Processing of Donated Foods Under the State Processing Program and National Commodity Processing Program
Federal RegisterDec 7, 1994
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DEPARTMENT OF AGRICULTURE
Food and Consumer Service
7 CFR Parts 250 and 252
RIN 0584-AB30
Processing of Donated Foods Under the State Processing Program
and National Commodity Processing Program
AGENCY: Food and Consumer Service, USDA.
ACTION: Final rule.
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SUMMARY: This final rule amends the Food Distribution Program
regulations to strengthen the provisions concerning the processing of
donated food and to increase the uniformity between the provisions
governing the State processing program and the National Commodity
Processing (NCP) Program. The changes incorporated in this final rule
reflect the results of two national meetings: a meeting held to discuss
ideas on improving the administration of the State processing and the
NCP Programs and the Department's Paperwork Reduction Task Force
meeting held to discuss ways to reduce the paperwork burden associated
with the processing programs.
EFFECTIVE DATE: This final rule is effective January 6, 1995.
FOR FURTHER INFORMATION CONTACT: Beverly King, Chief, Commodity
Processing Branch, Food Distribution Division, Food and Consumer
Service, U.S. Department of Agriculture, Park Office Center, Room 520,
3101 Park Center Drive, Alexandria, Virginia 22302-1594; or telephone
(703) 305-2888.
SUPPLEMENTARY INFORMATION:
Classification
This final rule has been determined to be not significant for
purposes of Executive Order 12866 and, therefore, has not been reviewed
by the Office of Management and Budget.
Information Collection
This final rule contains information collections which are subject
to review by the Office of Management and Budget (OMB) under the
Paperwork Reduction Act of 1980 (44 U.S.C. 3501-3520). The title,
description, and respondent description of the information collections
are shown below with an estimate of the annual reporting and
recordkeeping burdens. Included in the estimate is the time for
reviewing instructions, searching existing data sources, gathering and
maintaining the data needed.
Title: Technical Amendments to the State processing and National
Commodity Processing Programs.
Description: Recommendations made by the Paperwork Reduction Task
Force in August 1990 and subsequently incorporated into USDA's 1990
Report to Congress were included in this final regulation. As a result,
the reporting and recordkeeping burden hours associated with four
program areas will be reduced under this final regulation. The
reporting and recordkeeping requirements identified below have been
submitted to OMB for approval and are not effective until such approval
is obtained and OMB has assigned a control number.
The OMB control numbers assigned to the existing recordkeeping and
reporting requirements were approved by OMB for Part 250 under control
number 0584-0007 and for Part 252 under control number 0584-0325.
Description of Respondents: Distributing agencies, school food
authorities, and commercial food processors.
State Processing Program Description of Respondent's Estimated Annual Reporting and Recordkeeping Burdens
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Annual Average
CFR Part Annual No. frequency burden per Annual
respondents response hours burden
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7 CFR 250.30(c):
Previous.............................................. 500 1 2 hours 1,000
Proposed.............................................. 166 1 2 hours 332
7 CFR 250.30(l):
Previous.............................................. 57 12 2 hours 1,368
Proposed.............................................. 19 12 2 hours 456
7 CFR 250.30(m):
Previous.............................................. 500 12 1.33 hour 8,000
Proposed.............................................. 500 9 1 hour 4,500
7 CFR 250.30(n)(4):
Previous.............................................. 500 1 1 hour 500
Proposed.............................................. 0 0 0 0
Total Previous Burden Hours:10,868
Total Proposed Burden Hours:5,288
Total Difference:-5,580
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These programs are listed in the Catalog of Federal Domestic
Assistance under 10.550 and are subject to the provisions of Executive
Order 12372 which requires intergovernmental consultation with State
and local officials (7 CFR Part 3015, Subpart V and final rule-related
notices published at 48 FR 29114, June 24, 1983 and 49 FR 22676, May
31, 1984).
This final rule has been reviewed under Executive Order 12778,
Civil Justice Reform. This rule is intended to have preemptive effect
with respect to any State or local laws, regulations or policies which
conflict with its provisions or which would otherwise impede its full
implementation. This rule is not intended to have retroactive effect
unless so specified in the ``Effective Date'' section of this preamble.
Prior to any judicial challenge to the provisions of this rule or the
application of its provisions, all applicable administrative procedures
must be exhausted. This includes any administrative procedures provided
by State or local governments. For disputes involving procurements by
State agencies and sponsors, this includes any administrative appeal
procedures to the extent required by 7 CFR Parts 3015 or 3016.
The Department of Agriculture is committed to carrying out its
statutory and regulatory mandates in a manner that best serves the
public interest. Therefore, where legal discretion permits, the
Department actively seeks to promulgate regulations that promote
economic growth, create jobs, are minimally burdensome and are easy for
the public to understand, use or comply with. In short, the Department
is committed to issuing regulations that maximize net benefits to
society and minimize costs imposed by those regulations.
Background
Section 250.30 of the current Food Distribution Program regulations
sets forth the terms and conditions under which distributing agencies,
subdistributing agencies, and recipient agencies may enter into
contracts with commercial firms for processing donated foods and
prescribes the minimum requirements to be included in such contracts.
Part 252 sets forth the terms and conditions under which the Food and
Consumer Service (FCS) and commercial firms may enter into National
Commodity Processing (NCP) Program contracts for the processing and
distribution of designated donated foods to eligible recipient
agencies.
On May 25, 1993, the Department published a proposed rule in the
Federal Register (58 FR 29985) which would amend the Food Distribution
Program regulations to strengthen provisions concerning the processing
of donated foods and to increase uniformity between provisions
governing State processing activities, Part 250, and those governing
NCP Program, Part 252. The proposed rule provided a 60-day comment
period.
This final rule addresses those provisions regarding food service
management companies, contract renewal, requirements for processing
contracts, liquidated damages, alternate value pass-through systems,
invoice information, substitution of donated food, time frames for
processors to pay refunds, refund applications/performance reports, and
list of contracting agencies.
Please note that a typographical error in the proposed rule
published on May 25, 1993, (58 FR 29995) misidentified section
250.30(k)(3) as section 250.30(k)(4). The Department apologizes for any
inconvenience this may have caused in reviewing the proposed rule for
comment. Throughout this final rule, the correct section number will be
referred to when discussing provisions of that proposed rule in order
to avoid further confusion. However, the Department recognizes that the
current section 250.30(k)(4) is obsolete, in that it requires
distributing agencies to notify processors of the total amount of
donated cheese they can receive during the 1988-1989 school year.
Because this requirement is no longer pertinent to current program
operations, the Department is removing this language from the
regulations.
Analysis of Comments
The Department received a total of 41 comment letters from
distributing agencies, local school food authorities, commercial food
processors, a State school food service association, a private sector
representative, the American Commodity Distribution Association, and
the American School Food Service Association.
Food Service Management Companies
Sections 250.3 and 250.30(a) of the proposed rule would revise the
definition of ``processor'' and associated requirements to remove the
blanket exception from the State processing regulations for commercial
food service management companies. Additionally, the proposed rule
would revise the definition of ``processor'' to exempt any commercial
enterprises which handle, prepare, and/or serve products or meals
containing donated foods on-site solely for the individual recipient
agency under contract.
With regard to the removal of the blanket exception for commercial
food service management companies from the definition of ``processor,''
twenty-five comments were received. All commenters supported this
proposal for the reasons set forth in the preamble of the proposed
rule. The Department proposed this change because of problems
identified in the past when food service management companies use
commercial facilities to produce items for the various school food
authorities under contract.
Under the current regulations, it is often difficult to determine
if donated food is used to produce meals for the appropriate recipient
agency and if the value of the donated food is reflected in a reduction
of the food service management companies' fees to the recipient
agencies. Because these companies are exempt from the processing
regulations, there is little the distributing agency or recipient
agency can do to monitor commodity inventories. Based on the reasons
set forth in the preamble to the proposed rule and the overwhelming
response from commenters in favor of the proposal, the blanket
exclusion of food service management companies from the State
processing regulations is eliminated from the section 250.3 definition
of ``processor'' and Sec. 250.30(a).
Thirty-three comments were received regarding the proposed change
to the definition of ``processor'' to exempt any commercial enterprises
which handle, prepare and/or serve products or meals containing donated
foods on-site solely for the individual recipient agency under
contract. Thirty-two commenters were opposed to this change, primarily
as it applied to recipient agencies. Of this number, twenty-five
commenters believed that all recipient agencies providing meals to
other recipient agencies, whether on-site or off-site, should be exempt
from the processor requirements of Part 250. Several commenters stated
that the use of commodities could be monitored satisfactorily through
existing food distribution review standards. Another commenter stated
that recipient agencies should be exempt from this requirement if they
provide for accountability and value pass-through for the donated food.
This commenter stated that this could be accomplished by ensuring that
funds obtained from meals furnished to other recipient agencies are
deposited into the recipient agency's food service account. Other
commenters stated that the proposed rule defining a school food
authority which provides meals to summer feeding programs, child and
adult day care centers, senior citizens and others as a processor is
not practical. One commenter stated that the definition could be
corrected by adding a sentence to the definition that donated food
recipient agencies which prepare their own meals on-site and prepare
meals for other recipient agencies at the same location are also exempt
from this definition. One commenter stated that schools and child care
centers should not be classified as commercial food service management
companies if they are eligible for participation as recipient agencies
in child nutrition programs.
