Child and Adult Care Food Program; Improved Targeting of Day Care Home Reimbursements

SUMMARY: This interim rule amends the Child and Adult Care Food Program

regulations governing reimbursement for meals served in family or group

day care homes by incorporating provisions of the Personal

Responsibility and Work Opportunity Reconciliation Act of 1996.

Specifically, this rule establishes a two-tiered reimbursement rate

structure for day care homes. Under this structure, the level of

reimbursement for meals served to enrolled children will be determined

by economic need based on: the location of the day care home; the

income of the day care provider; or the income of individual children's

households. In addition, this rule makes a minor amendment to the

National School Lunch Program regulations to facilitate the provision

of elementary school data on free and reduced price eligibility

determinations to sponsors of family day care homes. These revisions

are intended to target higher CACFP reimbursements to low-income

providers and children.

DATES: Effective July 1, 1997, except for sections 210.9(b)(20),

210.19(f), 226.6(f)(2) and 226.6(f)(9), which are effective March 10,

1997. To be assured of consideration, comments must be postmarked on or

before April 7, 1997, except for comments on the information collection

which must be received by March 10, 1997.

ADDRESSES: Comments should be addressed to Mr. Robert M. Eadie, Chief,

Policy and Program Development Branch, Child Nutrition Division, Food

and Consumer Service, Department of Agriculture, 3101 Park Center

Drive, Room 1007, Alexandria, Virginia 22302. Comments in response to

this rule may be inspected at the above address during normal business

hours, 8:30 a.m. to 5:00 p.m., Monday through Friday.

FOR FURTHER INFORMATION CONTACT: Robert M. Eadie or Edward Morawetz at

the above address or by telephone at 703-305-2620.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

This interim rule has been determined to be economically

significant and was reviewed by the Office of Management and Budget

under Executive Order 12866.

Regulatory Flexibility Act

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

the Regulatory Flexibility Act (5 U.S.C. 601-612). This rule is

expected to have a significant impact on a substantial number of small

entities. Specifically, it will impact day care homes classified as

tier II day care homes. Additional discussion of this impact is

contained in the Economic Impact Analysis following this rule.

Executive Order 12372

The Child and Adult Care Food Program (CACFP) and the National

School Lunch Program (NSLP) are listed in the Catalog of Federal

Domestic Assistance under No. 10.559 and 10.555, 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 published at 48 FR

29114, June 24, 1983).

Paperwork Reduction Act

Summary: In accordance with the Paperwork Reduction Act of 1995,

this Notice announces the Food and Consumer Service's (FCS) intention

to request Office of Management and Budget (OMB) review of the

adjustments to be made to the information collections for the Child and

Adult Care Food Program and the National School Lunch Program as a

result of the interim rule, Child and Adult Care Food Program: Improved

Targeting of Day Care Home Reimbursements.

To be assured of consideration, comments on the information

collection must be received by March 10, 1997.

Comments on the information collection should be addressed to Mr.

Robert M. Eadie, Chief, Policy and Program Development Branch, Child

Nutrition Division, Food and Consumer Service, Department of

Agriculture, 3101 Park Center Drive, Room 1007, Alexandria, Virginia

22302.

Comments are invited on the following areas: (a) Whether the

proposed collection of information is necessary for the proper

performance of the functions of the agency, including whether the

information will have practical utility; (b) the accuracy of the

agency's estimate of the burden of the proposed collection of

information, including the validity of the methodology and assumptions

used; (c) ways to enhance the quality, utility and clarity of the

information to be collected; and (d) ways to minimize the burden of the

collection of information on those who are to respond, including

through the use of appropriate automated, electronic, mechanical, or

other technological collection techniques or other forms of information

technology.

All responses to this Notice will be summarized and included in the

request for OMB approval, and will become a matter of public record.

Titles: 7 CFR Part 226, Child and Adult Care Food Program and 7 CFR

Part 210, National School Lunch Program.

OMB Numbers: 0584-0055 and 0584-0006.

Type of request: Revision of existing collections.

Abstract: The interim rule, Child and Adult Care Food Program:

Improved Targeting of Day Care Home Reimbursements, is intended to

implement the provision included in Public Law 104-193, the Personal

Responsibility and Work Opportunity Reconciliation Act of 1996, that

establishes a two-tiered reimbursement system for day care homes

participating in the Child and Adult Care Food Program. Under this

structure, the level

[[Page 890]]

of reimbursement for day care homes will be determined by economic need

based on: (1) The location of the day care home; (2) the income of the

day care home provider; or (3) the household income of each

participating child.

In accordance with the Paperwork Reduction Act of 1995, the

Department is providing the public with the opportunity to comment on

the information requirements of this interim rule as noted below:

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

Annual

Section Annual No. of Annual Annual Per burden

respondents frequency responses response hours

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

7 CFR 210.9(b)(20) School food authorities provide State agencies with a listing of elementary schools with at

least 50% eligibility

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

New................................... 4,969 school food 1 4,969 .50 2,485

authorities.

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

7 CFR 210.19(f) State agency collects and maintains a listing of all elementary schools participating in the

National School Lunch Program with at least 50% eligibility

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

New................................... 54 State agencies........ 1 54 2 108

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

7 CFR 210.19(f) State agency provides Child and Adult Care Food Program State agencies with a listing of all

elementary schools participating in the National School Lunch Program with at least 50% eligibility

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

New................................... 12 State agencies........ 1 12 .50 6

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

7 CFR 226.6(f)(9) State agencies administering CACFP provide listing of eligible schools to sponsoring

organizations

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

New................................... 54 State agencies........ 23 1,242 1 1,242

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

7 CFR 226.6(f)(9) State agencies administering CACFP provide census data to sponsoring organizations

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

New................................... 54 state agencies........ 2.3 124 1 124

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

7 CFR 226.6(f)(10) Sponsoring organizations submit tier I and tier II enrollment information to State agencies

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

New................................... 1,240 sponsors........... 1 1,240 1 1,240

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

7 CFR 226.15(e)(3) Sponsoring organizations maintain documentation used to classify homes as tier I

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

New................................... 1240 sponsors............ 40 49,600 1 49,600

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

7 CFR 226.13(b) Sponsoring organizations collect and report meals by category to State agency each month

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

New................................... 1,240 sponsors........... 12 14,880 2 29,760

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

7 CFR 226.13(d)(1)-(3), 226.18(e) Tier I and Tier II homes submit monthly meal counts to sponsors

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

New................................... 193,000 homes............ 12 2,316,000 1.25 2,895,000

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

7 CFR 226.13(d)(3)(i)-(iii) Sponsoring organizations establish reimbursement amounts for tier II homes with

income-eligible children

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

New................................... 496 sponsors............. 78 38,688 .50 19,344

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

7 CFR 226.15(e)(3) Sponsoring organizations, upon request, collect free and reduced applications from enrolled

children in Tier II that are not providers own at least once a year and maintain eligibility determination of

each enrolled child

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

New................................... 496 sponsors............. 39 19,344 .50 9,672

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

7 CFR 226.23(e)(1) Households of children enrolled in tier II day care homes complete free and reduced price

applications

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

New................................... 166,752 households....... 1 166,752 .075 12,506

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

7 CFR 226.23(h)(6) Sponsoring organizations collect information to conduct verification of homes that qualify as

tier I based on provider's income

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

New................................... 1,240 sponsors........... 16 19,840 1 19,840

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

Total Proposed Burden Hours: 3,040,927.

Executive Order 12778

This interim 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

[[Page 891]]

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.

In the Child and Adult Care Food Program: (1) Institution appeal

procedures are set forth in 7 C.F.R. Sec. 226.6(k); and (2) disputes

involving procurement by State agencies and institutions must follow

administrative appeal procedures to the extent required by 7 CFR 226.22

and 7 CFR 3015.

This rule implements the amendments set forth under sections 708(e)

(1) and (3) of the Personal Responsibility and Work Opportunity

Reconciliation Act of 1996, Pub. L. 104-193 (the Act), which was

enacted on August 22, 1996. The Act made several fundamental changes

affecting the reimbursement provided for meals served in family or

group day care homes under the Child and Adult Care Food Program.

Section 708(k)(3) of Pub. L. 104-193 requires that interim regulations

implementing these amendments be issued by January 1, 1997, and that

final regulations be issued by July 1, 1997. For this reason, the

Administrator of the Food and Consumer Service has determined, in

accordance with 5 U.S.C. 553(b)(3)(B), that it is impracticable and

contrary to the public interest to take prior public comment and that

good cause therefore exists for publishing this rule without prior

public notice and comment. Comments are being solicited until April 7,

1997. A longer comment period is not practicable given the Act's

requirement that final regulations be issued by July 1, 1997. All

comments will be carefully considered prior to final rulemaking.

Background

Under the Child Care Food Program (CCFP), as it was initially

established and authorized in November 1975 by section 16 of the

National School Lunch Act and Child Nutrition Act of 1966 Amendments of

1975 (Pub. L. 94-105), application requirements, enrollee eligibility

determinations, and reimbursement rates were the same for both family

and group day care homes and centers. Specifically, individual

eligibility determinations based on household size and income

statements were required, and the meal reimbursement rates paid to

centers and to sponsors on behalf of day care homes were based on each

enrolled child's eligibility for free, reduced price, or paid meals.

Eligibility for free and reduced price meals was based on income

thresholds and procedures essentially the same as those used by the

National School Lunch Program (and still in use by the National School

Lunch Program). At this time, in both day care centers and day care

homes, approximately 70 percent of enrolled children were eligible for

free and reduced price meals; the remaining 30 percent were eligible

for paid meals.

Over the next several years, concern was raised that licensing,

paperwork, and recordkeeeping requirements were creating barriers to

day care home participation in the CCFP, and it became clear that there

were major differences between the administrative capabilities and

operating methods of day care home providers and child care center

operators. Specifically, differences in size of facility, relationship

with parents, and management sophistication suggested the need for

simpler administrative procedures in day care homes. In 1978, these

concerns were addressed in the Child Nutrition Amendments of 1978 (Pub.

L. 95-627). This law eliminated individual free and reduced price

eligibility determinations (i.e., means testing) in day care homes and

established a single reimbursement rate for each type of meal served.

This rate was slightly less than the rate paid for comparable meals

served at the ``free'' rate in child care centers. These changes

encouraged day care home provider participation in the Program by

reducing their administrative paperwork burden.

The Omnibus Budget Reconciliation Act of 1981 (Pub. L. 97-35)

introduced a requirement to means test households of providers' own

children by eliminating reimbursement for providers' own children if

the providers' households had incomes greater than 185 percent of the

Federal income poverty guidelines. Otherwise, the simplified procedures

established by Public Law 95-627 were left intact. With the sole

exception of means testing of providers' own children, day care homes

have continued to receive reimbursement under the Program for meals

served to all enrolled children, without application and regardless of

income.

Simpler administrative procedures for family and group day care

homes led to significant growth in their program participation. This

growth was especially evident among family day care homes serving

middle and upper-income children. The Study of the Child Care Food

Program (CCFP) conducted for FCS by Abt Associates, Inc., showed that

by 1986 approximately 70 percent of children then receiving

reimbursement for meals served in family day care homes would have

qualified for ``paid'' meals prior to the changes to the law in 1978.

(``Paid'' meals are for children from households with incomes over 185

percent of poverty.) These percentages were exactly opposite from the

percentages of income-eligible children participating in the program

before the means test was eliminated. Led by growth in the family day

care portion of the CCFP--renamed the Child and Adult Care Food Program

(CACFP) in 1989--Program expenditures increased from $300 million in

1983 to $1.44 billion by 1995.

To illustrate the current difference between reimbursement in day

care homes and centers, in 1996, for example, if a child eligible for

paid meals and a child eligible for free meals both transferred from a

center to a day care home, reimbursement provided for lunches for the

paid child would change from $0.32 in the center to $1.54 in the day

care home. The change for the child eligible for free meals would

change from $1.94 in the center to $1.54 in the home. The rate

difference for the ``free'' child is largely due to administrative

costs, which are paid separately to sponsoring organizations of day

care homes, while center administration is included in the

reimbursement rate they receive.

The goal of reducing overall Federal expenditures has prompted a

review of many programs and led to a decision to improve the targeting

of benefits to low-income children in the CACFP. To accomplish this

targeting, the Personal Responsibility and Work Opportunity

Reconciliation Act of 1996 establishes two ``tiers'' of day care homes

and reimbursement rates. Under the law, tier I homes are those that are

located in low-income areas or those in which the provider's household

income is at or below 185 percent of the Federal income poverty

guidelines. All meals served to enrolled children in tier I homes will

continue to be reimbursed at essentially the same rates that they

currently receive, adjusted for inflation. Tier II homes, in contrast,

are those which do not meet the location or provider income criteria

for a tier I home. The meals served in tier II homes are reimbursed at

lower rates, unless the provider elects to have the sponsor collect

free and reduced price applications from the households of children

enrolled for day care in the home. In that case, the meals served to

identified income-eligible children (i.e., children from households

with incomes at or below 185 percent of the Federal income poverty

guidelines) are reimbursed at the higher, tier I rates.

[[Page 892]]

These and other related provisions of the law are discussed in

greater detail in the preamble that follows.

Tier I Family or Group Day Care Homes

Definition

Section 708(e)(1) of the Personal Responsibility and Work

Opportunity Reconciliation Act of 1996 amended section 17(f)(3)(A) of

the National School Lunch Act (NSLA) (42 U.S.C. Sec. 1766(f)(3)(A)) by

defining a ``tier I family or group day care home'' as:

[1] a family or group day care home that is located in a

geographic area, as defined by the Secretary based on census data,

in which at least 50 percent of the children residing in the area

are members of households whose incomes meet the income eligibility

guidelines for free or reduced price meals under section 9 [of the

NSLA]; [2] a family or group day care home that is located in an

area served by a school enrolling elementary students in which at

least 50 percent of the total number of children enrolled are

certified eligible to receive free or reduced price school meals

under this Act [the NSLA] or the Child Nutrition Act of 1966 (42

U.S.C. 1771 et seq.); or [3] a family or group day care home that is

operated by a provider whose household meets the income eligibility

guidelines for free or reduced price meals under section 9 [of the

NSLA] and whose income is verified by the sponsoring organization of

the home under regulations established by the Secretary.''

Also, providers whose day care homes qualify as tier I day care

homes on the basis of the provider's household income may demonstrate

that they meet the criteria for free or reduced price meals by virtue

of their receipt of food stamp, Food Distribution Program on Indian

Reservation, or certain State programs for Temporary Assistance to

Needy Families (formerly Aid to Families with Dependent Children)

benefits.

