Improved Targeting of Day Care Home Reimbursements

DEPARTMENT OF AGRICULTURE

Food and Consumer Service

7 CFR Parts 210 and 226

Child and Adult Care Food Program:

Improved Targeting of Day Care Home Reimbursements

RIN 0584-AC42

AGENCY: Food and Consumer Service, USDA.

ACTION: Final rule.

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

regulations governing reimbursement for meals served in family day care

homes by incorporating changes resulting from the Department's review

of comments received on a January 7, 1997, interim rule. These changes

and clarifications involve: The appropriate use of school and census

data for making tier I day care home determinations; documentation

requirements for tier I classifications; tier II day care home options

for reimbursement, including use of child care vouchers; calculating

claiming percentages/blended rates using attendance and enrollment

lists; and procedures for verifying household applications of children

enrolled in day care homes. This final rule also amends the National

School Lunch Program regulations to facilitate tier I day care home

determinations by requiring school food authorities to provide

elementary school attendance area information to sponsoring

organizations. These revisions implement in final form the provisions

of the Personal Responsibility and Work Opportunity Reconciliation Act

of 1996 to target higher CACFP reimbursements to low-income children

and providers.

EFFECTIVE DATE: April 27, 1998.

FOR FURTHER INFORMATION CONTACT: Mr. Robert M. Eadie, Policy and

Program Development Branch, Child Nutrition Division, Food and Consumer

Service, Department of Agriculture, 3101 Park Center Drive, Room 1007,

Alexandria, Virginia 22302, or telephone (703) 305-2620.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

This final 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 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).

Unfunded Mandate Reform Act

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

104-4, establishes requirements for Federal agencies to assess the

effects of their regulatory actions on State, local, and tribal

governments and the private sector. Under section 202 of UMRA, the Food

and Consumer Service generally must prepare a written statement,

including a cost-benefit analysis, for proposed and final rules with

``Federal mandates'' that may result in expenditures to State, local,

or tribal governments, in the aggregate, or to the private sector, of

$100 million or more in any one year. When such a statement is needed

for a rule, section 205 of UMRA generally requires the Food and

Consumer Service 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 rule contains no Federal mandates (under the regulatory

provisions of Title II of UMRA) for State, local, and tribal

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

year. Thus, this rule is not subject to the requirements of sections

202 and 205 of UMRA.

Paperwork Reduction Act

This final rule contains information collection requirements which

are subject to review by the Office of Management and Budget (OMB)

under the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35). The

final rule contains changes to the information collection requirements

that were not included in the interim rule. Specifically, the final

rule contains changes based on recent day care home participation data

and on information contained in a recent study, and a requirement that

school food authorities provide, upon request, elementary school

attendance area information for schools in which 50 percent or more of

enrolled children have been certified eligible for free or reduced

price meals. In accordance with section 3507(d) of the Paperwork

Reduction Act of 1995 (44 U.S.C. 3501 et seq.) the information

collection or recordkeeping requirements included in this final rule

have been submitted for approval to OMB. When OMB notifies us of its

decision, we will publish a document in the Federal Register providing

notice of the assigned OMB control number or, if approval is denied,

providing notice of what action we plan to take.

Title: Child and Adult Care Food Program: Improved Targeting of Day

Care Home Reimbursements.

Description: Under this final rule, some existing recordkeeping

activities contained in 7 CFR parts 210 and 226 would be affected. The

OMB control numbers are 0584-0006 and 0584-0055, respectively.

Description of Respondents: State agencies, school food authorities

and sponsoring organization of family day care homes.

