National School Lunch Program, Special Milk Program for Children and School Breakfast Program: Finalization of Coordinated Review Effort Interim Rule

DEPARTMENT OF AGRICULTURE

Food and Nutrition Service

7 CFR Parts 210, 215 and 220

National School Lunch Program, Special Milk Program for Children

and School Breakfast Program: Finalization of Coordinated Review Effort

Interim Rule

AGENCY: Food and Nutrition Service, USDA.

ACTION: Final rule.

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

SUMMARY: On July 17, 1991, the Department published a final rule in the

Federal Register which set forth the Coordinated Review Effort, a

unified accountability system required by the Child Nutrition and WIC

Reauthorization Act of 1989. On August 26, 1992, the Department

published an interim rule in the Federal Register which became

effective on September 25, 1992, and which modified a number of

provisions contained in the 1991 final rule. This rulemaking responds

to the comments received during the interim rule comment period and

adopts as final, with changes, the provisions which were set forth in

the August 26, 1992 interim rule. These revisions are a part of the

Coordinated Review Effort and are intended to facilitate the review

activities of the State agencies.

EFFECTIVE DATE: February 14, 1994.

FOR FURTHER INFORMATION CONTACT: Robert M. Eadie or Charles Heise,

Policy and Program Development Branch, Child Nutrition Division, FNS,

USDA, 3101 Park Center Drive, room 1007, Alexandria, Virginia 22302,

Phone: 703-305-2620.

SUPPLEMENTARY INFORMATION:

Classification

This final rule is issued in conformance with Executive Order

12866.

This rule has been reviewed with regard to the requirements of the

Regulatory Flexibility Act (5 U.S.C. 601 through 612). The Acting

Administrator of the Food and Nutrition Service has certified that this

rule will not have a significant economic impact on a substantial

number of small entities. This rule will affect State agencies and

school food authorities since this rule is expected to clarify

regulatory requirements and facilitate the review activities of State

agencies. However, the effect of these modifications will not be

significant since State agencies and school food authorities already

conduct review activities under the Coordinated Review Effort and this

rule will not increase their current Coordinated Review Effort

activities.

The National School Lunch Program, Special Milk Program for

Children and the School Breakfast Program are listed in the Catalog of

Federal Domestic Assistance under Nos. 10.555, 10.566, and 10.553,

respectively, 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

notice at 48 FR 29112, June 24, 1983.)

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 the provisions, all applicable administrative procedures

must be exhausted. In the National School Lunch Program, the

administrative procedures are set forth under the following

regulations: (1) School food authority appeals of State agency findings

as a result of a Coordinated Review must follow State agency hearing

procedures as established pursuant to 7 CFR 210.18(q); (2) school food

authority appeals of FNS findings as a result of a Coordinated Review

must follow FNS hearing procedures as established pursuant to 7 CFR

210.30(d)(3); and (3) State agency appeals of State Administrative

Expense fund sanctions (7 CFR 235.11(b)) must follow the FNS

Administrative Review Process as established pursuant to 7 CFR

235.11(f).

Information Collection

The reporting and recordkeeping requirements identified in this

rule have been approved by the OMB for use through September 30, 1994.

The OMB control number is 0584-0006.

Background

Legislative History

Section 110 of Public Law 101-147, enacted November 10, 1989,

amended the National School Lunch Act (42 U.S.C. 1751-1769c) by adding

a new section 22 which states: ``There shall be a unified system

prescribed and administered by the Secretary for ensuring that local

food service authorities that participate in the school lunch program

under this Act comply with the provisions of this Act * * *. [E]ach

State educational agency shall--(A) require that local food service

authorities comply with the provisions of this Act; and (B) ensure such

compliance through reasonable audits and supervisory assistance

reviews. * * * In carrying out this section, the Secretary shall--(1)

assist the State educational agency in the monitoring of programs

conducted by local food service authorities; and (2) through management

evaluations, review the compliance of the State educational agency and

the local school food service authorities with regulations issued under

this Act * * *.''

