the professional standards training requirements, a variety of training formats may be used, such as webinars, classroom training, and seminars. State agencies may use SAE funds to pay for the costs of receiving or delivering annual NSLP procurement training. Generally, training is an allowable use of school food service funds. State agencies and SFAs are encouraged to access the free or low-cost training resources listed online at https://professionalstandards.fns.usda.gov/. Annual training is an important step to ensure personnel who work on NSLP procurement activities have the knowledge they need to successfully implement Federal procurement requirements. Ensuring that responsible personnel annually gain knowledge of Federal procurement standards and contract performance monitoring through this regulatory change is an important step towards improving program integrity. Accordingly, this final rule adds new paragraphs at 7 CFR 210.21(h), 210.30(g)(3), and 235.11(h)(3) to require State directors of school nutrition programs, State directors of distributing agencies, and school nutrition program directors, management, and staff who work on NSLP procurement activities to complete annual procurement training. The compliance date is August 23, 2024. II. CACFP Amendments A. Background FNS is also using this opportunity to codify statutory requirements that are designed to improve the administration and operational efficiency of CACFP, with less paperwork. FNS published a proposed rule, Child and Adult Care Food Program: Amendments Related to the Healthy, Hunger-Free Kids Act of 2010, 77 FR 21018, on April 9, 2012, https://www.fns.usda.gov/cacfp/fr-040912, that included amendments that would replace the renewal application with an annual certification process, vary the timing of reviews of day care homes and centers, require permanent operating agreements for sponsored centers, broaden procedures for the collection of meal benefit forms for children enrolled in day care homes, and allow carry over and simplified calculation of administrative payments. Since these changes in CACFP policy were required by the Healthy, Hunger-Free Kids Act of 2010 (HHFKA), and FNS released the changes in policy memos, they have become standard operating practices for State agencies and sponsoring organizations. In the intervening years since publication of the proposed rule, due to shifting priorities and the COVID-19 pandemic, FNS was unable to publish subsequent rulemaking to incorporate these statutory amendments into CACFP regulations under 7 CFR part 226. Through this final rule, FNS is incorporating only the statutory amendments proposed in the Child and Adult Care Food Program: Amendments Related to the Healthy, Hunger-Free Kids Act of 2010, 77 FR 21018, on April 9, 2012, https://www.fns.usda.gov/cacfp/fr-040912, into CACFP regulations. FNS received 27 comments in response to the proposed rule. Many of them pointed out technical errors, questioned potential gaps in implementation, and offered valuable suggestions for improvement, but none of the comments objected to any of the six amendments, which are required by statute. There were no adverse comments challenging the rule's underlying premise or approach or suggesting that the content of the rule would be inappropriate, ineffective, or unacceptable without a change. The comments are posted at http://www.regulations.gov under docket ID FNS-2012-0022, Child and Adult Care Food Program: Amendments Related to the Healthy, Hunger-Free Kids Act of 2010. The amendments included in this final rule: • Require institutions to submit an initial application to the State agency and, in subsequent years, periodically update the information, in lieu of submitting a new application; • Require sponsoring organizations to vary the timing of reviews of sponsored facilities; • Require State agencies to develop and provide for the use of a standard permanent agreement between sponsoring organizations and day care centers; • Allow tier II day care homes to collect household income information and transmit it to the sponsoring organization; • Modify the method of calculating administrative payments to sponsoring organizations of day care homes; and • Allow sponsoring organizations of day care homes to carry over up to 10 percent of their administrative funding from the previous Federal fiscal year into the next fiscal year. B. Codifying the CACFP Amendments 1. Elimination of the Annual Application for Renewing Institutions Annual certification of an institution's eligibility to continue participating in CACFP has replaced the renewal application process. Section 17(d)(2) of the NSLA, as amended by HHFKA, directs the Secretary to develop a policy to address the initial application requirements for institutions and annual confirmation of compliance with licensing and all other requirements for institutions and facilities to continue to participate in CACFP. These amendments required changes to current regulations, which require institutions to submit an annual application to participate in the program. Renewing institutions must re-apply at intervals of between 12 and 36 months after their initial application was approved by the State agency. FNS issued CACFP 19-2011, Child Nutrition Reauthorization 2010: Child and Adult Care Food Program Applications, on April 8, 2011, https://www.fns.usda.gov/cacfp/applications, to provide guidance regarding the HHFKA requirements that renewing institutions must submit an annual certification of information, updated