Serious Deficiency Process in the Child and Adult Care Food Program and Summer Food Service Program

DEPARTMENT OF AGRICULTURE

Food and Nutrition Service

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

[FNS-2024-0005]

RIN 0584-AE83

Serious Deficiency Process in the Child and Adult Care Food Program and Summer Food Service Program

AGENCY:

Food and Nutrition Service (FNS), USDA.

ACTION:

Proposed rule.

SUMMARY:

This rulemaking proposes important modifications to make the application of serious deficiency procedures in the Child and Adult Care Food Program and Summer Food Service Program consistent, effective, and in line with current requirements under the Richard B. Russell National School Lunch Act. The serious deficiency process provides a systematic way for State agencies and sponsoring organizations to correct serious management problems, and when that effort fails, protect Child Nutrition Program integrity through due process. In response to public comments received on a prior rulemaking, the Food and Nutrition Service (FNS) proposes improvements to ensure that application of the serious deficiency process is fair and fully implemented. FNS proposes to add clarity to the serious deficiency process by defining key terms, establishing a timeline for full correction, and establishing criteria for determining when the serious deficiency process must be implemented. This rulemaking will also address termination for cause and disqualification, implementation of legal requirements for records maintained on individuals on the National Disqualified List, and participation of multi-State sponsoring organizations.

DATES:

Written comments must be received on or before May 21, 2024 to be assured of consideration.

ADDRESSES:

Federal eRulemaking Portal:

Go to

https://www.regulations.gov.

Follow the online instructions for submitting comments.

Mail:

Send comments to: Navneet Kaur Sandhu, Program Integrity and Innovation Division, USDA Food and Nutrition Service, 1320 Braddock Place, Alexandria, VA 22314.

All written comments submitted in response to the provisions of this proposed rule will be included in the record and will be made available to the public. Please be advised that the substance of the comments and the identity of the individuals or entities submitting the comments will be subject to public disclosure. USDA will make the written comments publicly available on the internet via

https://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT:

Navneet Kaur Sandhu, Program Integrity and Innovation Division, USDA Food and Nutrition Service, 703-305-2728,

navneet.sandhu@usda.gov.

SUPPLEMENTARY INFORMATION:

I. Background

II. Section-By-Section Discussion of the Regulatory Provisions

A. Child and Adult Care Food Program (CACFP)

1. The CACFP Serious Deficiency Process

2. Oversight and Implementation of the Serious Deficiency Process in Institutions

3. Oversight and Implementation of the Serious Deficiency Process in Day Care Homes and Unaffiliated Sponsored Centers

B. Summer Food Service Program (SFSP)

1. Applying the Serious Deficiency Process to SFSP

2. Oversight and Implementation of the Serious Deficiency Process in SFSP

C. Suspension

D. Disqualification and the National Disqualified List

1. Termination for Cause and Disqualification

2. Reciprocal Disqualification in Child Nutrition Programs

3. Legal Requirements for Records Maintained on Disqualified Individuals

E. Multi-State Sponsoring Organizations

F. Summary of Regulatory Provision Proposals

III. Procedural Matters

A. Executive Orders 12866, 13563 and 14094

B. Regulatory Flexibility Act

C. Unfunded Mandates Reform Act

D. Executive Order 12372

E. Federalism Summary Impact Statement

F. Executive Order 12988, Civil Justice Reform

G. Civil Rights Impact Analysis

H. Executive Order 13175

I. Paperwork Reduction Act

J. E-Government Act Compliance

I. Background

Integrity is essential to meeting the mission of all Child Nutrition Programs. To improve program operations, the Food and Nutrition Service (FNS) works in close collaboration with State and local partners. In the Child and Adult Care Food Program (CACFP), State agencies are responsible for approving and monitoring institutions—independent child and adult care centers and sponsoring organizations of family day care homes and centers—to maintain program integrity and ensure compliance with program requirements. State agencies have a similar responsibility for oversight of sponsors in the Summer Food Service Program (SFSP).

More than 20 years ago, FNS established a system for protecting CACFP against the incidence of mismanagement, abuse, and fraud by institutions and facilities participating in the program. The serious deficiency process was implemented in response to Federal reviews that revealed critical weaknesses in State agency and institution management controls over program operations. The reviews uncovered examples of regulatory noncompliance by institutions and facilities, including improper use of program funds, inadequate financial and administrative controls, and documented instances of mismanagement and, in some cases, fraud, by program participants.

These findings raised questions regarding Federal and State administration of CACFP that led to increased focus on program management and integrity in CACFP. The Agricultural Risk Protection Act of 2000, Public Law 106-224, established statutory requirements under section 17 of the Richard B. Russell National School Lunch Act (NSLA), at 42 U.S.C. 1766(d)(5), for terminating or suspending participating institutions and day care home providers. The Grains Standards and Warehouse Improvement Act of 2000 and Healthy Hunger-Free Kids Act of 2010, Public Laws 106-472 and 111-296, respectively, further amended those provisions.

In response to the Federal reviews, FNS published guidance to help State agencies implement the statutory requirements relating to a serious deficiency determination, corrective action, suspension, termination, and disqualification of institutions and responsible principals and responsible individuals in CACFP. FNS implemented these as requirements through publication of the

Child and Adult Care Food Program; Implementing Legislative Reforms to Strengthen Program Integrity

interim rule, 67 FR 43447, June 27, 2002; and

Child and Adult Care Food Program Improving Management and Integrity

final rule, 76 FR 34542, June 13, 2011. These rulemakings established a serious deficiency process at 7 CFR 226.6 and 226.16 that requires a process for addressing severe and pervasive problems, with a structured series of steps that give CACFP institutions and day care homes the opportunity for corrective action and due process.

To protect program integrity, these rulemakings implemented procedures that would correct problems in a timely manner. That is why there are corrective action timeframes for completion of corrective action and milestones for monitoring progress towards meeting the deadline. The serious deficiency process for CACFP starts when the State agency identifies a serious problem and concludes when that serious problem is resolved, either through corrective action or by termination and disqualification. The regulations identify lists of serious deficiencies and describe corrective action, termination, and disqualification procedures.

The current CACFP serious deficiency process at 7 CFR 226.6(c) includes procedures to help the State agency document the case to terminate and disqualify non-performing CACFP institutions that are unwilling to or incapable of resolving their serious deficiencies. The process also includes procedures to provide seriously deficient institutions the opportunity to appeal the State agency's adverse actions and to continue to receive payments of valid claims while they receive a fair hearing. CACFP sponsoring organizations implement a similar process to correct serious problems of noncompliance in day care homes, as described in 7 CFR 226.16(l).

Until enactment of the Healthy, Hunger-Free Kids Act of 2010 (HHFKA), there were no corresponding statutory requirements for implementing a serious deficiency process for SFSP. However, through HHFKA, Congress established requirements relating to the termination of participation of service institutions which included maintaining a list of disqualified service institutions and individuals. The regulations under 7 CFR 225.6(h) specify criteria State agencies must consider when approving sites for participation; provide authority for the State agency to terminate sponsor participation at 7 CFR 225.11(c); and establish procedures for sponsors to appeal adverse actions, including termination of a sponsor or site and denial of an application for participation, at 7 CFR 225.13. However, SFSP regulations do not currently reflect the statutory requirement to disqualify service institutions and individuals that are seriously deficient from participating in SFSP, or any other Child Nutrition Program, the provision for a fair hearing and prompt determination, or placement on a list of disqualified institutions and individuals.

In developing the proposed rule,

Child Nutrition Program Integrity,

81 FR 17563, March 29, 2016, FNS applied existing serious deficiency requirements to establish a serious deficiency process for service institutions and individuals,

i.e.,

sponsors and sites in SFSP and unaffiliated child care centers and unaffiliated adult day care centers in CACFP. To strengthen management practices and eliminate gaps that put program integrity at risk, FNS proposed amendments that would:

• Extend the serious deficiency process to unaffiliated centers in CACFP;

• Implement a serious deficiency process in SFSP;

• Require each SFSP State agency to provide appeal procedures to sponsors, annually and upon request;

• Specify the types of adverse actions that cannot be appealed in SFSP;

• Establish a list of disqualified institutions and individuals 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 the State agency to deny the application of any applicant that has been terminated for cause from any Child Nutrition Program or placed on a CACFP or SFSP list of disqualified institutions and individuals;

• Require the State agency to terminate an agreement whenever a program operator's participation ends; and

• Require action by the State agency to terminate an agreement for cause, through the serious deficiency process or placement on list of disqualified institutions and individuals.

FNS also published a notice,

Request for Information: The Serious Deficiency Process in the Child and Adult Care Food Program,

84 FR 22431, May 17, 2019, to gather information to help FNS understand firsthand the experiences of State agencies and program operators. An analysis of the comments on the proposed rule and responses to the notice convinced FNS that important modifications were needed to make the application of the serious deficiency process consistent and effective, and to ensure it is in line with current statutory requirements.

On August 23rd, 2023, FNS published the

Child Nutrition Program Integrity

final rule, 88 FR 57792, which codifies changes required under HHFKA to strengthen administration of Child Nutrition Programs, at all levels, through enhanced oversight and enforcement tools. As proposed, the Child Nutrition Program Integrity final rule included amendments related to serious deficiency and termination procedures in SFSP, serious deficiency and termination procedures for unaffiliated sponsored centers in CACFP, and reciprocal disqualification of applicants terminated for cause and placed on the National Disqualified List. However, FNS received comments expressing concern about using the CACFP serious deficiency process as a model for establishing procedures in other Child Nutrition Programs. The comments suggested that FNS further investigate and attempt to address potential inconsistencies in implementation of the serious deficiency process among States. Ultimately, FNS agreed that further changes from what was proposed in the

Child Nutrition Program Integrity

rule are needed to improve the serious deficiency process and ensure its application is fair and fully implemented. Instead of finalizing the proposed rule as it related to the serious deficiency process, FNS decided to pursue a separate rulemaking in order to consider improvements to the serious deficiency process before extending serious deficiency, termination, and disqualification procedures to SFSP.

To better serve administering agencies and program operators, this proposed rule is intended to make the application of the serious deficiency process for CACFP and SFSP consistent, effective and in line with current statutory requirements. FNS proposes improvements to ensure that the serious deficiency process is fair, equitable, and effective. This new rulemaking proposes amendments to CACFP and SFSP regulations that are designed to increase program operators' accountability and operational efficiency, while improving the ability of administering agencies to address severe or repeated violations of Federal requirements.

While minimizing changes to procedures, FNS proposes to add clarity to the serious deficiency process by defining key terms, establishing a timeline for full correction, and establishing criteria for determining when the serious deficiency process must be implemented. This proposed rule also addresses agreements that are terminated for cause, disqualification from participation in CACFP or SFSP, reciprocal disqualification from any Child Nutrition Program, legal requirements for records maintained on individuals on the National Disqualified List, and participation of multi-State sponsoring organizations.

This rulemaking also re-examines the concept of good standing in light of recent rulemaking. The final rule,

Streamlining Program Requirements and Improving Integrity in the Summer

Food Service Program (SFSP),

87 FR 57304, September 19, 2022, established that a program operator would be considered in “good standing” if it were reviewed by the State agency with no major program findings or it had completed and implemented all corrective actions from the last compliance review. Good standing reflects a program operator's status and is considered by State agencies as a factor when making decisions around frequency of reviews. Therefore, FNS recognized that providing further clarification to determine what good standing means across all Child Nutrition Programs would benefit State agencies and program operators. This proposed rule would define the status of good standing as a program operator that meets its program responsibilities, is current with its financial obligations, and, if applicable, has fully implemented all corrective actions within the required period of time. This would serve as a general definition that would apply to all program operators across Child Nutrition Programs and would be added to 7 CFR 210.2, 215.2, 220.2, 225.2, and 226.2.

FNS also proposes to reorganize the CACFP and SFSP regulations to improve readability and reduce duplication of information in the serious deficiency process. For CACFP, references to program operations that are seriously deficient and corresponding requirements pertaining to appeals, suspension of participation, termination of agreements, and disqualification are found in multiple sections of existing regulations. This proposed rule would move these requirements into a new single subchapter under 7 CFR 226.25. The other provisions described under 7 CFR part 226, subpart G would be renumbered to correspond with this proposed change. FNS also proposes to reorganize SFSP regulations by collecting all provisions of the serious deficiency process under a single subchapter at 7 CFR 225.18 and renumbering the other sections of 7 CFR part 225, subpart D.

This proposed rule gives the public the opportunity to provide comments that will inform the development of a final rule on the oversight and implementation of the serious deficiency process in CACFP and SFSP. FNS will consider all relevant comments submitted during the 60-day comment period for this rulemaking. FNS invites the public to submit comments on all aspects of this proposed rule, including comments in response to specific program changes that are found throughout this preamble and alternatives that are suggested for certain provisions. FNS also invites comments from administering agencies and program operators on the administrative cost of compliance and the potential impact on program access of any of the provisions in this rulemaking.

Please select those issues that most concern and affect you, or that you best understand, and include examples of how the proposed rule would impact you, positively or negatively. Consider what could be done to foster incentives for flexibility, consistency, eliminating duplication, ensuring compliance, and protecting program integrity. Your written comments should be specific to the issues raised in this proposed rule and explain the reasons for any changes you recommend or proposals you oppose. Where possible, please reference the specific section or paragraph of the proposal you are addressing and whether the concern is related to either CACFP or SFSP, or both.

II. Section-By-Section Discussion of the Regulatory Provisions

A. Child and Adult Care Food Program (CACFP)

1. The CACFP Serious Deficiency Process

Defining Serious Deficiency

Underlying the concerns of the serious deficiency process is the broader, systemic issue of what constitutes a serious deficiency and how State agencies and sponsoring organizations should utilize the serious deficiency process as an effective tool in managing program operations. Public comments that FNS has received in response to previous rulemakings and informal feedback from CACFP professionals and advocates consistently point out that the lack of defined terminology confuses program administrators and contributes to errors in responding to serious management problems. Before extending the serious deficiency process to unaffiliated centers or establishing a process for SFSP, these stakeholders asked FNS to define terms in 7 CFR 226.2 that align with the statutory structure and are consistent across CACFP and SFSP.

