Special Supplemental Nutrition Program for Women, Infants and Children (WIC): Food and Nutrition Services and Administration Funding Formulas Rule

DEPARTMENT OF AGRICULTURE

Food and Nutrition Service

7 CFR Part 246

RIN 0584-AC64

Special Supplemental Nutrition Program for Women, Infants and

Children (WIC): Food and Nutrition Services and Administration Funding

Formulas Rule

AGENCY: Food and Nutrition Service, USDA.

ACTION: Proposed rule.

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SUMMARY: This rule proposes to revise both the food and the nutrition

services and administration (NSA) funding formulas to improve the

effectiveness of WIC funds distribution now that WIC is in a relatively

stable funding environment. The revised food funding formula would help

to ensure food funds are allocated to State agencies that can utilize

the funds to maintain current participation as well as to direct funds,

as available, to State agencies that are serving a lesser proportion of

their WIC eligible population than other State agencies. The revised

NSA funding formula would simplify the funding formula by deleting

obsolete components and updating existing components to more equitably

distribute funds among State agencies.

DATE: To be assured of consideration, written comments on this rule

must be postmarked by January 11, 1999. No electronically transmitted

correspondence will be accepted.

ADDRESSES: Comments may be mailed to Ron Vogel, Acting Director,

Supplemental Food Programs Division, Food and Nutrition Service, USDA,

3101 Park Center Drive, Room 540, Alexandria, Virginia 22302, (703)

305-2746. All written comments will be available for public inspection

during regular business hours (8:30 a.m.-5:00 p.m. Monday through

Friday) at the above address.

FOR FURTHER INFORMATION CONTACT: Deborah McIntosh, Chief, Program

Analysis and Monitoring Branch, Supplemental Food Programs Division,

Food and Nutrition Service, USDA, 3101 Park Center Drive, Alexandria,

Virginia 22302, (703) 305-2710. An analysis package containing the

formula database, comparisons and mathematical computations is

available upon request at the above address.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

This rule has been reviewed by the Office of Management and Budget

under Executive Order 12866 and has been determined to be significant.

An impact analysis statement has been prepared and is available upon

request.

Public Law 104-4

Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Pub.

L. 104-4 (2 U.S.C.), establishes requirements for Federal agencies to

assess the effects of their regulatory actions on State, local, and

tribal governments and the private sector. Under section 202 of the

UMRA, the Food and Nutrition Service (FNS) generally must prepare a

written statement, including a cost-benefit analysis, for proposed and

final rules with ``Federal mandates'' that may result in expenditures

to State, local, or tribal governments, in the aggregate, or to the

private sector, of $100 million or more in any one year. When such a

statement is needed for a rule, section 205 of the UMRA generally

requires FNS to identify and consider a reasonable number of regulatory

alternatives and adopt the least costly, more cost-effective or least

burdensome alternative that achieves the objectives of the rule.

This proposed rule contains no Federal mandates (under the

regulatory provisions of Title II of the UMRA) for State, local, or

tribal governments or the private sector of $100 million or more in any

one year. Thus, this proposed rule is not subject to the requirements

of sections 202 and 205 of the UMRA.

Regulatory Flexibility Act

This proposed rule has been reviewed with regard to the

requirements of the Regulatory Flexibility Act (5 U.S.C. 601-612).

Shirley R. Watkins, Under Secretary, Food, Nutrition and Consumer

Services, has certified that this rule would not have a significant

economic impact on a substantial number of small entities. This

proposed rule would affect how FNS will calculate food and NSA grant

allocations for State agencies. State agencies are not small entities

under the Regulatory Flexibility Act.

Paperwork Reduction Act

This rule does not contain reporting or recordkeeping requirements

subject to approval by the Office of Management and Budget under the

Paperwork Reduction Act of 1995 (44 U.S.C. 3507).

Executive Order 12372

The Special Supplemental Nutrition Program for Women, Infants and

Children (WIC) is listed in the Catalog of Federal Domestic Assistance

Programs under No. 10.557. For the reasons set forth in the final rule

in 7 CFR part 3015, subpart V, and related Notice (48 FR 29114), this

program is included in the scope of Executive Order 12372 which

requires intergovernmental consultation with State and local officials.

Executive Order 12988

This rule has been reviewed under Executive Order 12988, Civil

Justice Reform. This rule is intended to have a preemptive effect with

respect to any State or local laws, regulations or policies which

conflict with its provisions or which would otherwise impede its full

implementation. This rule is not intended to have retroactive effect

unless so specified in the ``Effective Dates'' paragraph of this

preamble. Prior to any judicial challenge to the provisions of this

rule or the applications of its provisions, all applicable

administrative procedures must be exhausted.