This rule amends section 226.2 of the CACFP regulations by adding a

definition of ``tier I day care home.''

Provision of Data

Except in cases in which a provider demonstrates its household

income meets the free or reduced price eligibility standards, the Act

requires that either elementary school eligibility data or census data

must be utilized in order for a day care home to qualify as a tier I

family or group day care home. Section 708(e)(3) of the Act further

amended section 17(f)(3) of the NSLA to set forth requirements

pertaining to the provision of this data to family or group day care

home sponsoring organizations.

School Data

Section 708(e)(3) of the Act added section 17(f)(3)(E)(ii) to the

NSLA to require that each State agency that administers either the

National School Lunch or School Breakfast Programs annually provide to

approved family or group day care home sponsoring organizations a list

of elementary schools in the State in which at least one-half of the

enrolled children are certified to receive free or reduced price meals.

That provision of the Act further stipulates that, when determining

whether a day care home qualifies as a tier I day care home, the CACFP

State agency and sponsors shall use the most current data available at

the time of the determination. Finally, the Act directs State agencies

which administer the school nutrition programs to collect on an annual

basis the data necessary to comply with these requirements.

The Department considers that aggregate school data on the

percentage of enrolled children eligible for free and reduced price

meals is a highly effective way of determining whether or not day care

homes are located in low-income areas. To enable sponsors to obtain

this information, this interim regulation amends the National School

Lunch Program (NSLP) regulations to require school food authorities to

provide the State agency administering the NSLP with a list of all

elementary schools under their jurisdiction in which 50 percent or more

of the enrolled children are determined eligible for free or reduced

price meals as of the last operating day in October. Although the law

refers to both the State agency which administers the NSLP and the

State agency which administers the School Breakfast Program, in fact

there are no States in which the NSLP and School Breakfast Program are

operated by separate State agencies. Furthermore, in accordance with

section 301 of the Healthy Meals for Healthy Americans Act of 1994

(Pub. L. 103-448), we are planning to consolidate the regulations for

the NSLP and School Breakfast Program in the near future in order to

eliminate duplication and to streamline program requirements.

Therefore, the Department has determined that it is unnecessary to

amend 7 CFR Part 220, regulations for the School Breakfast Program, to

include the provision of data requirements discussed above.

The Department notes that this information is already collected and

maintained at the local school food authority level. Section 210.8(c)

requires school food authorities to report the total number of enrolled

free, reduced price and paid children to the State agency on the

October claim for reimbursement. To submit this data, the school food

authority consolidates the enrollment data submitted by the individual

schools under its jurisdiction. Moreover, school food authorities are

required pursuant to section 210.9(a)(8) to analyze monthly meal counts

submitted by their schools for accuracy. This is generally done by

comparing the free, reduced price and paid meal counts to an attendance

factor developed using the October enrollment data. Therefore, this new

statutory requirement will not result in an additional information

collection burden at the local level.

Likewise, there should be little, if any, increase in reporting

burden. While there is no Federal requirement for school food

authorities to report the names of participating schools to the State

agency, many States do collect this information. The Department also

notes that some school food authorities are accustomed to providing

individual school data for severe need reimbursement under the School

Breakfast Program. In most instances, these will be the same low-income

schools as those meeting the criteria for a tier I low-income area

determination. For these reasons, the increase in reporting burden

should not be large.

The law directs the State agency administering the NSLP to provide

this information directly to sponsors that request it. However, the

Department is concerned that some sponsors, particularly smaller ones,

may not know whom to contact in the State agency administering the NSLP

to obtain this information. This would be especially true of sponsors

operating in States in which an agency other than the State education

agency administers the CACFP.

Therefore, this interim regulation requires the NSLP State agency

to provide the CACFP State agency with a list of elementary schools in

which 50 percent or more of enrolled children have been determined

eligible for free or reduced price meals in addition to requiring NSLP

State agencies to provide the list to requesting sponsors. This will

facilitate sponsors' access to local school data while minimizing

confusion. The first list shall be submitted by school food authorities

to the NSLP State agency no later than March 1, 1997, from the NSLP

State agency to the CACFP State agency no later than March 15, 1997,

and by the CACFP State agency to sponsoring organizations by April 1,

1997. In subsequent years, this list must be provided by school food

authorities no later than December 31, and from the

[[Page 893]]

NSLP State agency to the CACFP State agency no later than February 1 of

each year. This schedule gives school food authorities 60 days after

the end of October to report this data to the NSLP agency, and the

February 1 deadline will provide that agency with one month in which to

compile the list and forward it to the CACFP State agency, which would

then make the information available to sponsors by February 15 each

year.

Census Data

Section 708(e)(3) of the Act amended section 17(f)(3)(E)(i) of the

NSLA to require that the Secretary provide each State agency

administering CACFP with appropriate census data showing the areas of

the State in which at least 50 percent of the children are from

households meeting the income standards for free or reduced price

meals. Each CACFP State agency, in turn, must provide the data to day

care home sponsoring organizations in the State.

Section 708(e)(3) of the Act further provides that the sponsoring

organization's determination that a day care home is located in an

eligible low-income area be in effect for three years when such

determination is based on school data. When census data are used, the

determination remains in effect until such time as more recent census

data are available. Regardless of the type of data used, section

708(e)(3) of the Act further amended section 17(f)(3) of the NSLA to

give the State agency the discretion to change the determination if it

subsequently learns that the area in which a home is located no longer

qualifies as an eligible area. Since we believe that in order to ensure

program integrity all levels of program administration should have the

responsibility to amend tier I determinations based upon the benefit of

new information, this interim rule provides FCS and sponsors, as well

as State agencies, with this authority. This expanded authority is

being granted under the Department's general authority to issue

regulations necessary for the administration of the Program.

The Department has experience in the Summer Food Service Program

with area eligibility determinations and the data available to document

area eligibility. Based on this experience, the Department believes

that census data should not be used when relevant, current information

on free and reduced price eligibility in local elementary schools is

available. Since census data are collected only once every ten years,

and release of the data by the Bureau of the Census typically does not

occur until several years after the data are collected, school data is

far more current and will, in most cases, more accurately represent

current economic conditions in a given area. However, we recognize that

there may be certain circumstances which warrant the use of census data

to establish a day care home's eligibility, even when current-year

school data are available. Therefore, when providing the required

census data, the Department will provide specific guidance as to the

use of such data to all State agencies for making determinations in

such situations.

We also recognize that there may be situations in which census data

and school data provide conflicting results of an area's eligibility.

Our guidance accompanying the census data will outline very specific

instances in which using census data, instead of current-year school

data, is appropriate. Using this guidance, the Department expects State

agencies to exercise their oversight to resolve conflicts between the

data sources so as to ensure that decisions on classifying tier I homes

are appropriate. Of primary concern to the Department is that

sponsoring organizations use the data that is most reflective of the

socio-economic status of a given area when classifying homes as tier I

or tier II.

Accordingly, this interim rule adds a new paragraph (b)(20) to

section 210.9 to require school food authorities to provide their NSLP

State agencies, by March 1, 1997, and by December 31 of each year

thereafter, with a list of all elementary schools under their

jurisdiction in which 50 percent or more of the enrolled children have

been determined eligible for free or reduced price meals as of the last

operating day of October. Furthermore, a new paragraph (f) is added to

section 210.19 requiring the State agency administering the NSLP to

provide by March 15, 1997, and by February 1 each year thereafter, to

the State agency administering the CACFP, and to sponsoring

organizations upon request, a list of all elementary schools

participating in the NSLP in which at least 50 percent of enrolled

children have been determined eligible for free or reduced price meals

as of the last operating day of October. In addition, this rule amends

section 226.6(f) by adding a new paragraph (9) to require that the

CACFP State agency provide all approved day care home sponsoring

organizations in the State the school and census data as described

above. For school data, this would require coordination with the NSLP

State agency. New section 226.6(f)(9) also requires that, when using

school or census data, the most recent available data be used in making

the determination of a home's eligibility as a tier I day care home;

that determinations of a home's eligibility as a tier I home will be

valid for one year if based on a provider's household income, three

years if based on school data, or until more current data are available

if based on census data; and that a sponsor, a State agency, or FCS may

change the determination if information becomes available indicating

that a home is no longer in a qualified area.

Making Tier I Day Care Home Determinations

Section 708(e)(3) of the Act amended section 17(f)(3)(E) of the

NSLA to require that school and census data ultimately be provided to

sponsoring organizations. Sponsoring organizations, consequently, will

be responsible for determining which day care homes are eligible as

tier I day care homes. As discussed above, this will be accomplished

applying the school or census data provided by the CACFP State agency,

or by determining that the households of day care home providers not

located in low-income areas are eligible for free or reduced price

meals by use of a free and reduced price application.

Since there is a significant financial benefit associated with the

classification of a day care home as a tier I day care home, this rule

requires State agencies to establish overclaims against sponsors which

improperly classify a home as a tier I day care home. The Department

recognizes that, because day care home classification is a new process,

there are various circumstances which may result in the

misclassification of a day care home as a tier I day care home as

sponsors and State agencies begin these new procedures. Therefore, FCS

will issue guidance, in advance of the implementation of the two-tiered

reimbursement structure, to address circumstances under which a State

agency may decide not to assess overclaims for tier I

misclassifications.

In addition, this rule requires that sponsoring organizations of

day care homes include in their annual management plans a description

of their system for making tier I day care home determinations. As is

the case with all items included in the management plans, State

agencies are required by section 226.6(f)(2) to review and approve the

system. For the initial implementation period, sponsors are required to

amend their plans to include this description by April 1, 1997. The

Department recognizes that this requirement will impose an additional

[[Page 894]]

administrative burden on sponsors and State agencies during the

transition period to the two-tiered structure. However, given the

potential for significant financial liability for sponsors and State

agencies resulting from incorrect determinations, it is extremely

important to ensure that each sponsor's method for making tier I

determinations is appropriate and achieves the most accurate

determinations possible using the most current available data.

Accordingly, this rule amends section 226.15 by redesignating

paragraphs (f) through (j) as paragraphs (g) through (k), respectively,

and by adding a new paragraph (f) to require sponsoring organizations

to make tier I day care home determinations. New paragraph (f) also

indicates, as discussed above and indicated in revised section

226.6(f)(9), that determinations of a home's eligibility as a tier I

day care home will be valid for one year if based on the provider's

household income, three years if based on school data, or until more

current data are available if based on census data. Additionally, as

discussed above, a sponsor, State agency, or FCS may change a

determination if information becomes available indicating that a home

is no longer in a qualified area. In addition, section 226.14(a) is

amended to require that State agencies establish overclaims against

sponsoring organizations of day care homes when they misclassify day

care homes as tier I day care homes unless the State agency determines,

in accordance with FCS guidance, that the misclassification was

inadvertent. Finally, section 226.6(f)(2) is amended to add the

requirement that the annual management plan include a description of

the sponsor's system for making tier I day care home determinations.

For initial implementation, each sponsoring organization of day care

homes shall amend its plan, subject to review and approval by the State

agency, to include this information by April 1, 1997.

Reimbursement Factors for Tier I Homes

Section 708(e)(1) of the Personal Responsibility and Work

Opportunity Reconciliation Act amended section 17(f)(3)(A) of the NSLA

to establish the reimbursement factors for meals served in tier I day

care homes as the factors in effect on July 1, 1996, with adjustments

made to the factors on July 1, 1997, and each July 1 thereafter. This

section of the Act further amended section 17(f)(3)(A) of the NSLA to

require that the factors be rounded to the nearest lower whole cent,

instead of to the nearest quarter-cent increment as previously

required. Subsequent adjustments must be based on the unrounded rate

from the preceding school year. In addition, annual adjustments, which

were previously based on changes in the Consumer Price Index for food

away from home, must now be made based on the Consumer Price Index for

food at home.

Section 226.4(c) of the current regulations contains the base

reimbursement rates for day care homes. These rates are adjusted

annually on July 1 and announced in a notice in the Federal Register.

Since the base reimbursement rates become out-of-date as soon as they

are adjusted for inflation, including them in the regulation serves no

useful purpose. Therefore, this rule will not include the base

reimbursement rates established for tier I homes under Pub. L. 104-193.

A notice announcing the reimbursement rates will continue to be

published in the Federal Register each July 1, as provided for under

section 226.4(g).

Accordingly, this rule amends section 226.4(c) to remove the base

reimbursement rates and to indicate that meals served in tier I day

care homes will be reimbursed at the current rates for such homes.

Also, section 226.4(g) is amended to incorporate the revised method of

making annual adjustments to the rates of reimbursement. Additional

discussion of reimbursement for meals served in day care homes may be

found in the next section of this preamble.

Tier II Family or Group Day Care Homes

Definition

Section 17(f)(3)(A)(iii) of the NSLA, as amended by section

708(e)(1) of the Act, describes a ``tier II family or group day care

home'' as a day care home that does not meet the criteria set forth for

a tier I family or group day care home. Specifically, a tier II family

or group day care home would not be located in an area that meets the

50 percent free or reduced price eligibility criteria, based on

elementary school or census data, nor would the day care home

provider's household income be at or below 185 percent of the Federal

income poverty guidelines.

Accordingly, this rule amends section 226.2 to add a definition of

``tier II day care home'' which defines such a home as one which does

not meet the criteria for a tier I day care home.

Election by Providers

In contrast to tier I day care homes, the law provides that meals

served in tier II day care homes may be eligible for two levels of

reimbursement--the tier I day care home rates for meals served to

income-eligible children and tier II rates for meals provided to all

other children. The Act further amended section 17(f)(3)(A)(iii) of the

NSLA to give providers operating tier II homes three options with

regard to how meals served in such homes are reimbursed.

While the law does not specifically require sponsors to provide

notification to tier II homes of their reimbursement options, section

17(f)(3)(A)(iii)(II), as amended by the Act, clearly gives day care

homes, not their sponsoring organizations, the authority to elect the

reimbursement option. Therefore, this rule requires sponsors to provide

such notification.

Under the first option, a day care home provider may elect to have

its sponsoring organization distribute income applications to the

households of all children enrolled in the home. In that case, for all

meals served to enrolled children who are determined to meet the

criteria for free or reduced price meals, the home would receive the

tier I reimbursement rates. Meals served to enrolled children who are

not eligible for free or reduced price meals, or children from whose

households completed income applications are not received, would be

reimbursed at the tier II reimbursement rates.