Regulatory History

On July 17, 1991, the Department published a final rule in the

Federal Register (56 FR 32920) which set forth the Coordinated Review

Effort, a unified accountability system required by the Child Nutrition

and WIC Reauthorization Act of 1989. On August 26, 1992, the Department

published an interim rule in the Federal Register (57 FR 38579) which

modified a number of provisions contained in the July 17 final rule.

The interim rulemaking was effective on September 25, 1992 and provided

for a 60-day comment period which ended on October 26, 1992. Fifty-four

comments were received during the comment period. The Department would

like to take this opportunity to thank those individuals who commented

on the interim rulemaking. It was clear that commenters put a great

deal of effort in describing their concerns and offering their

suggestions. The Department is most appreciative of that effort. This

final rule responds to the comments received during the interim rule

comment period and restates, as appropriate, the provisions set forth

in the interim rule. The provisions set forth in the interim rule:

Implementation Dates--Authorized FNS to approve a State

agency's written request showing good cause to delay implementation of

the Coordinated Review Effort from July 1, 1992 to January 1, 1993.

(Sec. 210.18(a))

Residential Child Care Institutions--Excluded residential

child care institutions from the 100/100 school selection criteria.

(Sec. 210.18(e))

Application Review Procedures--Allowed State agencies the

option of reviewing (a) all approved free and reduced price

applications effective for the review period (as required in the July

17, 1991 final Coordinated Review Effort rule) or (b) all approved free

and reduced price applications back to the beginning of the school

year, or (c) all approved free and reduced price applications effective

on the day(s) the review is conducted. (Sec. 210.18(g))

Notice of Fiscal Action or Withholding Payment--Required

State agencies to advise school food authorities in writing of the

grounds for denial of all or a part of a Claim for Reimbursement or

withholding of payment resulting from a review conducted under

Sec. 210.18 and of the appeal rights available to affected school food

authorities. (Sec. 210.18(j))

Withholding Payment--Limited mandatory withholding of

payments on a follow-up review. Specifically, the interim rule limited

mandatory withholding of all Program payments to those school food

authorities with critical area violations which exceed review

threshold(s). In addition, the interim rule required the withholding of

a minimum of 10 percent of Program payments where serious problems

continue to exist in either of two aspects of the general areas of

review, verification and recordkeeping. (Sec. 210.18(l))

Withholding Payment Exception--Allowed State agencies to

reduce the amount withheld from a school food authority which fails to

take corrective action by as much as 60 percent of the total Program

payments when it is determined to be in the best interest of the

Program. Withholding less than 40 percent would continue to require the

approval of FNS. (Sec. 210.18(l))

Fiscal Action--Allowed State agencies to limit fiscal

action from the point corrective action occurs back through the

beginning of the review period for errors of certification, issuance of

benefits and updating eligibility status identified on an

administrative review, provided corrective action occurs.

(Sec. 210.18(m))

Administrative Appeal Process--Established an

administrative appeal procedure which allows school food authorities

the opportunity to appeal the denial of all or a part of a Claim for

Reimbursement or withholding of payments which result from a review

required under Sec. 210.18. (Sec. 210.18(q), Sec. 210.30(d),

Sec. 215.11(b)(2), and Sec. 220.13(f)(2))

Overpayment Disregard--Allowed FNS, the Department's

Office of Inspector General and State agencies to disregard any

overpayment identified by management evaluations, reviews or audits if

the total, in any fiscal year, does not exceed $600. (Sec. 210.19(d),

Sec. 215.13(e) and Sec. 220.15(f))

Commenter concerns, corrections and revisions addressed in this

rulemaking are discussed in this preamble by the pertinent regulatory

citation.

Section 210.18(a) Implementation Dates

Section 210.18(a), Implementation dates, of the interim rule,

authorized FNS to approve a State agency's written request to delay

implementation of the Coordinated Review Effort from July 1, 1992 to

January 1, 1993 if FNS determined that the State agency demonstrated

good cause to delay implementation.