licensing information, and a budget. FNS included the requirements for annual certification in the April 9, 2012, proposed rule for the public to review and comment on. FNS did not receive any substantive comments on this provision. This final rule adopts these changes, as proposed, by amending 7 CFR 226.6(b) to require an initial application for new institutions and annual confirmation for renewing institutions that they are compliant with program requirements. Renewing sponsoring organizations must submit updated licensing information for its sponsored facilities, an annual budget, and an annual certification of compliance with all of the requirements under 7 CFR 226.6(b)(2) and 226.6(f)(1). The renewing sponsoring organization must certify that: • The management plan on file with the State agency is complete and up to date, per 7 CFR 226.6(b)(1)(iv); • The sponsoring organization and its principals are not currently on the National Disqualified List, per 7 CFR 226.6(b)(1)(xii); • No sponsored facility or principal of a sponsored facility is currently on the CACFP National Disqualified List, per 7 CFR 226.6(b)(1)(xii); • A list of any publicly funded programs that the sponsoring organization and its principals have participated in, in the past 7 years, is current, per 7 CFR 226.6(b)(1)(xiii)(B); • The sponsoring organization and its principals have not been determined ineligible for any other publicly funded programs due to violation of that program's requirements, in the past 7 years, per 7 CFR 226.6(b)(1)(xiii)(B); • No principals have been convicted of any activity that occurred during the past 7 years and that indicated a lack of business integrity, per 7 CFR 226.6(b)(1)(xiv)(B); • The names, mailing addresses, and dates of birth of all current principals have been submitted to the State agency per 7 CFR 226.6(b)(1)(xv); • The outside employment policy most recently submitted to the State agency remains current and in effect, per 7 CFR 226.6(b)(1)(xvi); • The sponsoring organization is currently compliant with the required performance standards of financial viability and management, administrative capability, and program accountability, per 7 CFR 226.6(b)(1)(xviii); • Licensing or approval status of each sponsored child care center, adult day care center, or day care home is up-to-date; • The list of the sponsoring organization's facilities on file with the State agency is up-to-date; and • All facilities under the sponsoring organization's oversight have adhered to Program training requirements. Renewing independent centers must submit updated licensing information and an annual certification of compliance with all of the requirements under 7 CFR 226.6(b)(2) and 226.6(f)(1). The renewing independent center must certify that: • The center and its principals are not currently on the National Disqualified List, per 7 CFR 226.6(b)(1)(xii); • A list of any publicly funded programs that the center and its principals have participated in the past 7 years is current, per 7 CFR 226.6(b)(1)(xiii)(B); • The center and its principals have not been determined ineligible for any other publicly funded programs due to violation of that program's requirements in the past 7 years, per 7 CFR 226.6(b)(1)(xiii)(B); • No principals have been convicted of any activity that occurred during the past 7 years and that indicated a lack of business integrity, per 7 CFR 226.6(b)(1)(xiv)(B); • The names, mailing addresses, and dates of birth of all current principals have been submitted to the State agency per 7 CFR 226.6(b)(1)(xv); • The center is currently compliant with the required performance standards of financial viability and management, administrative capability, and program accountability, per 7 CFR 226.6(b)(1)(xviii); and • Licensing or approval status of each child care center or adult day care center. State agencies may add to this list other types of information that they require annually for proper administration of the program, such as submission of budgets by independent centers, which is not a Federal requirement. The miscellaneous responsibilities currently listed under 7 CFR 226.6(f)(3)(iv) include additional reporting requirements for CACFP institutions. This final rule makes a corresponding change to remove the reapplication requirements under 7 CFR 226.6(f)(2) and move the responsibilities at other time intervals, listed under paragraph (f)(3), to paragraph (f)(2). Accordingly, as required by statute, this action amends 7 CFR 226.2, and 226.6(b) to require an initial application for new institutions and annual updates, as needed, for renewing institutions. A corresponding change is made at 7 CFR 226.6(f). This provision has been a standard operating practice for State agencies since 2011. The compliance date is September 22, 2023. 