Background

Need for Revisions to the WIC Funding Formulas

The WIC Program has consistently demonstrated its effectiveness in

promoting the health and nutritional well-being of low-income women,

infants and children at nutritionally related medical or dietary risk.

The WIC Program has grown and changed significantly during the past few

years. However, as growth has plateaued, FNS believes that it is

appropriate to propose changes to both the NSA and food funding

formulas to enhance their effectiveness at distributing funds fairly

and equitably among WIC State agencies

[[Page 54630]]

in an environment where appropriations are relatively stable.

The WIC Program is a fixed grant program, not a Federal entitlement

program, and is not guaranteed unlimited funds. WIC State agencies must

manage within a finite appropriation level; however, State agencies

have considerable latitude to manage program costs to accommodate

variable funding levels.

These revised formulas would better provide State agencies with the

equal opportunity to serve eligible persons who apply for benefits.

Currently, State agency funding levels are not necessarily proportional

to their WIC eligible population. The revised formulas are intended to

allocate funds more fairly among all State agencies under a relatively

stable funding environment.

Stakeholder Input

FNS believes that the rulemaking process is enhanced by public

opinion, and that, to the extent permissible, discussion and input on

the most equitable and fair distribution of WIC funds should occur

prior to publication of the final funding regulation. In fact, section

204(a) of UMRA requires meetings with our cooperators in State, local,

and tribal governments so we may receive their ``meaningful and timely

input in the development of regulatory proposals''. To fulfill this

statutory obligation, FNS and the National Association of WIC Directors

(NAWD) convened a committee to discuss the appropriateness of the

current funding formula components and ways in which the allocation

formula could be improved. This committee was composed of FNS

employees, designated State agency employees, and a designated employee

of a local municipal government agency.

To further the goal of obtaining stakeholder input into the

regulatory process, this proposal actively solicits comments from State

agencies, NAWD, advocacy groups and other interested parties on the

proposed funding formula changes. We are particularly seeking comment

on whether and how some components of the current funding formulas

should be deleted or modified as a way to determine the most

appropriate funding methodology to fairly and equitably distribute WIC

funds.

Nutrition Services and Administration (NSA) Funding Formula

The current WIC NSA funding formula became effective April 1, 1988.

The objectives of the formula were to ensure a reasonable measure of

funding stability while providing funding levels that enabled

equivalent services to participants across State agencies and to

promote incentives for reducing food costs so that more persons may be

served.

The current NSA formula is, however, complicated and a tremendous

amount of data collection is required for the formula--some of which

may no longer be needed or has little impact on the actual allocation

of funds. Further, some data are not available in time to permit

issuance of final grants at the beginning of the fiscal year. As a

result, the current NSA funding formula may no longer be the most

efficient and effective means of distributing NSA funds.

Current NSA Provisions--General

Section 246.16(c)(2) of the WIC regulations sets forth both the NSA

funding requirements as established in section 17(h) of the Child

Nutrition Act of 1966 (42 U.S.C. 1786) and the process by which NSA

funds are allocated to State agencies. The current NSA funding formula

meets the legislative requirements by: (1) establishing a ``target''

NSA funding level, referred to as parity, that each State agency should

receive as its fair share NSA grant; (2) preserving stability by

guaranteeing, to the extent funds are available, the prior year NSA

grant level, and then gradually moving State agencies to their parity

target level; and (3) addressing the varying needs of each State agency

by allocating regional discretionary funds based on regional and

National priorities.

The following outlines the current provisions and proposed changes

to the NSA funding formula:

Section 246.16(c)(2)(ii)(B)--Current NSA Parity Component

The current parity target level is based primarily on the number of

participants projected to be served by State agencies. Using food grant

levels allocated for the current fiscal year, FNS projects the number

of participants each State agency is expected to serve taking into

consideration its State-reported per participant food costs and

inflation. In addition to projected participation, three adjustments

are made to this participation-based formula to recognize factors

believed to affect the cost of Program administration. These include:

(a) Economies of scale--Recognizes the higher per participant costs

associated with smaller participation levels (currently an adjustment

is made at three levels: 5,000 or fewer participants, 5,001-15,000

participants, and more than 15,000 participants);

(b) Salary differentials--Considers the differential salary levels

paid within each State for employees in Public Administration, Health

and Social Services; and

(c) Targeting of benefits to high-risk participants--Considers the

proportion of Priority I participants served by the State agency.