As explained in the

Child and Adult Care Food Program; Implementing Legislative Reforms to Strengthen Program Integrity

interim rule, prior to 2002, the term “serious deficiency” was used to describe program performance at two very different stages of an oversight process. In the first instance, an institution failing to perform under the terms of its agreement was notified by its State agency that it was seriously deficient in its operation of CACFP and was given an opportunity to take corrective action. Later, if the institution failed to take corrective action during the specified time, its agreement was terminated by the State agency and the institution was placed on a list of seriously deficient institutions. The use of the same term in both instances, as stakeholders pointed out, caused confusion for State agencies and institutions.

The concept of serious deficiency changed when the first interim rule addressing management improvement and oversight,

Child and Adult Care Food Program; Implementing Legislative Reforms to Strengthen Program Integrity,

67 FR 43447, June 27, 2002, was published. This interim rule amended 7 CFR 226.2 to define seriously deficient as “the status of an institution or a day care home that has been determined to be non-compliant in one or more aspects of its operation of the program.” Serious deficiency is a larger concept in that it reflects the situation before the opportunity for corrective action or the right to appeal is exercised by an institution. In the interim rule preamble, FNS attempted to explain this concept, emphasizing that the serious deficiency process should refer to every action that happens after a serious deficiency is declared, beginning with the determination of the finding, and ending with full and permanent resolution or disqualification.

Although current CACFP regulations define “seriously deficient,” other terms that affect implementation of the current serious deficiency process are not clearly defined. For example, there is no corresponding definition of “serious deficiency” under 7 CFR 226.2. The regulations do not clearly define standards for determining the severity of a problem identified as a finding and when that finding rises to the level of a serious deficiency. The regulations are also ambiguous with regard to differentiating between occasional administrative errors and systemic management problems. Some terms have multiple connotations—for example, administrative review may mean a fair hearing or it may mean an evaluation of program operations—while other terms, such as good standing, are vague or subjective. As public comments and stakeholder feedback have revealed, these gaps have long been of concern to the CACFP community.

Under this proposed rule, the findings that trigger the serious deficiency

process would be defined as serious management problems, which are currently known as serious deficiencies. This term appears in section 17 of the NSLA, at 42 U.S.C. 1766(d), which requires State agencies to conduct more frequent reviews of any institution that has serious management problems or is at risk of having serious management problems. The proposed definition characterizes a serious management problem as the type of administrative weakness that affects an institution's ability to meet CACFP performance standards—financial viability, administrative capability, and program accountability—or that affects the quality of meals served or the integrity of a claim for reimbursement in a day care home or center. For example, a sponsoring organization that operates a variety of community programs may be at risk of serious management problems if it has limited staffing to support program operations or is devoting too small of a share of administrative resources to CACFP. More frequent monitoring by the State agency and sponsoring organization would help improve CACFP operations by identifying and addressing these weaknesses. However, if these measures are not effective, the State agency would have to apply the serious deficiency process to require the sponsoring organization to take specific corrective actions to protect program integrity.

FNS proposes that the serious deficiency process provide program operators with the opportunity to correct serious management problems through a corrective action plan. Institutions would develop corrective action plans to identify the steps they will take to correct serious management problems, or serious deficiencies as they are known under the current process.

Prior to 2011, serious deficiencies were “rescinded” when an institution's corrective action plan was approved. Unfortunately, rescinding the serious deficiency that early in the process often resulted in later reviews that demonstrated the serious deficiency had not been corrected, or that the corrective action left institutions vulnerable to other serious deficiencies. As a result, FNS changed the process to temporarily defer a finding of serious deficiency. In current regulations at 7 CFR 226.6(c)(1)(iii)(B), (c)(2)(iii)(B), and (c)(3)(iii)(B), the State agency is required to temporarily defer the institution's serious deficiency. However, under this process, institutions were never able to have their serious deficiency status removed, even after years of reviews with no additional findings. Through this rulemaking, changing the serious deficiency determination to occur at the point of termination aligns the regulations with statute at section 17 of the NSLA, at 42 U.S.C. 1766(a), which asserts that an institution that has been seriously deficient in operating any Child Nutrition Program cannot be eligible to participate in CACFP.

Terms under the current serious deficiency process have led to confusion. The term “fully and permanently corrected” lacks clarity, particularly in cases where the same findings reoccur and the program operator's agreement is proposed to be terminated. The term “permanent” is contradictory as it assumes that the same findings cannot arise again, regardless of the amount of time that has passed since the initial findings. The term “temporarily deferred” is confusing and the existing process does not establish limits on the duration of the deferment after corrective actions have taken place. Instead, this proposed rule would create a path to full correction within a defined period of time. When achieved, the serious management problem would be vacated, not deferred. If the same finding occurs after full correction is achieved, it will not lead directly to proposed termination.

FNS recognizes that clearly defined terminology is essential to fully understand and correctly implement the serious deficiency process. FNS proposes to amend 7 CFR 226.2 to clarify existing terms, remove terms that are confusing, and add definitions to terms that had not previously been defined in the regulations. This proposed rule includes the following list of terms that relate to proposed modifications to the serious deficiency process described in this rulemaking:

• Contingency plan

means the State agency's written process for the transfer of sponsored centers and day care homes that will help ensure that program meals for children and adult participants will continue to be available without interruption if a sponsoring organization's agreement is terminated.

• Corrective action

means implementation of a solution, written in a corrective action plan, to address the root cause and prevent the recurrence of a serious management problem.

• Disqualified

means the status of an institution, facility, responsible principal, or responsible individual who is ineligible for participation in the program.

• Fair hearing

means due process provided upon request to:

○ An institution that has been given notice by the State agency of an action that will affect participation or reimbursement under the program;

○ A principal or individual responsible for an institution's serious management problem and issued a notice of proposed termination and proposed disqualification from program participation; or

○ An individual responsible for a day care home or unaffiliated center's serious management problem and issued a notice of proposed disqualification from program participation.

• Finding

means a violation of a regulatory requirement identified during a review.

• Fiscal action

means the recovery of an overpayment or claim for reimbursement that is not properly payable through direct assessment of future claims, offset of future claims, disallowance of overclaims, submission of a revised claim for reimbursement, or disallowance of funds for failure to take corrective action to meet program requirements.

• Full correction

means the status achieved after a corrective action plan is accepted and approved, all corrective actions are fully implemented, and no new or repeat serious management problem is identified in subsequent reviews, as described in proposed § 226.25(c).

• Good standing

means the status of a program operator that meets its program responsibilities, is current with its financial obligations, and if applicable, has fully implemented all corrective actions within the required period of time.

• Hearing official

means an individual who is responsible for conducting an impartial and fair hearing—as requested by an institution, responsible principal, or responsible individual responding to a proposal for termination—and rendering a decision.

• Lack of business integrity

means the conviction or concealment of a conviction for fraud, antitrust violations, embezzlement, theft, forgery, bribery, falsification or destruction of records, making false statements, receiving stolen property, making false claims, or obstruction of justice.

• Legal basis

means the lawful authority established in statute or regulation.

• National Disqualified List

(NDL) means a system of records, maintained by the Department, of institutions, responsible principals, and responsible individuals disqualified from participation in the program.

• Notice

means a letter sent by certified mail, return receipt (or the equivalent private delivery service), by

facsimile, or by email, that describes an action proposed or taken by a State agency or FNS with regard to an institution's program reimbursement or participation. Notice also means a letter sent by certified mail, return receipt (or the equivalent private delivery service), by facsimile, or by email, that describes an action proposed or taken by a sponsoring organization with regard to a day care home or unaffiliated center's participation.

• Program operator

means any entity that participates in one or more Child Nutrition Programs.

• Responsible individual

means any individual employed by, or under contract with an institution or facility, or any other individual, including uncompensated individuals, who the State agency or FNS determines to be responsible for an institution or facility's serious management problem.

• Responsible principal

means any principal, as described in this section, who the State agency or FNS determined to be responsible for an institution's serious management problem.

• Review cycle

means the frequency and number of required reviews of institutions and facilities.

• Serious management problem

means the finding(s) that relates to an institution's inability to meet the program's performance standards or that affects the integrity of a claim for reimbursement or the quality of meals served in a day care home or center.

• Seriously deficient

means the status of an institution or facility after it is determined that full corrective action will not be achieved and termination for cause is the only appropriate course of action.

• State agency list

means an actual paper or electronic list, or the retrievable paper records, maintained by the State agency, that includes information on institutions and day care home providers or unaffiliated centers through the serious deficiency process in that State. The list must be made available to FNS upon request and must include information specified in proposed § 226.25(b).

• Termination for cause

means the termination of a program agreement due to considerations related to an institution or a facility's performance of program responsibilities under the agreement between:

○ A State agency and the independent center,

○ A State agency and the sponsoring organization,

○ A sponsoring organization and the unaffiliated center, or

○ A sponsoring organization and the day care home.

Accordingly, this proposed rule would define additional terms under 7 CFR 226.2 by defining contingency plan, corrective action, fair hearing, finding, fiscal action, full correction, good standing, hearing official, lack of business integrity, legal basis, responsible individual, responsible principal, review cycle, and serious management problem. Definitions of disqualified, National Disqualified List, notice, seriously deficient, State agency list, and termination for cause that are currently listed under 7 CFR 226.2 would be amended. Definitions of administrative review, administrative review official, and the combined term, “responsible principal or responsible individual” would be removed from 7 CFR 226.2.

Current Requirements of the CACFP Serious Deficiency Process

Historically, the CACFP serious deficiency process established a systematic way for an administering agency—a State agency or sponsoring organization—to correct problems and protect program integrity. Serious deficiency, termination, and disqualification procedures already exist for institutions, day care homes, responsible principals, and responsible individuals in CACFP under section 17 of the NSLA, 42 U.S.C. 1766(d)(5), and codified in regulations at 7 CFR 226.6(c), 226.6(k), 226.6(l), and 226.16(l).

These procedures give institutions and day care homes the opportunity for corrective action and due process. They are also designed to help administering agencies (State agencies and sponsoring organizations) document the case to terminate and remove from CACFP any program operator that is unwilling or incapable of resolving serious deficiencies that place program integrity at risk. Current CACFP regulations allow only two possible outcomes of the serious deficiency process, either the correction of the serious deficiency to the administering agency's satisfaction within stated timeframes, or the administering agency's proposed termination of the agreement and disqualification of the program operator and its responsible principals and responsible individuals. However, even when the serious deficiency is corrected, it is still only temporarily deferred.

Current §§ 226.6(c) and 226.16(l) describe steps that start when the administering agency identifies a serious deficiency and end when that finding of serious deficiency has been resolved, either through corrective action or termination and disqualification. FNS has provided guidance for administering agencies on the serious deficiency process, including steps in the

Serious Deficiency, Suspension, and Appeals for State Agencies and Sponsoring Organizations

handbook. These steps include that the administering agency:

1.

Identify a finding that rises to the level of serious deficiency.

There are several factors to consider in deciding that a program finding is a serious deficiency, including the severity of the problem, the degree of responsibility attributable to the program operator, the program operator's past performance and training, the nature of the requirements that relate to the problem, and the degree to which the problem impacts program integrity.

2.

Issue a notice of a serious deficiency.

A formal notice must provide information to the program operator, responsible principals, and responsible individuals that explains all of the cited findings, describes the actions required to fully and permanently correct the serious deficiencies, and provide a definite and appropriate time limit for the corrective action to be implemented.

3.

Receive and assess a written corrective action plan.

The program operator must submit a corrective action plan that describes what actions and management controls have been implemented to address each serious deficiency. The administering agency must evaluate the plan to determine that actions taken to correct each serious deficiency are adequate and that management controls are in place to ensure that the serious deficiencies are fully and permanently corrected.

4.

Issue a notice of temporary deferral of the serious deficiency or a notice of proposed termination and disqualification.

If the program operator submits a corrective action plan that satisfactorily corrects the serious deficiencies within the allotted period of time, the serious deficiency determination is temporarily deferred. The administering agency issues a notice to advise the responsible principals and or responsible individuals that the corrective action is successful and the serious deficiency determination is temporarily deferred. If it is later, at any time, determined that the serious deficiency has recurred, the administering agency must immediately issue a new notice of proposed termination and disqualification. If no corrective action plan is submitted or if the corrective action is not permanent or not adequate, the administering agency

issues a notice of proposed termination for cause and disqualification with appeal rights and procedures.

5.

Provide an appeal of the proposed termination and disqualification if requested by the program operator.

An institution and its responsible principals and responsible individuals may request an in person hearing or an administrative review of documents to determine whether the State agency's actions comply with program requirements. A day care home also has the right to appeal a proposed termination through an administrative review of documents. The day care home may review the record on which the termination decision was based and refute the action in writing. The administrative review official is not required to hold a hearing.

6.

Issue a notice of final termination and disqualification or a notice of temporary deferral.

On the date when the time for requesting an appeal expires or the administrative review official upholds the proposed termination and disqualification, the administering agency immediately terminates the program operator's agreement, disqualifies the program operator and its responsible principals and responsible individuals, and adds their names to the National Disqualified List. If the administrative review official vacates the proposed termination, the administering agency issues a notice to withdraw the serious deficiency determination and temporarily defer the proposed termination.

Once on the National Disqualified List, an institution, day care home, responsible principal, or responsible individual is ineligible to participate in CACFP in any State as an institution, a facility under a sponsoring organization, or as part of a different institution or facility. FNS believes it is critical to the effectiveness of the serious deficiency process that these procedures are consistently applied when an institution or provider is declared seriously deficient. For example, if the serious deficiency process is not completed, an individual who was found responsible for the serious deficiency in one institution might simply re-incorporate under a new name and be admitted to participate in CACFP in another State.

Public comments on prior rulemaking have disclosed that implementation may vary widely. Respondents described weaknesses in existing regulations that created a process that they perceived to be unreasonable, ineffective, and punitive. This perception undermines the goal of the serious deficiency process to strengthen program compliance and integrity. FNS agrees that improvements to the serious deficiency process are needed to ensure its application is fair and fully implemented. To better serve State agencies and program operators, FNS is proposing modifications that will make the application of the serious deficiency process more consistent and more effective.

Proposed Changes to the CACFP Serious Deficiency Process

As noted earlier, FNS has carefully examined the serious deficiency process and the lessons learned through policy development and operational experience, to understand how to address and correct serious management problems in the CACFP. FNS's understanding is that the steps described above have been useful for administering agencies dealing with serious failure to perform, and not just for the worst examples of potential fraud. This proposed rule would maintain the steps that have been proven effective—basic procedures guiding administering agencies in identifying serious management problems, requiring corrective action, providing appeals, continuing payments of valid claims until the appeals are resolved, and taking actions on termination and disqualification. However, based on that examination, several key changes are proposed in this rule.