Estimated Annual Recordkeeping Burden: Changes in the annual burden

[[Page 9088]]

hours and participation figures from the interim rule are based on

recent participation data and information contained in a recent study,

Early Childhood and Child Care Study, Profile of Participants in the

CACFP: Final Report, Volume 1, prepared in May of 1997. Specifically,

adjustments were made in the number of National School Lunch Program

State Agencies (SA), the number of sponsoring organizations of family

day care homes, and the annual frequency of sponsoring organization's

recordkeeping requirements. In addition, an adjustment was made to the

projected number of households of tier II children who complete and

submit an application. The use of this data results in the deletion of

23,813 reporting hours and the addition of 12,208 recordkeeping burden

hours from the burden hours used in the interim rule estimate of burden

hours to the Child and Adult Care Food Program.

The final rule also requires that school food authorities provide,

when available and upon request by Child and Adult Care Food Program

sponsoring organizations, elementary school attendance area information

for schools in which 50 percent or more of enrolled children have been

certified eligible for free or reduced price meals. This provision was

not specifically addressed in the interim rule because the Department

assumed that attendance area information would be publicly available to

sponsoring organizations. However, given the importance of attendance

area information in making tier 1 day care home determinations using

school data, and commenter concern regarding the availability of

attendance area information, the final rule requires school food

authorities to provide this information. The final rule does not

require the creation or collection of new data, but rather the

provision, upon request, of attendance area information that already

exists, thereby imposing a minimal burden. The inclusion of this

provision results in the addition of 39,752 reporting burden hours to

the burdens for the National School Lunch Program.

Executive Order 12988

This final rule has been reviewed under Executive Order 12988,

Civil Justice Reform. This rule is intended to have preemptive effect

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

conflict with its provisions or which would otherwise impede its full

implementation. This rule is not intended to have retroactive effect

unless so specified in the Effective Date section of this preamble.

Prior to any judicial challenge to the provisions of this rule or the

application of its provisions, all applicable administrative procedures

must be exhausted. In the CACFP: (1) Institution appeal procedures are

set forth in 7 CFR 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 part 3015.

This rule implements in final form the amendments set forth under

sections 708(e) (1) and (3) of the Personal Responsibility and Work

Opportunity Reconciliation Act of 1996 (PRWORA), Pub. L. 104-193, which

was enacted on August 22, 1996. In accordance with section 708(k)(3)(A)

of PRWORA, the Department published an interim rule, instead of a

proposed rule, on January 7, 1997 (62 FR 889). Due to errors contained

in the preamble and regulatory text of the rule published on January 7,

1997, the Department published a correction document on February 6,

1997 (62 FR 5519), and extended the original 90-day comment period to

120 days, through May 7, 1997.

Among other things, this final rule amends Sec. 210.9(b)(20) of the

National School Lunch Program regulations to require that school food

authorities provide, when available and upon request by CACFP

sponsoring organizations, elementary school attendance area information

for schools in which 50 percent or more of enrolled children have been

determined eligible for free or reduced price meals. This provision was

not specifically addressed in the interim rule published on January 7,

1997 (62 FR 889) because the Department assumed that such information

would be publicly available to sponsoring organizations. However, a

number of sponsoring organizations have expressed concern about their

ability to obtain this information. Attendance area information is

essential to making tier I day care home determinations using school

data, an option specifically required by the PRWORA amendments. In

addition, the requirement to provide attendance area information only

pertains to those school food authorities in which such information

already exists, thereby imposing a minimal burden. For these reasons,

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 promulgating this provision in the

final rule without prior public notice and comment.

In addition, this final rule amends Sec. 226.15(f) to include

criteria on the appropriate use of school and census data for making

tier I day care home determinations. These criteria place primary

emphasis on the use of elementary school free and reduced price

enrollment data. The preamble to the interim rule expressed the

Department's strong preference for school data over census data, stated

several reasons for this preference, and indicated that the Department

would subsequently issue guidance for use by sponsoring organizations

in making tier I day care home determinations. The Department issued

this guidance on March 10, 1997. Because the criteria were not set

forth in the interim rule, there was no opportunity for formal public

comment. However, sponsoring organizations have made their initial tier

I determinations in accordance with the criteria set forth in the March

10 guidance, and in this final rule. 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 promulgating this provision in the final rule

without prior public notice and comment.