Eighty percent of funds available for allocation through the parity

component are allocated in accordance with projected participation,

adjusted by the economy of scale factor. This is done on the basis of

administrative grant per participant (AGP) rates that are adjusted for

the higher per participant costs associated with smaller participation

levels (15,000 or fewer participants per month). Twenty percent of

funds available for the parity grant component are allocated on the

basis of differential salary levels and service to Priority I

participants.

Proposed ``Fair Share'' Component

Renaming the Parity Component

The term ``parity'' is used to describe the basic concept of

gradually moving State agencies to a funding level that represents

their respective ``fair share'' of available funds. FNS believes that

the term ``fair share'' better describes the purpose and intent of this

component and, therefore, proposes that the current ``parity''

component be renamed the ``NSA fair share'' component. This change

would also provide continuity with terminology used in the food funding

formula.

Food Cost Data Used in Calculating Projected Participation

The NSA funding formula projects the number of participants to be

served by each State agency by dividing the current year food grant

level by the State-reported per participant food cost, adjusted for

inflation. The data currently used represents the closed-out per

participant food cost data for the 12-month period beginning in July

and ending in June prior to the fiscal year for which the grants are

being calculated. This closed-out food cost data is usually available

150 days after the report month. Therefore, closed-out food cost data

for June is available to FNS in late November. This data is then used

in the calculation of final WIC grants, which are usually released by

January 1.

To allow for the calculation of final WIC grants at the beginning

of the fiscal year, FNS proposes that April through March closed-out

food cost data be used. As is currently done, an inflation adjustment

would be applied to the food cost data to more accurately project

[[Page 54631]]

actual food costs and to adjust for inflationary increases that may

occur during the remainder of the fiscal year. While other timeframes

were considered for use, it was felt that a 12-month base of food cost

data was necessary to take into consideration seasonal fluctuations of

food prices. While the current regulations do not address the specific

months of food cost data used in the calculations, FNS did want to

inform interested parties of the change in the timeframes that will be

used when final regulations are issued.

Economy of Scale/Bands

As noted above, NSA costs are affected by economy of scale. There

are certain fixed administrative costs in the delivery of program

benefits incurred by a State agency that do not vary regardless of the

size of the caseload. Therefore, State agencies with larger

participation levels are able to realize reductions in costs per

participant as these fixed costs are spread among more participants.

Smaller State agencies, particularly Indian Tribal Organizations

(ITOs), have comparatively higher costs per participant. Although the

current NSA funding formula includes a size-adjusted cost factor, other

alternatives and adjustment factors were examined to determine if the

current adjustments adequately recognize the various range of

administrative expenditures for State agencies of differing sizes.

The current adjustment factors were based on administrative

expenditures per participant (AEP) calculated over 10 years ago. The

expenditures per participant were evaluated and compared to the size of

the State agency, creating ``bands'' or groupings. The size of the

bands were determined using regression techniques that analyzed the

relationship between the administrative cost per participant and total

participation levels. By analyzing the positive correlation between

these two factors, the band sizes were determined based on the grouping

of State agencies of various sizes. For each State agency, an

adjustment factor is used to establish a funding level applied to each

band of participation. The first 5,000 participants are adjusted at a

level that is no more than 68 percent higher than the per participant

funding provided for average participation levels exceeding 15,000

monthly. The next 10,000 participants, or average monthly participation

levels between 5,001 and 15,000 participants, are funded at a level

that is no more than 2.4 percent higher than the per participant

funding for participation levels exceeding 15,000 monthly. These

percentages (68 percent and 2.4 percent) equal the percent differences

between the weighted average AEP for the State agencies with

participation levels up to 5,000 and in the range of 5,001 to 15,000,

respectively, and the weighted average AEP for State agencies with

participation levels over 15,000. The weighted average AEP for

participation up to 5,000 was calculated by dividing the FY 1986 total

Federal NSA expenditures for State agencies in that size group by their

FY 1986 total cumulative participation. The weighted average AEPs for

State agencies with participation levels between 5,001 and 15,000 and

over 15,000 were calculated in a similar way using FY 1986 data and

allowing for higher AEPs for the first 15,000 participants.

After lengthy consideration, FNS determined that the current bands

should be retained because the updated NSA cost information needed to

determine new band sizes is unavailable. It was felt that the data upon

which the AEP bands are currently based remains the best available.