The Department believes that many of the commenters' responses were
based on the discussion in the preamble of the proposed rule which
dealt with situations in which one recipient agency prepares meals for
another recipient agency. A recipient agency which prepares meals for
other recipient agencies is a food service management company under the
definition in Sec. 250.3. The preamble stated that the Department
believes that where a nonprofit recipient agency, such as a school food
authority, prepares products or meals containing donated foods for more
than one recipient agency under more than one contract in the same
facility or prepares products or meals for any one recipient agency
off-site, that recipient agency is operating as a commercial food
service management company and must comply with the processing
provisions of Part 250 pursuant to the proposed changes to the
definition of ``processor'' in Sec. 250.3. The majority of the
commenters stated that recipient agencies that prepare meals for other
recipient agencies should be exempt from being defined as a processor.
Based on the concerns raised by the commenters, however, the
definition of ``processor'' in Sec. 250.3 of this final rule is amended
to provide that recipient agencies which prepare products or meals
containing donated foods for more than one recipient agency under more
that one contract in the same facility or prepare products or meals for
any one recipient agency off-site are excluded from the definition of
``processor'' if the recipient agency preparing products or meals can
provide accountability for any donated foods received from another
recipient agency in accordance with Sec. 250.16 of the Food
Distribution Program regulations and any funds received as payment for
preparing products or meals shall be deposited in the meal account of
the recipient agency preparing the products or meals.
Fee-for-Service
Section 250.3 of the proposed rule would define the term ``fee-for-
service'' and delete the obsolete definition of ``processing fee''.
Sections 250.30 (d) and (e) of the proposed rule would be reorganized
to clarify refund, discount, hybrid and alternate value pass-through
systems and to incorporate procedures for billing fee-for-service end
products. Additionally, under Sec. 250.30(c)(4)(viii)(D) of the
proposed rule the processing contract would require those processors
who wished to give credit for by-products via a reduction in the fee-
for-service price to identify in the contract the specific dollar value
amount reflected in the lowered price. Under Sec. 250.30(e)(3) of the
proposed rule, end products containing meat or poultry, together with
any other donated food, would be prohibited from being delivered and
sold to recipient agencies through distributors under fee-for-service
contracts. The proposed rule would allow end products containing meat
or poultry and additional ingredients which are not donated foods, to
be sold to recipient agencies through distributors under fee-for-
service contracts. The proposed rule would also permit end products
containing meat or poultry, together with other donated food sold
directly to recipient agencies by the processor, to be sold under fee-
for-service contracts. FCS was particularly interested in comments and
recommendations regarding the impact this proposal would have on any
products which were manufactured using a combination of meat and
poultry and other donated food and sold through distributors and
possible alternatives to the proposed rule on this point. A total of
fifteen comments was received on the above proposals.
Eight commenters responded to the proposed definition of ``fee-for-
service.'' Four of these commenters agreed with the definition as it
was proposed. The remaining four commenters stated that the definition
needed to be expanded. Three of the commenters in favor of expansion
stated that the fee-for-service price and the free on board (FOB) plant
price are the same prices and this should be reflected in the final
rule. They stated that the FOB price is the actual cost of producing
the end product, and that this price should be the same for all States;
the only difference in price would be the cost of transportation to
deliver the finished end products back to each State. These same
commenters said that this concept would mean that each processor would
only have to prepare one end product data schedule for the entire
nation. This action would make the idea of a clearinghouse for end
product data schedules become a reality. The other commenter wanted the
definition of fee-for-service expanded to clearly state that it is a
method of payment for processing services and is an alternative to a
value pass-through system, in addition to being the price representing
the processor's cost of ingredients, packaging, and overhead.
The Department disagrees with the commenters that stated that the
FOB price and the fee-for-service price represent the same figures. The
FOB price represents the processor's cost of producing an item prior to
shipment and delivery. FOB pricing includes the cost of all ingredients
used in the manufacture of the product; the price reduction for donated
food is not reflected in the FOB price. Fee-for-service, on the other
hand, represents the cost of ingredients (other than donated food)
labor, packaging, overhead, and other costs incurred in the conversion
of the donated food into the specified end product. The net case price
(the FOB price minus the commodity discount or refund for the donated
food) and fee-for-service are equivalent prices. The Department
believes that the definition of fee-for-service is correct as written
in the proposed rule, and therefore, the definition is adopted without
change in the final rule.
Four comments, all in favor, were received in response to section
250.30(c)(4)(viii)(D) of the proposed rule which would require the
value credits of any by-products to be listed on the end product data
schedule. Two of these commenters stated that they currently require
this information to be part of the processing agreement. This provision
is adopted without change in the final rule.
Only one comment, which was favorable, was received on section
250.30(e)(1)(iv) of the proposed rule which would establish new fee-
for-service billing procedures. Distributing agencies have been using
the proposed fee-for-service billing procedures for a number of years
without problem pursuant to a policy memo dated March 22, 1989.
Therefore, this final rule contains these procedures as proposed.
Two commenters were in favor of section 250.30(e)(3) of the
proposed rule which would restrict the sale of end products containing
both substitutable and non-substitutable (meat and/or poultry) donated
food through distributors to either the refund, hybrid, or alternate
value pass-through system and nine commenters were opposed. Those who
were opposed to the proposal wanted to have the option to approve the
sale of end products containing both substitutable and non-
substitutable donated food under fee-for-service arrangements.
Additionally, several commenters were opposed to the use of the term
``sold'' in section 250.30(e)(3) of the proposed rule in regard to end
products being ``sold'' to recipient agencies through distributors.
They stated that fee-for-service end products should be delivered but
not sold to a distributor. One commenter stated that the word ``sold''
implied that any quantity of end product can be purchased by any
recipient agency. That commenter further said that this is in contrast
to the actual availability of a commodity and the allocation process
that is associated with non-substitutable commodities that is used by
FCS and distributing agencies.
Four comments were received on the impact that the proposal would
make on end products manufactured from both substitutable and non-
substitutable donated food and delivered through distributors. However,
only one commenter provided a possible alternative to the proposed
rule. That commenter stated that since distributing agencies, and
ultimately recipient agencies, receive specific allocations of meat and
poultry, the quantity of meat and poultry made available to a processor
should be pre-assigned, based on a fair share apportionment and the
recipient agency's choice. The pre-assigned end products may then be
returned to the recipient agency through a distributor. This fee-for-
service billing process through a distributor for all end products
containing meat or poultry which are sold through a distributor would
be accomplished by either: 1) a dual billing system through which the
recipient agency is billed by the processor for the fee-for-service and
the distributor bills for the storage and delivery of end products or
2) a system through which the processor bills separately for the fee-
for-service and the distributor's storage and delivery charges. If
these end products should also contain substitutable foods, that
portion of the value pass-through could be handled as a refund or
discount, indicated on the processor's invoice. Both types of
information could be shown on the end product data schedule. The other
three commenters pointed out the impact that the proposal would have
without proposing alternatives. Their comments are as follows: 1) if
the proposed rule results in prohibiting end products containing
protein from being sold via a distributor, unless specified by a value
pass-through system, it could result in processors leaving the program;
2) this proposed change may result in meat and poultry processors
choosing not to utilize donated flour, oil, or other donated foods
because they would be required to choose a value pass-through system
other than fee-for-service; 3) the use of fee-for-service is necessary
in the production of end products made with donated meat and poultry
because of the difficulty in replacing the donated product and the
prohibition against substitution; and 4) it is uncertain as to how the
use of a refund or discount system instead of a fee-for-service could
assure that there was no substitution of commercial food for non-
substitutable donated food. Due to the concerns raised by the
commenters opposed to the proposal, section 250.30(e)(3) of the
proposed rule will not be adopted in the final rule, and processing
contracts may continue to be made under fee-for-service arrangements
when such end products are delivered and sold through distributors,
regardless of whether they are manufactured with both substitutable and
non-substitutable donated foods.
Contract Extension
Under sections 250.30(c)(1) and 252.4(b) of the proposed rule,
processing contracts would continue to be required to terminate on June
30 of each year; however, contracting agencies (or FCS in the case of
NCP) would be given the option of extending contracts for two 1-year
periods. Section 250.30(c)(1) of the proposed rule would also require
that any changed information be updated before any contract extension
is granted, including pricing and yield information, bonding
information, and the signature page. Furthermore, section 250.30(c)(1)
of the proposed rule would provide that contracts could be extended
only if the processor performed satisfactorily during the previous
year, submitted the required annual reconciliation reports and had its
certified public accountant (CPA) audit report closed.
A total of eighteen commenters responded to this proposal. Eleven
commenters supported the provision as proposed. One commenter supported
the option of two 1-year extensions, but added that requiring
processors to submit the annual reconciliation report and requiring the
closure of the CPA audit report as conditions for contract extension
are not workable due to the submission and resolution time frames
associated with these reports. Another commenter supported the option
of two 1-year extensions but stated that the annual reconciliation
reports should be eliminated as a condition since the proposal for
submission of the monthly performance report with year-to-date totals
would serve the same purpose. Four commenters were in favor of contract
extension but recommended four 1-year extensions to make processing
contract extensions consistent with the food service management company
contract duration requirements under 7 CFR Part 210. Three of these
commenters also recommended that bids should be separate and distinct
from the processing agreement and not be subject to automatic renewal.