Currently, the administering agency identifies a serious deficiency violation, which is defined in regulation. For new institutions, current § 226.6(c)(1)(ii) provide that serious deficiencies include the submission of false information and concealment of a conviction during the past 7 years that indicates a lack of business integrity. Examples are provided in current regulation for offenses that indicate a lack of business integrity, with discretion allowed for the State to determine other offenses that may indicate a lack of business integrity or any other action affecting the institution's ability to administer the program in accordance with program requirements.

Under this proposed rule, a program finding identified during a review will no longer be considered a serious deficiency, but a serious management problem, if certain standards are met. This is a change in the terminology used to describe the process of identifying problems that needs correction. While FNS issued a CACFP handbook,

Serious Deficiency, Suspension, and Appeals for State Agencies and Sponsoring Organizations,

in February 2015, which recommends a framework to guide decision making, the current regulations are unclear about what standards apply to distinguish between errors and more serious findings.

Under this proposed rule, FNS is proposing to codify the criteria found in the CACFP handbook,

Serious Deficiency, Suspension, and Appeals for State Agencies and Sponsoring Organizations,

that the State agency must consider when determining whether a program violation is a serious management problem. This rulemaking also proposes several questions to assist the administering agency. In addition to inviting comments on this proposed rule in general, FNS specifically welcomes public comments on the following five criteria:

1.

The severity of the problem.

Is the noncompliance on a minor or substantial scale? Are the findings indicative of a systemic problem, or is the problem truly an isolated event? There is a point at which continued problems indicate serious mismanagement. Problems that initially appear manageable may become serious if not corrected within a reasonable period of time. Even minor problems may be serious if systemic. Some problems are serious even though they have occurred only once. For example, missing the recording of meal counts at the point of service for one day out of a month could be resolved with technical assistance. However, a second review with the same problem or an initial review with multiple days of incomplete point-of-service meal counts could rise to the level of a serious management problem.

2.

The degree of responsibility attributable to the program operator.

To the extent that evidence is available, can the administering agency determine whether the findings were inadvertent errors of an otherwise responsible institution or facility? Is there evidence of negligence or a conscious indifference to regulatory requirements or is there evidence of deception?

3.

The program operator's history of participation and training in CACFP.

Is this the first time the institution, day care home or unaffiliated center is having problems or has noncompliance occurred frequently at the same institution or facility?

4.

The nature of the requirements that relate to the problem.

Are the program operator's actions a clear violation of CACFP requirements? Has the program operator implemented new policies correctly?

5.

The degree to which the problem impacts program integrity.

Is the finding undermining the intent or purpose of the CACFP, such as misuse of program

funds, or is it simply an administrative error?

Current §§ 226.6(c)(3)(iii)(A) and 226.16(l)(3)(i) require the administering agency to issue a notice of the serious deficiency identified. The program operator must submit a corrective action plan to resolve the serious deficiency. Under this proposed rule, the administering agency would declare the program operator to be seriously deficient at the point of termination. A notice of proposed serious deficiency and proposed termination would be issued after the program operator has been provided an opportunity to correct serious management problems through a corrective action plan. If corrective action is not submitted, not approved, or not implemented, the administering agency would move to propose termination, with the opportunity to request a fair hearing. If the termination is upheld, the agreement is terminated for cause and the program operator is declared seriously deficient.

Current §§ 226.6(c)(3)(iii)(B) and 226.16(l)(3)(i)(B) require the corrective action plan to detail the program operator's response to the notice of serious deficiency. The program operator must submit a written plan that describes the internal controls that are being implemented to ensure that the serious deficiency is fully and permanently corrected. Under this proposed rule, the corrective action plan must address the root causes,

i.e.,

the underlying, true causes, of the serious management problem. By doing so, the corrective action plan should support elimination of the underlying challenges experienced by the program operator for long term program improvement. The program operator would be required to submit a written plan that describes the actions to be taken to correct the root causes of the identified problem, expected period of time for the corrective action to be put into place, and interim milestones for reaching implementation that would lead to full correction.

Under current § 226.6(c)(3)(iii)(C), a notice of proposed termination and disqualification specifies the same set of outcomes for all types of institutions—the institution is terminated for cause, disqualified, and placed on the National Disqualified List. FNS is considering alternatives for institutions that are school food authorities, including an option that would require termination of the program agreement allowing participation in CACFP, but would not subject the school food authority to disqualification and placement on the National Disqualified List. In the discussion of reciprocal disqualification in Child Nutrition Programs, under section II-D-3 of this preamble, FNS requests specific input on this proposal to implement an alternative to disqualification for program operators that are school food authorities. Public comments on this alternative will be critical as FNS develops the final rule.

Under current § 226.6(c)(1), if an applying institution does not meet all of the application requirements, the State agency must deny the application and initiate action through the serious deficiency process, which could lead to the disqualification of the new institution, the person who signs the application, and any other responsible principal or responsible individual. However, FNS recognizes that the intent of the serious deficiency process is to address program performance under a legally binding agreement. Under this rulemaking, at proposed § 226.6(c), a separate process—not the serious deficiency process—would provide applicants the opportunity to correct the application and request due process if the application is denied.

While current § 226.2 includes a combined term of “responsible principal or responsible individual,” this proposed rule would set out separate definitions. Each State agency determines which people are responsible for a program operator's serious management problem. In most cases, State agencies designate the executive director, director, and board chair as the positions that would represent the institution or sponsor and be held responsible for any serious management problem. For a for-profit organization, it would include the owner. For a public agency, a responsible principal might also include a supervisor or department head. FNS proposes to require any principals who fill positions that the State agency designates as responsible to certify their role as a responsible principal, as described in the definition.

Under current §§ 226.6(c)(3)(iii)(B)(

1

)(i) and 226.16(l)(3)(ii), if a corrective action plan is approved and implemented, the program operator's serious deficiency is temporarily deferred and the serious deficiency is considered fully and permanently corrected. If the same finding reoccurs at any time in the future, the serious deficiency process resumes and may lead to termination. Under this proposed rule, if the corrective action plan is approved and implemented within a defined period of time, the administering agency will provide increased oversight and conduct more frequent reviews, as described in proposed §§ 226.6(k)(2) and 226.16(d)(4)(iv) and (v). Corrective action would no longer be described as permanent. Instead, FNS proposes that the serious deficiency process provide program operators with the opportunity to correct serious management problems through a corrective action plan, which would occur within a defined period of time and result in full correction. When achieved, the serious management problem would be vacated, not deferred.

Temporary deferment would no longer be applicable, because this rulemaking proposes a path to full correction and changes the point at which a program operator is declared seriously deficient to occur at the point of termination. If the same serious management problem occurs after the time period under which full correction is achieved, it would not lead directly to proposed termination. “Full correction” would describe the status achieved after a corrective action plan is accepted and approved, all corrective actions are fully implemented, and no new or repeat serious management problems are identified in at least two full reviews occurring once every 2 years. Additionally, institutions would only achieve “full correction” if the first and last full review is at least 24 months apart and all review, including follow up reviews, in between the first and last full review reveal no new or repeat serious management problems.

Under proposed § 226.25(c)(3)(i), institutions may achieve full correction after at least two full reviews occurring in separate review cycles—with the first and last full review at least 24 months apart reveal no new or repeat serious management problems. A “review cycle” refers to the frequency and number of required reviews of institutions and facilities. The

Child Nutrition Program Integrity Final Rule

amended current § 226.6(m) to require State agencies to review program operators with serious management problems at least once every 2 years. FNS analyzed a large sample of serious deficiency notices and determined that most repeat serious deficiencies occurred within a 2-year period, with many repeat serious deficiencies reoccurring within just a matter of months. As a result, this rulemaking proposes a standard of “two full reviews, occurring once every 2 years and at least 24 months apart” for an institution to achieve full correction. FNS welcomes public comments on this standard.

To understand how the defined period of time for full correction of serious management problems would be determined, consider an example: a State agency cites a sponsoring

organization for a serious management problem in June 2020. The sponsoring organization is now subject to reviews at least once every 2 years. Subsequent full reviews took place in May 2021 and May 2023. Neither reviews revealed new or repeat serious management problems. The sponsoring organization achieved full correction in May 2023. The serious management problems are “fully corrected” if subsequent reviews result in no new or repeat serious management problems over a minimum of two full reviews occurring at least once every 2 years and with the first and last full review taking place at least 24 months apart. The State agency has discretion to conduct reviews more frequently and, in these cases, all reviews must result in no new or repeat serious management findings in order for the sponsoring organization to achieve full correction.

A second example: A State agency reviews a sponsoring organization in June 2020 and identifies a serious management problem. The sponsoring organization submits a corrective action plan that is approved by the State agency and the sponsoring organization enters a 2-year review cycle. The State agency does a follow up review in August 2020 to ensure the corrective action plan has been implemented. The State agency determines that the corrective action plan has been fully implemented. The State agency conducts the first full review in July 2021 and no new or repeat serious management problems are identified. The sponsoring organization is reviewed again in April 2022 and again, no new or repeat serious management problems are identified. Because 24 months have not passed (July 2021 and August 2022) between the first and last full review, the serious management problems are not considered fully corrected. The sponsoring organization receives a full review again in December 2023 and again, no new or repeat serious management problems are identified. At that point, full correction is achieved,

i.e.,

all the reviews revealed no new or repeat serious management problems and at least 24 months passed between the first and last full reviews.

Current §§ 226.6(c)(3)(iii)(B)

(3)

and 226.16(l)(3)(ii) establish that repeat serious deficiencies may lead directly to proposed termination. If it were discovered that the program operator's corrective action was not adhered to and the serious deficiency was repeated, the administering agency could resume the serious deficiency process by immediately issuing a notice of proposed termination and disqualification. Under this proposed rule, a serious management problem that occurs again, after full correction is achieved, would not be considered a repeat serious management problem and would not directly result in proposed termination. However, the recurrence of a serious management problem during the time before full correction is achieved would lead directly to proposed termination. If new serious management problems occur before an institution achieves full correction of its initial serious management problem, the institution would continue to be reviewed once every 2 years until at least two full reviews occurring at least 24 months apart reveal no new or repeat serious management problems.

For another example, consider that a State agency reviews an independent center in April 2021 and identifies a serious management problem. The independent center submits a corrective action plan that is approved by the State agency and the State agency does a follow up review in July 2021 to ensure the corrective action plan has been implemented. The State agency returns to conduct a full review in January 2023 and no new or repeat serious management problems are identified. The State agency conducts a second full review of the independent center in February 2025, the same serious management problem reoccurs. Because full correction was not achieved, this serious management problem is considered repeat. The State agency would propose to terminate the independent center. At this point, the independent center would have a right to a fair hearing.

Current regulations do not define good standing. Under the definition of “good standing” in this proposed rule, the proposed serious deficiency process in CACFP would impact an institution's good standing status. In the proposed serious deficiency process, identification of a serious management problem would move an institution out of good standing. An institution would need to fully implement all corrective actions and fully pay any debts owed to the program to return to good standing. Until these criteria are met, the institution would remain out of good standing. This proposed standard ensures that the institution is complying with requirements of the serious deficiency process and is working towards achieving full correction of its serious management problem. FNS welcomes public comments on this proposed standard of good standing in the serious deficiency process.

For example, let's say, a review in May 2022 of a sponsoring organization reveals a serious management problem that results in an overclaim. At this point, the sponsoring organization would not be in good standing. In June 2022, the State agency conducts a follow up review and determines that the corrective actions are fully implemented and the unearned reimbursement is fully repaid. At this point, at the State agency's discretion, the sponsoring organization returns to good standing. However, the serious management problem is not yet considered fully corrected.

2. Oversight and Implementation of the Serious Deficiency Process in Institutions

State agencies are responsible for oversight of institutions—

i.e.,

sponsoring organizations, independent child care centers, and independent adult day care centers that enter into agreements with the State agency to participate in CACFP. FNS is proposing to modify the serious deficiency process to improve State agency oversight efforts. FNS proposes to codify standards to help State agencies distinguish occasional administrative errors from systemic management problems, determine that corrective action plans are adequate, put in place a fair hearing process that is accessible and fair, and prepare well-written notices of actions throughout the course of the serious deficiency process.

Current program regulations describe serious deficiency notification procedures for participating institutions, responsible principals, and responsible individuals at 7 CFR 226.6(c)(3)(iii). This section includes requirements for the notice of serious deficiency at 7 CFR 226.6(c)(3)(iii)(A). Corrective action is described in 7 CFR 226.6(c)(3)(iii)(B) and (c)(4). Administrative review procedures for the provision of a fair hearing are found at 7 CFR 226.6(k). Termination is at 7 CFR 226.6(c)(3)(iii)(C) and (E) and (c)(4). Disqualification and placement on the National Disqualified List are at 7 CFR 226.6(c)(iii)(E) and (c)(7). FNS proposes to move these requirements from subpart C, State Agency Provisions, to a new subchapter addressing administrative actions under subpart G at 7 CFR 226.25.

This rulemaking proposes to codify standards, under proposed § 226.25(a)(3), to help State agencies distinguish occasional administrative errors from systemic management problems. These standards would guide the State agency's efforts in identifying systemic errors that reflect an institution's inability to effectively manage the program as required under

the regulations. The State agency would have to consider:

• The severity of the problem;

• The degree of responsibility attributable to the institution;

• The institution's history of CACFP participation and training;

• The nature of the requirements that relate to the problem; and

• The degree to which the problem impacts program integrity.

An institution would no longer be in good standing if the State agency determines that a finding rises to the level of a serious management problem. Information about the institution and its responsible principals and responsible individuals would be added to the State agency list, which State agencies are required to maintain and update through each step of the serious deficiency process. Requirements for the State agency list in current § 226.6(c)(8) would move to proposed § 226.25(b). Maintenance of this list allows the State agency to track the institution's progress towards resolving each serious management problem.

If the State agency determines that a program finding rises to the level of a serious management problem, the State agency would issue a written notice that is easy to understand, documenting each finding that must be addressed and corrected. The notice requirements in current § 226.6(c)(3)(iii)(A) would move to proposed § 226.25(a)(6)(i). The State agency would send the notice to the institution, the management officials who bear responsibility for the poor performance, and other responsible individuals, including nonsupervisory employees, contractors, and unpaid staff who have been directly involved in causing the serious management problem. A well-written notice will: provide a detailed explanation of each serious management problem; list appropriate regulatory citations to support the notice; identify the responsible principals and responsible individuals; provide a clear description of the actions required in order to correct the serious management problem; and provide a definite and appropriate time limit for the corrective action.