However, more research and analysis is needed to understand how

economies of scale actually affect WIC NSA costs, what specific costs

are most influenced, the participation level(s) at which economies of

scale vary and how much allowance should be made at each of those

levels. Therefore, FNS will conduct further analysis in this area to

examine how funding for different size State agencies might be

acknowledged in the NSA funding formula. Until FNS's further analysis

is completed and appropriate baseline data is available, it is proposed

that the current bands of 5,000 or fewer; 5,001 to 15,000; and over

15,000 and the corresponding percent adjustment between bands be

retained. Comments on this aspect of the funding formula are welcome as

are suggestions as to how economies of scale can be objectively and

fairly determined for future consideration.

Salary and Priority I Participant Targeting Component

The combined salary and targeting component determines 20 percent

of a State agency's NSA fair share target level. In an effort to

simplify the funding formula and to delete obsolete components, both

the salary and targeting components were analyzed to determine whether

they continue to have a significant and appropriate impact on the final

NSA grant allocations.

Salary Component. Salary data were incorporated into the current

funding formula in recognition that salary costs represent by far the

most significant contributor to WIC NSA costs. Additionally, due to

regional variations in labor costs, similar levels of service have

different salary costs. The salary data used to compute differential

salary levels for State agencies includes average annual salaries for

State and local government workers provided by the Bureau of Labor

Statistics (BLS) for the 50 States, the District of Columbia, Puerto

Rico, and the Virgin Islands. BLS does not gather this information for

American Samoa, Guam or the ITOs. Therefore, the salary level for a GS-

9, step 1 in the Federal Government's General Schedule pay scale is

used for American Samoa, Guam and ITOs acting as State agencies. FNS

determined that a GS-9, step 1 salary is a reasonable approximation of

the salary costs incurred on an individual employee basis by State

agencies in American Samoa, Guam and the ITOs. The most current data

available from BLS reflects average salary levels paid 2 years prior to

the applicable fiscal year for which funds are allocated. The GS-9

salary level used for American Samoa, Guam and ITO State agencies

reflects the salary level for the same year as the available BLS data.

Overall, most State agencies are affected only slightly by the

salary component, primarily because the salary component makes up only

10 percent of the total parity component (called the fair share target

funding level in this proposed rule). An analysis of the final grants

with and without the salary component reveals that for approximately 90

percent of WIC State agencies, the difference in final NSA grants

without the salary component is within 3 percent (+/-) of a State's

grant inclusive of the salary adjustment.

FNS recognizes that the salary component is a controversial area

and that there are strong opinions and arguments supporting both the

inclusion and deletion of the salary component in the NSA funding

formula. Therefore, FNS proposes to retain the current salary

component, which would continue to equal 10 percent of the NSA fair

share component of the NSA funding formula. However, comments on

whether the current salary factor contributes to an appropriate and

fair allocation of NSA funds are welcomed.

Targeting Component. The targeting component was originally

designed to provide an incentive for targeting benefits to the highest

risk participants, Priority I women and infants, as defined in current

Program regulations at Sec. 246.7(e)(4)(i). At the time it was

incorporated into the NSA funding formula in 1988, the food funding

formula also included a targeting component. In a time when WIC was

[[Page 54632]]

not able to meet the need for Program benefits, targeting funds to

those State agencies that were serving a greater proportion of high

risk individuals was a necessary objective. Now, however, based on

estimates derived from State-reported participation data, nationwide,

virtually all fully eligible infants are receiving services through the

WIC Program and most fully eligible women are participating at some

point during their pregnancies. Therefore, FNS believes the targeting

component is no longer needed to encourage and support service to

Priority I participants.

The targeting component is based on a complex process, dependent on

State reported data, requiring many computations to calculate a

targeting index by which each State agency's share of targeting funds

is determined. Its effect on the final NSA funding allocation today is

negligible. Therefore, FNS proposes to delete this component. Targeting

was deleted from the food funding formula in a final food funding rule

published in the Federal Register October 6, 1994. Elimination of this

feature from the NSA formula would result in formula consistency. By

deleting the targeting component, 100 percent of the NSA ``fair share''

funds would be allocated based on projected participation levels,

adjusted for State agency size (90 percent) and salary differentials

(10 percent).

Section 246.16(c)(2)(i) NSA Stability Funds

Throughout the deliberations on the possible revisions to the NSA

funding formula, it was recognized that a critical aspect of NSA

funding is the stability component. The stability grant helps to

guarantee, to the extent funds are available, some measure of funding

continuity that acknowledges that State agencies have fixed NSA costs

that are relatively stable from year to year and are necessary for

continued Program operations. In the event that available funding is

insufficient to fund State agencies at their prior year funding level,

each State agency experiences a pro-rata reduction to its grant, as is

done with the food funding formula.