Nineteen commenters to the interim rule expressed concerns

regarding the start of the staggered review cycles which resulted from

the delayed start option. In general, commenters sought to standardize

the review cycle so that all State agencies are on the same cycle. A

number of beginning and ending dates were suggested; however, there was

no consensus of opinion.

Two commenters, on behalf of the same State agency, requested that

FNS allow a 5-year review cycle for those State agencies which review

all other school related programs on a 5-year cycle.

The Department concurs that a standardized cycle of review is in

the best interest of the Program. To protect the interests of both

those State agencies beginning on July 1, 1992 and of those beginning

on January 1, 1993, the Department has determined to extend the first

year of the first 4-year cycle. Thus, paragraph (a) is unchanged and

the first sentence of introductory paragraph (c) has been revised to

read: ``The first year of the first 4-year review cycle began on July

1, 1992, or as otherwise authorized under paragraph (a) of this section

and shall end on June 30, 1994. For each State agency, the first 4-year

review cycle shall end on June 30, 1997.''

Given the commenter concerns regarding standardization of the

review cycle in this final rule, the Department has determined to

retain the 4-year cycle, thus making no provision for the 5-year cycle

sought by two commenters. However, the Department will continue to

consider this issue for possible future revision.

Section 210.18(e) Residential Child Care Institutions

Section 210.18(e), Number of schools to review, as amended by the

interim rule, limited the number of multi-site residential child care

institutions a State agency needs to review to the minimum number

identified in Table A. Paragraph (e)(1) of the interim rule stated

``Except for residential child care institutions, the State agency

shall review all schools with a free average daily participation of 100

or more and a free participation factor of 100 percent or more. In no

event shall the State agency review less than the minimum number of

schools in Table A.'' (Table A was not changed.)

Generally, residential child care institutions are single unit

institutions; however, in some cases, the residential child care

institution has a number of units that report to a single governing

body, (e.g., State administered juvenile detention centers). The term

``multi-site residential child care institution'' is intended to refer

to those institutions which have a number of units that report to a

single governing body.

Six commenters to the interim rule, all representing State

agencies, addressed this provision. All were in complete support of the

interim provision to limit the number of multi-site residential child

care institutions a State agency needed to review to the minimum number

identified in Table A. For this reason, the provisions set forth in

paragraph (e)(1) of the interim rule are adopted without change.

Section 210.18(g) Application Review Procedures

Section 210.18(g), Critical areas of review, as amended by the

interim rule, expanded the methodology for the review of the free and

reduced price applications. Rather than limiting the review of the free

and reduced price applications to those applications effective for the

review period, paragraph (g)(1) of the interim rule allowed the State

agency to review (a) all approved free and reduced price applications

effective for the review period; or (b) all approved free and reduced

price applications back to the beginning of the school year; or (c) all

approved free and reduced price applications effective on the day(s)

the review is conducted.

Thirteen commenters addressed this provision of the interim rule.

Virtually all commenters were supportive of this provision; however, a

number of commenters requested expanding the provision to include

specific procedures to facilitate implementation of this provision.

Some commenters questioned implementation of this provision, as well as

what is meant by ``statistically valid sample'' and how potential

reclaims (overpayment of Federal funds) would be calculated. Some

commenters were confused about references to an abbreviated application

provision and whether it became effective on September 25, 1992, as did

the other provisions of the interim rule.

This final rule leaves unchanged the provisions of paragraph (g)(1)

as presented in the interim rule. The Department would like to assure

commenters that instructions for implementation of this provision, for

implementation of the statistical sampling provision and for

information on how to calculate potential reclaims are addressed in the

guidance materials prepared for the Coordinated Review Effort. These

materials were developed by FNS, with the help of State agency and

local personnel. The materials were distributed to State agencies in

the Spring of 1993. Thus, all of the questions raised by commenters can

be resolved through reference to these materials.

The Department would like to take this opportunity to clarify a

misunderstanding regarding an abbreviated review of the free and

reduced price applications. The development of procedures which would

enable State agencies to conduct an abbreviated review of free and

reduced price applications is currently underway. However, it is the

Department's position that these procedures would benefit from the

solicitation of public comment. Thus, the Department is also developing

a proposed rulemaking which will set forth the proposed procedures and

request comments from the public. Since the Department intends to

pursue a proposed rulemaking, these procedures will not become

effective until such time as the proposal is issued, comments are

received and analyzed, and a final rule is published in the Federal

Register.