The assessment of corrective action in current § 226.6(c)(3)(iii)(B) would move to proposed § 226.25(c). This proposed rule would require the institution to take corrective action to address the root cause of each finding. At proposed § 226.25(c)(1), this rulemaking outlines the information that would guide the institution's development of a corrective action plan that demonstrates that the noncompliance is resolved. The State agency's approval of the corrective action plan would include a review of the institution's responses to these questions:

• What is the serious management problem and the action taken to address it?

• Who addressed the serious management problem?

• When was the action taken to address the serious management problem?

• Where is documentation of the corrective action plan filed?

• How were staff and providers informed of the new policies and procedures?

The timelines for corrective action, at proposed § 226.25(c)(2), with an emphasis on correcting problems quickly, remain unchanged from the requirements at current § 226.6(c)(4). Corrective action must be taken within reasonable timeframes established in the current regulations that ensure that each serious management problem is quickly addressed and corrected. The timeframe must fit the type of serious management problem found. The allotted time begins on the date the institution receives the notice—up to 30 days for a false claim or unlawful practice, up to 90 days for correction of other problems, and more than 90 days for management system or process changes, if the State agency determines that a longer time frame is needed. Although the institution may take corrective action at any point in the serious deficiency process, the State agency would issue a notice of proposed termination if any of the deadlines described in proposed § 226.25(c)(2)(ii) through (iv) are not met.

State agencies would have to prioritize monitoring resources to conduct more frequent reviews of institutions with serious management problems. FNS has recently published a final rule,

Child Nutrition Program Integrity,

88 FR 57792, August 23, 2023, that requires State agencies to schedule reviews at least once every 2 years of institutions that have had serious management problems in previous reviews or are at risk of having serious management problems. This rulemaking would move this requirement from current § 226.6(m) to proposed § 226.6(k).

Current § 226.6(c)(3)(iii)(B)(

1

) requires the State agency to establish that corrective action is permanent. Proposed § 226.25(c)(3)(i) would take a different approach to the determination of full correction. This proposed rule would create a path to full correction for institutions with serious management problems if at least two full reviews, occurring once every 2 years and the first and last full review occurring at least 24 months apart demonstrate that the institution has the ability to operate CACFP with no new or repeat serious management problems. Once the State agency approves a corrective action plan, the institution must receive full reviews at least two times and at least once every 2 years before full correction is achieved.

If corrective actions are fully implemented, the State agency would issue a notice to advise the institution, responsible principals, and responsible individuals of successful corrective action. The notice requirements in current § 226.6(c)(3)(iii)(B) would move to proposed § 226.25(a)(6)(ii). The State agency would continue to provide oversight to ensure that the corrective actions to correct the serious management problem remain in place. If corrective action is complete for the institution but not for all the responsible principals and responsible individuals or vice versa, proposed § 226.25(a)(6)(ii)(A)(

2

) addresses partial achievement of corrective action.

If corrective action is not submitted, approved or implemented, the State agency proposes to terminate the institution. Current § 226.6(k) describes administrative review procedures for the provision of a fair hearing. Termination is described in current § 226.6(c)(3)(iii)(C) and (E) and (c)(4) and disqualification and placement on the National Disqualified List are described in current sections 7 CFR 226.6(c)(3)(iii)(E) and (c)(6). This rulemaking describes procedures the State agency should follow for fair hearings at proposed § 226.25(g), termination for cause at proposed § 226.25(d)(1), notice of serious deficiency status at proposed § 226.25(a)(6)(iii)(B), and placement on the National Disqualified List at proposed § 226.25(e)(2)(i).

Current § 226.6(k) addresses due process. In this rulemaking, proposed § 226.25(g) describes the institution's right to a fair hearing, parameters for conducting a fair hearing, and guidance on the role of the hearing official and the decision-making. The purpose of the fair hearing is limited to a determination by the hearing official that the State agency has complied with CACFP requirements in taking the actions that are under appeal. It is not to determine whether to uphold duly promulgated Federal and State program requirements.

State agencies must provide a fair hearing to institutions when they take actions affecting an institution's participation or its claim for reimbursement, such as application denial, claim denial, overpayment

demands. During the serious deficiency process, the State agency's issuance of a notice of proposed termination is the only action that is subject to administrative review. Although FNS proposes to replace the term “administrative review” with the term “fair hearing,” and move the requirements from current § 226.6(k)(5) to proposed § 226.25(g)(2), the provision of due process remains unchanged, which is:

• The State agency must give notice of the proposed termination and procedures for requesting a fair hearing to the institution, its executive director, board chair, owner, any other responsible principals and responsible individuals.

• The State agency's notice must specify the basis for proposing termination and the procedures under which the institution, responsible principals, or responsible individuals may request a fair hearing.

• The appellant must submit a written request for a fair hearing within 15 calendar days of receipt of State agency's notice of proposed termination. If the State agency's fair hearing procedures direct the appellant to send the request to the hearing official, then the procedures must identify which office will be responsible for acknowledging the appellant's request.

• The State agency must acknowledge receipt of the fair hearing request within 10 calendar days of receiving it.

• If a fair hearing is requested, the State agency must continue to pay any valid claims for reimbursement of eligible meals served and allowable administrative expenses incurred until the hearing official issues a decision.

• Any information upon which the State agency based the proposed termination must be available to the appellants for inspection from the date of receipt of the hearing request.

• Appellants may contest the proposed termination in person or by submitting written documentation to the hearing official.

• Appellants may represent themselves, retain legal counsel, or be represented by another person.

• All documentation must be submitted prior to the beginning of the hearing. All parties, including the State agency, must submit written documentation to the hearing official within 30 calendar days of receipt of the notice of proposed termination.

• Hearing officials must be independent and impartial. Even if they are employees of the State agency, hearing officials cannot be involved in the action that is the subject of the fair hearing, cannot occupy any position which would potentially subject to them to undue influence from other State employees who are responsible for the State agency's action, or have any direct personal or financial interest in the outcome of the fair hearing.

• Hearing officials must issue decisions within 60 calendar days of the State agency's receipt of the appellants' hearing request, based solely on the information provided by the parties. 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 fair hearing process.

• The hearing official's decision is the final administrative decision. Appellants may not administratively contest the hearing official's decision.

If the appellant prevails, the State agency would issue a notice that confirms that the proposed termination of the institution, responsible principals, and responsible individuals is vacated, as described in proposed § 226.25(a)(6)(iii)(A). However, the institution would still have to implement procedures and policies to fully correct the serious management problem.

If the hearing official upholds the State agency's proposed termination action, the State agency would immediately notify the institution, executive director, owner, board chair, and any other responsible principals and responsible individuals that the institution's agreement is terminated, as described in proposed § 226.25(a)(6)(iii)(B). It is at this point in the process that this rulemaking proposes to declare the institution seriously deficient. The State agency would issue a serious deficiency notice that informs the institution, responsible principals, and responsible individuals of their disqualification from CACFP participation. Termination of the agreement and disqualification described in current § 226.6(c)(3)(iii)(E) would move to proposed § 226.25(d) and proposed § 226.25(e), respectively. The State agency would provide a copy of the serious deficiency notice to FNS, with the mailing address and date of birth for each responsible principal and responsible individual, and the full amount of any determined debt associated with the institution, responsible principals, and responsible individuals, for inclusion on the National Disqualified List. Requirements at current § 226.6(c)(6) describing placement on the National Disqualified List would move to proposed § 226.25(e)(2).

Proposed § 226.25(h) addresses the State agency's responsibilities for the payment of valid claims found in current § 226.6(c)(5)(i)(D); collection of unearned payments found in current § 226.14(a); suspension of payments found in current § 226.6(c)(5)(ii)(E); and State liability for payments found in current § 226.6(h)(11). Requirements from current § 226.6(c)(iii)(6) for State agency action in response to the independent determination of a serious management problem by FNS would move to proposed § 226.25(i).

Accordingly, this proposed rule would amend CACFP regulations by removing the requirements describing termination of a participating institution's agreement, including serious deficiency notification procedures, successful corrective action, agreement termination, corrective action timeframes, administrative review, and State agency list, under 7 CFR 226.6(c) and (k). This rulemaking proposes to address all requirements for State agency oversight and implementation of the serious deficiency process in institutions under 7 CFR 226.25. Corresponding amendments are proposed at 7 CFR 226.2, 226.6(b)(1) and (2), 226.6(c), (k), and (m)(3), and 226.16(l).

3. Oversight and Implementation of the Serious Deficiency Process in Day Care Homes and Unaffiliated Sponsored Centers

Sponsoring organizations enter into agreements with day care homes, unaffiliated child care centers, and unaffiliated adult day care centers to oversee their participation and meal service operations. The sponsoring organization is financially responsible for any meals served incorrectly or served to ineligible children and adults, making it even more important that serious management problems are properly identified and corrected.

The serious deficiency process offers a clear way for sponsoring organizations to take actions guiding day care homes and unaffiliated centers to correct problems that affect the integrity of their meal service operations. It gives day care homes and centers the opportunity for improvement, technical assistance, and due process. For sponsoring organizations, it is a critical tool for resolving performance issues and correcting serious management problems at the operational level.

Current program regulations describe serious deficiency notification procedures for participating day care homes at 7 CFR 226.16(l)(3). This section includes requirements for the notice of serious deficiency at 7 CFR

226.16(l)(3)(i). Corrective action is described in 7 CFR 226.16(l)(3)(ii). Administrative review procedures for the provision of a fair hearing are found at 7 CFR 226.6(l). Termination and disqualification are described at 7 CFR 226.16(l)(3)(iii) and (v). FNS proposes to move these requirements of the serious deficiency process for day care homes to a new subchapter addressing administrative actions under subpart G at 7 CFR 226.25. This proposed rule would also require sponsoring organizations to follow these procedures to implement the serious deficiency process for unaffiliated centers.

Under this proposed rule, many of the sponsoring organization responsibilities and actions would be identical to the provisions outlined for State agencies. However, FNS is proposing key changes to not only recognize CACFP requirements that are simplified for day care homes, but also to distinguish between the center that participates directly under the State agency and the center that elects to participate through a sponsoring organization.

Part of a strong and sustained effort to ensure program integrity is the enhanced oversight that sponsoring organizations provide day care homes and unaffiliated centers. For example, while the State agency is generally required to conduct onsite reviews at least once every 2 or 3 years, depending on the size and circumstances of the institution being reviewed, a sponsoring organization will have conducted a minimum of six to nine reviews of each of its day care homes and unaffiliated centers during the same time period. The serious deficiency process that FNS proposes for day care homes and unaffiliated centers takes into account the additional monitoring, training, and technical assistance that sponsoring organizations must provide.

This rulemaking proposes to codify standards, under proposed § 226.25(a)(3), to help sponsoring organizations distinguish occasional administrative errors from systemic management problems. The sponsoring organization would have to consider:

• The severity of the problem;

• The degree of responsibility attributable to the day care home or unaffiliated center;

• The day care home or unaffiliated center's history of CACFP participation and training;

• The nature of the requirements that relate to the problem; and

• The degree to which the problem impacts program integrity.

Whenever a sponsoring organization identifies a serious management problem, the day care home or unaffiliated center can no longer be considered to be in good standing. The sponsoring organization must provide information to the State agency to keep the State agency list updated through each step of the serious deficiency process. Current § 226.6(c)(7) requires the State agency list to include information about institutions and day care homes that are seriously deficient. This proposed rule would expand the list to include information on any unaffiliated center that has a serious management problem, as described in proposed § 226.25(b).

Current § 226.16(l)(3)(i) addressing the notice of serious deficiency would move to proposed § 226.25(a)(7)(i). If the sponsoring organization determines that a program finding rises to the level of a serious management problem, the sponsoring organization would issue a notice documenting, in plain language, each serious management problem that must be corrected. The sponsoring organization would issue the notice to the day care home provider, center director, and any other responsible principals or responsible individuals who have been directly involved in causing the serious management problem. A well-written notice will: provide a detailed explanation of each serious management problem; list appropriate regulatory citations to support the notice; identify the responsible principals and responsible individuals; provide a clear description of the actions required in order to correct the serious management problem; and provide a definite time limit for the corrective action.

Corrective action described in current § 226.16(l)(3)(ii) would move to proposed § 226.25(c). Day care homes and unaffiliated centers would be required to take corrective action to address each serious management problem. The day care home or unaffiliated center would submit a written corrective action plan for the sponsoring organization to approve. The corrective action plan would have to address the root cause of each finding, with enough detail explaining the implementation—

i.e.,

what, how, when, and by whom—for the sponsoring organization to make an assessment regarding its effectiveness in fully correcting the serious management problem. It would also describe where the documentation of changes will be filed.

The emphasis of the timeline for corrective action is on correcting problems quickly, as described in current § 226.16(l)(3)(i)(C). Under proposed § 226.25(c)(2)(i), day care homes and unaffiliated centers would have up to 30 days to take corrective action that, in the sponsoring organization's judgment, will correct the serious management problem. Although corrective action may occur at any point in the serious deficiency process, the sponsoring organization would issue a notice of serious deficiency if the 30-day deadline is not met.

If the corrective action plan is accepted, the sponsoring organization would confirm that the corrective actions are fully implemented. Current § 226.16(l)(3)(ii) temporarily defers a determination of serious deficiency if the sponsoring organization establishes that corrective action is successful. This proposed rule would create a path to full correction if follow-up reviews, as described in current § 226.16(d)(4)(v), demonstrate that the day care home or unaffiliated center has the ability to operate CACFP with no new or repeat serious management problems. The day care home or unaffiliated center would be reviewed at the same frequency as existing regulations require, as described in current § 226.16(d)(4)(iii). Full correction is achieved when, after three consecutive reviews are complete, the day care home or unaffiliated center demonstrates that it has no new or repeat serious management problems, as described in proposed § 226.25(c)(3)(ii) and (iii). After full correction is achieved, any recurrence of the same serious management problem would require the sponsoring organization to issue a new notice to restart the serious deficiency process. Serious management problems that occur after full correction is achieved would not lead to an immediate proposal of termination. However, as described in proposed § 226.25(c)(3)(iv), the recurrence of a serious management problem before full correction is achieved would lead directly to proposed termination.