The stability component would be continued in this proposed rule,

with modifications. It is recognized that the funding formula, if

properly designed, should calculate an NSA grant commensurate with a

State agency's NSA funding needs. In the past, discretionary funding

decisions made by FNS may have, over time, unnecessarily inflated the

grant allocations provided to particular States due to additional

funding allocated for large capital expenditures. These discretionary

funds then become a permanent part of a State agency's stability grant

the following year. Therefore, FNS proposes changes to the stability,

or base, grant calculation to eliminate consideration of discretionary

funding (or, as described below, ``operational adjustment funding'')

allocations made in the prior fiscal year.

FNS proposes to revise Sec. 246.16 (c)(2)(i) to provide each State

agency a stability grant equal to its NSA grant from the previous year,

less any discretionary fund adjustments for that year. As is currently

the case, each State agency's stability grant would be reduced by a

pro-rata share if insufficient funds were available.

Section 246.16(c)(2)(ii) NSA Residual Funds

Currently, after NSA stability grants are determined, any remaining

funds available for allocation are referred to as residual funds and

are distributed according to Sec. 246.16(c)(2)(ii) of current Program

regulations. Residual funds represent funding that either: (1) Helps to

cover NSA costs associated with increases in projected participation,

or (2) moves State agencies closer to their ``fair share'' target

funding level. The fair share for NSA funds is an administrative grant

per person (AGP) for each projected participant, adjusted for factors

that affect NSA costs.

FNS proposes that priority for residual funds should be given only

to State agencies below their NSA fair share target funding level. The

fair share principle, which is participant-based, represents the amount

of NSA funds needed by a State agency to support current participation

projections based on the food grant the State agency will receive. The

part of the current regulatory provision which provides funds on the

basis of increased participation countervails the fair share objective

by allocating funds to State agencies which are already over their fair

share funding level.

Therefore, the proposed NSA formula grant for each State agency

would be calculated based on each State agency's fair share target

funding level, which considers the difference between the estimated

cost of projected participation (as adjusted for economy of scale and

salary differential) and the prior year NSA formula grant. If a State

agency's NSA fair share target funding level is greater than its

stability grant, the State agency would be eligible to receive

additional NSA funds proportionate to their respective shortfall from

the fair share target funding level.

Section 246.16 (c)(2)(iii) Discretionary Funds

The success of the WIC Program is due in large part to the

flexibility of the program to accommodate individual State needs and

initiatives. As the WIC Program continues to change and mature, the

responsiveness of the Program to meet State agencies' varying needs and

provide for program innovation becomes more critical.

Section 246.16 (c)(2)(iii) currently requires that ten percent of

each State agency's total NSA grant level be subtracted and aggregated

by region to form the FNS regional discretionary funding pools. In FY

1998, these pools amounted to over $100 million nationally. Each FNS

regional office then allocates the discretionary funds back to State

agencies within the region on the basis of the varying needs of State

agencies and national guidelines. Through the regional allocation of

discretionary administrative funds, the funding process can satisfy

many of the administrative and structural needs not accounted for in

the NSA funding formula (e.g., one-time acquisition costs for

management information systems).

FNS considered the discretionary funding allocation process and the

actual use of these funds. As a result of these considerations, it was

determined that the term ``discretionary'' does not fully represent or

accurately describe the use of these funds, and that many State

agencies must use these funds for operational costs. Therefore, FNS

proposes to change the name ``discretionary funds'' to ``operational

adjustment funds'' (OAF). This change will help clarify that the use of

the funds are for both capital investments as well as operational

activities, and that, in many cases, the funds are a critical part of a

State agency's WIC grant and are needed to support ongoing operations.

The degree to which FNS regions have been inconsistent in the

methodology used to award discretionary fund allocations and the

adherence to national guidelines was also considered. While some

regions have used a competitive process to award the majority of

available discretionary funds, other regions simply returned a large

portion of the available discretionary funds to the State agencies in

their region according to the distribution allocated through the

funding formula. This inconsistency has caused concern as funding for

projects becomes more competitive and funding levels for the program

are being scrutinized. Further, FNS regions including large State

agencies

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contributing to the regional fund have more flexibility than regions

with smaller State agencies. FNS recognizes that regions have various

funding resources and needs and, for most regions, the process employed

for discretionary fund allocations is a mutually acceptable one in

which the State agencies and the regions are satisfied with the

process. After much consideration of this issue, it was decided to

allow up to 10 percent of the total regional NSA funds to be used for

OAF (formerly discretionary fund) allocations. However, regions would

be given the authority to withhold less than 10 percent of the total

regional NSA funds available if deemed appropriate for that region's

needs.