Finally, one commenter stated that contract extensions would not result
in reduced paperwork because distributing agencies would have to
maintain separate active contract files for each year of the contract.
This commenter added that if there were any changes from the original
contract, the distributing agency would need to issue additional
amendments.
The Department continues to believe sections 250.30(c)(1) and
252.4(b) of the proposed rule will reduce paperwork, facilitate
contract approval, and expedite the arrangement of early commodity
shipments directly to processors. Based on the comments on section
250.30(c)(1) of the proposed rule, however, the Department recognizes
that the time frames for the submission of certain reports, such as the
annual reconciliation report or closure of the CPA audit report, cannot
practically be conditions for contract extension. Annual reconciliation
reports are not due to be submitted to the distributing agencies until
after the new contract year has begun. CPA audit reports are due prior
to extending a contract; however, the audit might not be closed at the
time of contract extension. Typically, distributing agencies begin
negotiating contracts for the upcoming contract year in March or April.
Because distributing agencies need to have the most recent data
available to them in determining whether a processing contract should
be extended, this rule will require that distributing agencies ensure
that any changed information must be updated before any contract
extension is granted, including but not limited to pricing and yield
information value, bonding information, and signature page. The
distributing agency also must ensure that all required reports and any
corrections to reports that are due up to the time that contract
extension occurs have been submitted by the processor.
Accordingly, this final rule adopts section 250.30(c)(1) of the
proposed State processing regulations and section 252.4(b) of the
proposed NCP regulations without change, except that section
250.30(c)(1) is modified to provide that as a condition of extension,
the processor must, in addition to performing satisfactorily during the
previous year, submit all required reports and any corrections to such
reports up to the time that contract extension occurs and submit its
CPA audit report.
Requirements for Processing Contracts
Section 250.30(c)(4)(ii) of the proposed State processing
regulations and section 252.4(c)(1) of the NCP regulations would
eliminate the requirement that the free on board (FOB) plant price be
included as part of the State processing and NCP contracts. In lieu of
the FOB price, the proposed rule would permit processors to provide any
pricing information, so long as the processor thoroughly explained what
this additional pricing information represented. The processor,
however, under section 250.30(c)(4)(ii) of the proposed rule would also
be required to include the contract value of each USDA commodity and
where processing was to be performed only on a fee-for-service basis,
as defined in the rule, the actual fee would be listed. Additionally,
section 250.30(c)(4)(ii) of the proposed rule would require that
information pertaining to yields and pricing of end products be listed
on separate pages of the contract.
A total of sixteen comments was received on this proposal. In
response to the proposal to eliminate the FOB price from the end
product data schedule, six commenters agreed that it should be removed
from the regulations and four commenters stated that it should be
retained. Commenters who supported the elimination of the FOB price
stated that there is a great deal of confusion regarding what the FOB
price represents. One commenter stated that FOB prices are misleading
and believed it would be better to have a processor spell out the
pricing mechanism as clearly as possible at the State contract level.
Two commenters proposed eliminating all pricing information from the
end product data schedule. One of these commenters stated that the FOB
price causes confusion among recipient agencies and also reveals
sensitive information to a company's competitors should they obtain
copies of the end product data schedule. The other commenter stated
that the FOB price is irrelevant and unauditable and there is no
accurate means to compare price information on the end product data
schedule to actual price paid by the recipient agency. This same
commenter said that the majority of recipient agencies arrange for
purchases through a bid process, and that the competitive market will
control the costs.
Additionally, this commenter stated that it would be better to
eliminate the FOB price entirely and satisfy the audit trail through:
1) payment of a refund which reflects the contract value; 2)
documentation that the distributor reduced the commercial price of the
end product by the full contract value under the hybrid system; or 3)
that the normal commercial price has been discounted by the full
contract value for sales made under the direct discount system. Another
commenter stated that only value pass-through information should be
included on the end product data schedule and that full pricing
information, such as delivered price, should be included as a separate
attachment to the agreement. Three commenters supported the current
requirement and indicated that delivery costs should also be identified
on the end product data schedule. Two commenters recommended that FOB
price and fee-for-service definitions should be clarified so that they
are compatible.
FCS is aware that pricing information supplied by processors often
represents prices other than the FOB price. Many processors use
delivered price to a State warehouse, highest price that can be charged
to a recipient agency, delivered price to a recipient agency, etc.
Based on this and the comments received, the Department believes that
the requirement that FOB price be included as part of the State and NCP
processing contracts should be eliminated. However, because the
Department realizes that pricing information is very important to
recipient agencies, the Department also believes that processors should
provide any pricing information requested by the contracting agency,
along with a thorough explanation of what this information represents.
Regarding the proposal to place price and yield data on separate
pages, four commenters were in favor of this idea and seven were
opposed. Those in favor stated that a two-part system could result in
reduced paperwork and that processors would not be required to submit
new yield schedules for contract renewal or pricing changes. Another
commenter stated that if preparing a separate sheet for yields will
lead to a uniform commodity yield allowances and these are clearly
related to end product, then the proposed changes may be desirable.
That commenter further stated that the yield data should be cross-
referenced on the end product data schedule. Those commenters opposed
to the proposed requirement stated that placing price and yield data on
separate pages doubles the paperwork required, not reduces it. Several
commenters stated that most processors have end product data schedules
computerized, so it would be easier and more efficient to create
revised yield and pricing information on a single sheet. One commenter
stated that the specific reference to a two-part form should be removed
from the regulations, but its removal would not prevent the use of a
two-part form if this is preferred by the processor and the
distributing agency. Another commenter opposed the proposal to have
yield and pricing information on separate pages of the contract and
preferred to have the gross and net pricing columns eliminated from the
current end product data schedule and leave the rest of the end product
data schedule as it currently exists.
The Department proposed placing pricing and yield data on separate
pages because it was thought that this would eliminate the need to
update all end product data schedules when changes become necessary.
However, the Department finds the arguments made by the commenters
opposed to the proposal persuasive, in that placing the information on
separate pages would increase the workload and paperwork for processors
and distributing agencies. Additionally, with the increased use of
computer technology, it would be easier to update the end product data
schedule rather than requiring separate pages.
This final rule adopts Sec. 250.30(c)(4)(ii) of the proposed State
processing regulations and Sec. 252.4(c)(1) of the proposed NCP
regulations without change, except that the proposal to require that
price and yield data be placed on separate pages is not incorporated
into Sec. 250.30(c)(4)(ii) of the final rule.
Liquidated Damages
Section 250.30(c)(4)(iv)(B) of the current State processing
regulations provides for termination of the processing contract when
there has been noncompliance with its terms and conditions by the
contracting agency or the processor. However, it has been the
Department's experience that there have been circumstances where
termination of processing contracts would seriously affect the ability
of recipient agencies to purchase processed end products. Rather than
terminating contracts for non-compliance with the contract provisions,
the Department believes that there could be some middle ground
established where instances of non- compliance could be better handled
by means of assessing damages against the non-performing party of the
contract under the State processing program. To accomplish this, the
proposed rule requested comments from interested parties on ways to
handle instances of program violations, short of contract termination.
Commenters were requested to identify areas of non-compliance that have
created the greatest problems in the past as well as the type and
amounts of reasonable damages for non-compliance with specific
provisions of the processing agreement to be applied against a
processor. These liquidated damages were to be based on the severity
and nature of the program violations identified, in order to ensure
consistent application of the requirement. Additionally, comments were
solicited regarding the incorporation of the liquidated damages
provision of the NCP agreement into the NCP regulations.
Twelve comments were received in response to this proposal. Ten
commenters were opposed to the inclusion of a liquidated damages
provision in the State processing and the NCP regulations. Many of
these commenters stated that while the concept of establishing
conditions of non-compliance in lieu of contract termination could be
useful as an incentive for processors to adhere to contract
requirements, addressing these conditions in Federal regulations is not
appropriate. Rather than include such provisions in Federal
regulations, six commenters stated that distributing agencies should be
encouraged to identify liquidated damages assessments in a special
provisions article of the processing agreement. Three commenters
expressed concern that inclusion of a liquidated damages provision
could deter processors from participating in the processing programs.
Three commenters expressed concern that State laws are too varied and
that such provisions may invoke unnecessary or excessive charges
against processors, which could ultimately result in higher fees
charged to recipient agencies. One commenter stated that most instances
of non-compliance fall into the area of recordkeeping problems, such as
failure to submit reports in a timely manner or to maintain production
records. The commenter stated that the best way to handle such
occurrences is for the distributing agency to work directly with the
processor to resolve these problems rather than to impose fines. Two
commenters stated that adding a liquidated damages provision to the NCP
regulations would create undue hardship on a single processor with
contracts in multiple states. Three commenters stated that there was no
need for a liquidated damages provision because the bond was sufficient
to cover the loss of any donated food. However, a different view point
toward the bond coverage was expressed by two commenters who were in
favor of including a liquidated damages provision. One of these
commenters stated that since the bond only covers loss of inventory or
loss of commodity, a liquidated damages provision would be appropriate
if very carefully written so that good processors would not be deterred
from program participation and that such a provision could not be
punitive in nature. The other commenter in favor of a liquidated
damages provision stated that while performance bonds do provide some
relief, they do not adequately compensate the State or the recipient
agencies for the additional administrative work which can result when a
processor violates the provisions of the processing regulations and
agreement provisions. This commenter stated that a well-constructed
liquidated damages provision may enable the distributing agency to
collect penalties which could be used to offset the administrative work
that is generated by such violations.