Successful corrective action is described in current § 226.16(l)(3)(ii). If corrective actions are fully implemented, the sponsoring organization would issue a notice of successful corrective action to the day care home, unaffiliated center, responsible principals, and responsible individuals of, as described in proposed § 226.25(a)(7)(ii)(A). The sponsoring organization would continue to provide oversight to ensure that the procedures and policies to fully correct the serious management problem are implemented.

Current § 226.16(l)(3)(iii) and (v) address the sponsoring organization's actions when full and permanent correction is not achieved. If the corrective action plan is not accepted or a repeat serious management problem occurs before full correction is achieved,

this proposed rule describes the procedures the sponsoring organization would follow for fair hearings at proposed § 226.25(g)(1)(ii) and (g)(2), termination for cause and notification of serious deficiency status at proposed § 226.25(a)(7)(iii), and placement on the National Disqualified List at proposed § 226.25(e)(2).

The sponsoring organization would issue a proposed termination notice, and a fair hearing would be offered. If a fair hearing is requested and the fair hearing upholds the proposal to terminate or the time frame for requesting a fair hearing has passed, the sponsoring organization would issue a notice of serious deficiency and termination. If the fair hearing vacates the proposed termination, the sponsoring organization would issue a notice to vacate the proposed termination as described in proposed § 226.26(c)(7)(iii)(A). However, the day care home or unaffiliated center must still implement procedures and policies to fully correct the serious management problem.

As described in current § 226.6(l)(1), the State agency will continue to have authority to decide whether a fair hearing will be heard by the state or by the sponsoring organization. As described in proposed § 226.25(g)(3), hearing officials, whether retained by the state or the sponsoring organization, must be independent, impartial, and have no involvement in the action that is the subject of the fair hearing. Their decisions must be based on a review of written submissions by all parties. They are not required to hold an in-person hearing for day care homes or unaffiliated centers.

If the hearing official upholds the proposed termination, the sponsoring organization would immediately notify the day care home provider, center director, owner, board chair, and any other responsible principals and responsible individuals that the agreement is terminated, as described in proposed § 226.25(c)(7)(iii)(B). This would also be the point in the process when the day care home or unaffiliated center would be declared seriously deficient. The sponsoring organization would issue a serious deficiency notice that informs the day care home, unaffiliated center, responsible principals, and responsible individuals of their disqualification from CACFP participation.

The sponsoring organization would provide a copy of the serious deficiency notice to the State agency, with the mailing address and date of birth for each responsible principal and responsible individual, and the full amount of any determined debt associated with the day care home or unaffiliated center. The State agency would continue to update the State agency list and provide this information to FNS for inclusion on the National Disqualified List.

Accordingly, this proposed rule would amend CACFP regulations by removing the requirements describing the termination of agreements for cause, including serious deficiency notification procedures, under 7 CFR 226.16(l). This rulemaking would address all requirements for sponsoring organization oversight and implementation of the serious deficiency process in day care homes and unaffiliated centers under 7 CFR 226.25.

B. Summer Food Service Program (SFSP)

1. Applying the Serious Deficiency Process to SFSP

Section 13 of the NSLA, at 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 must also maintain a disqualification list for State agencies to use in approving or renewing sponsor applications.

Prior to enactment of the Healthy Hunger-Free Kids Act of 2010, SFSP regulations included provisions addressing corrective action, termination, and appeals. Current SFSP regulations specify:

• Criteria State agencies must consider when approving sites for participation; provide authority for the State agency to terminate sponsor participation, as described in 7 CFR 225.6(h);

• List the types of program findings that would be grounds for application denial or termination, as described in 7 CFR 225.11(c);

• Require State agencies to terminate participation of sites or sponsors for failure to correct program findings within timeframes specified in a corrective action plan as described in 7 CFR 225.11(f); and

• Set out procedures for sponsors to appeal adverse actions, including termination of a sponsor or site and denial of an application for participation, as described in 7 CFR 225.13.

However, the regulations do not provide explicit authority to FNS or State agencies to disqualify sponsors or any of the people who are responsible for the types of findings that weaken program management and integrity. Under the Healthy Hunger-Free Kids Act of 2010, Congress established requirements related to service institutions that were terminated, including maintaining a list of disqualified service institutions and individuals. To implement those requirements, in this proposed rule, specific steps are provided to establish a serious deficiency process in SFSP, building on the proposals outlined in the previous sections of this preamble. This rulemaking also proposes expansion of the National Disqualified List, establishment of State agency lists, and changes to termination and appeal procedures that would hold sponsors, responsible principals, and responsible individuals accountable for serious management problems in SFSP. These modifications are set out in the regulatory text section of this rulemaking in proposed § 225.18.

In applying the serious deficiency process to SFSP, this rulemaking would expand the list of defined terms under 7 CFR 225.2. This rulemaking proposes definitions of the following terms that relate to important aspects of program management and the serious deficiency process:

• Contingency plan

means the State agency's written process for the transfer of sponsored site service area that will help ensure that Program meals for children will continue to be available without interruption if a sponsor's agreement is terminated.

• Corrective action

means implementation of a solution, written in a corrective action plan, to address the root cause and prevent the recurrence of a serious management problem.

• Disqualified

means the status of a sponsor, responsible principal, or responsible individual who is ineligible for participation in the program.

• Fair hearing

means due process provided upon request to:

○ A sponsor that has been given notice by the State agency of an action that will affect participation or reimbursement under the program;

○ A principal or individual responsible for a sponsor's serious management problems and issued a notice of proposed termination and proposed disqualification from Program participation; or

○ A sponsor that has been given notice of proposed termination.

• Finding

means a violation of a regulatory requirement identified during a review.

• Fiscal action

means the recovery of an overpayment or claim for reimbursement that is not properly payable through direct assessment of future claims, offset of future claims, disallowance of overclaims, submission of a revised claim for reimbursement, disallowance of funds for failure to take corrective action to meet program requirements.

• Full correction means

the status achieved after a corrective action plan is accepted and approved, all corrective actions are fully implemented, and no new or repeat serious management problems are identified in subsequent reviews, as described in proposed § 225.18(c)(3).

• Good standing

means the status of a program operator that meets its program responsibilities, is current with its financial obligations, and, if applicable, has fully implemented all corrective actions within the required period of time.

• Hearing official

means an individual who is responsible for conducting an impartial and fair hearing—as requested by a sponsor, responsible principal, or responsible individual responding to a proposal for termination—and rendering a decision.

• Lack of business integrity

means the conviction or concealment of a conviction for fraud, antitrust violations, embezzlement, theft, forgery, bribery, falsification or destruction of records, making false statements, receiving stolen property, making false claims, obstruction of justice.

• Legal basis

means the lawful authority established in statute or regulation.

• National Disqualified List

(NDL) means a system of records, maintained by the Department, of sponsors, responsible principals, and responsible individuals disqualified from participation in the program.

• Notice

means a letter sent by certified mail, return receipt (or the equivalent private delivery service), by facsimile, or by email, that describes an action proposed or taken by a State agency or FNS with regard to a sponsor's program reimbursement or participation.

• Principal

means any individual who holds a management position within, or is an officer of, a sponsor or a sponsored site, including all members of the sponsor's board of directors or the sponsored site's board of directors.

• Program operator

means any entity that participates in one or more child nutrition programs.

• Responsible individual

means any individual employed by, or under contract with a sponsor or an individual, including uncompensated individuals, who the State agency or FNS determines to be responsible for a sponsor's serious management problems.

• Responsible principal

means any principal, as described in this section, who the State agency or FNS determines to be responsible for a sponsor's serious management problems.

• Review cycle

means the frequency and number of required reviews of sponsors and sites.

• Serious management problem

means the finding(s) that relate to a sponsor's inability to meet the program's performance standards or that affect the integrity of a claim for reimbursement or the quality of meals served at a site.

• Seriously deficient

means the status of a sponsor after it is determined that full correction has not been achieved and termination for cause is the only appropriate course of action.

• State agency list

means an actual paper or electronic list, or the retrievable paper records, maintained by the State agency, that includes information on sponsors through the serious deficiency process in that State. The list must be made available to FNS upon request and must include information specified in proposed § 225.18(b).

• Termination for cause

means the termination of a Program agreement due to considerations related to a sponsor's performance of Program responsibilities under the agreement between the State agency and sponsor.

Accordingly, this proposed rule would amend 7 CFR 226.2 by adding definitions for contingency plan, corrective action, disqualified, fair hearing, finding, fiscal action, full correction, good standing, hearing official, lack of business integrity, legal basis, National Disqualified List, notice, principal, program operator, responsible individual, responsible principal, review cycle, serious management problem, seriously deficient, State agency list, and termination for cause.

2. Oversight and Implementation of the Serious Deficiency Process in SFSP

Sponsors that enter into agreements with the State agency to operate SFSP must be able to assume responsibility for the entire administration of the program at all their meal service sites. They are required to demonstrate that they have the necessary financial and administrative capability to comply with SFSP requirements. If a sponsor is unable to properly manage the program, the serious deficiency process provides a clear way for the State agency to identify and correct serious management problems and improve integrity of meal service operations at the local level.

Although SFSP and CACFP are autonomous programs with unique operational requirements, they are often administered by the same State agency. To facilitate consistent and equitable application of the serious deficiency process, within and across States, FNS proposes a set of procedures for SFSP that is similar to the modifications this rulemaking proposes to make in CACFP.

As in CACFP, the intent of the serious deficiency process for SFSP is to offer a systematic way for an administering agency to correct problems and protect program integrity. The process would include procedures to identify serious management problems—what 7 CFR part 225 refers to as significant operational problems—and provide opportunities for corrective action and due process. The steps of the serious deficiency process would also be designed to help the State agency document the case to terminate and remove any sponsor that is unwilling to or incapable of resolving serious management problems that place program integrity at risk.

This proposed rule would reorganize existing regulations into a new subchapter at 7 CFR 225.18, amend termination procedures, and establish a disqualification process similar to the process employed in CACFP, with modifications reflecting the shorter duration of meal service operations in SFSP. For example, the proposed maximum timeframe for which the corrective action plan may be implemented in SFSP would be up to 10 calendar days, whereas in CACFP the maximum timeframe could be up to 90 calendar days for institutions.

To examine how State agencies can minimize risk to SFSP integrity, this rulemaking proposes to codify standards under proposed § 225.18(a) to help State agencies distinguish occasional administrative errors from systemic management problems. These standards would guide the State agency's efforts in identifying systemic errors that reflect sponsor's inability to effectively manage the program as required under the regulations. The State agency would have to consider the following criteria, which FNS welcomes public comments on:

1.

The severity of the problem.

Is the noncompliance on a minor or substantial scale? Are the findings indicative of a systemic problem or is the problem truly an isolated event? There is a point at which continued problems indicate serious

mismanagement. Problems that initially appear manageable may become serious if not corrected within a reasonable period of time. Even minor problems may be serious if systemic. Some problems are serious even though they have occurred only once. For example, missing the recording of meal counts at the point of service for one day out of a month could be resolved with technical assistance. However, a second review with the same problem or an initial review with multiple days of incomplete point-of-service meal counts could rise to the level of a serious management problem.

2.

The degree of responsibility attributable to the sponsor.

To the extent that evidence is available, can the State agency determine whether the findings were inadvertent errors? Is there evidence of negligence or a conscious indifference to regulatory requirements, or even worse, is there evidence of deception?

3.

The sponsor's history of participation and training in SFSP.

Is this the first time the sponsor is having problems or has noncompliance occurred frequently?

4.

The nature of the requirements that relate to the problem.

Are the sponsor's actions a clear violation of SFSP requirements? Has the sponsor implemented new policies correctly?

5.

The degree to which the problem impacts program integrity.

Is the finding undermining program intent or purpose, such as misuse of program funds, or is it simply an administrative error?

When the State agency identifies a serious management problem, the sponsor can no longer be in good standing. At proposed § 225.18(b), this proposed rule would require the State agency to maintain a State agency list to track each sponsor's progress towards resolving each serious management problem. The State agency would add information about the sponsor and its responsible principals and responsible individuals to the list and keep the list updated through each step of the serious deficiency process.

If the State agency determines that a finding rises to the level of a serious management problem, the State agency would issue a notice documenting in plain language each problem that must be addressed and corrected, as described under proposed § 225.18(a)(6)(i). The State agency would send the notice to the sponsor, the management officials who bear responsibility for the poor performance, and other responsible principals and individuals, including nonsupervisory employees, contractors, and unpaid staff who have been directly involved in causing the serious management problem. A well-written notice will: provide a detailed explanation of each serious management problem; list appropriate regulatory citations to support the notice; identify the responsible principals and responsible individuals; provide a clear description of the actions required in order to fully correct the serious management problem; and provide a definite and appropriate time limit for the corrective action.

At proposed § 225.18(c)(1), this proposed rule outlines the information that would guide the sponsor's development of a corrective action plan that would address the root cause of each finding, while also demonstrating that the noncompliance is resolved. The State agency's approval of the corrective action plan would include a review of the sponsor's responses to these questions:

• What is the serious management problem and the action taken to address it?

• Who addressed the serious management problem?

• When was the action taken to address the serious management problem?

• Where is documentation of the corrective action plan filed?

• How were the sponsor's staff informed of the new policies and procedures?

The section on assessing corrective action at proposed § 225.18(c)(2), requires a short timeline to ensure that problems are corrected quickly, particularly given SFSP's brief period of operation. If corrective action cannot be achieved, the regulations describe procedures the State agency should follow for fair hearings, termination for cause, notices of serious deficiency status, and placement on the National Disqualified List. Although corrective action may occur at any point in the serious deficiency process, the State agency would issue a notice of proposed termination if the deadline described in proposed paragraph (c)(2) is not met.

If corrective action is fully implemented, the State agency would issue a notice to advise the sponsor, responsible principals, and responsible individuals of successful corrective action, as described in proposed § 225.18(a)(6)(ii)(A). The State agency would continue to provide oversight to ensure that the procedures and policies the sponsor implemented to fully correct the serious management problem are still in place. If corrective action is complete for some but not all of the serious management problems, proposed § 225.18(a)(6)(ii)(A)(

2

) addresses partial achievement of corrective action. If corrective actions are not implemented, this rulemaking describes procedures the State agency should follow for fair hearings in proposed § 225.18(f), notice of serious deficiency status in proposed § 225.18(a)(6)(iii)(B), termination for cause in proposed § 225.18(d), and placement on the National Disqualified List in proposed § 225.18(e)(2).