Food Funding Formula

Current Food Funding Provisions--General

The current food funding formula, finalized on October 6, 1994, was

developed for use during a time of participation growth and annual

increases in WIC appropriations. The primary objectives were to: (1)

Provide a greater share of funds to State agencies receiving

comparatively less than their fair share of funds; (2) simplify the

food funding formula and delete obsolete components; and (3) provide

for a level of stability for State agencies. While the current food

funding formula has met those objectives, WIC has now entered a time in

which, at least for the foreseeable future, increases in appropriations

are not likely and emphasis must be placed on shifting available funds

among State agencies to reflect demographic changes in the eligible

population and to reach the maximum number of participants possible

within available Program resources.

The following outlines the current provisions and proposed changes

to the food funding formula:

Section 246.16 (c)(3)(ii) Current Food Stability Component

The stability component of the current food funding formula

provides that each State agency receive its prior year food grant,

adjusted for full inflation, contingent on available resources. If

funding is inadequate to fund all State agencies at this level, each

State agency would receive a reduced stability grant based on a pro-

rata reduction of funds.

The current stability component, in a stable funding environment,

results in little if any additional funding to assist State agencies

that, for historical reasons or due to demographic shifts, do not have

a share of WIC funding proportionate to their share of their eligible

WIC population. These State agencies are considered to be ``under fair

share''. Therefore, FNS proposes that the stability component of the

food funding formula be modified to allow some funds to be available to

allocate to under fair share State agencies to further the objective of

funding equity among State agencies. In a relatively stable funding

environment, mechanisms must be in place to allow for some movement of

funds to correspond to shifts in eligible populations, and the ability

of State agencies to fully utilize available funding to maximize

participation.

Proposed Stability Component

Long consideration was given to stability food funding and whether

full inflation should be guaranteed. Concerns were raised that if State

agencies were not funded with full inflation, prior year end

participation levels may not be sustained, thereby forcing some State

agencies to cut caseload. This concern, however, was countered by the

objective of making available, to the extent possible, additional

funding to under fair share State agencies so that they have the

opportunity to add participants to bring them closer to the level of

service provided by State agencies that have received allocations above

their fair share.

After exploring options available, FNS proposes to modify

Sec. 246.16 (c)(3)(ii) to redefine stability as the prior year food

grant level, without any initial adjustments for inflation. Any funds

remaining after guaranteeing prior year end grant levels would be

split. Fifty percent of the remaining funding would be provided for an

inflation allowance based on the fair share funding level allocated

with the new year appropriation instead of the prior year grant levels

currently used in the formula. The remaining 50 percent would be

allocated to under fair share State agencies to bring them closer to

their fair share level. The funds subject to the 50/50 split would

include current year appropriated funds and unspent recoverable funds

from the prior fiscal year.

These changes to the stability component would ensure that even in

a funding environment in which the Program receives only a modest

increase above prior year grant levels, State agencies with less than

their fair share of funds would continue to receive a greater increase

in funding relative to over fair share State agencies.

We recognize that the 50/50 split of the remaining funds after

prior year grant levels are funded and the inflation calculation are

different than what was discussed with the NAWD Committee. However, we

were persuaded during the review process that a more aggressive

approach was necessary to shift available funds to under fair share

State agencies. Therefore, we are particularly interested in comments

concerning the split of funds and the method used to calculate

inflation adjustments.

To determine the amount of funds allocated to each State agency,

State agencies would initially receive their prior year end food grant

as their stability grant. As is currently done, if funds are

insufficient to fund all State agencies at the prior year end grant

level, each State agency would receive a pro-rata reduction to its

grant. If funds are available in excess of prior year-end grant levels,

50 percent of such funds would be made available to each State agency

for inflation. An inflation allowance will be calculated based on the

difference between each State agency's inflated appropriated fair share

grant level and their appropriated fair share grant level. The

remaining 50 percent of available funds would be allocated to under

fair share State agencies proportionate to their shortfall from their

fair share target funding level. Once all State agencies have received

their target food inflation level, 100 percent of all available funds

would be allocated to under fair share State agencies. If sufficient

funding is available to fund inflation and all under fair share State

agencies up to their fair share target levels of funding, additional

funds would be allocated according to Sec. 246.16 (c)(3)(iii)(B) to any

State agency requesting additional food funds.