2. Timing of Unannounced Reviews Reviews are more effective at ensuring program integrity when they are unannounced and unpredictable. Section 17(d)(2)(B)(ii) of the NSLA requires sponsoring organizations to vary the timing of unannounced reviews in a manner that makes the reviews unpredictable to sponsored facilities. Current regulations require sponsoring organizations to conduct three reviews per year at each facility, two of which must be unannounced. One of the unannounced reviews must include observation of a meal service. No more than 6 months may elapse between reviews. However, there is no current regulatory requirement that the timing of those reviews must be varied. FNS issued CACFP 16-2011, Child Nutrition Reauthorization 2010: Varied Timing of Unannounced Reviews in the Child and Adult Care Food Program, on April 7, 2011, https://www.fns.usda.gov/cacfp/varied-timing-unannounced-reviews-child-and-adult, to advise State agencies of the new statutory requirement under HHFKA to ensure that the timing of unannounced reviews is varied in a way that would ensure they are unpredictable to the day care home or sponsored center. FNS included the requirements for the timing of unannounced reviews in the CACFP proposed rule for the public to review and comment on. FNS did not receive any substantive comments on this provision. This final rule adopts these changes by amending 7 CFR 226.16(d)(4)(iii) to require sponsoring organizations to vary both the timing of unannounced reviews and the types of meal service that are subject to review. This rulemaking also amends the review content at 7 CFR 226.6(m)(3) to add a requirement that the State agency assess the frequency, predictability, and type of each sponsoring organization's facility reviews. Effective monitoring of day care homes and sponsored centers will require sponsoring organizations to ensure that: • At least two of the three annual reviews are unannounced; • At least one unannounced review includes observation of a meal service; • At least one review is made during each new facility's first 4 weeks of program operations; • No more than 6 months elapse between reviews; • The timing of unannounced reviews is varied so that they are unpredictable to the facility; • All types of meal service are reviewed; and • The types of meal service reviewed are varied. Accordingly, this final rule amends 226.16(d)(4)(iii) to require sponsoring organizations to vary the timing of unannounced reviews and vary the type of meal service subject to review. A corresponding change is made at 7 CFR 226.6(m)(3)(ix) to require the State agency to assess the timing of each sponsoring organization's reviews of day care homes and sponsored centers. This provision has been a standard operating practice for sponsoring organizations and State agencies since 2011. The compliance date is September 22, 2023. 3. Standard Agreements Between Sponsoring Organizations and Sponsored Centers Section 17(j) of the NSLA requires State agencies to develop and provide for the use of a standard form of agreement between each sponsoring organization and day care home or sponsored center. Current regulations require the sponsoring organization to enter into a written permanent agreement with each sponsored day care home, which specifies the rights and responsibilities of both parties. However, there is no standard form of agreement and no requirement that sponsoring organizations establish agreements with sponsored centers. FNS included the requirements for standard operating agreements in the CACFP proposed rule for the public to review and comment on. FNS did not receive any substantive comments on this provision. FNS proposed establishing a standard form of agreement between sponsoring organizations and their sponsored centers at 7 CFR 226.16(h) that would specify the rights and responsibilities of each party. This final rule adopts the proposed terms of a standard agreement between a sponsoring organization and a child care center at 7 CFR 226.17, an at-risk afterschool care center at 7 CFR 226.17a, an outside-school-hours care center at 226.19, and an adult day care center at 226.19a. The standard agreement, described at 7 CFR 226.6(p), requires the center to: • Allow visits by sponsoring organizations or State agencies to review meal service and records; • Promptly inform the sponsoring organization about any change in its licensing or approval status; • Meet any State agency approved time limit for submission of meal records; and • Distribute to parents a copy of the sponsoring organization's notice to parents if directed to do so by the sponsoring organization. The standard agreement also establishes the right of centers to receive timely reimbursement from the sponsoring organizations for meals served. Consistent with the requirement under 7 CFR 226.16(h)(2), sponsoring organizations must pay program funds to child care centers, adult day care centers, emergency shelters, at-risk afterschool care centers, or outside-school-hours care centers within 5 working days of receipt from the State agency. FNS also proposed a corresponding amendment to define “Facility” under 7 CFR 226.2. In this final rule, facility means a sponsored center or day care home. FNS is finalizing a new definition of “Sponsored center”, as proposed, to mean a child care center, an at-risk afterschool care center, an adult day care center, an emergency shelter, or an outside-school-hours care center that operates CACFP under the auspices of a sponsoring organization. A sponsored center may be either affiliated—as part of the same legal entity as the CACFP sponsoring organization—or unaffiliated, which is legally distinct from the sponsoring organization. Accordingly, this final rule amends 7 CFR 226.6(p) and 226.17a(f) and adds new paragraphs at 226.17(e) and (f), 226.19(d) and (e), and 226.19a(d) and (e) to require sponsoring organizations to enter into permanent agreements with their unaffiliated centers. New definitions of “Facility” and “Sponsored center” are added under 7 CFR 226.2. This provision is a standard operating practice for sponsoring organizations. The compliance date is September 22, 2023. 