This proposed rule would create a path to full correction if at least two full reviews, occurring once every year—with the first and last full review occurring at least 12 months apart—demonstrate that the sponsor has the ability to operate SFSP with no new or repeat serious management problems. Additionally, all reviews in between the first and last full review, including follow up reviews, would need to demonstrate that the sponsor has no new or repeat serious management problems. As described under proposed § 225.18(c)(3), once the State agency approves a corrective action plan, the sponsor must be reviewed at least two times, at least once every year, before full correction is achieved. Current § 225.7(e)(4)(ii) requires the State agency to annually review every sponsor that has experienced significant operational problems in the prior year. This proposed rule would make a corresponding change to replace the term “significant operational problem” with the term “serious management problem.” Serious management problems would be considered fully corrected if two consecutive reviews—one full review each year for 2 years and at least 12 months apart—indicate no new serious management problems or no repeat of a serious management problem. FNS welcomes public comments on this standard.

For example, let's say a State agency reviews a sponsor in June 2022 and identifies a serious management problem. The sponsor submits a corrective action plan that is approved by the State agency and sponsor enters a once every year review cycle. The State agency does a follow up review in August of 2022 to ensure that actions are fully implemented. The State agency determines that the corrective action plan has been fully implemented and all debts owed to the program are fully repaid. At this point the sponsor returns to good standing. The State agency conducts a full review in June of 2023 and again in June of 2024. All reviews reveal no new or repeat serious management problems and the first and last full review are at least 12 months apart. At this point, the sponsor's serious management problem is

considered fully corrected and the sponsor has achieved full correction.

Under proposed § 225.18(c)(3)(iv), a serious management problem that occurs again, after full correction is achieved, would not be considered a repeat serious management problem and would not directly result in proposed termination. However, the recurrence of a serious management problem before full correction is achieved would be considered repeat and would lead directly to proposed termination. If new serious management problems occur before a sponsor achieves full correction of its serious management problems, the sponsor would continue to be reviewed at least once every year until at least two full reviews—with the first and last review occurring at least 12 months apart—reveal no new or repeat serious management problems.

State agencies must provide appeal rights when they take actions affecting a sponsor or site's participation, claim for reimbursement, request for advance payments, or registration of a food service management company, as described in current § 225.13(a). Appeal procedures, which are described in current § 225.13(b), would be replaced by the fair hearing procedures of the serious deficiency process, at proposed § 225.18(f). This section describes the sponsor's right to a fair hearing, parameters for conducting a fair hearing, and guidance on the role of the hearing official and the decision-making.

The purpose of the fair hearing is limited to a determination by the hearing official that the State agency has complied with SFSP requirements in taking the actions that are under appeal. As with CACFP, it is not to determine whether to uphold duly promulgated Federal and State program requirements. FNS welcomes comments on the following points at issue. As described in proposed § 225.18(f), this rulemaking proposes the following set of actions:

• The State agency must give notice of the proposed termination and procedures for requesting a fair hearing to the sponsor, its executive director, board chair, and any other responsible principals and responsible individuals.

• The State agency's notice must specify the basis for proposing termination and the procedures under which the sponsor, responsible principals, or responsible individuals may request a fair hearing.

• The appellant must submit a written request for a fair hearing within 10 calendar days after receipt of the State agency's notice of proposed termination. If the State agency's fair hearing procedures direct the appellant to send the request to the hearing official, then the procedures must identify which office will be responsible for acknowledging the appellant's request.

• The State agency must acknowledge receipt of the fair hearing request within 5 calendar days of receiving it.

• If a fair hearing is requested, the State agency must continue to pay any valid claims for reimbursement of eligible meals served until the hearing official issues a decision.

• Any information upon which the State agency based the proposed termination must be available to the appellants for inspection from the date of receipt of the hearing request.

• Appellants may contest the proposed termination in person or by submitting written documentation to the hearing official.

• Appellants may represent themselves, retain legal counsel, or be represented by another person.

• All documentation must be submitted prior to the beginning of the hearing. All parties, including the State agency, must submit written documentation to the hearing official within 20 calendar days after sponsor's receipt of the notice of proposed termination.

• Hearing officials must be independent and impartial. Even if they are employees of the State agency, hearing officials cannot be involved in the action that is the subject of the fair hearing, cannot occupy any position which would potentially subject to them to undue influence from other State employees who are responsible for the State agency's action, or have any direct personal or financial interest in the outcome of the fair hearing.

• Hearing officials must issue decisions within 30 calendar days of the State agency's receipt of the appellants' hearing request, based solely on the information provided by the parties. 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 fair hearing process.

• The hearing official's administrative decision is final. Appellants may not administratively contest the hearing official's decision.

If the appellant prevails, the State agency would issue a notice that confirms the proposed termination of the sponsor, responsible principals, and responsible individuals is vacated, as described in proposed § 225.18(a)(6)(iii)(A). However, the sponsor would still have to implement procedures and policies to fully correct the serious management problem.

If the hearing official upholds the State agency's proposed termination action, the State agency would immediately notify the sponsor, executive director, board chair, and any other responsible principals and responsible individuals that the sponsor's agreement is terminated, as described in proposed § 225.18(a)(6)(iii)(B). As with CACFP, it is at this point in the process that this rulemaking proposes to declare the sponsor seriously deficient. The State agency would issue a serious deficiency notice that informs the sponsor, responsible principals, and responsible individuals of their disqualification from SFSP participation. This proposed rule describes termination of the agreement at proposed § 225.18(d) and disqualification at proposed § 225.18(e).

The State agency would provide a copy of the serious deficiency notice to FNS, with the mailing address and date of birth for each responsible principal and responsible individual, and the full amount of any determined debt associated with the sponsor, responsible principals, and responsible individuals, for inclusion on the National Disqualified List. Requirements at proposed § 226.25(e)(2) describe placement on the National Disqualified List. Extension of the National Disqualified List to SFSP would make a list of disqualified sponsors and individuals available to State agencies to use in approving or renewing sponsor applications.

Proposed § 225.18(g) addresses the State agency's responsibilities for the payment of valid claims and the collection of unearned payments. Requirements for State agency action in response to the independent determination of a serious management problem by FNS is described in proposed § 225.18(h).

Accordingly, this proposed rule would establish a serious deficiency process to address serious management problems in SFSP. This rulemaking would address State agency oversight and implementation of the serious deficiency process under 7 CFR 225.18. Corresponding amendments are proposed at 7 CFR 225.2, 225.6(b)(9), 225.11(c), and 225.13.

C. Suspension

Section 17 of the NSLA, at 42 U.S.C. 1766(d)(5), recognizes that there are circumstances that may require the immediate suspension of program operations, where continued participation in CACFP is inappropriate because health, safety, or program

integrity are at risk. Current §§ 226.6(c)(5)(i) and 226.16(l)(4) describe a set of actions that an administering agency must implement if a program operator's participation poses an imminent threat to the health or safety of children, adult participants, or the public. Under current § 226.6(c)(5)(ii), the regulations outline administrative procedures when a State agency determines a false or fraudulent claim is submitted. There is no corresponding statute or regulations for suspension of participation in SFSP.

Suspension requirements would move to proposed § 226.25(f). FNS does not propose any procedural changes for administering agencies when there is an imminent threat to health and safety through the suspension process. However, FNS is proposing to strengthen requirements for State agency action when a program operator knowingly submits a false or fraudulent claim. Proposed § 226.25(f)(2) would require State agencies to exercise their authority to suspend CACFP participation when it is determined that a claim for reimbursement is fraudulent or cannot be verified with required documentation.

This rulemaking also includes technical amendments to correspond with the proposed changes in terminology and reorganization of the serious deficiency process regulations. Under proposed § 226.25(f), a suspension would remain in effect until the serious management problem is corrected, as in the case of a suspension based on a false or fraudulent claim, or a fair hearing of the proposed termination is completed. Although the agreement is not formally terminated, a program operator cannot participate in CACFP during the period of suspension.

Suspension for Health or Safety Threat

CACFP participation must be suspended if an imminent threat is identified that places the health or safety of children, adult participants, or the public at risk. The suspension is immediate and cannot be appealed. The administering agency must notify the program operator, responsible principals, and responsible individuals that participation and payments are suspended and termination and disqualification are proposed. The notice must identify the serious management problem and include procedures for requesting a fair hearing of the proposed termination and disqualification, as described in current §§ 226.6(c)(5)(i)(B) and 226.16(l)(4)(ii). Proposed § 226.25(f)(1)(i)(A) would address the notice of suspension of an institution and proposed § 226.25(f)(1)(ii)(A) would address the notice of suspension of a day care home or an unaffiliated center.

The administering agency is prohibited from offering an appeal prior to the commencement of the suspension and payments will remain suspended until the fair hearing is concluded. If the hearing official overturns the suspension, the program operator may claim reimbursement for eligible meals served during the suspension. Current § 226.6(c)(5)(i)(C), which addresses termination of the agreement by the program operator and placement on the National Disqualified List, would move to proposed § 226.25(f)(1)(i)(B) and (f)(1)(ii)(B). If a program operator voluntarily terminates its agreement after receiving the notice of proposed termination, the program operator will still be terminated for cause and disqualified.

Proposed Suspension for Fraud or Fraudulent Claim

Submission of a false claim for reimbursement in facilities is a serious management problem that must be addressed through the serious deficiency process. However, an institution is subject to suspension for the submission of a false claim for reimbursement. Current § 226.6(c)(5)(ii), authorizes State agencies to suspend participation, at their discretion, if the State agency determines that a claim for reimbursement is fraudulent or cannot be verified with required documentation. Under proposed § 226.25(f)(2) of this rulemaking, FNS would require State agencies to suspend participation of institutions in all cases of false or fraudulent claims. Suspension stops the flow of payments to those institutions and provides protection against misuse of program funds.

Suspension for false or fraudulent claims is not immediate. At the time suspension is proposed, the State agency must initiate action to terminate the agreement to disqualify the institution, responsible principals, and responsible individuals. Suspension for false or fraudulent claims becomes effective if the institution does not appeal the proposed termination and disqualification or, if a suspension review is requested, the hearing official upholds the State agency's proposed action. If a suspension for submission of a false or fraudulent claim is overturned, the serious deficiency process to address the institution's serious management problems would still continue.

All of the requirements for suspending an institution for submitting a fraud or fraudulent claim that are found in current § 226.6(c)(5)(ii) would move to proposed § 226.25(f)(2). Suspension of payments would move from current §§ 226.6(c)(5)(i)(D), 226.6(c)(5)(ii)(E), and 226.16(l)(4)(iv) to proposed § 226.25(h)(2). When the State agency proposes to suspend an institution's participation, including program payments for the submission of a false or fraudulent claim, the State agency must issue a combined notice of serious management problems and proposed suspension, which would include a description of the serious management problem and the State agency's fair hearing procedures for suspension and termination. The institution has the right to request a suspension review as well as a fair hearing of the proposed termination and disqualification action.

The suspension is implemented if the institution does not appeal the action or, if an appeal is filed, the hearing official upholds the action proposed by the State agency. If the suspension review official overturns the proposed suspension, the institution may claim reimbursement for eligible meals served during the proposed suspension. A State agency must not reimburse an institution for that portion of a claim that the State agency knows to be invalid. Voluntary termination of the institution's agreement with the State agency after having received the notice would still result in termination for cause and placement on the National Disqualified List.

Suspension of participation and suspension of payments add strong integrity protections against the submission of false and fraudulent claims in CACFP. FNS is concerned that there are similar circumstances in SFSP where continuing program operations is inappropriate, yet there are no corresponding requirements authorizing the State agency to suspend participation and payments. FNS recognizes that additional public input is needed to consider the use of suspension to protect against the submission of false or fraudulent claims in SFSP. Public comments on the following proposed options will be critical as FNS develops the final rule:

1. Option 1 of this proposed rule would require the State agency to apply the serious deficiency process when it determines that a sponsor in SFSP has submitted a false or fraudulent claim. The serious deficiency process would provide the sponsor the opportunity for corrective action and a fair hearing, with no suspension of participation. The sponsor would be eligible to continue to participate in SFSP and receive

payments for all valid claims that are submitted to the State agency for reimbursement.

2. Option 2 would require the State agency to propose suspension based on a sponsor's submission of a false or fraudulent claim, at the same time that the serious deficiency process is implemented. The suspension would remain in effect until the false or fraudulent claim is corrected or a fair hearing of the suspension completed. Although there would be no formal termination of the agreement, the sponsor would not be eligible to participate in SFSP during the period of suspension. All payments of claims for reimbursement would be suspended. If a fair hearing overturns the suspension, the sponsor would be eligible for retroactive reimbursement.

Accordingly, this rulemaking proposes to make corresponding changes to 7 CFR 226.2 and 226.25 to align the proposed amendments to the serious deficiency process. This proposed rule would move State agency actions to suspend participation if health or licensing officials cite an institution for serious health or safety violations from 7 CFR 226.6(c)(5)(i) through 226.25(f)(1). Requirements for the State agency to exercise its authority to suspend participation if it determines that an institution knowingly submitted a claim for reimbursement that is fraudulent or that cannot be verified with required documentation would move from 7 CFR 226.6(c)(5)(ii) to 226.25(f)(2). Fair hearing procedures at 7 CFR 226.6(k) and (l) would move to § 226.25(g). Sponsoring organization actions to suspend participation of day care homes that are currently found at 7 CFR 226.16(l)(4) would move to § 226.25(f). Requirements for the suspension of payments would move from 7 CFR 226.6(c)(5)(i)(D), 226.6(c)(5)(ii)(E), and 226.16(l)(4)(iv) to 226.25(h)(2).

D. Disqualification and the National Disqualified List

1. Termination for Cause and Disqualification

The serious deficiency process gives program operators the opportunity for corrective action and due process. The administering agency can accept corrective action at any point up until the program agreement is terminated. If the administering agency determines that the program operator, whose ability to manage the program has already been called into question, fails to take successful corrective action, the program agreement must be terminated for cause. Under this proposed rule, the administering agency would declare the program operator to be seriously deficient at the point of termination, which would be followed by disqualification.

Termination for Cause

The

Child Nutrition Program Integrity Final Rule

amended CACFP and SFSP regulations to allow a program operator to terminate an agreement for convenience for considerations unrelated to its program performance, at current §§ 225.6(i) and 226.6(b)(4)(ii). In the serious deficiency process, due to a program operator's inability to properly perform its responsibilities under its program agreement, termination must always be for cause, not convenience. Current § 226.16(l) also addresses a sponsoring organization's actions to terminate a day care home's agreement for cause. There are no regulations describing the termination for cause of a CACFP institution or unaffiliated center or an SFSP sponsor's agreement related to the performance of program requirements.