Section 246.16 (c)(3)(i)(B) Adjustments for Higher Cost Areas

In calculating the fair share target food level for State agencies,

the regulations permit an adjustment for the higher cost of food for

State agencies located outside of the 48 contiguous States and the

District of Columbia. This adjustment is done to ensure that the share

of funds received by these State agencies is adequate to serve their

share of the eligible population given their higher costs. Currently,

five State agencies receive this adjustment. Current regulations allow

for these adjustments after a State agency demonstrates that it has

successfully implemented voluntary cost containment measures, such as

improved vendor management practices, participation in multi-state

agency infant formula rebate contracts or other cost containment

efforts. FNS believes that the current adjustments

[[Page 54634]]

and conditions under which adjustments may be applied are consistent

with Program objectives and consistent with high cost adjustments

available to States in the National School Lunch Program and the School

Breakfast Program and, therefore, no changes to this component of the

food funding formula are proposed.

Section 246.16 (e) (2) (i) Food Spending Performance Standard

The current food spending performance standard was implemented in

fiscal year 1995. Failure to meet this standard results in an

adjustment of the current year grant. The current standard requires

each State agency to expend at least 97 percent of its food grant.

Typically, State agencies cannot spend 100 percent of their WIC grants

due to factors that are inherent to the Program. For example, because

the federal grant is the only source of funds for WIC in most states,

State agencies must exercise caution to ensure that they do not spend

more than their federal grant. In addition, because State agencies must

estimate the value of vouchers and checks to distribute food benefits,

they cannot determine the Program's actual food costs until the

vouchers and checks have been redeemed and processed. While FNS

recognizes that the structure of the Program may cause some State

agencies to have difficulty meeting this expenditure standard, the

majority of State agencies should be able to expend at least 97 percent

of its food funds in a stable funding environment. Therefore, the 97

percent food spending performance standard would be retained and the

obsolete references to the performance standards for fiscal years 1995-

1997 would be deleted.

Eligibility Data

Data on the number of individuals estimated to be income eligible

for Program benefits is produced annually at the national level. State-

level estimates of income-eligible infants and children are produced

using similar data. These estimates, in turn, are used to estimate the

fair share funding levels for WIC food grants. Much consideration was

given as to the reliability and accuracy of the income eligible data.

Current regulations stipulate at Sec. 246.16(c)(3)(i) that the income

eligible data be calculated by FNS using the best available, nationally

uniform, indicators. FNS continues to believe that the current

methodology is the best available data and proposes no changes at this

time. However, FNS will reevaluate the method for estimating the

potential eligible population if new data sources or methods become

available that could improve the current estimation process.

List of Subjects in 7 CFR Part 246

Food assistance programs, Food donations, Grant programs--Social

programs, Indians, Infants and children, Maternal and child health,

Nutrition education, Public assistance programs, WIC, Women.

For reasons set forth in the preamble, 7 CFR part 246 is proposed

to be amended as follows:

PART 246--SPECIAL SUPPLEMENTAL NUTRITION PROGRAM FOR WOMEN, INFANTS

AND CHILDREN

1. The authority citation for part 246 continues to read as

follows:

Authority: 42 U.S. C. 1786.

1. In Sec. 246.16:

a. Paragraph (c)(2)(i) is revised.

b. Paragraph (c)(2)(ii) is revised.

c. Paragraphs (c)(2)(iii) and (c)(2)(iv) are redesignated as

paragraphs (c)(2)(iv) and (c)(2)(v), respectively, and a new paragraph

(c)(2)(iii) is added.

d. Newly redesignated paragraph (c)(2)(iv) is revised.

e. Newly redesignated paragraph (c)(2)(v) is amended by removing

the word ``discretionary funds'' and adding, in its place, the word

``operational adjustment funds''.

f. The heading of paragraph (c)(3)(i) and the first sentence of

paragraph (c)(3)(i)(A) are revised.

g. Paragraph (c)(3)(ii) is revised.

h. The heading of paragraph (c)(3)(iii)and the first sentence of

paragraph (c)(3)(iii)(A) are revised.

i. The first sentence of paragraph (e)(2)(i) is revised.

The revisions and an addition read as follows:

Sec. 246.16 Distribution of funds.