4. Collection and Transmission of Household Income Information Section 17(f)(3)(A)(iii)(III)(dd) of the NSLA allows day care homes to assist in the transmission of necessary household income information to the sponsoring organization. Section 17(f)(3)(A)(iii)(III)(ee) directs the Secretary to develop policy specifying the written consent of parents and other conditions, which would allow day care home providers to assist in transmitting meal benefit forms from parents to the sponsoring organizations. Current regulations include procedures for families whose children are enrolled in family day care to provide household income information on meal benefit forms that are transmitted directly to the sponsoring organization. The sponsoring organization is responsible for informing tier II day care homes of all of their options for receiving reimbursement for meals served to enrolled children, including electing to have the sponsoring organization attempt to identify all income-eligible children enrolled in the day care home, through collection of meal benefit forms. The sponsoring organization must also ensure that free and reduced-price eligibility information of individual households is not available to day care homes. FNS issued CACFP 17-2011, Child Nutrition Reauthorization 2010: Transmission of Household Income Information by Tier II Family Day Care Homes in the Child and Adult Care Food Program, on April 7, 2011, https://www.fns.usda.gov/cacfp/transmission-household-income-information-tier-ii. This guidance describes how tier II family day care home providers may participate in the collection and transmission of household information. The guidance also outlines the options and privacy protections available to households. FNS included these options in the CACFP proposed rule for the public to review and comment on. FNS did not receive any substantive comments on this provision. This final rule adopts these options by amending the sponsoring organization's responsibility under 7 CFR 226.18(b)(13) to allow tier II day care homes to assist in collecting meal benefit forms from households and transmitting the forms to the sponsoring organization on the household's behalf. It is important to emphasize that this is an option available to day care home providers and households. The State agency or sponsoring organization cannot require day care homes to collect and transmit this information. Households cannot be required to return their meal benefit forms directly to the provider. The sponsoring organization is also responsible for establishing procedures that prohibit a day care home provider who chooses this option from reviewing or altering the information on the meal benefit form. This rule finalizes a new paragraph at 7 CFR 226.23(e)(2)(vii) as proposed with minor clerical adjustments to further require the sponsoring organizations to protect the privacy of a household's income information. Households of children enrolled in tier II day care homes that elect this option must give their consent for the collection and transmission of their information. The household must be advised that: • The household is not required to complete the meal benefit form in order for a child to participate in CACFP; • The household may return the meal benefit form to either the sponsoring organization or the day care home provider; • By signing the letter and giving it to the day care home provider, the household has given the day care home provider written consent to collect and transmit the household's application to the sponsoring organization; and • The meal benefit form will not be reviewed by the day care home provider. Accordingly, this final rule adds a new paragraph at 7 CFR 226.18(b)(13) to add the right of the tier II day care home to assist in collecting and transmitting applications to the sponsoring organizations and prohibit the provider from reviewing applications from households. This final rule also adds a new paragraph at 7 CFR 226.23(e)(1)(vii) to address household consent and actions to protect the privacy of a household's income information. This provision has been a standard operating practice for sponsoring organizations of day care homes since 2011. The compliance date is September 22, 2023. 5. Calculation of Administrative Funding for Sponsoring Organizations of Day Care Homes Section 17(f)(3)(B)(i) of the NSLA authorizes reimbursement for administrative expenses of sponsoring organizations of day care homes and applies a formula for calculating the amount of administrative reimbursement a sponsoring organization may receive. As amended by HHFKA, section 17(f)(3) of the NSLA by eliminating the “lesser of” cost and budget comparison for calculating administrative payments to sponsoring organizations of day care homes, as defined under current regulations at 7 CFR 226.12(a). Under current regulations, the State agency determines administrative reimbursement by calculating and paying the “lesser of” actual administrative costs, budgeted administrative costs, or an amount established by a formula. FNS issued CACFP 06-2011, Child Nutrition Reauthorization 2010: Administrative Payments to Family Day Care Home Sponsoring Organizations, on December 22, 2010, https://www.fns.usda.gov/cacfp/2010-administrative-payments-family-day-care-home, to advise State agencies that a simpler method for determining monthly administrative payments had been established by HHFKA. Effective October 1, 2010, the sponsoring organization's monthly payment would be based on the statutory formula that would no longer require a comparison with actual expenditures or