To strengthen management practices and eliminate gaps that put program integrity at risk, FNS proposes to amend current §§ 225.2 and 226.2 to include definitions of “Termination for cause” to describe the administering agency's action to end an agreement with a sponsor, an institution, an unaffiliated center, or a day care home for reasons related to proper performance of program responsibilities. This proposed rule would also require action by the State agency to:

• Terminate an agreement whenever a sponsor's participation in SFSP or an institution's participation in CACFP ends at proposed §§ 225.6(i) and 226.6(b)(4)(iii), respectively;

• Terminate an agreement for cause, as described under the serious deficiency process proposed §§ 225.18(d)(1) and 226.25(d)(1); and

• Terminate an agreement for cause if a program operator, responsible principal, or responsible individual is on the National Disqualified List, at proposed §§ 225.18(e)(1) and 226.25(e)(1).

Disqualification

The National Disqualified List was established to prevent a disqualified institution or day care home from being approved to participate in CACFP or any other Child Nutrition Program. As described in the next section of this preamble, FNS proposes to amend 7 CFR 210.9(d), 215.7(g), 220.7(i), 225.6(b)(13), and 226.6(b)(1)(xiii), to establish a reciprocal disqualification process that would prohibit State agencies from approving an application for any program operator that is terminated for cause and placed on a National Disqualified List.

In CACFP, if a new institution's application does not meet program requirements under 7 CFR 226.6(b), 226.15(b), or 226.16(b), the State agency must deny the application and disqualify the applicant institution, the person who signed the application, and any other responsible principals or responsible individuals, as described in proposed § 226.6(c). The State agency must ensure that participating institutions annually certify that neither the institution nor its principals are on the National Disqualified List. The State agency must also ensure that participating sponsoring organizations annually certify that no sponsored facility or facility principal is on the National Disqualified List.

When a new application is denied, current § 226.6(c)(1) requires the State agency to follow the procedures for implementing the serious deficiency process. However, FNS recognizes that the intent of the serious deficiency process is to address program performance under a legally binding agreement. It may be more appropriate to address the denial of a program application through a remedial application process, instead of the serious deficiency process. This rulemaking would amend 7 CFR 226.6(c)(1) to propose a separate set of procedures that would provide applicants the opportunity to correct the application and request due process if the application is denied. Similarly, the serious deficiency process would not apply to a denial of a sponsor's application for SFSP, as described in 7 CFR 225.11(c).

2. Reciprocal Disqualification in Child Nutrition Programs

Section 12(r) of the NLSA, 42 U.S.C. 1760(r), specifies 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. FNS proposes 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 and the applicant is on the National Disqualified List for CACFP or SFSP. This process is called “reciprocal disqualification.”

The establishment of a reciprocal disqualification process supports

integrity when it is determined that a program operator currently participating in a Child Nutrition Program is terminated for cause from another Child Nutrition Program and placed on the National Disqualified List. Proposed § 226.6(b)(1)(xiii) would prohibit State agencies from approving an application for participation in any Child Nutrition Program for any program operator that is terminated for cause and placed on the National Disqualified List. Current § 226.6(c)(1)(iii)(C)(

3

) and proposed §§ 226.6(c)(6)(iii) and 226.25(g)(1)(i)(A) provide the right to a fair hearing to program operators whose applications are denied. The right to a fair hearing of an application denial for program operators based on the National Disqualified List is solely granted to contest the accuracy of the information on the National Disqualified List or the match to the National Disqualified List. The basis for denial, termination for cause, and placement on the National Disqualified List, is not subject to an additional hearing. The right to a fair hearing already would have been provided prior to termination and disqualification.

Proposed § 226.25(e)(1) would apply reciprocal disqualification for termination and placement on a National Disqualified List for program operators with an existing program agreement. This rulemaking would also apply termination procedures, under 7 CFR 210.25, 215.16, 220.19, 225.11, 226.6, and 226.16, when it is determined that a program operator currently participating in a Child Nutrition Program is terminated for cause from another Child Nutrition Program and placed on a National Disqualified List. The State agency would have to make an effort to ensure that eligible children and adult participants continue to have access to important nutrition benefits. For example, if a CACFP sponsoring organization is terminated and disqualified, the State agency should have a contingency plan for the transfer of homes or unaffiliated centers. A contingency plan, as defined in proposed §§ 225.2 and 226.2, and further described in proposed §§ 225.18(d)(2) and 226.25(d)(2), would help ensure that meal services continue to be available, without interruption.

This proposed rule would require the State agency to follow the same procedures to address serious management problems through corrective action and due process for all types of program operators. However, at the point when a proposed termination action is upheld and the program operator is declared seriously deficient, as described in proposed § 226.25(a)(6)(iii)(B) and (d)(1), FNS has determined that there are circumstances that may warrant an alternative to disqualification for institutions or sponsors that are also school food authorities. FNS recognizes that school food authorities are responsible to safeguard school meal benefits to children. Additional public input is needed to consider a different procedure when a school food authority that is also an institution or sponsor operating CACFP or SFSP, respectively, is declared seriously deficient. Public comments on the following options will be critical as FNS develops the final rule:

1. Option 1 would require the State agency to terminate, disqualify, and place on the National Disqualified List any school food authority that is declared seriously deficient, just like any other type of institution or sponsor that is operating CACFP and SFSP. If a school food authority is determined to be seriously deficient, the school food authority's agreement to operate CACFP or SFSP would be terminated, and it would be disqualified and placed on the National Disqualified List, as described under proposed §§ 225.18(e) and 226.25(e). Placement on the National Disqualified List would prohibit the school food authority from operating the National School Lunch Program, School Breakfast Program, or any other Child Nutrition Program. The responsible principals and responsible individuals would also be disqualified from program participation and placed on the National Disqualified List.

2. Option 2 would require the State agency to terminate the school food authority's agreement to operate CACFP or SFSP. In this case, the responsible principals and responsible individuals would be disqualified from program participation, placed on the National Disqualified List, and ineligible to participate in any Child Nutrition Program. However, the State agency would have discretion to disqualify and place the school food authority, itself, on the National Disqualified List. If the State agency determines that the school food authority should not be subject to disqualification and placement on the National Disqualified List, there would be no impact on the school food authority's ability to operate other Child Nutrition Programs, including the National School Lunch and School Breakfast Programs.

This rulemaking would not affect the eligibility of a school food authority that only operates the National School Lunch, School Breakfast, or Special Milk Programs to continue to participate in those programs. FNS does not anticipate that it will impact most school food authorities that operate CACFP or SFSP. With their experience managing the school nutrition programs, school food authorities are well-positioned to successfully operate CACFP and SFSP.

There may also be circumstances when a school food authority may be a meal vendor for a program operator that has been placed on the National Disqualified List. If the school food authority is not otherwise connected to the management of CACFP or SFSP, the school food authority would continue to be eligible to participate in the Child Nutrition Programs, because it would not be responsible for program operations. School food authorities, sponsors, and institutions are only responsible for the schools, sites, and facilities identified in their State agency agreements.

Accordingly, this proposed rule would amend 7 CFR 225.2 and 226.2 to include definitions of termination for cause and contingency plan. Additional amendments to 7 CFR 210.9(d), 215.7(g), 220.7(i), 225.6(b)(13), 225.18(d) and (e), 226.6(b)(1)(xiii) and (b)(2)(iii)(D), and 226.25(d) and (e) would prohibit State agencies from approving an application for participation in any Child Nutrition Program for a program operator that is terminated for cause and that is listed on a National Disqualified List. This rulemaking would also amend 7 CFR 225.11(c) and 226.6(c) to ensure that the appropriate procedures are followed for a denial of a sponsor's or institution's application.

3. Legal Requirements for Records Maintained on Disqualified Individuals

The National Disqualified List is a Federal computer matching program that uses a Computer Matching and Privacy Protection Act system of records of information on institutions and individuals who are disqualified from participation in CACFP. This is a mandatory collection under section 243(c) of Public Law 106-224, the Agricultural Risk Protection Act of 2000, which amended section 17 of the Richard B. Russell National School Lunch Act, at 42 U.S.C. 1766(d)(5)(E)(i) and (ii), and under 7 CFR 226.6(c)(7)(i). This proposed rule would expand the National Disqualified List to include the records of sponsors, sites, responsible principals, and responsible individuals who have been disqualified from SFSP, in compliance with section 13 of the NSLA, at 42 U.S.C. 1761(q)(3), and the Computer Matching Act, at 5 U.S.C. 552a. The Computer Matching Act applies when a Federal agency conducts

a computer match of two or more personally identifiable information records for establishing or verifying eligibility under a Federal benefit program. The Computer Matching Act also applies when a non-Federal agency compares information with a Federal system of records to determine eligibility for a Federal benefit program. A computer match takes information provided by a Federal source and compares it to a State record, using a computer to perform the comparison.

The National Disqualified List supports program integrity by preventing institutions whose program agreements were terminated for cause and disqualified in one State from being approved for participation in another State. It prevents disqualified responsible principals from continuing to be involved in program administration by forming a new corporate entity and entering the program under a different organizational name. It also prevents day care home providers and responsible individuals who have been terminated and disqualified by one sponsoring organization from re-entering the program under the auspices of a different sponsoring organization. Once disqualified, program participation is prohibited for 7 years from the effective date of the disqualification and until any debt is paid.

The records of institutions, responsible principals, and responsible individuals who have been disqualified from participation in CACFP are part of the National Disqualified List. As FNS described in the notice,

Privacy Act of 1974; System of Records Revision,

86 FR 48975, September 1, 2021, many of the steps of the serious deficiency process align with requirements of the Computer Matching Act. For example, the State agency initiating a National Disqualified List search must independently verify records to determine accuracy before taking adverse action against a program applicant or participant. FNS uploads every certified notice of serious deficiency into the system, which the State agency may use to verify that the match is correct. After records are verified, the State agency must notify the disqualified program applicant or participant of the match findings. However, current § 226.6(c)(6) describing the National Disqualified List does not address procedures or protections for data disclosure and privacy specified for records maintained on any person in a computer matching program under the Computer Matching Act.

This proposed rule would close the gap by codifying the responsibilities of administering agencies in implementing systems of records, as described in the Computer Matching Act. Under proposed §§ 225.18(e)(3) and 226.25(e)(3), each State agency would enter into a written matching agreement with FNS to address procedures and protections for disclosure and privacy of personally identifiable information records on the National Disqualified List. Additional amendments would advise State agencies on the use of matching agreements, independent verification of matching information, use of disqualification data, and safeguards to protect individuals who may be incorrectly placed on the National Disqualified List through human error or technical lapses in the system. Before a CACFP or an SFSP application is denied, the State agency would also have to notify any individual whom the application identifies as being placed on the National Disqualified List. The State agency must provide an opportunity for the individual to ensure that the record is accurate.

Current CACFP regulations at 7 CFR 226.6(b)(1)(xii) and (b)(2)(iii)(C) require State agencies and sponsoring organizations to verify that applicants are not on the National Disqualified List prior to approval or annual certification of participation. Similarly, before hiring, CACFP sponsoring organizations must check the National Disqualified List to verify that any new employee whose position will be supported by program funds or who will be working in CACFP is not on the National Disqualified List. Proposed § 226.25(e)(3)(i)(C) would require the State agency initiating a computer match to verify the disqualification before taking adverse action against a program applicant, participant, or employee. The State agency could contact the originating administering agency or check the certified notices that are uploaded to the system to verify the disqualification.

The serious deficiency process requires three types of certified notices that are uploaded to the system, which administering agencies may use to independently verify the accuracy of a computer match. This rulemaking would also amend the definition of “notice” under 7 CFR 226.2 and address the content and delivery requirements for all of the notifications that are transmitted as part of the serious deficiency process at proposed § 226.25(a)(5).

This proposed rule would also expand the National Disqualified List to include the records of sponsors, sites, responsible principals, and responsible individuals who have been disqualified from SFSP, as required under section 13 of the NSLA, at 42 U.S.C. 1761(q)(3). FNS proposes to amend SFSP regulations to address termination for cause at proposed § 225.18(d)(1); disqualification and placement on the National Disqualified List at proposed § 225.18(e)(2); and the State agency's responsibilities under the Computer Matching Act at proposed § 225.18(e)(3).

Accordingly, this proposed rule would amend 7 CFR 225.18(e)(3) and 226.25(e)(3) to address compliance with the Computer Matching Act's protections for data disclosure and privacy specified for records maintained on any person on the National Disqualified List. This rulemaking would also amend the definition of “notice” under 7 CFR 225.2 and 226.2 and further amend 225.18(a)(5) and (e)(3)(v), and 226.25(a)(5) and (e)(3)(v) to address the content and delivery requirements for serious deficiency process notifications and independent verification of a computer match.

E. Multi-State Sponsoring Organizations (MSSO)

A sponsoring organization is a type of public or private nonprofit institution that is entirely responsible for the administration of CACFP in any day care home, unaffiliated public or private nonprofit center, or affiliated for-profit center. Day care homes are required to participate in CACFP through a sponsoring organization. Although centers may enter into an agreement directly with the State agency, many centers find it is easier to participate in CACFP under an existing sponsoring organization. As a growing number of sponsoring organizations expand to serve multiple types of facilities in multiple States, State agencies are faced with unique challenges, particularly when serious management problems arise. Without regulated practices, assignment of State agency responsibilities and protocol of communication, State agencies dealing with multi-state sponsoring organizations (MSSOs) could duplicate each other's efforts and could be unaware of potential serious management problems occurring in another State. In SFSP, FNS understands there are an increasing number of sponsors operating summer meal programs at sites in more than one State.

FNS is taking this opportunity to propose regulations to strengthen State agency administration when a sponsoring organization operates the program in more than one State. This

proposed rule addresses provisions to facilitate the State agency's review of administrative budgets and allocation of shared costs, performance of monitoring and audit-related activities, and oversight when procurement standards vary from State to State. FNS recognizes that improved information sharing, collaboration, and coordination among administering agencies are also essential to ensure that participation of MSSOs is administered properly, with less duplication and burden.

At 7 CFR 226.2, FNS proposes to define an MSSO as a sponsoring organization that operates CACFP in more than one State. This proposed rule would define an MSSO as a sponsor that operates SFSP in more than one State, under 7 CFR 225.2. An MSSO enters into a written agreement with the administering agency in each State where it is approved to provide CACFP or SFSP meal services. An independently owned or franchised organization operating multiple centers, day care homes, or sites in a single State would not be an MSSO. However, a franchise operating multiple centers, day care homes, or sites in more than one State would be an MSSO. A for-profit organization is an MSSO when the parent corporation operates multiple affiliated centers or affiliated sites in more than one State.