* * * * *

(c) * * *

(2) * * *

(i) Fair share target funding level determination. For each State

agency, FNS will establish, using all available NSA funds, an NSA fair

share target funding level which is based on each State agency's

average monthly participation level for the fiscal year for which

grants are being calculated, as projected by FNS. Each State agency's

projected participation level shall be adjusted to account for the

higher per participant costs associated with small participation levels

and differential salary levels relative to a national average salary

level. The formula shall be adjusted to account for these cost factors

in the following manner: 90 percent of available funds shall provide

compensation based on rates which are proportionately higher for the

first 15,000 or fewer participants, as projected by FNS, and 10 percent

of available funds shall provide compensation based on differential

salary levels, as determined by FNS.

(ii) Stability allocation funding level. To the extent funds are

available and subject to the provisions of paragraph (c)(2)(iv) of this

section, each State agency shall receive an amount equal to 100 percent

of the final formula-calculated NSA grant of the preceding fiscal year,

prior to any operational adjustment funding allocations made under

paragraph (c)(2)(iv) of this section. If funds are not available to

provide all State agencies with their stability allocation funding

level, all State agencies shall have their stability allocation funding

level reduced by a pro-rata share as required by the short fall of

available funds.

(iii) Fair share allocation. Any funds remaining available for

allocation for NSA after the stability allocation required by paragraph

(c)(2)(ii) of this section has been completed and subject to the

provisions of paragraph (c)(2)(iv) of this section shall be allocated

to bring each State agency closer to its NSA fair share target funding

level. FNS shall make fair share allocation funds available to each

State agency based on the difference between the NSA fair share target

funding level and the stability allocation funding level, which are

determined in accordance with paragraphs (c)(2)(i) and (c)(2)(ii) of

this section, respectively. Each State agency's difference shall be

divided by the sum of the differences for all State agencies, to

determine the percent share of the available fair share allocation

funds each State agency shall receive.

(iv) Operational adjustment funds. Each State agency's final NSA

grant shall be reduced by up to 10 percent, and these funds shall be

aggregated for all State agencies within each FNS region to form an

operational adjustment fund. The Regions shall allocate these funds to

State agencies according to national guidelines and shall consider the

varying needs of State agencies within the region.

* * * * *

(3) * * *

(i) Fair share target funding level determination. (A) For each

State agency, establish a fair share target funding level which shall

be an amount of funds proportionate to the State agency's share of the

national aggregate population of persons who are income eligible to

participate in the Program

[[Page 54635]]

based on the 185 percent of poverty criterion.

* * * * *

(ii) Stability allocation. To the extent funds are available, each

State agency shall receive a stability allocation equal to its final

authorized grant level as of September 30 of the prior fiscal year. If

funds are not available to provide all State agencies with their full

stability allocation, all State agencies shall have their full

stability allocation reduced by a pro-rata share as required by the

short fall of available funds.

(iii) Inflation/fair share allocation. (A) If funds remain

available after the allocation of funds under paragraph (c)(3)(ii) of

this section, the funds shall be allocated as provided in this

paragraph. First, FNS will calculate a target inflation allowance based

on the fair share funding level determined for current year

appropriated funds. This fair share funding level is then adjusted by

the anticipated rate of food cost inflation as determined by the

Department. Second, FNS will allocate 50 percent of the available funds

to the State agencies in proportionate shares to meet the target

inflation level. Third, FNS will allocate 50 percent of the available

funds to each State agency which has a stability allocation, as

determined in paragraph (c)(3)(ii) of this section and adjusted for

inflation as determined in this paragraph, which is still less than its

fair share target funding level. The amount of funds allocated to each

State agency shall be based on the difference between its stability

allocation plus target inflation funds and the fair share funding

target level. Each State agency's difference shall be divided by the

sum of the differences for all such State agencies, to determine the

percentage share of the 50 percent of available funds each State agency

shall receive. In the event a State agency declines any of its

allocation under either this paragraph or paragraph (c)(3)(ii) of this

section, the declined funds shall be reallocated in the percentages and

manner described in this paragraph. Once all State agencies receive

allocations equal to their full target inflation levels, any remaining

funds shall be allocated or reallocated, in the manner described in

this paragraph, to those State agencies still under their fair share

target funding level.

* * * * *

(e) * * *

(2) * * *

(i) The amount allocated to any State agency for food benefits in

the current fiscal year shall be reduced if such State agency's food

expenditures for the preceding fiscal year do not equal or exceed 97

percent of the amount allocated to the State agency for such costs. * *

*

* * * * *

Dated: October 1, 1998.

Shirley R. Watkins,

Under Secretary, Food, Nutrition and Consumer Services.

[FR Doc. 98-27282 Filed 10-9-98; 8:45 am]

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