These free and reduced price eligibility determinations could be

made in several ways. First, as with the current method, families may

document their child's eligibility for tier I reimbursements by

completing an application which shows that their household income is at

or below 185 percent of poverty. The categorical eligibility options at

current section 226.23(e), which are based on section 9(d)(2) of the

NSLA would continue to be available to all households submitting

applications. In addition, section 17(f)(3)(A)(iii)(III)(bb) of the

NSLA, as amended by section 708(e)(1) of the Act, provides other

categorical eligibility options for households applying for tier I meal

reimbursements on behalf of children in tier II homes. Such households

may demonstrate eligibility if the child or parent participates in, or

is subsidized under, any ``federally or State supported child care or

other benefit program with an income eligibility limit that does not

exceed'' 185 percent of poverty. As quickly as possible, the Department

will issue a list of Federal programs which meet this criterion, and

then each State will be required to do the same for its own State-

funded programs. The Department wishes to emphasize that the process of

providing these lists will be ongoing, and that both the

[[Page 895]]

Department and the States will be updating the lists at least annually,

or more often if necessary.

Alternatively, under the second option, if a day care home provider

does not want to have income applications collected from the households

of enrolled children, section 17(f)(3)(A)(iii)(III)(cc), as amended by

the Act, provides that the provider may elect to have the sponsor

identify only those children in tier II homes who are considered

categorically eligible by virtue of their participation, or their

parent's participation, in a Federally or State supported program with

an income eligibility limit that does not exceed the standard for free

or reduced price meals. In this situation, the day care home would

receive the tier I reimbursements for meals served to the categorically

eligible children, and the tier II rates of reimbursement for meals

served to all other children.

It is the Department's position that the above option is only

possible in those limited situations where the provider knows which

enrolled children are categorically eligible, or when the sponsoring

organization has direct access to eligibility information for other

qualifying programs. For example, a day care home sponsoring

organization which is also a school food authority would be able to

identify, without applications being collected from households,

children in tier II homes who are categorically eligible based on their

or a sibling's receipt of free or reduced price school meals.

Similarly, a provider may be able to identify as categorically eligible

those children in tier II homes whose care is paid through State child

care vouchers that are issued based on equivalent eligibility

guidelines (assuming that programs permit the provider to share the

eligibility information with the sponsor). In these cases, the sponsor

would distribute income applications only to the households of the

children identified as participating in programs making them

categorically eligible for tier I rates. The households would have the

option of completing the information relating to the qualifying program

rather than the income information.

In most situations, however, providers and/or sponsors will only be

able to identify children whose meals are eligible for tier I

reimbursement by having income applications distributed to the

households of all enrolled children, a fact that the Act does not

explicitly recognize. Therefore, we envision that, when the provider

elects this option, the process will most often operate as it does now

in child care centers and as under the first option discussed above:

applications will be distributed to all households of children in the

care of the tier II day care provider in order to identify all income-

eligible children in that home. These applications will gather

information on participation in other qualifying programs, or will

request family size and income information.

Though direct certification of eligibility can be a more

streamlined, less burdensome method of determining eligibility, it also

raises issues related to access to information and household

confidentiality. The Department is interested in receiving comments on

the merits of permitting direct certification of eligibility for

sponsoring organizations of day care homes. Depending on the nature of

these comments, we may issue a proposed rule on such a provision in the

future.

Finally, as a third option set forth in the Act, a provider may

elect to receive tier II reimbursements for meals served to all

children in the home, regardless of income. In this case, the

sponsoring organization would not be required to collect any income

applications, nor would it need to attempt to identify categorically

eligible children.

The law is deliberately structured to give the provider in a tier

II day care home, rather than the sponsor, the choice as to whether or

not income applications will be collected from households of children

enrolled in the home since this choice will have an effect on the

amount of reimbursement received by the provider. When a provider

elects to have income applications collected, however, it is the

responsibility of the sponsoring organization to collect them, to

determine the eligibility of the children, and to maintain the

confidentiality of the information collected.

Sponsors also will now have the responsibility of informing

providers of their reimbursement options under the law. It is important

for States to assist sponsors in carrying out this responsibility.

Therefore, in addition to amending the regulations to incorporate the

above-discussed provisions, the Department encourages State agencies

during the implementation phases of this regulation to utilize a

portion of the grant money provided under section 17(f)(3)(D) of the

NSLA, as amended by section 708(e)(2) of Pub. L. 104-193, to further

the efforts of sponsors in informing and educating day care home

providers of their options.

It is the Department's opinion that in making the sponsoring

organization, rather than the day care home provider, responsible for

eligibility determinations, Congress recognized the need to provide an

extra level of confidentiality to the households of children attending

day care homes. Therefore, this rule also prohibits sponsoring

organizations of day care homes from making free and reduced price

eligibility information concerning individual households available to

day care homes and otherwise limits the use of such information to

persons directly connected with the administration and enforcement of

the Program. Although sponsors are prohibited from releasing

eligibility information concerning individual households, this rule

will permit sponsors to inform providers in tier II homes of the

numbers (not names) of identified income-eligible enrolled children.

This will afford providers in tier II homes with more precise

information concerning the accuracy of the reimbursement being paid to

them by their sponsors, while protecting the confidentiality of

individual households, as the law intended. In addition, the Department

notes that section 9(b)(2)(C)(iii) of the NSLA was amended by section

108 of the Healthy Meals for Healthy Americans Act (Pub. L. 103-448) to

clarify the permissible uses of free and reduced price information. The

Department is currently developing regulations concerning this

provision, and will make any necessary changes to the CACFP regulations

at that time.

In addition, there is a concern that a provider in a tier II home

will be unable to precisely calculate reimbursement without knowing the

income eligibility status of each enrolled child in the home. The

Department believes that allowing sponsoring organizations to inform

providers in tier II homes of the numbers of identified income-eligible

children, as discussed above, addresses this concern to a great extent,

while at the same time protecting the confidentiality of the households

of enrolled children. However, the Department is interested in

receiving public comment on how best to balance the confidentiality of

households with the needs of tier II day care home providers. Any

comments that we receive will be addressed in a future rulemaking.

Accordingly, this rule amends sections 226.2, 226.6(f)(2),

226.18(b) and 226.23(e)(1) to incorporate the above provisions and to

help ensure that providers are informed of their reimbursement options

under the law. Specifically, the definition of Documentation in section

226.2 is amended to incorporate the expanded categorical eligibility

provided in the law for use by tier II day care homes.

[[Page 896]]

Section 226.6(f)(2) is further amended to require that the annual

management plan submitted to the State agency by sponsoring

organizations include a description of the sponsor's system of

notifying tier II day care home providers of their options for

reimbursement. For the implementation period, this rule requires that

sponsors submit a plan amendment describing this system by April 1,

1997. Section 226.6(f) is further amended by adding a new paragraph,

(10), which requires State agencies to annually provide sponsoring

organizations with a list of State-funded programs which meet the

special categorical eligibility requirements for children in tier II

homes. Section 226.18(b) is amended to require that the agreement

between the sponsoring organization and the day care home specify the

responsibility of the sponsoring organization, upon the request of a

tier II day care home, to collect applications and to determine the

income eligibility of enrolled children, and/or to identify

categorically eligible children. In addition, section 226.18(b) is

further amended to require that the agreement include the sponsor's

responsibility to inform providers of their options for reimbursement

under the law. Finally, sections 226.23(e)(1)(i) and (iv) are amended

by deleting the language exempting sponsoring organizations of day care

homes from distributing income applications; by adding language to

clarify that sponsors, at the request of the provider, must collect

applications, determine the income eligibility of children in tier II

day care homes, and maintain the information in a confidential manner;

by adding language to indicate that sponsoring organizations may inform

providers in tier II homes of the numbers of income-eligible enrolled

children; and by clarifying the categorical eligibility procedures that

apply to households of children in tier II day care homes, as discussed

above.

Meal Counting and Reporting Procedures

Under this rule, all meals served in tier I homes or in tier II

homes without any identified income-eligible children will be

reimbursed at one rate--all tier I or all tier II, respectively. In

such homes, meals can continue to be counted and reported to the

sponsor as required by current regulations. However, for those tier II

homes with a mix of income-eligible and non-income-eligible children,

the introduction of two levels of reimbursement for meals necessitates

a change in the way meals are counted and reported.

The following sections of the preamble discuss the various options

available under the law for meal counting and reporting in tier II day

care homes with a mix of income-eligible and nonincome-eligible

children. It is important to consider the options in the context of the

affected population. In the Department's opinion, it is likely that a

relatively small percentage of day care homes participating in the

program will contain a mix of income-eligible and non-income-eligible

children, and therefore, be eligible for two levels of reimbursement.

The majority of homes will likely be either tier I day care homes

(i.e., those located in low-income areas or operated by a low-income

provider) or tier II day care homes without any income-eligible

children. The Department also recognizes that the mix of participating

homes may vary significantly from one sponsor to another, thus making

it important to provide as much flexibility as possible to sponsors in

their meal counting and claiming options, while at the same time

continuing to maintain program integrity.

Actual Meal Counts

Though it is a common current method of meal counting and

reporting, taking actual meal counts is not currently required by

regulations, and under a two-tiered reimbursement rate structure could

impose an additional burden on some providers and sponsoring

organizations. Under an actual counts system, for all tier II homes

which elect to have income-eligible children identified, sponsors would

have to collect and evaluate additional income applications, and/or

identify new categorically eligible children, each time the enrollment

of such a tier II home changes, or reimburse meals served to newly

enrolled children whose income status has not been determined at the

lower tier II rates. Because of the potential financial benefit, it is

likely that providers under an actual meal count system will expect

their sponsoring organizations to take immediate action to determine

the income status of newly enrolled children.

Since only sponsors have access to the income eligibility

information for each enrolled child in each of their day care homes,

providers under an actual count system would now be required to record

meal counts by each enrolled child's name. [Though we understand that a

number of sponsoring organizations currently require providers to

record meal counts by each enrolled child's name for monitoring

purposes, it is not currently required by regulation.] Recording meal

counts by each enrolled child's name is necessary under an actual count

system because providers will not have access to income eligibility

information or income status. Then, each provider would submit the meal

count records, by child's name, to the sponsor. Finally, using the

information collected and maintained by the sponsor on the income

status of each enrolled child, the sponsor would identify and aggregate

the total number of meals served which are eligible for tier I

reimbursements, and the total number of meals served which are eligible

for tier II reimbursements. This process would be performed for each

``mixed'' tier II home under a sponsor which uses actual meal counts in

order to prepare the sponsoring organization's monthly claim for

reimbursement.

One benefit of an actual count system is that reimbursements are

more precisely targeted, as is the intention of the Act. However, the

management sophistication of the sponsoring organization, the number of

``mixed'' tier II homes under a particular sponsorship, and the

stability or instability of day care home enrollment in a sponsorship

are also factors which must be considered when assessing the merits of

various counting and claiming systems. The Act recognizes the potential

burden on some sponsors and providers of performing actual meal counts,

and includes a provision for simplified meal counting and reporting

procedures, which is discussed below.

``Simplified'' Meal Counts

In addition to the usual method of recording and reporting actual

meal counts, section 708(e)(1) of the Act added section

17(f)(3)(A)(iii)(IV) to the NSLA to require that the Department

establish simplified meal counting and reporting procedures for tier II

day care homes that receive two levels of reimbursement for meals

served to enrolled children. The Act sets forth two possible

alternatives that may be used, and also gives the Department the

authority to develop its own simplified procedures.

The first simplified alternative set forth in the Act involves the

sponsor setting, for each tier II day care home, annual percentages of

the number of meals served that are to be reimbursed at the tier I and

tier II reimbursement rates. The percentages would be based on the

number of enrolled children identified as being from income-eligible

households, and the number not from such households, in a specified

month or other period. This procedure is currently an option for State

agencies

[[Page 897]]

for providing reimbursement in CACFP child care centers, adult day care

centers, and outside-school-hours care centers, and is referred to in

section 226.9(b)(2) of the regulations as ``claiming percentages.''

For example, under the ``claiming percentages'' alternative, if in

the month of September a tier II day care home had 5 enrolled children,

2 of whom were determined by the sponsor to be eligible for free or

reduced price meals, the home's claiming percentage for the coming year

would be set at 40 percent tier I reimbursement and 60 percent tier II

reimbursement. To receive reimbursement, the provider would only need

to submit total meal counts by type (breakfast, lunch/supper, and

supplements) each month, as is currently the case. The sponsor would

apply the established claiming percentage to determine the home's

reimbursement: 40 percent of all meals served in the month would

receive the tier I reimbursement rates; 60 percent would receive the

tier II rates.

A variation of ``claiming percentages'' is the ``blended rates''

method, also used by child care centers, adult day care centers, and

outside-school-hours care centers, and contained in section 226.9(b)(3)

of current regulations. Using the circumstances from the above example,

by multiplying the tier I rate for lunches by 0.40 (40 percent), the

tier II rate by 0.60 (60 percent), and then adding the products

together, a ``blended rate'' would be derived. If the tier I rate for

lunches is $1.5750 (the current rate through June 30, 1997), and the

tier II rate is $0.95, this would result in a blended reimbursement

rate of $1.20. All lunches served to enrolled children in the home

would be reimbursed at this single rate. Again, the day care home would

only need to submit total meal counts by type (breakfast, lunch/supper,

supplements) to the sponsor. The total reimbursement paid to the home

would be the same using either claiming percentages or blended rates.

The other alternative, presented in new section

17(f)(3)(A)(iii)(IV)(bb) of the NSLA, would annually place a tier II

home into one of two or more ``reimbursement categories'' based on the

percentage of income-eligible children in the home. Each reimbursement

category would ``carry [ ] a set of reimbursement factors'' (i.e., the

tier I rate, the tier II rate, or some other rate(s) within the range

defined by tier I and tier II rates).

One example of the second alternative could involve establishing

multiple reimbursement rates within the range defined by the tier I and

tier II rates, and then assigning a home a rate based on the percentage

of income-eligible children in the home. For example, four lunch rates

could be established as follows: at $0.95 (the tier II rate), $1.5750

(the tier I rate for FY 1997), and two approximately equal points

between the tier I and tier II rates--$1.16 and $1.36. Tier II homes

with no income-eligible children would, of course, receive $0.95 for

each lunch served to enrolled children, while tier II homes with all

income-eligible children would receive the maximum rate (i.e., $1.5750)

for each lunch served. However, homes with a mix of income-eligible and

non-income-eligible children would be assigned one of the intermediate

lunch rates ($1.16 or $1.36) based on the percentage of income-eligible

children served. Homes with more than zero and up to 33.3 percent

income-eligible children would receive $1.16 per lunch; homes with more

than 33.3 percent and less than 66.7 percent income-eligible children

would receive $1.36 per lunch; and homes with 66.7 percent or more

income-eligible children would receive the maximum tier I rate of

$1.5750. Again using the previous example, a home in which 40 percent

of the children were income-eligible would receive $1.36 per lunch, an

amount which is 16 cents per lunch higher than that derived with

claiming percentages or blended rates.