The State agency must determine if program operations will be provided in more than one State, as part of the application process. Proposed §§ 225.6(c)(5), 226.6(b)(1)(xix), and 226.6(b)(2)(iii)(L) would require the State agency to ask all applicants if they are approved or intend to submit an application to participate in any other State. The application of a potential MSSO would have to provide: additional information on the number of affiliated and unaffiliated facilities or sites it operates; its use of program funds for administrative expenses; and its nonprofit or for-profit status. The application would also have to include a comprehensive budget that provides the sum of all costs to be incurred, identifies costs that attribute directly to operations within each State, and sets out a cost allocation plan for costs benefiting more than one State.

For program purposes, a cognizant agency is any State agency or FNS Regional office that is responsible for oversight of CACFP or SFSP in the State where the MSSO's headquarters is located. The location of the MSSO's headquarters is the determining factor in assigning the role of the cognizant agency. This rulemaking proposes to add definitions of Cognizant State agency and Cognizant Regional office, under 7 CFR 225.2 and 226.2, to recognize the roles that these administering agencies have when an MSSO participates in CACFP or SFSP. These terms are currently not defined in regulation. By assigning responsibilities to the Cognizant State agency and Cognizant Regional office, this will eliminate a duplication of effort and increase program integrity by increasing awareness of the MSSO's performance in other States. FNS seeks input on how MSSO's headquarters are identified.

Over the years, FNS has issued CACFP guidance to clarify responsibilities—particularly with regard to participation of franchises and for-profit organizations, review of administrative budgets, allocation of shared costs, availability of records, performance of monitoring and audit-related activities, and procurement actions—for agencies that assume cognizance. This set of guidance includes FNS Instruction 788-5,

Approval of Administrative Budgets for Multi-State Sponsoring Organizations of Family Day Care Homes—Child Care Food Program,

October 25, 1982; FNS Instruction 788-16,

Administrative Procedures for Multi-State Sponsoring Organization—Child Care Food Program,

October 19, 1983; FNS Instruction 788-6, Revision 2,

Availability of Institutions' Records to Administering Agencies,

November 1, 1991; FNS Instruction 796-2, Revision 4,

Financial Management—Child and Adult Care Food Program,

December 11, 2013; and the memorandum,

Applicability of FNS Instruction 788-16 to Multi-State Proprietary CACFP Sponsors,

June 25, 2003.

FNS proposes to amend CACFP regulations at 7 CFR 226.6(q) to address the responsibilities of the administering agency in all States where MSSOs operate and describe the unique role of the cognizant agency in the State where the MSSO is headquartered. This proposed rule would add similar amendments to SFSP regulations under 7 CFR 225.6(n).

This rulemaking would require all CACFP State agencies and SFSP State agencies to:

•

Determine if an applicant is an MSSO.

As part of the application process, the State agency must ask all applicants if their organization operates in more than one State.

•

Obtain administrative and financial information from each MSSO.

The following information must be obtained initially on the MSSO's application and annually certified or updated:

☐ The number of affiliated facilities or sites it operates, by State;

☐ The number of unaffiliated facilities or sites it operates, by State;

☐ The names, addresses, and phone numbers of the organization's headquarters and the official who has administrative responsibility;

☐ The names, addresses, and phone numbers of the financial records center and the official who has financial responsibility; and

☐ The organization's decision whether or not to use program funds for administrative expenses.

•

Approve the administrative budgets of any MSSOs operating within their respective States.

The State agency is responsible for approving budget line items that are directly attributable to operations within the State. The State agency must notify the cognizant State agency of any CACFP administrative costs that exceed the 15 percent limit, as described in current § 226.6(f)(1)(iv). In SFSP, the State agency must notify the cognizant State agency if it has determined that the ratio of administrative to operating costs is high or that the net cash resources of an MSSO's nonprofit food service exceeds the limits that are described in 7 CFR 225.7(m).

•

Enter into a permanent written agreement with each MSSO operating within the State.

Each MSSO must enter into an agreement with the State agency to assume final administrative and financial responsibility for program management in each State in which it operates.

•

Track State-specific costs.

The State agency is responsible for approving State-specific costs, which include the State agency's portion of budget line item costs that are shared among other administering agencies, as well as costs that attribute directly to program operations within the State.

•

Conduct oversight of MSSO operations within the State.

State agencies must comply with SFSP and CACFP monitoring and program assistance requirements under proposed §§ 225.6(n)(2) and 226.6(q), respectively, to conduct reviews, training, and other oversight activities of MSSOs operating within their respective States. The review cycle would be based on the number of sites or facilities operating within the State. To reduce administrative burden, the State agency may use information from the cognizant State agency's monitoring activities to assess compliance in areas where the scope of review overlaps, during the same review cycle. In those circumstances, the State agency may choose to only review those aspects of CACFP or SFSP that are outside the scope of the cognizant agency's review,

such as implementation of additional State agency requirements or financial records to support State-specific administrative costs. Summaries of reviews conducted within each State must be provided to the cognizant State agency. The State agency may also choose to conduct a full review at the MSSO headquarters and financial records center, by requesting the necessary records from the cognizant State agency.

• Conduct audit resolution activities.

State agencies are responsible for reviewing audit reports, addressing audit findings, and implementing corrective actions to resolve audits of any MSSOs operating within their respective States. MSSOs must make audit reports available to the State agencies in all of the States in which they have program operations.

• Make available copies of notices of termination and disqualification.

The State agency conducting the oversight activities must notify all other administering agencies that have agreements with the MSSO of termination and disqualification actions. If a State agency holds an agreement with an MSSO that is disqualified by another administering agency and placed on the National Disqualified List, the State agency must terminate the MSSO's agreement, effective no later than 30 calendar days of the date of the MSSO's disqualification. This requirement is 45 days in CACFP regulations at current § 226.6(c)(2)(i). In SFSP, this proposed rule would require the State agency to terminate the MSSO's agreement, effective no later than 15 calendar days of the date of the MSSO's disqualification.

FNS also proposes requirements for the cognizant State agency administering CACFP or SFSP. This rulemaking would require the cognizant State agency to:

•

Determine if there will be shared administrative costs among the States in which the MSSO operates and how the costs will be allocated.

The cognizant agency has the authority to approve cost levels for cost items that must be allocated. The cognizant State agency must approve the allocation method that the MSSO uses for shared costs. The method must allocate the cost based on the benefits received, not the source of funds available to pay for the cost. If the MSSO operates CACFP centers, the cognizant agency must also ensure that administrative costs are capped at 15 percent on an organization-wide basis. In SFSP, the cognizant agency must ensure that the net cash resources of an MSSO's nonprofit food service do not exceed the limits that are described in 7 CFR 225.7(m).

•

Coordinate monitoring.

The cognizant State agency's monitoring activities must include a full review at the MSSO headquarters and financial records center. The cognizant State agency must coordinate the timing of reviews and make copies of monitoring reports and findings available to all other administering agencies that have agreements with the MSSO, as described in proposed §§ 225.6(n)(2)(iii) and § 226.6(q)(2)(iii).

•

Ensure that organization-wide audit requirements are met.

Each MSSO must comply with audit requirements, as described under 2 CFR part 200, subpart D, and USDA implementing regulations 2 CFR parts 400 and 415. Since their operations are often large and complex, MSSOs should have annual audits. If an MSSO has for-profit status, the cognizant agency must establish audit thresholds and requirements.

•

Oversee audit funding and costs.

Audit funding is a shared responsibility. The share of organization-wide audit costs may be based on a percentage of each State's expenditure of CACFP and SFSP funds and the MSSO's expenditure of Federal and non-Federal funds during the audited fiscal year. The cognizant State agency should review audit costs as part of the overall budget review and make audit reports available to the other administering agencies that have agreements with the MSSO.

•

Ensure compliance with procurement requirements.

Procurement actions involving MSSOs must follow the requirements under 2 CFR part 200, subpart D, and USDA implementing regulations 2 CFR parts 400 and 415. If the procurement action benefits all States in which the MSSO operates, the procurement standards of the State that are the most restrictive apply. If the procurement action only benefits a single State's program, the procurement standards of that State agency apply.

Accordingly, this rule proposes to amend 7 CFR 226.2, 226.6(b)(1) and (2), and 226.6(q) to address State administrative responsibilities when MSSOs participate in CACFP. Amendments to 7 CFR 225.2, 225.6(c)(5), and 225.6(n) would make similar changes to address State administrative responsibilities when MSSOs participate in SFSP.

F. Summary of Regulatory Provision Proposals

This rulemaking reflects FNS' commitment to work with State administrators, program operators, and other stakeholders to develop strategies to ensure that Child Nutrition Program requirements are effective, practical, and fair. FNS has proposed important modifications to the serious deficiency process that, when codified in the regulations, are designed to strengthen administrative oversight, improve operational performance, and protect Child Nutrition Programs from mismanagement, abuse, and fraud. The serious deficiency process described in this proposed rule includes procedures for corrective action, termination, disqualification, and due process that emphasize fairness and consistency for all types of program operators in CACFP and SFSP. This proposed rule addresses statutory requirements and policy improvements that would:

• Extend the serious deficiency process to unaffiliated centers in CACFP.

• Establish a serious deficiency process in SFSP.

• Make improvements to the serious deficiency process by:

○ Defining terms that would encourage a clear understanding and improve implementation of the serious deficiency process;

○ Including measures for identifying a serious management problem and determining the effectiveness of corrective action;

○ Offering a path to full correction of a serious management problem and the removal of the determination of serious deficiency;

○ Establishing timelines with an emphasis on correcting serious management problems quickly; and

○ Consolidating all regulatory requirements for oversight and implementation of the serious deficiency process, including due process, termination, and disqualification, in a single subchapter, at 7 CFR 225.18 and 226.25.

• Direct each SFSP State agency to establish a list of sponsors, responsible principals, and responsible individuals with serious management problems.

• Require action by the State agency to terminate a CACFP or SFSP agreement for cause through the serious deficiency process.

• Expand the National Disqualified List to include disqualified SFSP sponsors, responsible principals, and responsible individuals on the National Disqualified List.

• Direct the State agency to exercise its authority to suspend CACFP participation when a false or fraudulent claim is alleged.

• Require compliance with the Computer Matching Act's protections for data disclosure and privacy specified

for records maintained on any person on the National Disqualified List.

• Propose requirements to strengthen State agency administration when a program operator participates in CACFP or SFSP in more than one State.

Public input and assessment, with an opportunity to examine CACFP and SFSP operations and consider improvements related to this proposed rule, are essential elements of the rulemaking process. FNS invites the public to submit comments to help FNS gain a better understanding of both the possible benefits and any negative impacts associated with the proposed regulatory changes. FNS requests specific input on a proposal to allow an alternative to disqualification for program operators that are school food authorities. Specific public input is also requested on the requirement that State agencies exercise their authority to suspend CACFP participation when a false or fraudulent claim is alleged and to extend this authority to State agencies administering SFSP. Public comments on these amendments will be critical as FNS develops the final rule.

III. Procedural Matters

A. Executive Orders 12866, 13563 and 14094

Executive Orders 12866 and 13563 direct agencies to assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits, including potential economic, environmental, public health and safety effects, distributive impacts, and equity. Executive Order (E.O.) 13563 emphasizes the importance of quantifying both costs and benefits, reducing costs, harmonizing rules, and promoting flexibility. This rulemaking was determined to be not significant under section 3(f) of E.O. 12866, as amended by E.O. 14094, and therefore no Regulatory Impact Analysis is required.

B. Regulatory Flexibility Act

The Regulatory Flexibility Act, 5 U.S.C. 601-612, requires Agencies to analyze the impact of rulemaking on small entities and consider alternatives that would minimize any significant impacts on a substantial number of small entities. The FNS Administrator has certified that this proposed rule will not have a significant economic impact on a substantial number of small entities. This rulemaking codifies provisions 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. While this rulemaking will affect State agencies and local organizations operating the Child and Adult Care Food Program and Summer Food Service Program, any economic effect will not be significant.

C. Unfunded Mandates Reform Act

Title II of the Unfunded Mandate Reform Act of 1995 (UMRA), Public Law 104-4, establishes requirements for Federal agencies to assess the effects of their regulatory actions on State, local, and tribal governments, and the private sector. Under section 202 of UMRA, FNS generally must prepare a written statement, including a cost-benefit analysis, for proposed and final rules with “Federal mandates” that may result in expenditures to State, local, or Tribal governments in the aggregate, or to the private sector, of $100 million or more in any one year. When such a statement is needed for a rule, section 205 of UMRA generally requires FNS to identify and consider a reasonable number of regulatory alternatives and adopt the least costly, more cost-effective or least burdensome alternative that achieves the objectives of the rule. This proposed rule contains no Federal mandates, under the regulatory provisions of title II of UMRA, for State, local, and Tribal governments, or the private sector, of $100 million or more in any one year. Therefore, this rulemaking is not subject to the requirements of sections 202 and 205 of UMRA.

D. Executive Order 12372

The Child and Adult Care Food Program is listed in the Assistance Listings under the Catalog of Federal Domestic Assistance Number 10.558. The Summer Food Service Program is listed under No. 10.559. The National School Lunch, Special Milk, and School Breakfast Programs are listed under Nos. 10.555, 10.556, and 10.553, respectively. All are subject to Executive Order 12372, which requires intergovernmental consultation with State and local officials. Since these programs are State-administered, FNS has formal and informal discussions with State and local officials, including representatives of Indian tribal organizations, on an ongoing basis regarding program requirements and operations. This provides FNS with the opportunity to receive regular input from State administrators and local program operators, which contributes to the development of feasible requirements.

E. Federalism Summary Impact Statement

Executive Order 13132 requires Federal agencies to consider the impact of their regulatory actions on State and local governments. Where such actions have federalism implications, agencies are directed to provide a statement for inclusion in the preamble to the regulations describing the agency's considerations in terms of the three categories called for under section 6(b)(2)(B) of Executive Order 13132. FNS has determined that this proposed rule does not have federalism implications. This rulemaking does not impose substantial or direct compliance costs on State and local governments. Therefore, under section 6(b) of the Executive Order, a federalism summary is not required.

F. Executive Order 12988, Civil Justice Reform

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

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