budgeted administrative costs. FNS included the requirements for calculating administrative payments in the CACFP proposed rule for the public to review and comment on. FNS did not receive any substantive comments on this provision. This final rule adopts this change by amending 7 CFR 226.12(a) to establish that administrative costs payments are determined only by multiplying the appropriate administrative reimbursement rate by the number of day care homes submitting claims for reimbursement during the month. Administrative reimbursement rates are announced annually in the Federal Register . Sponsoring organizations are still required to submit annual budgets and remain responsible for correctly accounting for costs and maintaining records and sufficient supporting documentation to demonstrate that the claimed costs were incurred, are allocable to the program, and comply with Federal regulations and policies. State agencies must continue to recover reimbursements that are unallowable or that lack adequate documentation. However, the expenditures for administrative costs, the amount of costs approved in the administrative budget, and the 30 percent restriction on the total amount of administrative payments and food service payments for day care home operations no longer apply in determining the sponsoring organization's monthly payment. Accordingly, this final rule amends 7 CFR 226.12(a) to simplify the calculation of monthly administrative reimbursement that sponsoring organizations of day care homes are eligible to receive. To determine the amount of payment, the State agency must multiply the appropriate administrative reimbursement rate, which is announced annually in the Federal Register , by the number of day care homes submitting claims for reimbursement during the month. This provision has been a standard operating practice for State agencies since 2010. The compliance date is September 22, 2023. 6. Carryover of Administrative Funding for Sponsoring Organizations of Day Care Homes Section 17(f)(3)(B)(iii) of the NSLA, as amended by HHFKA, directs the Secretary to develop procedures under which up to 10 percent of a sponsoring organization's administrative funds may remain available for obligation or expenditure in the succeeding fiscal year. It allows sponsoring organizations to carry over up to 10 percent of their administrative payments from the previous fiscal year into the next fiscal year. There is no provision for carryover of administrative payments in current regulations. FNS issued a memorandum, CACFP 18-2011 Child Nutrition Reauthorization 2010: Carry Over of Unused Child and Adult Care Food Program Administrative Payments, on April 8, 2011, https://www.fns.usda.gov/cacfp/carry-over-unused. FNS advised State agencies of the option available to sponsoring organizations of day care homes to carry over up to 10 percent of unspent administrative reimbursement from the current Federal fiscal year to the next fiscal year. FNS issued additional guidance, CACFP 11-2012, Family Day Care Home Administrative Reimbursements: Options and Carryover Reporting Requirements, on March 19, 2012, https://www.fns.usda.gov/cacfp/family-day-care-home-administrative-reimbursements-options-and-carryover-reporting, and CACFP 24-2012: REVISED, Family Day Care Home Administrative Reimbursements: Carryover Reporting Requirements for Fiscal Year 2012 and All Subsequent Years, on September 5, 2012, https://www.fns.usda.gov/cacfp/family-day-care-home-administrative-reimbursements-carryover-reporting-requirements-fy-2012. These memoranda provided clarification of options regarding administrative reimbursements and the management of unspent funds that may be carried over from the current Federal fiscal year to the next fiscal year. They also described procedures for reporting administrative funds under a 2-year period of performance. FNS included the requirements allowing sponsoring organizations of day care homes to carry over administrative funding in the CACFP proposed rule for the public to review and comment on. FNS did not receive any substantive comments on this provision. This final rule amends 7 CFR 226.12(a) to allow a sponsoring organization to carry over and obligate a maximum of 10 percent of administrative funds into the succeeding fiscal year, with State agency approval. Corresponding amendments at 7 CFR 226.6(f)(1)(iv), 226.7(g) and 226.7(j), require State agencies to ensure that: • The annual budget that is submitted for the State agency's review and approval includes an estimate of the sponsoring organization's requested administrative fund carryover amounts and a description of the proposed purpose for obligating or expending those funds; • An amended budget, which identifies the amount of administrative funds that the sponsoring organization actually carried over and describes the purpose, is submitted for the State agency's review and approval as soon as possible after fiscal year close-out; • The review of the sponsoring organization's administrative costs includes a review of the documentation supporting carryover requests, obligations, and expenditures; and • Procedures are established to recover any administrative funds that exceed 10 percent of that fiscal year's administrative payments, and any carryover amount that is not expended or obligated by the end of the fiscal year following the fiscal year in which the funds were earned. Administrative funds remaining at the end of the fiscal year must be returned to the State agency. If any remaining