Another variation of the ``reimbursement categories'' alternative

set forth in the law would also involve assigning a home a rate based

on the percentage of income-eligible children in the home. However, in

this variation, only the tier I and tier II rates would be used. Any

home with 50 percent or more income-eligible children would receive the

tier I rates for all meals served; a home with less than 50 percent

income-eligible children would receive the tier II rates for all meals

served. In the above example, a home with 2 of 5 enrolled children

identified as income-eligible (40 percent), would receive the tier II

reimbursement rate of $0.95 for all lunches served.

Given the small number of children enrolled in the typical family

day care home, any method other than actual counts would be especially

sensitive to changes in enrollment. Any change in enrollment which

results in a different mix of eligibility categories will change the

actual percentage of income-eligible children in the home, thus skewing

the reimbursements above or below the level which the home would

receive under an actual meal count system. Again using the above

example, if one income-eligible child is withdrawn from care, the

home's actual percentage of children eligible for tier I meal

reimbursements would decline from 40 percent to 25 percent. Under most

of the simplified methods described above, the provider would then

receive more reimbursement than would be the case if actual meal counts

by category of reimbursement were used.

Counting and Claiming Methods Permitted by This Regulation

Based on its analysis of the relative advantages and disadvantages

of each of the methods discussed above, the Department has decided to

allow actual meal counts, claiming percentages, or blended rates for

counting, reporting, and reimbursement of meals served in tier II day

care homes serving children eligible for both tier I and tier II rates.

In order to provide maximum flexibility, and recognizing the diversity

and varying levels of management sophistication of sponsoring

organizations, this interim rule provides sponsoring organizations the

option of which of the methods to use for their day care homes.

However, each sponsor must use only one method for all of its homes,

and will be permitted to change this method no more frequently than

annually. This limitation will minimize the potential for

administrative confusion and allow State agencies to track each

sponsor's system for oversight and claims edit purposes. Further, to

mitigate the effects of enrollment changes when using the simplified

methods, we are exercising the discretion provided to the Department

under new section 17(f)(3)(A)(iii)(IV)(cc) of the NSLA, which permits

``such other simplified procedures as the Secretary may prescribe,'' by

requiring that claiming percentages or blended rates for each home be

adjusted at least semiannually by the sponsor, rather than annually as

is the case for centers.

At this time, we are not adopting the use of the ``reimbursement

categories'' approach described in the law and in two examples above.

The above example involving multiple rates makes clear that at this

time such an approach is potentially a far more complicated and

unfamiliar method that does not offer any distinct advantages over

claiming percentages or blended rates. Further, the option of

reimbursing at the tier I rates for all meals served in a tier II home

with 50 percent or more income-eligible children is far less precise in

targeting benefits. The Department is also concerned that there is

potential for abuse with this method, since a provider would gain

substantial financial benefit when there are 50 percent or more income-

eligible

[[Page 898]]

children in the home during the month of the ``category''

determination. Finally, the use of the ``reimbursement categories''

approach could significantly reduce the Federal cost savings attributed

to this provision.

To further alleviate the potential burden on sponsors of the meal

counting and reporting provisions being implemented, this interim rule

will not establish any specific dates for recalculation of claiming

percentages or blended rates for homes, or for determining the income

eligibility of enrolled children when utilizing either the simplified

methods or actual counts. Rather, by requiring changes to the

percentages/rates at each home no less frequently than every six

months, and redeterminations of individual eligibility at least

annually (as discussed below), sponsors will be able to implement a

system to more evenly distribute the work load associated with these

options over the course of the year.

The claiming percentages/blended rates alternative set forth in

section 708(e)(1) of the Act indicates that the claiming percentage or

blended rate be established based on the percentage of identified

income-eligible children enrolled in a home ``in a specified month or

other period.'' Although this interim regulation does not prescribe a

specific time period for the enrollment determination, the Department

believes it may be appropriate to consider methods which more

accurately capture the income status of children enrolled in the home.

Therefore, we are interested in receiving comments on two potential

alternatives which would provide greater accuracy. The first

alternative would involve a sponsor calculating the claiming percentage

or blended rate based on a home's enrollment for an entire month using

a list of enrolled children submitted by the day care home. The sponsor

would assess the income eligibility status of each of the children

enrolled in the home during the month and, using the enrollment list,

derive the appropriate claiming percentage or blended rate. For

example, if a home's enrollment list for the month of January indicates

that 10 children were enrolled during the month, the home's claiming

percentage or blended rate would be based on the number of identified

income-eligible children, divided by 10. The second alternative would

involve the day care home submitting an attendance list for the

specified month. In contrast to the enrollment list, the sponsor using

an attendance list would determine the claiming percentage or blended

rate for the home using a weighted average of each enrolled child's

level of participation during the month. The Department believes that

both of these methods achieve greater accuracy in reimbursement

payments, though, especially in the case of the attendance list, may

impose an additional burden on the sponsor and day care homes.

Under the claiming percentages/blended rates option, for all tier

II homes which elect to have the sponsor determine the income

eligibility of enrolled children, the sponsor would make individual

income eligibility determinations for enrolled children on an annual

basis. The claiming percentage or blended rate would be set for the

home at least every six months, taking into account any changes in

enrollment that occurred in the six-month period. For example, for a

tier II day care home that enters the program in January, the sponsor

would take applications and determine the income eligibility of all

enrolled children prior to the beginning of program operations. Based

on the income status of the children enrolled in the home, a claiming

percentage or blended rate would be established for the home. That

percentage or rate would be used to reimburse meals served in the home

for the next six months, regardless of changes in the home's enrollment

during that period. By July, the sponsor would have assessed the income

eligibility of those children new to the home since the January

calculation, and would calculate a new claiming percentage or blended

rate, to be used for the next six months, based on the income

eligibility of each child enrolled in the home. Any child whose income

status has not been determined at the time of the recalculation would

be figured in the calculation at the tier II rate. The status of all

children whose income eligibility had been determined in January would

remain the same for the July calculation; redeterminations for these

children would occur the following January.

The Department has some concerns about the potential for abuse of

the claiming percentage/blended rates method; for example, low-income

children who will not be in care on a regular basis could be enrolled

by the provider during the month of the calculation so that the

claiming percentage or blended rate is more favorable to the provider.

Therefore, in an attempt to minimize potential abuse, this rule

provides State agencies the authority to require a sponsoring

organization to recalculate the claiming percentage or blended rate of

any of its homes before the required semiannual calculation if a State

agency has reason to believe that a home's percentage of income-

eligible children has changed significantly or was incorrectly

established in the previous calculation. State agencies and sponsors

should be aware of and look for such potential abuse when conducting

their monitoring activities. The Department is especially interested in

receiving comments on ways to further minimize this potential abuse.

This issue will be considered further and may be addressed in future

guidance or in a future rulemaking concerning the overall management

and integrity of the Program.

Although the claiming percentages/blended rates method will be

adopted by this interim rule as the ``simplified meal counting and

reporting procedures'' required by law, the Department is especially

interested in receiving public comment on the second possible

alternative in the law, described above as the ``reimbursement

categories'' method, which is not being included in this interim rule.

The Department is also interested in suggestions on other systems of

meal counting and reporting that would not place undue burden on day

care home providers or sponsors, but would provide for reimbursement

payments that accurately reflect the income level of the households of

enrolled children.

Accordingly, this rule amends section 226.13(c) to require that

State agencies reimburse sponsoring organizations of day care homes

based on the number of meals served to enrolled children, by meal type

(breakfast, lunch/supper, and supplements) and by category (tier I and

tier II), multiplied by the appropriate rates of reimbursement as

established in the law. For the reasons discussed previously in this

preamble, section 226.13(c) will no longer include the specific base

reimbursement rates. The rule also adds a new section, 226.13(d), to

set forth the meal counting requirements for day care homes, and to

allow sponsoring organizations to select the reimbursement method

(either actual counts, claiming percentage, or blended rates) that they

will use to pay providers in tier II day care homes with a mix of

incomeeligible and non-income-eligible children. If a sponsoring

organization elects to use claiming percentages or blended rates, this

rule requires in section 226.13(d) that they be recalculated at least

every six months, unless the State agency requires the sponsor to

recalculate a home's claiming percentage or blended rate before the

required semiannual calculation if it has reason to believe that a

home's percentage of income-eligible children has changed

[[Page 899]]

significantly or was incorrectly established in the previous

calculation. The claiming percentages or blended rates are based on

individual income eligibility determinations made on an annual basis in

accordance with section 226.23(e)(1).

For a detailed discussion of the implementation phases of this

regulation, please refer to the Implementation section in the preamble

below.

Implementation

In order to comply with the Act and implement the provisions of

this regulation on July 1, 1997, sponsoring organizations will have to

undertake several duties in advance of that date. First, using census

data provided to the CACFP State agency by the Department, school data

provided by the CACFP State agency by the State agency that administers

the NSLP, or day care home providers' income information, all day care

homes must be determined to be either tier I or tier II day care homes.

As discussed above, once a home is designated as a tier I day care

home, all meals served to enrolled children in the home are eligible

for tier I rates of reimbursement (except for providers' own children,

who must be income eligible). All tier II homes, unless they elect

otherwise, will receive the tier II rates of reimbursement for all

meals served to enrolled children.

For all tier II homes in which the provider elects to have income-

eligible children identified, however, the sponsor must: (1) Collect

applications and/or identify categorically eligible children; and (2)

elect to use either actual meal counts, claiming percentages or blended

rates as the method of reimbursement for all of its homes. If the

information is not collected in order to separate actual meal counts by

incomeeligible and non-income-eligible children, or to calculate a

claiming percentage or blended rate for a tier II day care home by the

July 1 implementation date, such a home must receive the lower tier II

reimbursement rates for all meals served until the claiming percentage

or blended rate is calculated, or the income status of children in an

``actual counts'' home is determined.

Reimbursement Factors for Tier II Homes

Section 708(e)(1) of the Act amended section 17(f)(3)(A)(iii)(I) of

the NSLA to establish the reimbursement factors for meals served in

tier II day care homes at 95 cents for lunches and suppers, 27 cents

for breakfasts, and 13 cents for supplements, with adjustments made to

the rates on July 1, 1997, and each July 1 thereafter. As is the case

with tier I day care home reimbursement factors, the Act further

amended section 17(f)(3)(A)(iii)(I)(bb) of the NSLA to require that

these factors be rounded to the nearest lower cent increment, and that

adjustments be based on changes to the Consumer Price Index for ``food

at home'' instead of ``food away from home.'' As provided for in the

Act, adjustments to the rates in subsequent years will be based on the

unrounded rate from the preceding school year. As discussed in the

preamble above, the base reimbursement rates will not be included in

the regulatory language.

Accordingly, this rule further amends section 226.4(c) to indicate

that, except for meals served to children identified as income

eligible, as discussed above, all meals served in tier II day care

homes will be reimbursed at the rates established in the law for tier

II day care homes. Section 226.4(g) is also further amended to

incorporate the revised method of adjusting the rates of reimbursement

for tier II day care homes.

General Requirements for State Agencies, Sponsors and Homes

State Agency Program Reviews

Section 226.6(l) currently requires State agencies to maintain

documentation of reviews of sponsoring organizations conducted,

corrective actions prescribed, and follow-up efforts. This section

further indicates that State agency reviews shall assess sponsoring

organizations' compliance with regulations and Departmental and FCS

instructions. Due to the significant financial benefit associated with

classification of a day care home as a tier I home, this interim rule

specifically requires that State agency reviews of sponsoring

organizations of day care homes include an evaluation of the

documentation used by sponsors to classify homes as tier I homes.

Furthermore, due to the potentially significant financial liability to

a State agency if homes are misclassified as tier I homes by sponsors,

the Department strongly encourages--but will not require--State

agencies to review the documentation supporting classification of tier

I day care homes which qualify on the basis of school or census data at

the time the sponsor initially makes the determination. Verification

requirements for tier I homes qualifying on the basis of the provider's

household income are addressed in this preamble below.

Accordingly, this rule amends section 226.6(l) to require that

State agency reviews include the provision discussed above.

Documentation

In addition to changing the method by which sponsoring

organizations reimburse meals served in day care homes, the amendments

made to the CACFP by the Personal Responsibility and Work Opportunity

Reconciliation Act of 1996 also necessitate changes in the records that

day care home sponsors and providers are required to maintain. Section

226.15(e) sets forth the recordkeeping requirements for institutions,

including sponsoring organizations of day care homes. In addition to

documentation of the enrollment of each child in day care, and income

eligibility information for enrolled providers' children, sponsors will

now be required to maintain income eligibility information for children

enrolled in tier II day care homes that have elected to have sponsors

collect free or reduced price information. This includes family size

and income information and/or evidence of categorical eligibility for

children who participate in, or who have a parent participating in, a

Federally or State supported child care or other benefit program with

an income eligibility limit that does not exceed the standard for free

or reduced price meals. Finally, sponsors will also be required to

maintain documentation of information used to classify day care homes

as tier I day care homes. This would include the appropriate school or

census data, and/or applications from providers whose households have

been verified as eligible for free or reduced price meals.

Sections 226.18 (e) and (f) set forth similar recordkeeping

requirements for day care homes. These provisions include the

requirement that day care home providers maintain daily records of the

number of children in attendance and the number of meals, by type

(breakfast, lunch/supper, supplements), served to enrolled children. In

addition, sponsors are required to submit family size and income

information only for providers' own children, and day care homes must

maintain documentation of this information. Under this rule, tier II

day care homes in which the provider elects to have the sponsoring

organization identify enrolled children who are eligible for free or

reduced price meals, and whose sponsor employs ``actual counts''

claiming methods, will now be required to maintain and submit to the

sponsor the number and types of meals (breakfast, lunch/supper,

supplements) served each day to each enrolled child by name.

[[Page 900]]

Accordingly, this rule amends section 226.15(e)(3) to add the above

requirements for documentation for sponsoring organizations of day care

homes. In addition, section 226.18(f) is amended by removing the second

sentence, which restricts the collection and maintenance of family size

and income information to that used to determine the eligibility of

providers' own children, since this information may now also be

collected from the households of children in tier II homes. Finally,

section 226.18(e) is amended to add the recordkeeping requirements for

tier II day care homes in which actual meal counts are used, as

discussed above.