While the Department recognizes the need to have a means of
addressing non-compliance with program and contract provisions, other
than contract termination, the majority of the commenters'
recommendations stated that it would be inappropriate for the
Department to develop a liquidated damages provision that would be
applicable to all distributing agencies nationwide. Based on these
comments, the Department believes that handling such instances of non-
compliance is best left to the discretion of the distributing agencies.
Therefore, this rule does not require that a liquidated damages
provision be included in the State processing contract. However, as a
means of ensuring compliance with all requirements of the processing
contract short of contract termination, the Department strongly
encourages the inclusion of a liquidated damages provision or other
similar provision in the processing contract. As discussed in the
preamble to the proposed State processing regulations, there are
circumstances in which termination of processing contracts would
seriously affect the ability of recipient agencies to purchase
processed end products, and thus, termination is not always a practical
option for less significant contract noncompliance. It has been the
Department's experience in NCP that a liquidated damages provision has
been a useful method of ensuring full compliance with the terms of the
contract. The Department will continue to appraise the use and
effectiveness of liquidated damage provisions or other intermediate
alternatives to contract termination by distributing agencies and will
address this issue in the future if warranted.
Since FCS serves as the distributing agency in the NCP Program, and
because this provision has been successfully applied in the past to
address instances of non-compliance, the liquidated damages article
that is currently part of the NCP agreement will remain unchanged. The
Department plans to raise this issue with the distributing agencies
participating in the State processing program to determine whether it
is appropriate to incorporate a similar provision in State processing
contracts.
Alternate Value Pass-Through Systems
Section 250.30(d)(1)(iii) of the proposed State processing
regulations and section 252.4(c)(4)(iii) of the proposed NCP
regulations would permit FCS to take the paperwork and resource burden
associated with using the alternate value pass-through systems into
consideration when determining whether an alternate system should be
approved. The proposed rule would also reserve to FCS the right to deny
approval of systems which are labor- intensive and provide no greater
accountability than systems specifically described for use by the
current regulations.
A total of twelve comments was received on this proposal, with ten
commenters being in favor of the provision, one commenter being
opposed, and one commenter possibly misunderstanding the proposed
provision. Six of the ten commenters supported the provision exactly as
proposed, while the remaining four made additional suggestions for
inclusion in the provision. The additional suggestions were as follows:
1) the Department must develop specific objective guidelines to follow
when reviewing alternate value pass-through systems to ensure that all
systems are evaluated under the same criteria; 2) the Department must
consider the burden an alternate system would place on smaller
processors, since they would probably have to use that system in a
State where it had been approved; and 3) any alternate value pass-
through system should be piloted for one year before receiving full
approval and reviewed every year thereafter to ensure that it is an
accountable and efficient system. The Department believes that one
commenter may have misunderstood the provisions, since concern was
expressed that the Department was proposing to eliminate the option of
allowing alternate value pass-through systems. Finally, the one
commenter who was opposed to the provision stated that there was no
need for this proposal, since the Department already has the authority
to approve or deny alternative value pass-through systems.
The Department supports the continued use of alternate value pass-
through systems with FCS approval under the State processing and NCP
Programs. The Department also supports the proposal that the paperwork
and resource burden associated with an alternate value pass-through
system are extremely important factors that must be taken into
consideration when determining whether an alternate system should be
approved. The Department believes that distributing agencies, recipient
agencies, and processors do not have the time or resources to dedicate
to alternate systems that are more labor-intensive and provide no
greater accountability than systems currently described for use by the
regulations.
Furthermore, since there has been little interest expressed by
distributing agencies in using alternate value pass-through systems,
the Department does not believe it would be practical to develop
specific guidelines for use in evaluating such systems. Historically,
there have only been three requests to use alternate systems. While two
of these systems were approved for use in the State processing program,
only one is currently in use. Instead, the Department finds that it is
more effective to evaluate all requests to use alternate system value
pass-through systems on a case-by-case basis, making sure that, at a
minimum, the alternate system under consideration complies with the
verification requirements contained in section 250.19(b)(2) of the Food
Distribution Program regulations.
This final rule adopts section 250.30(d)(1)(iii) of the proposed
State processing regulations and section 252.4(c)(4)(iii) of the NCP
regulations without change.
Invoice Information
The proposed rule would eliminate the requirement under sections
250.30(d)(2) and 250.30(e)(2) of the State processing regulations and
section 252.4(c)(4) of the NCP regulations that processor/distributor
invoices must indicate the amount of the discount included or refund
due the recipient agencies for the end products purchased, regardless
of the type of value pass-through system used. Sections 250.30.(d)(3)
and 250.30(e)(2) of the proposed rule would also require processors to
provide pricing information summaries to contracting agencies.
Contracting agencies would be required to provide these pricing
information summaries to recipient agencies as soon as possible after
contract approval by the distributing agency. If any pricing
information changed during the contract year, processors would be
required to provide updated pricing information summaries to the
contracting agencies 30 days prior to the effective date. The
contracting agencies, in turn, would be required to provide the updated
summaries to the recipient agencies. Section 250.30(c)(4)(xvii) of the
proposed State processing regulations would create the affirmative duty
of the processor to provide these pricing summaries and updated pricing
summaries. Under the NCP program, section 252.4(c)(4) of the proposed
rule would require processors to provide pricing information summaries
directly to the recipient agencies as soon as possible after FCS
contract approval. Also, section 252.4(c)(4) of the proposed rule would
require that if any pricing information changes during the contract
year, the processor must provide updated pricing information summaries
to FCS and the recipient agencies 30 days prior to the effective date
of such change.
Eight commenters were in favor of eliminating the requirement that
the processor ensure that invoices clearly show the discount included
or refund due to the recipient agencies for the end product purchased.
Commenters provided two main reasons for wishing to eliminate this
requirement: 1) it has proved very difficult to require distributors to
identify refunds due or discounts given on the invoices and 2) the
requirement had become somewhat obsolete because FCS policy currently
allows processors/distributors to provide pricing summaries to
recipient agencies in lieu of providing the pricing information on
invoices. Five commenters were opposed to the proposal and indicated
that they wanted to retain the pricing information on the invoices
because the invoice is the best place to alert recipient agencies that
a refund is due or a discount has been given. One commenter added that
many processors who utilize the refund system provide a pre-printed
rebate application which lists the commodity value for each end
product. Two commenters indicated that the proposed rule would have
little, if any, effect on their operations. Only one comment was
received on the changes proposed for the NCP Program. That commenter
endorsed the proposed provisions in section 252.4(c)(4).
In the past, several processors and distributors have expressed
concern to FCS about the added cost of redesigning and reprinting
invoices in order to accommodate the requirement in the current
regulations that the processor/distributor invoices clearly indicate
the discount included or the refund due on end products. In response to
the growing concern, on May 2, 1989, FCS issued a policy memorandum
which allowed processors or distributors to provide recipient agencies
a fact sheet, which clearly identified that the processed end products
are made from commodities and indicates the amount of refund or
discount due eligible recipient agencies for such purchases. The
Department believes it is appropriate to incorporate this existing
policy into the final rule. These pricing information summaries need
only consist of information such as the product code, gross price,
refund due or discount given and net price. These summaries, as well as
any updates to the summaries, must be prepared by processors and
furnished to recipient agencies by either the processor or the
distributing agency.
Based on the above, this final rule adopts sections
250.30(c)(4)(xvii), 250.30(d)(3) and 250.30(e)(2)of the proposed State
processing regulations and section 252.4(c)(4) of the proposed NCP
regulations without change.
Substitution of Donated Food
Section 250.30(f)(1)(i), of the proposed rule would allow the
substitution of commercial food for those donated foods specifically
listed as substitutable in the current regulations without requesting
prior approval from the distributing agency. Additionally, sections
250.30(f)(1)(iii), 250.30(f)(2), and 250.30(f)(4) of the proposed State
processing regulations include the following provisions: 1) Processors
may continue to request approval from FCS to substitute other
commercial foods (except meat and poultry), although without the
requirement that requests may be made only when the distributing
agency's inability to maintain the necessary inventory of donated food
at the processing plant would disrupt the production of end products
and in all cases in which a State processing contract permits
substitution, provided that processors must provide documentation
sufficient to substantiate that they continue to acquire sufficient
substitutable commercial foods necessary to meet the 100 percent yield
requirement; 2) Distributing agencies can withhold deliveries of
donated food from processors which have reduced their level of
commercial production because of participation in the State processing
program; and 3) Authorization to substitute commercial foods for
donated foods not specifically listed applies only for the duration of
all contracts currently entered into by the processor. Sections
252.3(c) and 252.4(c)(7) of the proposed rule would similarly amend the
NCP regulations.