Section 210.18(j) Notice of Fiscal Action or Withholding Payment

Section 210.18(j), Exit conference and notification, as amended by

the interim rule, required the State agency to notify school food

authorities in writing of the grounds for denial of all or a part of a

Claim for Reimbursement resulting from a review conducted under

Sec. 210.18. The notice, ``which shall be sent by certified mail,

return receipt requested, shall also include a statement indicating

that the school food authority may appeal the denial of all or a part

of a Claim for Reimbursement or withholding payment and the entity

(i.e., FNS or State agency) to which the appeal should be directed.''

Only one commenter, a State agency, addressed this provision. While

agreeing that the information should be made available to the school

food authority, the commenter observed that the information could be

provided at the entrance or exit conference. Requiring a certified

letter was seen as ``overkill''.

Since only one commenter found these provisions burdensome, the

Department leaves unchanged the provision as set forth in the interim

rule. The Department believes the ``certified'' letter requirement is

necessary to document that the State agency has met the required

timeframes.

Section 210.18(l)(1) Withholding Payment

Section 210.18(l)(1), Withholding payment, as amended by the

interim rule, limited the mandatory withholding provision to those

school food authorities with critical area violations which exceed the

review threshold(s) and/or where serious problems continue to exist in

either of two aspects of the general areas of review, verification and

recordkeeping. In addition, rather than withholding all Program

payments for serious violations of the verification or recordkeeping

requirements, paragraph (l)(1)(iv) required the State agency to

withhold a minimum of 10 percent of the Program payments if the State

agency finds, on a follow-up review, that serious problems continue to

exist in the school food authority's verification or recordkeeping

activities.

Of the 13 commenters addressing this provision, two commenters

disapproved of withholding payment for any reason whereas one commenter

approved of the interim rule provision. Other commenters offered

suggestions to modify the interim provisions. For example, four

commenters suggested limiting mandatory withholding to critical areas,

one commenter suggested limiting mandatory withholding for both the

critical and general areas to 10 percent of the Program payments, and

one commenter suggested withholding only those payments related to

critical area violations in the specific schools which caused a

threshold to be exceeded.

Several commenters opposed the 10 percent withholding provision

because it was perceived as burdensome and too complex to administer.

Commenters argued that more guidance will be needed to implement this

provision. Two commenters asked for a definition of ``serious

problems''.

This final rule limits the mandatory withholding provision to those

school food authorities with critical area violations which exceed the

review threshold(s). State agencies are encouraged to withhold payments

for serious problems in the areas of verification and recordkeeping;

however, the mandatory minimum withholding for serious verification and

recordkeeping problems has been removed.

Section 210.18(l)(3) Withholding Payment Exception

Section 210.18(l)(3), Exceptions, as amended by the interim rule,

allowed the State agency to withhold as little as 40 percent of total

program payments. To withhold less than 40 percent continued to require

the approval of FNS.

Of the three commenters addressing this provision, two commenters

supported the flexibility of this provision and one commenter argued

that withholding 40 percent is too burdensome and too complex to

administer. It was suggested that where funds for an individual school

can be separately identified, their claim for reimbursement be withheld

instead of that of the entire school food authority.

This final rule makes no change to the exception authorized under

paragraph (l)(3) in the interim rule. Commenter suggestions are being

taken under advisement pending a review of withholding situations as

they arise.

Section 210.18(m) Fiscal Action

Section 210.18(m), Fiscal action, as amended by the interim rule,

allowed a State agency to limit fiscal action for errors found on a

first review related to certification, updating eligibility and issuing

benefits. For first review errors related to certification, issuance of

benefits and updating eligibility status, the State agency was

authorized to limit fiscal action to the period from the point

corrective action occurs back through the beginning of the review

period, provided corrective action occurs.