Verification

Section 17(f)(3)(A)(iii)(V) of the NSLA, as amended by section

708(e)(1) of Pub. L. 104-193, authorizes the Secretary to establish any

necessary minimum verification requirements for tier II day care homes.

In addition, the definition of tier I day care home in section

17(f)(3)(A)(ii)(I) of the NSLA requires that a day care home that

qualifies as a tier I home on the basis of the provider's household

income must have this income ``verified by the sponsoring organization

of the home under regulations established by the Secretary,'' as

mentioned earlier in this preamble.

Current requirements for conducting verification of eligibility of

participants in various types of institutions, which include sponsoring

organizations of day care homes, are contained in section 226.23(h).

Because day care homes are considered ``nonpricing programs,'' State

agencies currently follow the provisions of section 226.23(h)(1), for

``nonpricing programs,'' to verify the applications of day care home

providers' own children. This section requires that State agencies

review all applications on file to ensure that (1) the application has

been correctly and completely executed by the household; (2) the

institution (i.e., sponsoring organization) has correctly determined

and classified the eligibility of enrolled participants; and (3) the

institution (i.e., sponsoring organization) has accurately reported to

the State agency the number of enrolled participants meeting the

criteria for free or reduced price eligibility and the number that do

not. This section also permits States to conduct additional

verification to determine the validity of information provided by

households on the application, in accordance with section 226.23(h)(2),

the verification procedures for ``pricing programs.''

Now that applications will be collected from the households of some

children enrolled in tier II day care homes, the amount of verification

activity required to be conducted by State agencies will increase.

However, this interim rule is not making any change to the current

regulations for verification by State agencies, which will continue to

follow the requirements set forth in sections 226.23(h)(1)-(2).

Therefore, under this interim rule, State agencies will have the option

of conducting the more extensive verification of applications under

section 226.23(h)(2), which would include parental contact to verify

the information provided on the applications, but are not required to

do so. The Department recognizes the importance of verification to

reduce the potential for fraud and abuse in the program and is

considering what amount of additional verification is appropriate. The

Department is considering the possibility of addressing the broad

subject of verification of applications in a future proposed rulemaking

concerning the overall management and integrity of the Program.

However, as required by the law, this rule adds the requirement

that sponsoring organizations conduct verification of the provider's

income, prior to approving the application, for all day care homes that

qualify as tier I homes on the basis of the provider's income. Since

the information provided on the application results in a large direct

benefit to the provider, in the form of higher reimbursements (tier I)

for meals served to all children in care, sponsors will be required to

perform the more extensive verification of the provider's eligibility

as described for pricing programs in current section 226.23(h)(2)(i).

This involves verifying the income and other information provided on

the approved application through collection of information from the

household.

Accordingly, this rule amends section 226.23(h) by adding a new

paragraph, (6), that contains these new requirements for verification

by sponsors of family day care homes.

Annual Requirements for Sponsoring Organizations

Section 226.6(f) sets forth requirements that institutions,

including sponsoring organizations of day care homes, must comply with

on an annual basis. In addition to the current requirements, this rule

also adds a requirement that sponsors annually submit current

information on the total number of tier I and tier II day care homes,

and a breakdown showing the total number of children enrolled in tier I

homes, the total number of children enrolled in tier II homes, and the

number of identified income-eligible children in tier II homes (i.e.,

those for whom tier I reimbursements would be claimed). Submission of

these data will provide States with information necessary to help

ensure that the reimbursement claims subsequently submitted by sponsors

accurately reflect enrollment by reimbursement category. In addition,

this information will be necessary to conduct the study of the tiering

system's impact mandated by section 708(l) of the Act and will provide

information regarding the characteristics of program beneficiaries.

Accordingly, this rule further amends section 226.6(f) by adding

new paragraph (11) to require that the above described information on

tier I and tier II day care homes and enrolled children be provided by

sponsoring organizations to State agencies on an annual basis.

Monthly Reporting by Sponsoring Organizations

Section 226.13(b) requires that each sponsoring organization

report, on a monthly basis to the State agency, the total number of

meals, by type (breakfast, lunch/supper, supplements), served to

children enrolled in day care homes. Due to the changes made to the

reimbursement structure for day care homes by Pub. L. 104-193,

sponsoring organizations will now be required to report the number of

meals served by type and by category (i.e., tier I and tier II). This

information will enable State agencies to pay claims to sponsoring

organizations at the appropriate levels of reimbursement.

Accordingly, this rule amends section 226.13(b) to add the

requirement that sponsoring organizations of day care homes report to

the State agency on a monthly basis the number of meals served by type

and by category.

Free and Reduced Price Policy Statements

Section 226.23 of the regulations requires that each institution,

including a day care home sponsoring organization, submit when it

applies for participation in the Program, a written policy statement

concerning free and reduced price meals for use in all facilities under

its jurisdiction. Under section 226.23(b), the policy statement for

sponsoring organizations of day care homes must consist of an assurance

to the State agency that all participants are served the same meals at

no separate charge, and that there is no discrimination in the course

of food

[[Page 901]]

service. With the establishment of tier I and tier II day care homes

under the Personal Responsibility and Work Opportunity Reconciliation

Act, different meal reimbursements may now be received for children in

the same day care home. Therefore, the Department believes it is

important for the sponsoring organization's policy statement to also

include an assurance that there will be no identification of tier I and

tier II recipients in day care homes, and that sponsoring organizations

will not share income eligibility information concerning individual

households with the day care homes and will limit the use of the

information to persons directly connected with the administration and

enforcement of the Program.

The Department notes that section 703 of Pub. L. 104-193 amended

section 9(b)(2)(D) of the NSLA to prohibit the requirement of annual

submission of free and reduced price policy statements once the initial

policy has been submitted unless there are substantive changes to the

original statement. However, it is the Department's position that a

change of the magnitude of the institution of the tiering system for

day care homes in the CACFP constitutes a ``substantive change'' in the

free and reduced price policy, and thus the revised free and reduced

price policy statement must be submitted to the State agency for

approval. Accordingly, this rule amends section 226.23(b) to add the

above requirement.

Providers' Own Children

The Personal Responsibility and Work Opportunity Reconciliation Act

did not make any changes to the current requirements concerning

providers' own children. In order to receive reimbursement for meals

served to providers' own children, the provider's household must meet

the income eligibility guidelines for free or reduced price meals. The

definitions of tier I and tier II homes in the law are such that meals

served to providers' own children could only be eligible for

reimbursement in tier I day care homes. Any provider in a non-needy

area whose own children are eligible for reimbursement would, by virtue

of being low income, meet the definition of a tier I home. It should be

noted, however, that income eligibility still must be determined for

providers' own children in homes that sponsors approve as tier I homes

based on census or school data. Since current regulations already

reflect the requirements of the law, this rule does not make any

changes to the regulatory language concerning providers' own children.

List of Subjects

7 CFR Part 210

Breakfast, Children, Food assistance programs, Grant programs--

Social programs, Lunch, Meal Supplements, Nutrition, Reporting and

recordkeeping requirements, School Nutrition Program, Surplus

agricultural commodities.

7 CFR Part 226

Day care, Food assistance programs, Grant programs-health, infants

and children, Records, Reporting and recordkeeping requirements,

Surplus agricultural commodities.

Accordingly, 7 CFR Parts 210 and 226 are amended as follows:

PART 210--NATIONAL SCHOOL LUNCH PROGRAM

1. The authority citation for 7 CFR Part 210 continues to read as

follows:

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

2. In Sec. 210.9, a new paragraph (b)(20) is added to read as

follows:

Sec. 210.9 Agreement with State agency.

* * * * *

(b) Annual agreement. * * *

(20) No later than March 1, 1997, and no later than December 31 of

each year thereafter, provide the State agency with a list of all

elementary schools under its jurisdiction in which 50 percent or more

of enrolled children have been determined eligible for free or reduced

price meals as of the last operating day of the preceding October.

* * * * *

3. In Sec. 210.19, a new paragraph (f) is added to read as follows:

Sec. 210.19 Additional responsibilities

* * * * *

(f) Cooperation with the Child and Adult Care Food Program. No

later than March 15, 1997, and no later than February 1 each year

thereafter, the State agency shall provide the State agency which

administers the Child and Adult Care Food Program with a list of all

elementary schools in the State participating in the National School

Lunch Program in which 50 percent or more of enrolled children have

been determined eligible for free or reduced price meals as of the last

operating day of the preceding October. In addition, the State agency

shall provide the current list, upon request, to sponsoring

organizations of day care homes participating in the Child and Adult

Care Food Program.

PART 226--CHILD AND ADULT CARE FOOD PROGRAM

1. The authority citation for Part 226 continues to read as

follows:

Authority: Secs. 9, 11, 14, 16, and 17, National School Lunch

Act, as amended (42 U.S.C. 1758, 1759a, 1762a, 1765, and 1766).

2. In Sec. 226.2:

a. The definition of Documentation is amended by redesignating

paragraph (c) as paragraph (d), and by adding a new paragraph (c); and

b. definitions of Tier I day care home and Tier II day care home

are added.

The additions read as follows:

Sec. 226.2 Definitions.

* * * * *

Documentation means * * *

(c) For a child in a tier II day care home who is a member of a

household participating in a Federally or State supported child care or

other benefit program with an income eligibility limit that does not

exceed the eligibility standard for free and reduced price meals:

(1) the name(s), appropriate case number(s) and name of the

qualifying program(s) for the child(ren); and

(2) the signature of an adult member of the household.

* * * * *

Tier I day care home means (a) a day care home that is operated by

a provider whose household meets the income standards for free or

reduced-price meals, as determined by the sponsoring organization based

on a completed free and reduced price application, and whose income is

verified by the sponsoring organization of the home in accordance with

Sec. 226.23(h)(6);

(b) a day care home that is located in an area served by a school

enrolling elementary students in which at least 50 percent of the total

number of children enrolled are certified eligible to receive free or

reduced price meals; or

(c) a day care home that is located in a geographic area, as

defined by FCS based on census data, in which at least 50 percent of

the children residing in the area are members of households which meet

the income standards for free or reduced price meals.

Tier II day care home means a day care home that does not meet the

criteria for a Tier I day care home.

* * * * *

3. In Sec. 226.4:

a. Paragraph (c) is revised; and

b. Paragraph (g)(1) is revised.

The revisions read as follows:

Sec. 226.4 Payments to States and use of funds.

* * * * *

[[Page 902]]

(c) Day care home funds. For meals served to children in day care

homes, funds shall be made available to each State agency in an amount

no less than the sum of products obtained by multiplying:

(1) The number of breakfasts served in the Program within the State

to children enrolled in tier I day care homes by the current tier I day

care home rate for breakfasts;

(2) The number of breakfasts served in the Program within the State

to children enrolled in tier II day care homes that have been

determined eligible for free or reduced price meals by the current tier

I day care home rate for breakfasts;

(3) The number of breakfasts served in the Program within the State

to children enrolled in tier II day care homes that do not satisfy the

eligibility standards for free or reduced price meals, or to children

from whose households applications were not collected, by the current

tier II day care home rate for breakfasts;

(4) The number of lunches and suppers served in the Program within

the State to children enrolled in tier I day care homes by the current

tier I day care home rate for lunches/suppers;

(5) The number of lunches and suppers served in the Program within

the State to children enrolled in tier II day care homes that have been

determined eligible for free or reduced price meals by the current tier

I day care home rate for lunches/suppers;

(6) The number of lunches and suppers served in the Program within

the State to children enrolled in tier II day care homes that do not

satisfy the eligibility standards for free or reduced price meals, or

to children from whose households applications were not collected, by

the current tier II day care home rate for lunches/suppers;

(7) The number of supplements served in the Program within the

State to children enrolled in tier I day care homes by the current tier

I day care home rate for supplements;

(8) The number of supplements served in the Program within the

State to children enrolled in tier II day care homes that have been

determined eligible for free or reduced price meals by the current tier

I day care home rate for supplements; and

(9) The number of supplements served in the Program within the

State to children enrolled in tier II day care homes that do not

satisfy the eligibility standards for free or reduced price meals, or

to children from whose households applications were not collected, by

the current tier II day care home rate for supplements.

* * * * *

(g) * * *

(1) The rates for meals served in tier I and tier II day care homes

shall be adjusted annually, on July 1 (beginning July 1, 1997), on the

basis of changes in the series for food at home of the Consumer Price

Index for All Urban Consumers published by the Department of Labor.

Such adjustments shall be rounded to the nearest lower cent based on

changes measured over the most recent twelve-month period for which

data are available. The adjustments shall be computed using the

unrounded rate in effect for the preceding school year.

* * * * *

4. In Sec. 226.6:

a. The second sentence of paragraph (f)(2) is revised;

b. Paragraphs (f)(9), (f)(10), and (f)(11) are added; and

c. A new sentence is added after the third sentence of paragraph

(l) introductory text.

The additions and revision read as follows:

Sec. 226.6 State agency administrative responsibilities.

* * * * *

(f) * * *

(2) * * * Such a plan shall include: detailed information on the

organizational administrative structure; the staff assigned to Program

management and monitoring; administrative budget; procedures which will

be used by the sponsoring organization to administer the Program in and

disburse payments to the child care facilities under its jurisdiction;

and, for sponsoring organizations of day care homes, a description of

the system for making tier I day care home determinations, and a

description of the system of notifying tier II day care homes of their

options for reimbursement. For initial implementation of the two-tiered

reimbursement structure for day care homes, by April 1, 1997, each

sponsoring organization of day care homes shall submit an amendment to

its plan, subject to review and approval by the State agency,

describing its systems for making tier I day care home determinations

and for notifying tier II day care homes of their options for

reimbursement.

* * * * *

(9) Coordinate with the State agency which administers the National

School Lunch Program to ensure the receipt of a list of elementary

schools in the State in which at least one-half of the children

enrolled are certified eligible to receive free or reduced price meals.

The State agency shall provide the list to sponsoring organizations by

April 1, 1997, and by each February 15 thereafter. The State agency

also shall provide each sponsoring organization with census data, as

provided to the State agency by FCS upon its availability on a

decennial basis, showing areas in the State in which at least 50

percent of the children are from households meeting the income

standards for free or reduced price meals. In addition, the State

agency shall ensure that the most recent available data is used if the

determination of a day care home's eligibility as a tier I day care

home is made using school or census data. Determinations of a day care

home's eligibility as a tier I day care home shall be valid for one

year if based on a provider's household income, three years if based on

school data, or until more current data are available if based on

census data. However, a sponsoring organization, the State agency, or

FCS may change the determination if information becomes available

indicating that a home is no longer in a qualified area.