The Department received sixteen comments on this proposal. All
commenters concurred that processors should not need written approval
from the distributing agency to substitute those donated foods listed
as substitutable in the regulations with commercial foods. However, two
commenters stated that the Department should consider making all
donated foods substitutable and one commenter stated that all donated
food, except for meat and poultry, should be considered as
substitutable. Those commenters who favored a total or almost total
substitution of all donated foods provided conditions under which
substitution should be permitted: 1) USDA's Food Safety Inspection
Service inspectors and/or USDA's Agricultural Marketing Service graders
verify that the commercial food being substituted is of equal or better
quality and is of the same generic identity as the donated food; 2) the
processor must provide the specifications of the commercial food used
to substitute for donated food, along with a certification that the
substituted foods are of equal or better quality; and 3) the processor
must report all substitution on the monthly performance report to the
distributing agency.
Three comments were received in response to the proposal which
would permit distributing agencies to withhold deliveries of donated
food from processors who have reduced their level of commercial
production because of participation in the State processing program.
These commenters made it clear that they believe distributing agencies
do not have access to a processor's records on the production of
commercial end products in order to determine whether withholding
donated food is appropriate. One processor expressed concern that the
documentation necessary to substantiate that the processor acquires
sufficient amounts of substitutable donated food would increase the
overall workload of the distributing agency staff.
The Department supports the commenters who recommended that all
donated foods currently listed in the regulations be considered as
substitutable with commercial foods without prior approval from the
distributing agency. However, the Department does not agree that all
donated foods should be considered as substitutable. The Department
purchases high quality products which must meet strict specifications
for recipient agencies to use in their meal service operations. Because
the quality of the non-listed donated foods, especially meat and
poultry, can vary tremendously, which will ultimately affect the
quality of the end product, the Department believes it is necessary to
eliminate any possibility that inferior commercial product could be
substituted for the high quality donated foods provided by USDA.
Additionally, the argument that Federal inspectors or graders could
ensure the quality of any commercial product being substituted for
donated food is not reasonable. Federal inspectors or graders are only
present in processing plants that convert donated meat or poultry into
finished end products; they are not required to be on-site in bakeries
or processing plants which only handle fruits, vegetables and/or
grains. The additional costs for obtaining the services of inspectors
or graders to perform these services would be extremely high.
Additionally, based on the comments received, it is apparent that
commenters do not favor requiring distributing agencies to monitor the
level of the processors's commercial production so they would be
permitted to withhold deliveries of donated food from processors which
have reduced their level of commercial production because of
participation in the State processing program.
This final rule adopts sections 250.30(f)(1)(i) and 250.30(f)(4) of
the proposed State processing regulations without change. To alleviate
the commenters' concerns, but to maintain the necessary program
accountability, section 250.30(f)(1)(iii) of this final rule will
require the processor to be responsible for maintaining documentation
that normal commercial production has not been reduced as the result of
participation in the processing program. To conform to the change in
section 250.30(f)(1)(iii), this final rule also adds a new paragraph to
section 250.30(c)(4)(xviii) of this final rule. This final rule adopts
section 250.30(f)(2) of the proposed State processing regulations as
proposed with a minor modification for clarification. Additionally,
this final rule adopts sections 252.3(c) and 252.4(c)(7) of the
proposed NCP regulations without change.
Time Frames for Processors to Pay Refunds
Section 250.30(k)(3) of the proposed State processing regulations
would require processors to make refund payments to recipient agencies
within 30 days after receipt of any refund application. Additionally,
sections 250.30(k)(1) and 252.4(c)(4)(i)(B) of the proposed rule would
also permit recipient agencies to file refund applications on a Federal
fiscal quarterly basis, if the total anticipated refund due for all
purchases from that processor during the quarter is 25 dollars or less.
Furthermore, processors would be permitted to group together refund
applications for a single recipient agency on a Federal fiscal basis if
the total anticipated refund due that recipient agency during the
quarter is 25 dollars or less. These quarterly options of batching of
refund applications and refund payments would only be permitted between
a recipient agency and a processor, not between a distributor and a
processor.
A total of 16 comments was received on this proposal. Regarding the
30-day time frame for processors to pay refunds, twelve commenters
stated that they agreed with this concept and three commenters were
opposed. Many of those commenters that supported the 30-day time frame
did so for the following reasons: 1) a 30-day time frame is more
realistic and logical than the 10-day time frame; 2) a 30-day time
frame conforms to time frames used in normal business practices; 3) a
10-day time frame is very difficult to meet because of limited staff
resources; and 4) a 30-day time frame is reasonable because a refund
payment will usually be received by the recipient agency before the
recipient agency's payment for the end products reaches the processor.
The three commenters who expressed opposition to the 30-day time frame
stated that it allows the processor to use school food authority money
for an excessive period of time. One processor also stated that the
current 10-day time frame is more appropriate because it is the key to
acceptance of the refund system by recipient agencies.
Fourteen comments were received regarding quarterly batching of
refund applications by recipient agencies and twelve comments were
received on quarterly batching of refund payments by processors. While
all comments received on the concept of quarterly batching were
favorable, three commenters made the following suggestions: 1) the
threshold should be increased from 25 dollars to 100 dollars; 2) there
should be no minimum dollar threshold associated with quarterly
submission of refund applications by recipient agencies; 3) recipient
agencies should have an option to file refund applications monthly or
quarterly and processors must provide refunds within 30 days of receipt
of the refund application; and 4) to accommodate extenuating
circumstances, distributing agencies should permit recipient agencies
to submit refund applications and processors to provide refund payments
outside of the quarterly time frames.
Based on the comments received and the reasons set forth above,
this final rule adopts sections 250.30(k)(1) and 250.30(k)(3) of the
proposed State processing and section 252.4(c)(4)(i)(B) of the proposed
NCP regulations without change.
Refund Applications/Performance Reports
Section 250.30(k)(1) of the proposed State processing regulations
would eliminate the requirement that recipient agencies must forward
copies of the refund applications to distributing agencies at the same
time they submit the refund applications to the processor. Section
250.30(m)(1) of the proposed rule would also amend the State processing
regulations to add the following requirements: 1) that monthly
performance reports be postmarked no later than the final day of the
month following the reporting period and the final performance report
for the contract period be postmarked no later than 60 days from the
close of the contract year; and 2) that performance reports must be
submitted monthly unless a processor made no sales and had no inventory
during that month. Finally, section 250.17 of the proposed State
processing regulations would provide that where performance reports are
electronically transmitted to the distributing agency by means of a
facsimile machine, the date printed by the facsimile machine on the
facsimile copy may serve as the postmark. The Department received
seventeen comments on this section of the proposed rule.
Ten comments were received on eliminating the requirement that
recipient agencies submit copies of the refund applications to the
distributing agencies. All commenters were in favor of the proposal,
stating that the elimination of this dual reporting requirement would
reduce the paperwork burden. Since section 250.30(k)(3) of the current
State processing regulations also requires processors to send copies of
the refund applications and refund payments to the distributing agency
as part of the monthly performance report, the requirement for
recipient agencies to also send the refund applications to the
distributing agencies was viewed as duplicative.
Ten comments were received regarding the use of the postmark date
to track the timing for submission of the monthly performance reports.
Nine commenters were in favor of the proposed change and one opposed.
Those in favor stated that by placing this requirement in the
regulations, any uncertainties about the required time frames for
submission of the performance reports would be clarified. The one
commenter opposed to this provision stated that upon receipt, each
performance report is stamp-dated when received and that the envelope
containing the postmark is discarded, because it is not practical to
keep mailing envelopes on file. The Department wishes to clarify that
the intent of this requirement was not for distributing agencies to
maintain mailing envelopes. Rather, distributing agencies should record
the postmark date that is on the mailing envelope and determine whether
the performance report has been submitted within the required time
frame. All comments received on the proposal that the date printed on a
report transmitted by facsimile machine may serve as the postmark date
were favorable; however, one commenter questioned whether it is
necessary to include such a policy in regulations. The Department
believes that it is important to state within the regulations that the
date printed by the facsimile machine may serve as the postmark date,
since this method of submitting performance reports is becoming more
commonplace.
Commenters were generally opposed to the proposed requirement that
processors would not have to submit performance reports for those
months in which no sales were made and where processors had no
inventory. Fifteen comments were received on this provision. Four
commenters were in complete agreement, one commenter was in favor but
with restrictions, and ten commenters opposed. Those in complete
agreement with the proposal did not provide further explanation for
their support. However, the one commenter in partial agreement with the
proposal recommended that the requirement be eliminated when processors
have no inventory and no sales activity, but stipulated that upon
arrival of any inventory or initiation of any approved sales from that
period on, monthly performance reports be required. Those commenters
who wished to require monthly performance reports for each month the
processing contract is in effect provided the following reasons: (1)
Distributing agencies often do not know if a processor has inventory or
has made any sales during the month until the monthly report is
received; (2) it would be difficult to know if a report was required,
if a report was submitted but lost in the mail, if the processor forgot
to submit the report, or if the processor purposely did not send the
report; (3) distributing agencies may not know the status of a
processor's inventory because incoming direct shipments of donated food
may not arrive when anticipated or product can be backhauled without
the distributing agency's knowledge; (4) monthly reports must be
maintained to establish an audit trail; (5) auditable records should
run consecutively without breaks in months; and (6) if the Department
eliminates the annual reconciliation report, distributing agencies, FCS
and auditors must have the monthly performance reports for each month
the processing agreement is in effect in order to verify all activities
that occurred during the agreement period. One commenter added that
processors should always have sales activity each month because the
current processing regulations discourage processors from entering into
agreements if their activity will be limited. The Department finds the
commenters' arguments persuasive that monthly performance reports be
required for each month that the processing agreement is in effect.