Of the 14 commenters addressing this interim provision all

expressed varying degrees of support. Two commenters representing the

same State agency suggested that while limiting fiscal action to the

review period is appropriate, this change, when taken together with the

expanded application review methodology allowing options for the review

period and the increased overpayment disregard threshold, may result in

future increased error rates since there is less likelihood of having

to repay funds which were incorrectly claimed. These commenters

questioned whether it is appropriate to have all three changes.

Five commenters argued that the interim rule changes were not

sufficient to improve fiscal action requirements set forth in the final

rule. These commenters opposed fiscal action back to the beginning of

the year for ``non-correctable'' errors. Several of these commenters

suggested that there must be an error tolerance in the evaluation of

the eligibility procedures and in the evaluation of meal components.

Another concern related to allowing underclaims to offset fiscal

action.

This final rule adopts the provision as set forth in the interim

rule. As with the withholding of payments provisions, the commenter

suggestions are being taken under advisement pending a review of the

implementation of the fiscal action requirements. The Department would

like to take this opportunity to point out that existing policy

authorizes State agencies to allow underclaims to offset overclaims.

Section 210.18(q) and Sec. 210.30(d) Administrative Appeal Process

Sections 210.18(q), School food authority appeal of State agency

findings, and Sec. 210.30(d), School food authority appeal of FNS

findings, as set forth in the interim rule, established appeal

procedures so that school food authorities could appeal the denial of

all or a part of a Claim for Reimbursement or withholding of payments

resulting from a review under the Coordinated Review Effort.

Of the 10 commenters addressing this provision, six commenters were

supportive although several observed that the procedures were somewhat

cumbersome. Two commenters representing the same State agency believed

the appeal procedures were unnecessary, very cumbersome and overly

prescriptive. These commenters observed that school food authorities

presently have the opportunity to provide documentation to reduce

fiscal action. Two commenters expressed concerns about the timeframes

specified.

This final rule leaves unchanged the appeal procedures as stated in

Sec. 210.18(q) and Sec. 210.30(d) of the interim rule and the authority

for such appeals as set forth in 7 CFR 215.11(b)(2) and 7 CFR

220.13(f)(2). The appeal procedures were modeled after those used in

the Child and Adult Care Food Program and, as such, have been tested

over the years. As these procedures are implemented in the National

School Lunch Program, the Department would be willing to consider

modifications which would expedite the process. The Department intends

to take commenter concerns under advisement until such time.

Section 210.19(d), Sec. 215.13(e) and Sec. 220.15(f) Overpayment

Disregard

Section 210.19(d), Management evaluations, as amended by the

interim rule, raised the overpayment disregard from $250 to $600. The

interim rule made similar changes to 7 CFR 215.13(e) and 7 CFR

220.15(f). As a result of this change, State agencies, FNS, and the

Department's Office of the Inspector General were authorized to

disregard any overpayment if the total overpayment does not exceed $600

for any fiscal year.

Eleven commenters supported the increased overpayment disregard;

however, several commenters suggested that the disregard should be

greater than $600. Examples of $1,000 and $750 were provided. On behalf

of Arizona, two commenters pointed out that the State Attorney

General's Office has indicated that Arizona prohibits disregarding any

overpayment. The Arizona State agency suggested language which would

enable the State agency to employ the $600 disregard.

The final rule adopts the interim provision with only a minor

technical change until such time as data is available to re-evaluate

the $600 figure. In the case of the Arizona State agency, the State's

rule of disregard does not authorize an amount in excess of the Federal

minimum amount set forth in this final rule, but rather, sets a more

stringent monetary standard. Because an overpayment disregard is

discretionary on the part of the evaluating entity (unless there is

evidence of violations of criminal law or civil fraud statutes), the

prohibition in Arizona which prevents the State agency from

disregarding any overpayment discovered during an evaluation does not

conflict with this final rule. The Department will not, therefore,

revise the final provision to allow the Arizona State agency to employ

the $600 disregard.