(10) Provide all sponsoring organizations of day care homes in the

State with a listing of State-funded programs, participation in which

by a parent or child will qualify a meal served to a child in a tier II

home for the tier I rate of reimbursement.

(11) Require each sponsoring organization of day care homes to

submit the total number of tier I and tier II day care homes that it

sponsors; a breakdown showing the total number of children enrolled in

tier I day care homes; the total number of children enrolled in tier II

day care homes; and the number of children in tier II day care homes

that have been identified as eligible for free or reduced price meals.

* * * * *

(1) * * * Program reviews shall include State agency evaluation of

the documentation used by sponsoring organizations to classify their

day care homes as tier I day care homes. * * *

* * * * *

5. In Sec. 226.13:

a. Paragraph (b) is revised;

b. Paragraph (c) is revised; and

c. New paragraph (d) is added.

The addition and revisions read as follows:

Sec. 226.13 Food service payments to sponsoring organizations for day

care homes.

* * * * *

(b) Each sponsoring organization shall report each month to the

State agency the total number of meals, by type (breakfasts, lunches,

suppers, and

[[Page 903]]

supplements) and by category (tier I and tier II), served to children

enrolled in approved day care homes.

(c) Each sponsoring organization shall receive payment for meals

served to children enrolled in approved day care homes at the tier I

and tier II reimbursement rates, as applicable, and as established by

law and adjusted in accordance with Sec. 226.4. However, the rates for

lunches and suppers shall be reduced by the value of commodities

established under Sec. 226.5(b) for all sponsoring organizations for

day care homes which have elected to receive commodities. For tier I

day care homes, the full amount of food service payments shall be

disbursed to each day care home on the basis of the number of meals

served, by type, to enrolled children. For tier II day care homes, the

full amount of food service payments shall be disbursed to each day

care home on the basis of the number of meals served to enrolled

children by type, and by category (tier I and tier II) as determined in

accordance with paragraphs (d)(2) and (d)(3) of this section. However,

the sponsoring organization may withhold from Program payments to each

home an amount equal to costs incurred for the provision of Program

foodstuffs or meals by the sponsoring organization on behalf of the

home and with the home provider's written consent.

(d) As applicable, each sponsoring organization for day care homes

shall:

(1) Require that tier I day care homes submit the number of meals

served, by type, to enrolled children.

(2) Require that tier II day care homes in which the provider

elects not to have the sponsoring organization identify enrolled

children who are eligible for free or reduced price meals submit the

number of meals served, by type, to enrolled children.

(3) Not more frequently than annually, select one of the methods

described in paragraphs (d)(3) (i)-(iii) of this section for all tier

II day care homes in which the provider elects to have the sponsoring

organization identify enrolled children who are eligible for free or

reduced price meals. In such homes, the sponsoring organization shall

either:

(i) Require that such day care homes submit the number and types of

meals served each day to each enrolled child by name. The sponsoring

organization shall use the information submitted by the homes to

produce an actual count, by type and by category (tier I and tier II),

of meals served in the homes; or

(ii) Establish claiming percentages, not less frequently than

semiannually, for each such day care home on the basis of the number of

enrolled children determined eligible for free or reduced-price meals.

The State agency may require a sponsoring organization to recalculate

the claiming percentage for any of its day care homes before the

required semiannual calculation if the State agency has reason to

believe that a home's percentage of income-eligible children has

changed significantly or was incorrectly established in the previous

calculation. Under this system, day care homes shall be required to

submit the number of meals served, by type, to enrolled children; or

(iii) Determine a blended per-meal rate of reimbursement, not less

frequently than semiannually, for each such day care home by adding the

products obtained by multiplying the applicable rate of reimbursement

for each category (tier I and tier II) by the claiming percentage for

that category. The State agency may require a sponsoring organization

to recalculate the blended rate for any of its day care homes before

the required semiannual calculation if the State agency has reason to

believe that a home's percentage of income-eligible children has

changed significantly or was incorrectly established in the previous

calculation. Under this system, day care homes shall be required to

submit the number of meals served, by type, to enrolled children.

6. In Sec. 226.14, the introductory text of paragraph (a) is

amended by adding a sentence after the first sentence to read as

follows:

Sec. 226.14 Claims against institutions.

(a) * * * State agencies shall assert overclaims against any

sponsoring organization of day care homes which misclassifies a day

care home as a tier I day care home unless the misclassification is

determined to be inadvertent under guidance issued by FCS. * * *

* * * * *

7. In Sec. 226.15:

a. Paragraph(e)(3) is revised;

b. Paragraphs (f) through (j) are redesignated as paragraphs (g)

through (k), respectively; and

a. A new paragraph (f) is added.

The addition and revision read as follows:

Sec. 226.15 Institution provisions.

* * * * *

(e) * * *

(3) Documentation of: the enrollment of each child at day care

homes; information used to determine the eligibility of enrolled

providers' children for free or reduced price meals; information used

to classify day care homes as tier I day care homes; and information

used to determine the eligibility of enrolled children in tier II day

care homes that have been identified as eligible for free or reduced

price meals in accordance with Sec. 226.23(e)(1).

* * * * *

(f) Day care home classifications. Each sponsoring organization of

day care homes shall determine which of the day care homes under its

sponsorship are eligible as tier I day care homes. A sponsoring

organization may use current school or census data provided by the

State agency or free and reduced price applications collected from day

care home providers in making a determination for each day care home.

Determinations of a day care home's eligibility as a tier I day care

home shall be valid for one year if based on a provider's household

income, three years if based on school data, or until more current data

are available if based on census data. However, a sponsoring

organization, State agency, or FCS may change the determination if

information becomes available indicating that a home is no longer in a

qualified area.

* * * * *

8. In Sec. 226.18:

a. Paragraphs (b)(11) and (b)(12) are added;

b. Paragraph (e) is amended by adding a new sentence after the

first sentence; and

c. Paragraph (f) is amended by removing the second sentence.

The additions and revision read as follows:

Sec. 226.18 Day care home provisions.

* * * * *

(b) * * *

(11) The responsibility of the sponsoring organization to inform

tier II day care homes of all of their options for receiving

reimbursement for meals served to enrolled children.

(12) The responsibility of the sponsoring organization, upon the

request of a tier II day care home, to collect applications and

determine the eligibility of enrolled children for free or reduced

price meals.

* * * * *

(e) * * * Each tier II day care home in which the provider elects

to have the sponsoring organization identify enrolled children who are

eligible for free or reduced price meals, and in which the sponsoring

organization employs a meal counting and claiming system in accordance

with Sec. 226.13(d)(3)(i), shall maintain and submit each month to the

sponsoring organization daily records of the

[[Page 904]]

number and types of meals served to each enrolled child by name. * * *

* * * * *

9. In Sec. 226.23:

a. Paragraph (b) is amended by adding a sentence at the end of the

paragraph;

b. Paragraph (e)(1)(i) is revised;

c. Paragraph (e)(1)(iv) is revised; and

d. Paragraph (h)(6) is added.

The additions and revisions read as follows:

Sec. 226.23 Free and reduced price meals.

* * * * *

(b) * * * This statement shall also contain an assurance that there

will be no identification of children in day care homes in which meals

are reimbursed at both the tier I and tier II reimbursement rates, and

that the sponsoring organization will not make any free and reduced

price eligibility information concerning individual households

available to day care homes and will otherwise limit the use of such

information to persons directly connected with the administration and

enforcement of the Program.

* * * * *

(e)(1) * * *

(i) For the purpose of determining eligibility for free and reduced

price meals, institutions shall distribute applications for free and

reduced price meals to the families of participants enrolled in the

institution. Sponsoring organizations of day care homes shall

distribute applications for free and reduced price meals to day care

home providers who wish to enroll their own eligible children in the

Program. At the request of a provider in a tier II day care home,

sponsoring organizations of day care homes shall distribute

applications for free and reduced price meals to households of all

children enrolled in the home, or, if the provider in a tier II day

care home so elects, shall distribute such applications only to

households identified as being categorically eligible for tier I meals.

These applications, and any other descriptive material distributed to

such persons, shall contain only the family-size income levels for

reduced price meal eligibility with an explanation that households with

incomes less than or equal to these levels are eligible for free or

reduced price meals. Such forms and descriptive materials may not

contain the income standards for free meals. However, such forms and

materials distributed by child care institutions other than sponsoring

organizations of day care homes shall state that, if a child is a

member of a food stamp household or AFDC assistance unit, the child is

automatically eligible to receive free Program meal benefits, subject

to the completion of the application as described in paragraph

(e)(1)(ii) of this section; such forms and materials distributed by

sponsoring organizations of day care homes shall state that, if a child

or a child's parent is participating in or subsidized under a Federally

or State supported child care or other benefit program with an income

eligibility limit that does not exceed the eligibility standard for

free or reduced price meals, meals served to the child are

automatically eligible for tier I reimbursement, subject to the

completion of the application as described in paragraph (e)(1)(ii) of

this section, and shall list any programs identified by the State

agency as meeting this standard; such forms and materials distributed

by adult day care centers shall state that, if an adult participant is

a member of a food stamp household or is a SSI or Medicaid participant,

the adult participant is automatically eligible to receive free Program

meal benefits, subject to the completion of the application as

described in paragraph (e)(1)(iii) of this section. Sponsoring

organizations of day care homes shall not make free and reduced price

eligibility information concerning individual households available to

day care homes and shall otherwise limit the use of such information to

persons directly connected with the administration and enforcement of

the Program. However, sponsoring organizations may inform tier II day

care homes of the number of identified income-eligible enrolled

children.

* * * * *

(iv) If they so desire, households applying on behalf of children

who are members of food stamp households or AFDC assistance units may

apply for free meal benefits under this paragraph rather than under the

procedures described in paragraph (e)(1)(ii) of this section. In

addition, households of children enrolled in tier II day care homes who

are participating in a Federally or State supported child care or other

benefit program with an income eligibility limit that does not exceed

the eligibility standard for free and reduced price meals may apply

under this paragraph rather than under the procedures described in

paragraph (e)(1)(ii) of this section. Households applying on behalf of

children who are members of food stamp households, AFDC assistance

units, or, for children enrolled in tier II day care homes, other

qualifying Federal or State programs, shall be required to provide:

(A) The names and food stamp, AFDC, or for tier II homes, other

case number of the child(ren) for whom automatic free meal eligibility

is claimed; and

(B) the signature of an adult member of the household as provided

for in paragraph (e)(1)(ii)(G) of this section. In accordance with

paragraph (e)(1)(ii)(F) of this section, if a case number is provided,

it may be used to verify the current certification for the child(ren)

for whom free meal benefits are claimed. Whenever households apply for

benefits for children not receiving food stamp, AFDC, or for tier II

homes, other qualifying Federal or State program benefits, they must

apply in accordance with the requirements set forth in paragraph

(e)(1)(ii) of this section.

* * * * *

(h) * * *

(6) Verification procedures for sponsoring organizations of day

care homes. Prior to approving an application for a day care home that

qualifies as tier I day care home on the basis of the provider's

household income, sponsoring organizations of day care homes shall

conduct verification of such income in accordance with the procedures

contained in paragraph (h)(2)(i) of this section.

Dated: December 30, 1996.

Ellen Haas,

Under Secretary for Food, Nutrition, and Consumer Services.

Appendix to the Preamble

Note: This appendix will not appear in the Code of Federal

Regulations

ECONOMIC IMPACT ANALYSIS

1. Title: Child and Adult Care Food Program: Improved Targeting of Day

Care Home Reimbursements

2. Statutory Authority: Personal Responsibility and Work Opportunity

Reconciliation Act of 1996 (P.L. 104-193)

3. Background

This interim rule amends the Child and Adult Care Food Program

(CACFP) regulations governing reimbursement rates for meals served

in family or group day care homes by incorporating provisions of the

Personal Responsibility and Work Opportunity Reconciliation Act of

1996 (P.L. 104-193); these provisions reduce the reimbursement rates

for meals served to children who do not qualify for low-income

subsidies. Specifically, this rule develops a two tier reimbursement

structure for meals served to children enrolled in family or group

day care homes. Under this structure, the level of reimbursement for

meals served to enrolled children will be determined by: (1) the

location of the day care home; (2) the income of the day care

provider; or (3) the income of each enrolled child's household.

[[Page 905]]

This interim rule targets CACFP meal reimbursement payments to low-

income children and the day care home providers who serve them,

where low-income is defined as not exceeding 185 percent of the

Federal income poverty guidelines. This interim rule retains near-

current reimbursement rates for meals served to children by

providers residing in low-income areas or served by providers who

are low-income. Near-current reimbursements will also be retained

for meals served to children who are identified as low-income even

if the provider neither resides in a low-income area nor is low-

income. Meals served to all other children will be reimbursed at the

lower rates. These changes will be effective July 1, 1997.

4. Cost/Benefit Assessment of Economic and Other Effects

Benefits

The need to reduce overall Federal expenditures has prompted a

review of many programs and led to the legislative decision to

improve the targeting of CACFP benefits to low-income children. To

accomplish targeting of benefits, the Personal Responsibility and

Work Opportunity Reconciliation Act of 1996 establishes two tiers of

day care homes and reimbursement rates. Under tiering, any CACFP

participating day care home (DCH) located in a low-income area or

operated by a low-income provider is eligible for tier I status,

where low-income areas are determined by local school or census

data. All meals served in tier I DCHs are reimbursed at the higher

set of reimbursement rates. All DCHs not qualifying for tier I are

tier II DCHs. Meals served in tier II DCHs are reimbursed at the

lower set of rates, with the exception that meals served to

documented low-income children are reimbursed at the higher set of

rates.

The initial establishment of the Child Care Food Program (CCFP)

in November, 1975 required both types of CCFP providers, day care

centers and DCHs, to make individual eligibility determinations

based on each participating child's household size and income. Meal

reimbursement rates paid to sponsors for meals served in DCHs were

based on each enrolled child's documented eligibility for free,

reduced price or paid meals. In order to be a DCH, which denotes a

CCFP participating home in this analysis, a home has always had to

(1) meet State licensing requirements, or be approved by a State or

local agency and (2) be sponsored by an organization that assumes

responsibility for ensuring the DCH's compliance with Federal and

State regulations (these licensing and sponsorship requirements are

still in effect).