Based on the comments received and the above reasons, this final
rule adopts sections 250.17(f), 250.30(k)(1) and 250.30(m)(1) of the
proposed State processing regulations without change, except that the
proposal in section 250.30(m)(1) that processors would not be required
to submit performance reports for those months in which no sales were
made and where processors had no inventory is not included in this
final rule.
List of Contracting Agencies
As part of the performance report requirements under section
250.30(m) of the current State processing regulations, processors are
required to submit to the distributing agency a list of all contracting
agencies and their locations with which the processor has processing
contracts. Because the Department believes that requiring this list
every month is unnecessary and duplicative, the proposed rule would
eliminate this list.
Additionally, in order to ensure that sales are only made to
eligible recipient agencies with approved processing contracts,
Sec. 250.30(c)(4)(xv) of the current regulations requires that as part
of the processing contract, the contracting agency must provide the
processor with a list of all recipient agencies eligible to purchase
end products under the contract. However, the current rule implies, but
does not explicitly require, the contracting agency to provide updates
to the list of recipient agencies for any changes that occur during the
contract period. Therefore, to clarify the regulation,
Sec. 250.30(c)(4)(xv) of the proposed rule would require the
contracting agency to provide updates to the list of recipient agencies
for any changes which occur during the contract period.
Sixteen comments were received on these two proposals, all in favor
of the provisions as proposed. Accordingly, this final rule adopts
Secs. 250.30(c)(4)(xv) and 250.30(m) of the proposed State processing
regulations without change.
Quarterly Processing Activity Reports and Annual Reconciliation Reports
The proposed rule provided for major revisions in the areas of
quarterly inventory reports, the annual reconciliation report and the
monthly performance reports. Sections 250.30(m)(1), 250.30(n) (3) and
(4), and 250.30(o)(1) proposed to amend the State processing
regulations as follows: 1) the quarterly inventory reports and the
annual reconciliation report would be replaced with the monthly
performance reports with year-to-date totals; 2) distributing agencies
would be required to forward to the FCS Regional Office the monthly
performance report with year-to-date totals provided by the processor
for the last month of each Federal fiscal quarter; 3) when forwarding
these monthly performance reports, they would be required to be
postmarked no later than 60 days following the close of each Federal
fiscal quarter, except that such reports must be postmarked no later
than 90 days following the close of the contract period; 4) when a
processor submitted no monthly performance report for the last month of
a Federal fiscal quarter, distributing agencies would be required to
submit to the FCS Regional Office the last monthly performance report
received from the processor for that Federal fiscal quarter; 5) the
last monthly performance report for the contract period would serve as
the annual reconciliation report; 6) distributing agencies would be
required to certify the accuracy of the information contained in the
final performance report; and 7) when a processor submitted no monthly
performance report for the last month of the contract period, the last
monthly performance report received from the processor would serve as
the annual reconciliation report and this final performance report
would be required to be postmarked no later than 90 days following the
close of the contract period.
Seventeen comments were received on the above provisions contained
in the proposed rule. Regarding the replacement of the quarterly
inventory reports with the monthly performance reports, seven comments
were received, four in favor and three opposed. However, based on
comments received, it appears that some commenters may have
misunderstood the purpose for replacing the quarterly inventory reports
with the monthly performance reports with year-to-date totals. Under
the current regulations, performance reports are required to contain
inventory information on a monthly basis, but not on a quarterly basis.
Distributing agencies are required to extract inventory information
from the performance reports and compile this information on a
quarterly basis for submission to the FCS Regional Office. Requiring
that performance reports have year-to-date totals of inventory
information would eliminate the need for distributing agency staff to
prepare a quarterly inventory report. This reduces the workload of the
distributing agency staff and only requires a small change in the
processor's performance report format.
Furthermore, it was not the intent of the Department that
distributing agencies photocopy the entire content of the performance
report for submission to the FCS Regional Office. While sales activity
for the month usually comprises the major part of the performance
report, processors typically show inventory activity on a separate page
of the monthly performance report. On the inventory summary portion of
the performance report, all sales are represented by a single inventory
drawdown figure which represents the cumulative total of all individual
sales reported for the month. The intent of the proposed rule was for
distributing agencies to send the inventory summary portion of the
December, March and June performance reports that contains the
inventory information (i.e., beginning inventory, receipts for the
month, transfers in and out, inventory drawdown, and ending inventory
balance with year-to-date totals) to the FCS Regional Offices, and not
the entire performance report.
Twelve commenters were in favor of replacing the annual
reconciliation report with the last monthly performance report with
year-to-date totals, and two commenters were opposed. Those in favor
stated that this proposal is a positive step toward reducing paperwork,
while those opposed stated it would increase paperwork because
distributing agencies would be required to certify the accuracy of the
performance reports. In its review of this proposal and the comments
received, the Department believes this proposal will serve to reduce
paperwork. Under the current regulations for annual reconciliation,
processors must total donated food receipts, transfer information,
sales activity, and ending inventory balance from the individual
performance reports. Under the proposed rule, it would not be necessary
for processors to go through previous performance reports and compute
these figures, since this information will be tallied cumulatively each
month. Additionally, submitting performance reports with year-to-date
totals will eliminate the need for distributing agencies to compile
data from the individual quarterly reports to ensure that the annual
reconciliation report figures are accurate. The final performance
report for the contract year, including a summary sheet of year-to-date
inventory totals, will replace the annual reconciliation report
formerly required in the final rule.
One commenter expressed concern that the time frames for submitting
the performance reports with year-to-date totals to FCS are the same
time frames currently required for submission of the quarterly
inventory reports. That commenter indicated that if there were errors
in the report, there would not be sufficient time for the processor to
make the corrections and return the report to the distributing agency
in order for the distributing agency to submit it to the FCS Regional
Office on time. The Department believes that since most performance
reports are computer-generated, and the calculation of the year-to-date
totals would be performed by a formula placed into the computer
program, there would be very few errors made. Furthermore, the
Department believes that it is better to handle any errors that might
be discovered on performance reports on a case-by-case basis.
Distributing agencies will be required to certify that the inventory
information contained in the final performance report is accurate, just
as they are required to do under section 250.30(n)(4) of the current
rule for the annual reconciliation report. The time frames for
submission of the performance reports, as discussed earlier in this
preamble, will remain the same as in the proposed rule and are clearly
spelled out in the final rule under section 250.30(m)(1).
As discussed earlier in this preamble under Refund Applications/
Performance Reports, section 250.30(m)(1) of the proposed rule stated
that processors are not required to submit performance reports for
those months in which no sales were made and those months where
processors had no inventory. As previously discussed, this provision is
not included in the final rule. Therefore, the provisions in sections
250.30(n)(3) and 250.30(o)(1) of the proposed State processing
regulation, which would provide that when a processor does not submit a
monthly performance or inventory report for the last month of a Federal
fiscal quarter, the distributing agency must forward to the FCS
Regional Office the last monthly performance report received from the
processor for that quarter, are not included in this final rule.
This final rule adopts sections 250.30(m)(1), 250.30(n) (3) and
(4), and 250.30(o)(1) of the proposed State processing regulations
without change, except as previously noted. FCS plans to develop a
prototype performance report format which will be easily adaptable for
processors to incorporate into existing inventory reporting programs.
This section of the proposed rule did not affect the NCP Program.
List of Subjects in 7 CFR Parts 250 and 252
Aged, Agricultural commodities, Business and industry, Food
assistance programs, Food donations, Food processing, Grant programs-
social programs, Indians, Infants and children, Price support programs,
Reporting and recordkeeping requirements, School breakfast and lunch
programs, Surplus agricultural commodities.
For reasons set forth in the preamble, 7 CFR Parts 250 and 252 are
amended as follows:
PART 250--DONATION OF FOODS FOR USE IN THE UNITED STATES, ITS
TERRITORIES AND POSSESSIONS AND AREAS UNDER ITS JURISDICTION
1. The authority citation for Part 250 continues to read as
follows:
Authority: 5 U.S.C. 301; 7 U.S.C. 612c, 612c note, 1431, 1431b,
1431e, 1431 note, 1446a-1, 1859; 15 U.S.C. 713c; 22 U.S.C. 1922; 42
U.S.C. 1751, 1755, 1758, 1760, 1762a, 1766, 3030a, 5179, 5180.
2. In Sec. 250.3:
a. The definition of Fee-for-service is added in alphabetical
order;
b. The definition of Processing fee is removed; and
c. The definition of Processor is revised.
The addition and revision read as follows:
Sec. 250.3 Definitions.
* * * * *
Fee-for-service means the price by pound or by case representing a
processor's cost of ingredients (other than donated foods), labor,
packaging, overhead, and other costs incurred in the conversion of the
donated food into the specified end product.