Miscellaneous Correction

Section 210.19(c)(2)(ii), Fiscal action, as amended by the interim

rule, required fiscal action to be extended back to that point in time

during the current school year when the infraction first occurred,

``[u]nless otherwise specified under Sec. 210.18(m) * * *.'' The

wording ``[u]nless otherwise specified under Sec. 210.18(m)'' was a

technical change to accommodate the limitation on fiscal action

authorized under Sec. 210.18(m) of the interim rule.

The interim rule made an inadvertent change to this provision.

Under the 1991 final rule, fiscal action was required ``back to the

beginning of the school year or that point in time during the current

school year when the infraction first occurred, as applicable.'' The

interim rule incorrectly restated this provision, by replacing the

words ``as applicable'' with the words ``whichever is earlier.'' This

change had the effect of making the fiscal action provision more

stringent; this was unintentional. For this reason, this final rule

replaces the words ``whichever is earlier'' with the words ``as

applicable'' to ensure that it is correctly stated.

List of Subjects

7 CFR Part 210

Children, Commodity School Program, Food assistance programs,

Grants programs--social programs, National School Lunch Program,

Nutrition, Reporting and recordkeeping requirements, Surplus

agricultural commodities.

7 CFR Part 215

Children, Food assistance programs, Grant programs--social

programs, Milk, Nutrition, Reporting and recordkeeping requirements,

Special Milk Program for Children.

7 CFR Part 220

Children, Food assistance programs, Grant programs--social

programs, Nutrition, Reporting and recordkeeping requirements, School

Breakfast Program.

Accordingly, the interim rule amending 7 CFR parts 210, 215 and 220

which was published at 57 FR 38579 on August 26, 1992, and became

effective on September 25, 1992, is adopted as final, with the

following changes:

PART 210--NATIONAL SCHOOL LUNCH PROGRAM

1. The authority citation for 7 CFR part 210 is revised to read as

follows:

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

2. In Sec. 210.18,

a. The first sentence of the introductory text of paragraph (c) is

removed, and two new sentences are added in its place to read as set

forth below.

b. The semicolon and the words ``and/or'' at the end of paragraph

(l)(1)(iii) are removed and replaced with a period; paragraph

(l)(1)(iv) is removed, and paragraph (l)(1)(v) is redesignated as

paragraph (l)(1)(iv).

The addition reads as follows:

Sec. 210.18 Administrative reviews.

* * * * *

(c) * * * The first year of the first 4-year review cycle began on

July 1, 1992, or as otherwise authorized under paragraph (a) of this

section and shall end on June 30, 1994. For each State agency, the

first 4-year review cycle shall end on June 30, 1997. * * *

* * * * *

3. In Sec. 210.19,

a. The first sentence of paragraph (c)(2)(ii) is revised to read as

set forth below.

b. The fourth sentence of paragraph (d) is amended by removing the

word ``and'' between the words ``reviews'' and ``audits'' and adding

the word ``or'' in its place.

The revision reads as follows:

Sec. 210.19 Additional responsibilities.

* * * * *

(c) * * *

(2) * * *

(ii) Unless otherwise specified under Sec. 210.18(m) of this part,

fiscal action shall be extended back to the beginning of the school

year or that point in time during the current school year when the

infraction first occurred, as applicable.* * *

* * * * *

7 CFR PART 215--SPECIAL MILK PROGRAM FOR CHILDREN

1. The authority citation is revised to read as follows:

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

Sec. 215.13 [Amended]

2. In Sec. 215.13, the first sentence of paragraph (e) is amended

by removing the word ``and'' between the words ``reviews'' and

``audits'' and adding the word ``or'' in its place.

PART 220--SCHOOL BREAKFAST PROGRAM

1. The authority citation is revised to read as follows:

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

Sec. 220.15 [Amended]

2. In Sec. 220.15, the first sentence of paragraph (f) is amended

by removing the word ``and'' between the words ``reviews'' and

``audits'' and adding the word ``or'' in its place.

Dated: January 3, 1994.

George A. Braley,

Acting Administrator.

[FR Doc. 94-838 Filed 1-12-94; 8:45 am]

BILLING CODE 3410-30-U