In the years following establishment of the program, concerns

were raised that the paperwork and recordkeeping requirements were

creating barriers to DCH participation in the CCFP. In 1978, P.L.

95-627 eliminated free and reduced price eligibility determinations

for individual children in DCHs (but left unchanged day care

centers' individual eligibility determination requirements), and

established a single reimbursement rate for each type of meal served

in DCHs (lunches/suppers, breakfasts), and such changes encouraged

day care providers' participation in the CCFP by reducing their

administrative paperwork burden. The Omnibus Budget Reconciliation

Act of 1981 added the requirement of a means test for providers to

claim reimbursements for meals served to their own children in care.

With this sole exception, all DCHs continued to receive the same

reimbursements for all meals served to children in care, regardless

of each child's income.

The day care portion of the CCFP (The CCFP was renamed the Child

and Adult Care Food Program (CACFP) in 1989 when an adult day care

component was added.) has experienced dramatic growth in both DCH

participation and Federal government costs. From fiscal year 1986 to

fiscal year 1995, the number of participating DCHs increased from

82,000 to 193,000, an increase of 134 percent. During the same

period, meal reimbursements in nominal dollars increased from around

$190 million to about $730 million, a 280 percent increase.1,2

Program growth has occurred primarily among non-low-income children:

table 1 shows that the proportion of low-income DCH participants

decreased rapidly after individual eligibility determinations were

eliminated in 1978. The table shows the proportion of DCH children

with household incomes below 130 percent of the Federal income

poverty guidelines decreased by 33 percentage points between 1977

and 1982 and by an additional 9 between 1982 and 1986. During the

same periods the percentage of non-low-income children (above 185

percent of poverty) increased 46 and 7 percentage points,

respectively. While empirical data is unavailable, it is believed

that the income status of children in DCHs in 1996 was comparable to

that in 1986. The growth in DCHs among non-low-income children is

the impetus for P.L. 104-193's targeting of DCH benefits to low-

income children.

Table 1.--Income Eligibility Status of Children in DCHs by Year

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

Percent of DCH children in poverty strata by year(s)

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

Percent of poverty Change Change

1977a 1982b between 1977- 1986c between 1982-

1982 1986

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

130............................ 58 25 -33 16 -9

131-185................................... 24 11 -13 13 +2

185............................ 18 64 +46 71 +7

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

Total............................... 100 100 N/A 100 N/A

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

a Percentage represent the proportion of meals served by category: free (to children from hoseholds with income

130% of Federal income poverty guidelines), reduced price (131-185% of poverty), and paid (185% of poverty). Since most DCHs operating in 1977 were non-pricing, that is did not charge separately for

each meal served, it is assumed children in care of different income strata have equal propensitives consume

meals, which implies the proportion of meals served by category in 1977 is a reasonable proxy for children's

income eligibility percentages (assuming children eligible for free or reduced-price benefirts generally

became approved to receive them).

b Taken from a citation of the Evaluation of Child Care Food Program: Results of the Child Care Food Program:

Results of the Child Impact Study Telephone Survey and Pilot Study in the Study of the Child Care Food Program

\1\ report.

c Taken from Study of the Child Care Food Program.\1\

The 1986 Study of the Child Care Food Program (CCFP Study) \1\

that was conducted by Abt. and sponsored by USDA Food and Nutrition

Service, found that approximately 70 percent of the children

enrolled in DCHs in 1986 would not have been eligible for free or

reduced price meals had a means test been performed on them. The

establishment of a two tier reimbursement system focuses Federal

child care benefits on children who are low-income.

The two tier reimbursement rate structure is expected to effect

significant Federal budgetary savings. The six year projected

savings (fiscal years 1997-2002) are approximately $2.2 billion (see

table 4). The savings would result from 1) a reduction in the

reimbursement rates for meals served in tier II (non-low-income)

DCHs and 2) a decrease in the rate of growth of day care home

participation in the CACFP and savings in sponsor administrative

payments and audit expenditures resulting from this slower rate of

growth. The estimated savings assume that in fiscal years 1997-2002

approximately 70 percent of the children in care will be ineligible

for the higher reimbursement rates. This 70 percent assumption

follows from the income levels of the children who participated in

1986.1

The reduction in reimbursement rates for meals served to

children in tier II DCHs who are not documented income-eligible

would result in savings of approximately $1.9 billion over the next

six years (fiscal years

[[Page 906]]

1997-2002). Rates for all meals served to these children-lunches/

supper, breakfasts, and supplements-would decrease as shown in table

2. The rate change would result in a savings of about $0.63 for

every lunch or supper served during fiscal year 1998, the first full

fiscal year in which the new two tier system will be in effect. The

savings would increase to about $0.70 per meal by fiscal year 2002.

Breakfast savings would range from almost $0.61 per meal served in

fiscal year 1998 to almost $0.66 in fiscal year 2002, and supplement

savings would range from about $0.35 cents in fiscal year 1998 to

almost $0.39 cents in fiscal year 2002.

Table 2.--Changes in Tier II DCH Meal Reimbursement Rates Due to Tiering

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

Projected meal reimbursement rates

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

Fiscal year Meal type Tier II DCH rates

DCH rates before after P.L. 104- Difference Percent

P.L. 104-193 193 change

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

1998.......................... Lunch/Supper.... $1.6175 $0.9900 $0.6275 -38.8

Breakfast....... 0.8850 0.2800 0.6050 -68.4

Supplement...... 0.4825 0.1300 0.3525 -73.1

1999.......................... Lunch/Supper.... 1.6600 1.0100 0.6500 -39.2

Breakfast....... 0.9050 0.2900 0.6150 -68.0

Supplement...... 0.4950 0.1400 0.3550 -71.7

2000.......................... Lunch/Supper.... 1.7050 1.0400 0.6650 -39.0

Breakfast....... 0.9275 0.3000 0.6275 -67.7

Supplement...... 0.5075 0.1400 0.3675 -72.4

2001.......................... Lunch/Supper.... 1.7500 1.0700 0.6800 -38.9

Breakfast....... 0.9525 0.3100 0.6425 -67.5

Supplement...... 0.5225 0.1400 0.3825 -73.2

2002.......................... Lunch/Supper.... 1.7975 1.1000 0.6975 -38.8

Breakfast....... 0.9750 0.3200 0.6550 -67.2

Supplement...... 0.5350 0.1500 0.3850 -72.0

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

The growth of day care home participation in the CACFP is

projected to slow as a result of the two tier rate structure, as

some would-be providers are expected to perceive the program as

offering insufficient financial incentive and/or being more

administratively burdensome, relative to the financial benefits,

than under prior law. This slowing in homes' participation is

projected to cause a slowing in the rate of growth of sponsor

administrative payments and meals served. As shown in table 3, it is

estimated that in fiscal year 1998, the first full year of tiering,

27 million fewer meals will be served than would have been served

under the current reimbursement rate structure (due to a slower

growth rate in day care home participation). The six year effect

(fiscal years 1997-2002) of this projected slowing of growth is a

decrease in the number of meals served by 376 million, which is

measured relative to the number projected under pre-July 1, 1997

reimbursement rates. The six year (fiscal years 1997-2002) projected

savings from this slowing of program growth is approximately $300

million, measured in nominal dollars.

Table 3.--Changes in DCH Meal Growth Rate Due to Tiering

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

Projected meals (in thousands) b

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

Fiscal year After P.L. 104-193

Before P.L. ------------------------------------------ Difference Percent

104-193 Tier I Tier II Total (total) change

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

1997 a...................... 817,177 243,528 568,232 811,760 -5,417 -0.7

1998........................ 860,488 249,982 583,290 833,272 -27,216 -3.2

1999........................ 904,372 256,356 598,164 854,520 -49,852 -5.5

2000........................ 948,687 262,637 612,819 875,456 -73,231 -7.7

2001........................ 993,275 268,809 627,221 896,029 -97,246 -9.8

2002........................ 1,039,959 275,126 641,960 917,086 -122,873 -11.8

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

1997-2002................... 5,563,958 1,556,437 3,631,687 5,188,124 -375,834 -6.8

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

a Tiering does not become effective until the beginning of the fourth quarter (July 1, 1997) of fiscal year

1997.

b In fiscal year 1995, national DCH meal counts imply the average DCH served 19 breakfasts, 31 lunches/suppers,

and 31 supplements in an average week.

Costs

This interim rule promulgates the two tier CACFP meal

reimbursement system specified in P.L. 104-193. This system was

designed to reduce Federal child care subsidies to providers and

parents who are non-low-income. Tiering will reap a projected $2.2

billion in Federal savings over the next six fiscal years through

(1) lower meal reimbursement payment rates for non-low-income DCH

providers and non-low-income children and (2) secondary savings

stemming from the lower rates, including the decrease in DCH growth

rate. The non-low-income providers will likely pass some of their

revenue loss on to their clientele (primarily non-low-income

parents) through higher child care fees. Non-low-income providers

and parents will thus bear most of ing from the projected $2.2

billion reduction in Federal expenditures--as was the intent of P.L.

104-193. In addition to these fiscal costs, operating the two tier

system will place new

[[Page 907]]

administrative burdens (costs) on DCH sponsors, State CACFP and

State National School Lunch Program (NSLP) agencies, and NSLP school

food authorities. The following analysis will show these

administrative costs are minor in comparison with the costs to non-

low-income providers and parents.

Table 4.--Federal CACFP DCH Costs Before and After P.L. 104-193

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

Before P.L. 104-193 After P.L. 104-193 Change

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

Meal Total DCH

Fiscal year Total Admin. and ------------------------------------ Admin. and -------------------------- Meal Admin. and

Total DCH meals audit Total DCH Tier I Tier II Total audit (percent) audit

meal meal meal Dollars Percent (percent)

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

1997 a........................................ $952,099 $809,639 $142,460 $871,012 $242,083 $487,300 $729,383 $141,630 -$81,087 -8.5 -9.9 -0.6

1998.......................................... 1,026,020 875,034 150,986 693,686 257,400 289,518 546,918 146,768 -332,324 -32.4 -37.5 -2.8

1999.......................................... 1,104,105 943,294 160,810 727,323 270,711 305,178 575,950 151,374 -376,781 -34.1 -38.9 -5.9

2000.......................................... 1,186,699 1,015,754 170,945 758,701 284,903 321,110 606,013 152,688 -427,998 -36.1 -40.3 -10.7

2001.......................................... 1,273,343 1,091,954 181,389 796,114 299,951 337,907 637,858 158,256 -477,229 -37.5 -41.6 -12.8

2002.......................................... 1,365,473 1,173,027 192,446 835,559 315,070 356,536 671,607 163,952 -529,913 -38.8 -42.7 -14.8

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

1997-2002..................................... 6,907,739 5,908,702 999,035 4,682,396 1,670,179 2,097,550 3,767,729 914,667 -2,225,342 -32.2 -36.2 -8.4

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

a Tiering does not become effective until the beginning of the fourth quarter (July 1, 1997) of fiscal year 1997.

The costs of tiering for DCH providers will be addressed first

and then followed by a discussion of the costs for families with

children in tier II DCHs. The new administrative burdens that

tiering imposes on DCH sponsors will be discussed next and then

followed by an examination of the administrative costs for CACFP

State agencies, NSLP State agencies, and NSLP school food

authorities.

Implementation and use of the tiering system will have both

implementation and periodically recurring costs for the entities

discussed above. The implementation costs will depend highly on the

specifics of the State and local CACFP procedures currently in place

and on the reimbursement procedures selected under the new rule, and

will therefore vary greatly across States and localities. Because of

the lack of information on these current practices, quantification

of the implementation costs, within a reasonable degree of accuracy,

is precluded. It is recognized that these costs may be significant,

especially for State CACFP agencies (sponsors will need more

technical assistance). The recurring costs are more evident and

quantifiable, and what follows is a discussion of the recurring

costs the affected entities will incur.

I. Costs to Providers

For CACFP providers the costs of tiering will have an

administrative burden component, but will be primarily financial,

due to the lower meal reimbursement rates, and will fall on

providers operating tier II DCHs tier II DCHs will experience a

decrease in CACFP reimbursements; the majority of the $2.2 billion

in projected savings is due to lower reimbursements to non-mixed

tier II DCHs (a mixed tier II DCH is a tier II DCH where at least

one child in care is documented income-eligible; meals served to

such children are reimbursed at the higher rates). Non-mixed tier II

DCHs comprise an estimated 64 percent of all DCHs (see Costs to

Sponsors for explanation). For the average non-mixed tier II DCH,

the July 1, 1997 tier II rate decrease will cause weekly CACFP

revenues to decline 51 percent, from $82 to $402, which follows

directly from the average DCH's weekly meal mix footnoted in table 3

and the meal reimbursements shown in table 2. Since the average DCH

has about 6 children in care,\6\ this $42 decrease ($82-$40)

represents about $7 per child.

a. Potential Tier II Provider Responses to Lower CACFP Reimbursements

Providers of tier II DCHs will most likely respond to decreased

CACFP revenues through some combination of raising fees, absorbing

the loss, providing care for more children, and reducing operating

costs. Studies of the day care market corroborate this. They find

that in general providers will not try to pass all of the CACFP loss

on to the families they serve,3,4 but rather employ some of

these other options as well.

The amount which non-low-income providers can pass on through

higher fees will depend on the character of their local day care

market. Tier II providers in markets that are competitive on the

basis of fee will be discouraged from passing all of the loss on to

parents, as they need to keep fees approximately in line with the

local going rate to retain their customers.\4\ Providers in less

competitive markets, such as those where there is a child care

shortage, will be able to raise fees and pass most of their loss

along to parents. An example of a fee competitive market is one

where there are several day care homes operating in a moderate

income neighborhood, all having nearly equal appeal to parents and

nearly equal fees, but with only a few of the homes being tier II

DCHs (the rest being non-CACFP homes or tier I DCHs). Although the

tier II DCH providers would be tempted to raise fees in response to

the CACFP reimbursement rate decrease, the non-CACFP and tier I DCHs

would probably leave their fees unchanged; their doing so may cause

the tier II DCHs to leave their fees unchanged as well. Empirical

data on the relative extent of these two market scenarios is

unavailable. However, because the markets affected by tiering serve

mostly non-low-income families who, if fees are raised, would

probably choose to pay higher fees to stay with their current

provider, fee competitive markets may be the less common variety.