carryover funds are not obligated or expended by the sponsoring organization in the succeeding fiscal year, the sponsoring organization is required to return the remaining funds to the State agency. A sponsoring organization can avoid that situation by using its payments for administrative costs on a first-in-first-out basis. Sponsoring organizations are not required to carry over any unspent funds. They may, at their option, return them to the State agency. The sponsoring organization also has the option to request that the State agency base administrative payments on the sponsoring organization's actual expenses. However, sponsoring organizations receiving administrative payments based upon actual expenses are not permitted to carry over funds into the next fiscal year. Accordingly, this final rule amends 7 CFR 226.6(f)(1)(iv) and adds new paragraphs at 226.7(g)(2) and 226.12(a)(3) to allow carryover of administrative funds with State agency approval. This rulemaking also amends 7 CFR 226.7(j) and adds a new paragraph 226.12(a)(4) to require the State agency to establish procedures to recover administrative funds from sponsoring organizations of day care homes that are not properly payable, are in excess of the 10 percent maximum carryover amount, or any carryover amounts not expended or obligated by the end of the fiscal year following the fiscal year in which they were earned. This provision has been a standard operating practice for sponsoring organizations and State agencies since 2011. The compliance date is September 22, 2023. III. Simplifying Monitoring in NSLP and SBP A. Background State agencies are responsible for regularly monitoring SFA operations in NSLP and SBP, in addition to providing training and technical assistance. Since School Year 2013-2014, the unified administrative review process has provided State agencies with a comprehensive process for evaluating compliance with program requirements. It includes a review of an SFA's financial practices, compliance with nutrition standards, and a review of program operations to ensure compliance with Federal regulations. This final rule provides a means for FNS to amend the administrative review process. State agencies and SFAs have called on FNS to streamline requirements so that they could more effectively direct their resources to their core mission of serving nutritious meals to children. FNS looked for opportunities to reduce administrative burden addressing findings from USDA's Child Nutrition Reporting Burden Analysis Study, released in 2019, https://www.fns.usda.gov/child-nutrition-reporting-burden-analysis-study, in a responsible way, while giving consideration to local resource constraints. In a proposed rule, Simplifying Meal Service and Monitoring Requirements in the National School Lunch and School Breakfast Programs, 85 FR 4094, on January 23, 2020, https://www.fns.usda.gov/nslp/fr-012120, FNS suggested a number of discretionary changes to streamline the administrative review, without compromising State agency and SFA efforts to maintain accountability and integrity. Through this final rule, FNS is taking action to codify the proposed changes to monitoring. These amendments will give State agencies greater flexibility, eliminate redundancy, and target limited State resources to higher risk SFAs. This rulemaking includes amendments to: • Allow State agencies to return to a 5-year administrative review cycle and require State agencies that conduct reviews on a longer than 3-year cycle to identify high-risk SFAs for additional oversight at 7 CFR 210.18(c); • Give State agencies flexibility to substitute information from local-level audits for related parts of the administrative review, at 7 CFR 210.18(f)(3); • Reduce the performance-based reimbursement reporting requirement, from quarterly to annually, by removing 7 CFR 210.5(d)(2)(ii) and 210.7(d)(1)(vii) and (d)(2), which are obsolete; • Allow State agencies to omit specific elements of the administrative review, when equivalent oversight activities are conducted outside of the administrative review process, at 7 CFR 210.18(f), (g), and (h); • Adopt a framework that State agencies may elect to modify the administrative review if the State agency or SFA adopts the specified integrity-focused improvements, at 7 CFR 210.18(f), (g), and (h); • Give State agencies flexibility to conduct the assessment of an SFA's nonprofit school food service account at any point in the review process, at 7 CFR 210.18(h)(1); • Include compliance with the Buy American requirement as part of the general areas of the administrative review, at 7 CFR 210.18(b) and (h)(2); • Removes requirement for required fiscal action against SFAs for repeated violations of meal pattern noncompliance, at 7 CFR 210.18(l)(2); and • Allow State agencies to conduct the FSMC review on a 5-year cycle, at 7 CFR 210.19(a)(5). FNS received 57,248 public comments on the proposed rule. Nearly all of the comments were submitted in response to proposed amendments related to school meal nutrition standards, which are not addressed in this final rule but are instead addressed in a separate rulemaking. The comments are posted at http://www.regulations.gov under docket ID FNS-2019-0007, Simplifying Meal Service and Monitoring Requirements in the National School Lunch and School Breakfast Programs. Although less than 150 respondents addressed any of the proposed changes to monitoring under the [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2023-17992. Public record. Not legal advice.