* * * * *
Processor means any commercial facility which processes or
repackages donated foods. However, commercial enterprises which handle,
prepare and/or serve products or meals containing donated foods on-site
solely for the individual recipient agency under contract are exempt
under this definition. Notwithstanding this definition, a recipient
agency which prepares products or meals containing donated foods for
more than one recipient agency under more than one contract in the same
facility or prepares products or meals for any one recipient agency
off-site shall not be a processor if the recipient agency preparing
products or meals provides: (1) accountability for any donated foods
received from another recipient agency consistent with Sec. 250.16 of
this part and (2) any funds received as payment for preparing products
or meals shall be deposited in the non-profit meal account of the
recipient agency preparing products or meals.
* * * * *
3. In Sec. 250.17, a new paragraph (f) is added to read as follows:
Sec. 250.17 Reports.
* * * * *
(f) Report transmission. Where a report is to be postmarked by a
specific date and such report is transmitted by means of a facsimile
machine, the date printed by the facsimile machine on the facsimile
copy may serve as the postmark.
4. In Sec. 250.30:
a. The last sentence of paragraph (a) is removed;
b. Paragraph (b)(2)(ii) is revised;
c. Two sentences are added between the second and third sentences
of the introductory text of paragraph (c)(1), and the paragraph
incorrectly designated as (c)(1)(l) is redesignated as paragraph
(c)(1)(i);
d. The first sentence of paragraph (c)(4)(ii) is revised;
e. Paragraph (c)(4)(iii) is revised;
f. Paragraph (c)(4)(vii) is revised;
g. The words ``and identify'' are added to the end of the
introductory text of paragraph (c)(4)(viii)(D);
h. Paragraph (c)(4)(xiii) is revised;
i. Paragraph (c)(4)(xv) is amended by adding the words ``and
provide updates for any changes which occur during the contract
period'' at the end of the paragraph;
j. Paragraph (c)(5) is redesignated as paragraph (c)(4)(xvi) and is
further amended by adding the words ``A provision that'' at the
beginning of the paragraph;
k. A new paragraph (c)(4)(xvii) is added;
l. A new paragraph (c)(4)(xviii) is added;
m. Paragraph (d) is revised;
n. Paragraph (e) is revised;
o. Paragraphs (f)(1)(i) and (f)(1)(iii) are revised;
p. A new sentence is added after the first sentence in paragraph
(f)(2);
q. Paragraph (f)(4) is revised;
r. Paragraphs (k)(1) and (k)(3) are revised;
s. Paragraph (k)(4) is removed;
t. The first sentence of paragraph (l) is amended by adding the
words ``or renewed'' after the word ``into'';
u. The introductory text of paragraph (m)(1) is revised;
v. Paragraph (m)(1)(vii) is removed and reserved;
w. The first sentence of paragraph (n)(3) is revised;
x. Paragraph (n)(4) is revised;
y. Paragraph (o)(1) is revised;
z. The introductory text of paragraph (o)(2) is amended by removing
the words ``reporting the information identified'' and adding the words
``the reporting requirements'' in their place.
The revisions and additions read as follows:
Sec. 250.30 State processing of donated foods.
* * * * *
(b) Permissible contractual arrangements. * * *
(2) * * *
(ii) When selling end products through a distributor, such sales
shall be in accordance with paragraph (e) of this section.
* * * * *
(c) Requirements for processing contracts. (1) * * * However,
processing contracts may give contracting agencies the option of
extending contracts for two 1-year periods, provided that any changed
information must be updated before any contract extension is granted,
including the information in paragraphs (c)(3), (c)(4)(ii), and
(c)(4)(viii)(B) of this section. The processor must have performed to
the satisfaction of the contracting agency during the previous contract
year, submitted all required reports and any corrections to such
reports up to the time that contract extension occurs, and submitted
its certified public accountant report as required under paragraph
(c)(4)(xi) of this section before the contract may be extended. * * *
* * * * *
(4) * * *
(ii) A description of each end product, the quantity of each
donated food and the identification of any other ingredient which is
needed to yield a specific number of units of each end product (except
that the contracting agency may permit the processor to specify the
total quantity of any flavorings or seasonings which may be used
without identifying the ingredients which are, or may be, components of
flavorings or seasonings), the total weight of all ingredients in the
batch formula, the yield factor for each donated food, and any pricing
information provided by the processor in addition to that required in
paragraph (c)(4)(iii) of this section as requested by the contracting
agency and a thorough explanation of what this additional pricing
information represents. * * *
(iii) The contract value of each donated food to be processed and,
where processing is to be performed only on a fee-for-service basis as
defined in Sec. 250.3, the fee-for-service;
* * * * *
(vii) A provision that end products containing donated foods that
are not substitutable under paragraph (f) of this section shall be
delivered only to eligible recipient agencies and that end products
containing both substitutable and non-substitutable donated foods may
be delivered and sold in accordance with the requirements of paragraph
(d) and (e) of this section;
* * * * *
(xiii) A provision that the fee-for-service or value pass-through
system to be used for the sale of end products to recipient agencies
shall be described and be consistent with paragraphs (d) and (e) of
this section.
* * * * *
(xvii) A provision that the processor shall provide pricing
information summaries and updated pricing information summaries as
required in paragraphs (d)(3) and (e)(2) of this section.
(xviii) A provision that the processor shall maintain documentation
which demonstrates that the level of the processor's commercial
production has not been reduced, as required in paragraph (f)(1)(iii)
of this section.
(d) End products sold by processors. (1) When recipient agencies
pay the processor for end products, such sales shall be under:
(i) A refund system as defined in Sec. 250.3 and in accordance with
paragraph (k) of this section; or
(ii) A discount system which provides the price of each unit of end
product purchased by eligible recipient agencies to be discounted by
the stated contract value of the donated foods contained therein; or
(iii) An alternative value pass-through system under which the
value of the donated food contained in each unit of end product shall
be passed to the recipient agency and which has been approved by FCS at
the request of the distributing agency. Any alternative value pass-
through system approved under this paragraph must comply with the sales
verification requirements specified in Sec. 250.19(b) of this part, or
an alternative verification system approved by FCS. The Department
retains the authority to inspect and review all pertinent records
including records pertaining to the verification of a statistically
valid sample of sales. FCS may consider the paperwork and resource
burden associated with alternative value pass-through systems when
considering approval and reserves the right to deny the approval of
systems which are labor-intensive and provide no greater accountability
than those systems permitted under paragraphs (d) and (e) of this
section.
(2) When a processor delivers end products produced under a fee-
for-service contract, the processor shall separately identify on the
bill for the recipient agency the agreed-upon fee-for-service and any
delivery costs.
(3) Processors shall provide pricing information summaries to
contracting agencies and contracting agencies shall provide this
information to recipient agencies as soon as possible after contract
approval. If this pricing information changes during the contract
period, processors shall provide updated pricing information to the
contracting agency 30 days prior to the effective date of the change,
which, in turn, shall provide this updated information to eligible
recipient agencies.
(e) End products sold by distributors.
(1) When a processor transfers end products to a distributor for
delivery and sale to recipient agencies, such sales shall be under:
(i) A refund system as defined in Sec. 250.3 and in accordance with
paragraph (k) of this section; or
(ii) A hybrid system which provides a refund for the contract value
of the donated food shall be provided to the distributor in accordance
with paragraph (k) of this section and the price of each unit of end
product purchased by eligible recipient agencies through a distributor
shall be discounted by the contract value of the donated foods
contained therein; or
(iii) An alternative value pass-through system under which the
contract value of the donated food contained in each unit of end
product shall be passed on to the recipient agency and which has been
approved by FCS in accordance with paragraph (d)(1)(iii) of this
section; or
(iv) When a processor arranges for delivery of processed end
products produced under fee-for-service contracts by distributors, the
products shall be delivered and invoiced using one of the following
procedures:
(A) The recipient agency is billed by the processor for the fee-
for-service and the distributor bills the recipient agency for the
storage and delivery of the end products; or
(B) The processor arranges for the delivery of end products through
a distributor on behalf of the recipient agency. In this system, the
processor's invoice must include both the fee-for-service and the
distributor's charges as separate, clearly identifiable charges.
(2) Processors shall provide pricing information summaries to
contracting agencies and contracting agencies shall provide this
information to recipient agencies as soon as possible after contract
approval. If this pricing information changes during the contract
period, the processor shall provide updated pricing information to the
contracting agency, which, in turn, shall provide this information to
the eligible recipient agencies.
(f) Substitution of donated foods with commercial foods.
(1) * * *
(i) Only butter, cheese, corn grits, cornmeal, flour, macaroni,
nonfat dry milk, peanut butter, peanut granules, roasted peanuts, rice,
rolled oats, rolled wheat, shortening, vegetable oil, and spaghetti may
be substitutable as defined in Sec. 250.3 and such other food as FCS
specifically approves as substitutable under paragraph (f)(4) of this
section (substitution of meat and poultry items shall not be
permitted),
* * * * *
(iii) Processors shall maintain documentation that they have not
reduced their level of commercial production because of participation
in the State processing program.
(2) * * * Where commercial food is authorized to be substituted for
any donated food specifically listed in paragraph (f)(1)(i) of this
section, the processor shall maintain records to substantiate that it
continues to acquire on the commercial market sufficient purchases of
substitutable food for commercial production and any amounts necessary
to meet the 100 percent yield requirement. * * *
* * * * *
(4) Processor may request approval to substitute commercial foods
for donated foods not specifically listed in paragraph (f)(1)(i) of
this section by submitting such request to FCS in writing and
satisfying all requirements of paragraphs (f)(1)(ii) and (iii) of this
section. FCS will notify the processor in writing of authorization to
substitute commercial foods for donated foods not listed in paragraph
(f)(1)(i) of this section and such authorization shall apply for the
duration of all current contracts entered into by the processor
pursuant to this section.