Data from the 1990 Profile of Child Care Settings Study \3\

(PCCS) and the 1976 National Day Care Home Study \3\ (NDCH) provide

information on the likelihood that providers will respond to

decreased CACFP reimbursements by absorbing the loss or providing

care for more children. The PCCS and NDCH studies indicate that most

tier II CACFP providers are not in a position to completely absorb a

significant portion of the reduction in meal reimbursements. The

1976-80 NDCH study found that homes like DCHs (sponsored and

regulated) do not make even moderate operating surpluses (profits)-

the mean net hourly wage for providers in regulated, sponsored homes

was $1.92 (in 1976 dollars), 83 percent of the 1976 minimum wage

rate of $2.30 per hour (all DCHs are sponsored and regulated, but

not all sponsored, regulated homes are DCHs, i.e., participate in

the CACFP). The PCCS study suggests that providers' economic

situation may have even worsened since the NDCH study: PCCS found

that in real dollars, fees for regulated, sponsored homes decreased

between the period 1976-80 and 1990. Thus, the PCCS data suggests

that providers in sponsored homes, such as DCHs, do not have much of

an operating surplus to buffer a cut in subsidies. Other PCCS

findings indicate that most providers will not consider taking more

children into care as a means of increasing revenues to offset the

decrease in CACFP reimbursements. PCCS found that most providers of

sponsored, regulated homes are operating near their legal capacity

and that over half of all such providers surveyed indicated they are

unwilling to take more children into care.

b. Most Probable Provider Responses to Lower CACFP Reimbursements

The PCCS and NDCH data, and the data suggesting that some day

care markets may discourage the raising of fees4 imply that in

general tier II providers will respond to decreased meal

reimbursements by reducing operating costs; absorbing a small

portion of the decrease; and raising fees a modest amount, but will

not respond by providing care for more children.

c. Effects on Non-Mixed Tier II Providers

Tier II providers who respond to decreased CACFP revenues by

noticeably reducing operating costs or sharply raising fees may,

however, only exacerbate their income shortage, as parents may be

unwilling to accept the providers' decreased child care expenditures

(reduced operating costs) or higher fees and could respond by moving

their children to other providers, which would decrease the original

provider's income until replacement children could be found.

However, given that fees for DCHs (i.e., regulated and sponsored

providers) tend to be higher than those found in unregulated

[[Page 908]]

day care homes,5,6 parents who patronize DCHs have demonstrated

a willingness to pay a premium for regulated care and are therefore

less likely to be sensitive to an increase in provider fees.

The new reimbursement rates will have a significant economic

impact on non-mixed tier II DCHs. Based on FCS program data \2\ and

projected increases in the food at home series of the Consumer Price

Index, when DCH reimbursement rates are first tiered on July 1, 1997

the weighted average per meal rate for non-mixed tier II DCHs will

drop from the tier I level of $1.01 down to $0.49, a 51 percent

decrease. The July 1, 1997 rate cut will cause the average non-mixed

tier II DCH's weekly CACFP revenues to decline from $82 to $40, a

$42 decrease (a 51 percent decline), where the average DCH serves an

average weekly meal mix of 19 breakfasts, 31 lunches/suppers, and 31

supplements \2\ to six children.\6\ These estimates incorporate the

dynamic nature of the regulated day care market, where the annual

provider turnover rate is approximately 20 percent \1\: they assume

that lowering the meal reimbursement rates will decrease the

incentive for day care homes to join the CACFP and also increase the

rate of departure for existing DCHs. Numerically, this translates

into the expectation that the lower rates will cause the annual rate

of growth in DCHs to decrease from around 5 percent to about 2.5

percent.

d. Effects on Mixed Tier II Providers

Although minor in comparison with non-mixed tier II CACFP

revenue decreases, tiering's actual meal count system will place a

new administrative burden on some portion of the sub-group of mixed

tier II providers (an estimated 10 percent of DCHs are mixed tier

II) whose sponsors require them to use an actual meal counts system

(some providers already keep such counts). There will be no new

burden for providers using either of the ``simplified'' meal counts

systems (as explained in the Costs to Sponsors, Sponsor Meal

Claiming Burden section). In an actual counts system, the mixed tier

II DCHs would provide the sponsor, for each child in care, the

number of reimbursable meals the child was served, by meal type and

would also identify each child by name. This reporting requirement

represents an increase in burden over the current system where some

providers only record and provide sponsors with the total number of

reimbursable meals served, by meal type. Few DCHs are expected to

incur this burden, however, as this system is burdensome for the

sponsors; it is being assumed that only 5 percent of sponsors will

choose an actual count system, and that in addition, all such

sponsors will be small-serving no more than 50 DCHs, on average only

30 (see the Costs to Sponsors, Sponsor Meal Claiming Burden

section). The estimated weekly provider burden associated with an

actual count system in an average DCH (serving 6 children \6\ and

operating 5 days a week \1\) is 30 minutes, which assumes a burden

of 1 minute per child per day. The estimated annual burden for such

a home is therefore 25 hours. This translates into an annual fiscal

er provider. This calculation assumes that providers of regulated,

sponsored care are making about $5.30 per hour for their services

($5.30 is an inflation adjusted version of the NDCH study \5\

finding that providers of sponsored, regulated homes earned an

average of $1.92 per hour in 1976).

II. Costs to Families

Tiering imposes few costs on low-income families. One cost,

limited to low-income families with children in mixed tier II DCHs,

is their being asked to provide household income information.

Although the families are not obligated to provide this information,

based on NSLP data,\7\ it is expected that 90 percent will (see

Costs to Sponsors section for explanation). Providing this

information consumes time and could lessen a family's privacy.

Sponsors have the authority to verify the income information at a

later time, in which case the family would be contacted and asked to

submit supporting documentation for the income figures provided,

representing a second burden and further intrusion on family

privacy. Despite being authorized to conduct income verifications,

few sponsors are expected to do so in light of the associated

burden. As explained below, there may also be a limited number of

low-income families with children in non-mixed tier II DCHs; these

families will experience costs similar to those described below for

non-low-income families.

Tiering is intended to reduce subsidies to non-low-income

families, which as previously stated, is the intent of P.L. 104-193.

This reduction has potential cost implications for these families.

The Costs to Providers section explained that providers will likely

respond to the decrease in CACFP reimbursements through some

combination of reducing operating expenses, raising fees, and

absorbing the loss. At one extreme of the day care market, an area

not fee-competitive in which DCH providers have the freedom to

increase fees to completely offset the reduced reimbursements, fees

could increase by about $7 a week per child. This would recent

increase over the average weekly fees, $70, that parents of non-low-

income children currently pay for care ($70 is an inflation-adjusted

version of the CCFP Study's figure of $49).\1\ At the other extreme

of the day care market, a highly fee competitive setting, fees would

remain unchanged. Although empirical data on the relative extent of

these market types is unavailable, data from the Costs to Providers

section suggest that the former market type may be more common:

first, the markets affected by tiering are serving non-low-income

families who, if fees are raised, would probably choose to pay the

higher fees to stay with their current provider; and second,

families patronizing DCHs, which tend to charge higher fees than

unregulated providers, have demonstrated a willingness to pay more

for the higher quality of regulated care.

a. Competitive Markets

In child care markets where providers need to hold fees down to

retain customers, providers are constrained to react to the rate

decrease through some mixture of absorbing the cut and cutting

operating costs. The providers being considered here are primarily

those operating non-mixed tier II DCHs, the group that will

experience the greatest tiering related CACFP revenue drop. To cut

costs, these tier II providers may change their management practices

relating to food service and developmental opportunities and

materials, among other potential changes. Although intended as cost

cutting measures, some of these changes could have effects on the

children in care. In the area of developmental opportunities and

materials, lower reimbursements may leave providers somewhat less

able to afford the non-essential games, books, audio or video tapes,

etc. that were attainable when CACFP reimbursements were covering a

greater proportion of food expenses. There are also a number of

areas in food service where providers could reduce costs, and these

would impact children in tier II DCHs. One way to reduce costs would

be deciding that certain snacks under the old, higher CACFP

reimbursements will not be served under the new, lower rates, such

as an afternoon snack. Providers might also respond by decreasing

meal portions, although by specifying minimum serving sizes, CACFP

regulations limit the extent to which this could be done. Other

means of cutting food service costs could include replacing more

expensive ingredients and food items with less expensive ones. While

purchasing lower quality items and ingredients may have detrimental

nutritional implications, substituting something more affordable

could also represent a nutritional improvement if wise choices are

made. The CACFP study mandated by P.L. 104-193 will compare the

nutritional quality of meals served in post-tiering tier II DCHs

with the quality of meals served in those DCHs before tiering, among

other pre/post-tiering comparisons.

Should a tier II provider choose to cut operating costs, a

family may find the resulting conditions unacceptable and seek out

another provider. The search for a new provider entails costs in the

time spent finding a new provider, the potential for lost wages, and

the potential for subsequent transportation and added inconvenience

costs if the more suitable providers are not as conveniently located

as the original caregiver. It is also possible that providers

constrained to hold fees down will exit the DCH market, which would

also require a family to find another provider.

Under the fee competitive market scenario just considered, which

primarily affect non-low-income families, there is the potential

that some of the low-income children in mixed tier II DCHs will

experience some of the same costs the children in non-mixed tier II

DCHs will experience. Although some of the meals served in a mixed

tier II DCH will be eligible for the higher reimbursement rates,

others will not. If the provider is constrained to not raise fees to

recoup the decreased reimbursements for the non-low-income families,

the provider will experience a net decrease in revenue as discussed

above, the provider will likely respond to this net decrease by

either reducing operating costs or absorbing the loss. Reducing

operating costs would affect the low-income children in care.

However, USDA believes only 10 percent of all DCHs will be mixed and

that only a portion of these mixed homes are in competitive fee

markets; under these conditions, few low-income children would be

affected.

[[Page 909]]

b. Non-Competitive Markets

In the other child care market being considered, where providers

are not as constrained to hold fees down, providers will likely

respond to the rate decrease primarily through increased fees. As

suggested earlier in this section, because tiering mainly affects

non-low-income families who will likely choose to pay increased

provider fees, this type of market may be more common than the

competitive fee variety. In non-fee competitive markets, families

can respond to increased fees by either paying the higher fees,

moving their children to more affordable providers, or dropping out

of the labor force (fully or in part) to care for their children.

Each choice has different costs for families. In cases where the

parents elect not to move the child, the parents will be assuming

greater responsibility for food costs than under the previous system

where the Federal government was performing that function (the

intent of P.L. 104-193). In the case where the provider raises fees

enough to completely offset the reduced reimbursements, fees could

increase by about $7 a week per child, representing a 10 percent

increase over pre-tiering average fees.1 In the second case, where

the parents move a child to achieve lower fees, the child may have

to break established relationships with the current provider and

other children in care. The third alternative, dropping out of the

labor force, would presumably occur rarely, as the raising of fees

will primarily affect higher income families who will probably

choose to absorb the increase.

c. Effects of Tiering on Child Care Choices

Studies show that child care regulations enforce practices

beneficial to childhood development,\5\ but the preceding discussion

on the relationship between lower meal reimbursements and higher

fees implies that under tiering the number of families choosing

sponsored, regulated care may decrease. The 1976-80 NDCH Study

compared fees among unregulated providers; regulated but unsponsored

providers; and providers who are both regulated and sponsored. The

study found that providers who are both regulated and sponsored had

the highest fees. In the years since that study, fees charged by

regulated and sponsored providers have decreased until equaling the

fees charged by regulated but unsponsored providers.\3\ This

equaling of fees in regulated homes coincided with the post-1978

rapid growth of DCHs. CACFP reimbursements--available only to

sponsored, regulated homes--may have played a role in bringing down

fees charged by regulated, sponsored providers to equal fees of

regulated, unsponsored providers, which suggests that tiering's

lowering of CACFP rates may cause regulated, sponsored fees to rise.

Even if the post-1978 decline in regulated, sponsored provider fees

is attributable to other factors, it is likely (as discussed in the

Costs to Providers section) that decreased CACFP reimbursements will

cause regulated, sponsored providers to raise fees, at least in some

markets, which may shift children into more affordable, possibly

unregulated homes. Similarly, the decreased CACFP reimbursements

might cause some currently regulated and sponsored providers to

consider moving out of regulated care. Therefore, the possibility

that CACFP rates will no longer encourage the placement of children

in regulated care is another cost that tiering may bring to non-low-

income children and even some low-income children.

d. Intended Effect of Tiering

An important fact, worth reiterating, is that tiering primarily

affects families with incomes above 185 percent of the Federal

income poverty guidelines (non-low-income), as intended by P.L.104-

193 The only low-income families potentially affected by tiering

will be those with children in tier II DCHs. This presumably

encompasses few families, as it is believed, as mentioned earlier,

that (1) only 10 percent of all DCHs will be mixed (having both non-

low-income and documented low-income children in care) and that only

40 percent of the children in an average mixed DCH will be low-

income (see Tier II Household Income-Eligibility Determination

Burden under Costs to Sponsors); and (2) that the clear majority of

all other low-income children will be in tier I DCHs. Similarly, the

providers affected by tiering will presumably be all non-low-income,

since providers with incomes below 185 percent of the Federal income

poverty guidelines are eligible for tier I status. The Federal

income poverty guidelines are designed to take into account family

size, so that a given household will qualify for low-income status

at a lower income level than will a household that has more

children.

III. Costs to Sponsors

The two tier structure will impose several new administrative

burdens on organizations that sponsor DCHs, including determining

and documenting which DCHs and children are entitled to receive the

higher set of reimbursement rates; verifying the income of all

providers who qualify for tier I status based on provider income;

and collecting and reporting separate tier I and tier II meal,

enrollment, and provider counts.

a. Tiering Determination Burden

All sponsors will be responsible for determining whether each of

their DCHs is tier I or II. A sponsor can approve a DCH for tier I

status if the DCH is located in a low-income area or the provider is

low-income. A low-income area is defined as one in which the local

elementary school has at least one-half of its enrollment approved

for free or reduced price NSLP lunches, or an area in which at least

one-half of the resident children are low income, according to the

most recent census data. A sponsor can also approve a DCH for tier I

status if sponsor can demonstrate low-income status (income no more

than 185 percent of the Federal income poverty guidelines). If a

sponsor finds a provider to be low-income, the sponsor must verify

the provider's income before formally approving the DCH for tier I

status. Sponsors must annually re-determine every Tier I eligibility

determination based on a provider's income. Because verification is

a non-trivial burden to sponsors, it is expected that whenever

possible sponsors will approve providers for tier I on the basis of

area eligibility. Area eligibility determinations offer sponsors the

added benefit of being valid for three years when school data is

used and until more recent data is available, when census data is

used, at most ten years.

The verification that sponsors will perform on income-approved

tier I providers consists of obtaining pay

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