* * * * *
(k) Refund payments. (1) When end products are sold to recipient
agencies in accordance with the refund provisions of paragraph (d) or
(e) of this section, each recipient agency shall submit refund
applications to the processor within 30 days from the close of the
month in which the sales were made, except that recipient agencies may
submit refund applications to a single processor on a Federal fiscal
quarterly basis if the total anticipated refund due for all purchases
of product from that processor during the quarter is 25 dollars or
less.
* * * * *
(3) Not later than 30 days after receipt of the application by the
processor, the processor shall make a payment to the recipient agency
or distributor equal to the stated contract value of the donated foods
contained in the purchased end products covered by the refund
application, except that processors may group together refund
applications for a single recipient agency on a Federal fiscal
quarterly basis if the total anticipated refund due that recipient
agency during the quarter is 25 dollars or less. Copies of requests for
refunds and payments to recipient agencies and/or distributors shall be
forwarded to the appropriate distributing agency by the processor.
* * * * *
(m) Performance reports. (1) Processors shall be required to submit
to distributing agencies monthly reports of performance under each
processing contract with year-to-date totals. Processors contracting
with agencies other than a distributing agency shall submit such
reports to the distributing agency having authority over that
particular contracting agency. Performance reports shall be postmarked
no later than the final day of the month following the reporting
period; however, the final performance report for the contract period
shall be postmarked no later than 60 postmarked days from the close of
the contract year. The report shall include:
* * * * *
(n) Inventory controls. * * *
(3) The last monthly performance report for the contract period, as
required in paragraph (m)(1) of this section, shall serve as the annual
reconciliation report. * * *
(4) Distributing agencies shall certify the accuracy of the annual
reconciliation report and forward it to the FCS Regional Office. Such
report shall be postmarked no later than 90 days following the close of
the contract year. All monies shall be used in accordance with FCS
Instruction 410-1, Non-Audit Claims, Food Distribution Program.
* * * * *
(o) Processing inventory reports. (1) Distributing agencies shall
forward to the FCS Regional Office the inventory summary portion of the
monthly performance report submitted by the processors in accordance
with paragraph (m)(1) of this section for the last month of each
Federal fiscal quarter. Such reports shall be postmarked no later than
60 days following the close of each Federal fiscal quarter, except that
such reports shall be postmarked no later than 90 days following the
close of the contract year.
* * * * *
PART 252--NATIONAL COMMODITY PROCESSING PROGRAM
1. The authority citation for Part 252 continues to read as
follows:
Authority: Sec. 416, Agricultural Act of 1949 (7 U.S.C. 1431).
Sec. 252.3 [Amended]
2. In Sec. 252.3, the first sentence of paragraph (c) is amended by
removing the words ``When FCS approves the substitution of donated
commodities with commercial food or when the agreement permits such
substitution'' and adding in their place the words ``When the processor
substitutes commercial food for donated food in accordance with
Sec. 252.4(c)(7) of this part.''
3. In Sec. 252.4:
a. A new sentence is added to the end of paragraph (b);
b. The third sentence of paragraph (c)(1) is revised;
c. The third sentence of the introductory text of paragraph (c)(4)
is revised and a new sentence is added following the third sentence;
d. Paragraph (c)(4)(i)(B) is revised;
e. A sentence is added to the end of paragraph (c)(4) (iii);
f. Paragraph (c)(7) is revised;
g. Paragraphs (c)(14), (c)(15), (c)(16), and (c)(17) are
redesignated as paragraphs (c)(15), (c)(16), (c)(17), and (c)(18), and
a new paragraph (c)(14) is added.
The revisions and additions read as follows:
Sec. 252.4 Application to participate and agreement.
* * * * *
(b) Agreement between FCS and Participating Food Processors. * * *
However, FCS may extend processing contracts for two 1-year periods,
provided that any changed information must be updated before any
contract extension is granted, including the information in paragraphs
(c)(1) and (c)(5) of this section.
(c) Processor requirements and responsibilities. * * *
(1) * * * The end product data schedule shall provide pricing
information supplied by the processor as requested by FCS and a
thorough explanation of what this pricing information represents. * * *
* * * * *
(4) * * * Regardless of the method used, processors shall provide
pricing information summaries to recipient agencies as soon as possible
after contract approval by FCS. If the pricing information changes
during the contract period, processors shall provide updated pricing
information to FCS and the recipient agencies 30 days prior to the
effective date. * * *
(i) * * *
(B) Refund system. The processor shall invoice the recipient agency
for the commercial/gross price of the end product. The recipient agency
shall submit a refund application to the processor within 30 days of
receipt of the processed end product, except that recipient agencies
may submit refund applications to a single processor on a Federal
fiscal quarterly basis if the total anticipated refund due for all
purchases of end product from that processor during the quarter is 25
dollars or less. The processor shall pay directly to the eligible
recipient agency within 30 days of receipt of the refund application
from the recipient agency, an amount equal to the established agreement
value of donated food per case of end product multiplied by the number
of cases delivered to and accepted by the recipient agency, except that
processors may group together refund applications for a single
recipient agency on a Federal fiscal quarterly basis if the total
anticipated refund due that recipient agency during the quarter is 25
dollars or less. In no event shall refund applications for purchases
during the period of agreement be accepted by the processor later than
60 days after the close of the agreement period.
* * * * *
(iii) * * * FCS may consider the paperwork and resource burden
associated with alternative value pass-through systems when considering
approval and reserves the right to deny approval of systems which are
labor-intensive and provide no greater accountability than those
systems permitted under paragraph (c)(4) of this section.
* * * * *
(7)(i) Only butter, cheese, corn grits, cornmeal, flour, macaroni,
nonfat dry milk, peanut butter, peanut granules, roasted peanuts, rice,
rolled oats, rolled wheat, shortening, vegetable oil, and spaghetti may
be substituted as defined in Sec. 252.2 and such other food as FCS
specifically approves as substitutable under paragraph (c)(7)(i)(A) of
this section (substitution of meat and poultry items shall not be
permitted).
(A) Processors may request approval to substitute commercial foods
for donated foods not listed in paragraph (c)(7)(i) of this section by
submitting such request to FCS in writing and satisfying the
requirements of paragraph (c)(7) of this section. FCS will notify the
processor in writing of authorization to substitute commercial foods
for donated foods not listed in paragraph (c)(7)(i) of this section and
such authorization shall apply for the duration of all current
contracts entered into by the processor pursuant to this section.
(B) The processor shall maintain records to substantiate that it
continues to acquire on the commercial market amounts of substitutable
food consistent with their levels of non-NCP Program production and to
document the receipt and disposition of the donated food.
(C) FCS shall withhold deliveries of donated food from processors
that FCS determines have reduced their level of non-NCP Program
production because of participation in the NCP Program.
(ii) When the processor seeks FCS approval to substitute donated
nonfat dry milk with concentrated skim milk under paragraph
(c)(7)(i)(A) of this section, an addendum must be added to the request
which states:
(A) The percent of milk solids that, at a minimum, must be
contained in the concentrated skim milk;
(B) The weight ratio of concentrated skim milk to donated nonfat
dry milk:
(1) The weight ratio is the weight of concentrated skim milk which
equals one pound of donated nonfat dry milk, based on milk solids;
(2) In calculating this weight, nonfat dry milk shall be considered
as containing 96.5 percent milk solids;
(3) If more than one concentration of concentrated skim milk is to
be used, a separate weight ratio must be specified for each
concentration;
(C) The processor's method of verifying that the milk solids
content in the concentrated skim milk is as stated in the request;
(D) A requirement that the concentrated skim milk shall be produced
in a USDA approved plant or in a plant approved by an appropriate
regulatory authority for the processing of Grade A milk products; and
(E) A requirement that the contact value of donated food for a
given amount of concentrated skim milk used to produce an end product
is the value of the equivalent amount of donated nonfat dry milk, based
on the weight ratio of the two foods.
(iii) Substitution must not be made solely for the purpose of
selling or disposing of the donated commodity in commercial channels
for profit.
* * * * *
(14) The processor shall not assign the processing contract or
delegate any aspect of processing under a subcontract or other
arrangement without the written consent of FCS. The subcontractor shall
be required to become a party to the processing contract and conform to
all conditions contained in that contract.
* * * * *
4. In Sec. 252.5, the first sentence of paragraph (c) is revised to
read as follows:
Sec. 252.5 Recipient agency responsibilities.
* * * * *
(c) Refunds. A recipient agency purchasing end products under the
NCP Program from a processor utilizing a refund system shall submit a
refund application supplied by the processor to the processor within 30
days of receipt of the end products, except that recipient agencies may
submit refund applications to a single processor on a Federal fiscal
quarterly basis if the total anticipated refund due for all purchases
of end product from that processor during the quarter is 25 dollars or
less. * * *
* * * * *
Dated: December 1, 1994.
William E. Ludwig,
Administrator.
[FR Doc. 94-30084 Filed 12-6-94; 8:45 am]
BILLING CODE 3410-30-U
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