The final rule is being published based on comments received on the

interim rule, in accordance with the requirement contained in section

708(k)(3)(B) of PRWORA. The Department anticipates that it may later

propose additional changes to address issues that arise after

implementation of the two-tiered reimbursement structure on July 1,

1997.

Background

This rule implements in final form the amendments set forth under

sections 708(e) (1) and (3) of the Personal Responsibility and Work

Opportunity Reconciliation Act of 1996 (PRWORA), Public Law 104-193,

which was enacted on August 22, 1996. In accordance with section

708(k)(3)(A) of PRWORA, the Department published an interim rule,

instead of a proposed rule, on January 7, 1997 (62 FR 889).

In addition to requiring that an interim rule be published by

January 1, 1997, section 708(k)(3)(B) of PRWORA also required the

Department to publish a final rule on these provisions by July 1, 1997.

These extremely short timeframes limited the Department's ability to

benefit from public input in the development of the interim or final

rule. Thus, although the Department allowed 120 days for public comment

on the interim rule, the requirement to

[[Page 9089]]

publish a final rule by the date for implementation of the two-tiered

system (July 1, 1997) meant that the final rule could not reflect any

knowledge gained by the Department, State agencies, or sponsoring

organizations in operating the two-tiered system.

The Department recognizes the importance of State and local-level

input in developing effective program regulations that carry out the

intent of PRWORA while minimizing administrative burden. Therefore, the

Department is interested in receiving comments on implementation and

operation during the first year of the two-tiered system. Based on the

comments received, the Department may develop, at a later date, a

proposed rule to implement any needed changes within the statutory

framework.

In an effort to improve the targeting of benefits to low-income

children, PRWORA establishes a two-tiered system for reimbursing meals

served in family day care homes participating in the Child and Adult

Care Food Program (CACFP), effective July 1, 1997. Under this system,

tier I day care 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 day care homes are reimbursed at

essentially the same rates as prior to the two-tiered system, as

adjusted for inflation, regardless of the income levels of enrolled

children's households. Tier II day care homes are those which do not

meet the location or provider income criteria for a tier I day care

home. All meals served in tier II day care homes are reimbursed at

lower rates, unless the provider elects to have the sponsoring

organization identify children from income-eligible households. In that

case, meals served to identified income-eligible children are

reimbursed at the tier I rates.

The Department received 713 comments on the interim rule published

in the Federal Register on January 7, 1997. Of these, 21 were from

State agencies administering the CACFP or National School Lunch Program

(NSLP); 140 from sponsoring organizations of day care homes; 352 from

day care home providers; 5 from advocacy groups; 192 from parents and

other members of the general public; and 3 from others, including one

from a State Representative, one from a public school system, and one

from a school administrator's association.

In general, commenters were opposed to the changes made to the

CACFP by Public Law 104-193. Of the commenters, 583 specifically

expressed concern about the negative impact they anticipate that these

provisions will have on child care and, therefore, on children,

including: (1) Potentially significant dropout of providers from the

CACFP, which could result in an increase in the number of

``underground,'' unlicensed day care homes; (2) a possible increase in

day care rates if tier II providers choose to ``pass along'' the effect

of lost meal reimbursement to parents in the form of higher day care

rates; (3) a potential decrease in the quality of meals served to

children in CACFP day care homes, due to the lower reimbursement rates;

and (4) an overall decrease in available quality child care at a time

when new work requirements resulting from welfare reform necessitate an

increased supply. Instead of the two-tiered reimbursement system set

forth in PRWORA, 103 commenters suggested that budgetary savings could

be achieved by maintaining one set of rates, but by lowering them. Only

three commenters expressed support for the two-tiered reimbursement

system.

Several of the concerns expressed by commenters were addressed in

the economic impact analysis, which was published as an appendix to the

interim rule (62 FR 904). Overall, it is expected that non-low-income

providers and parents will bear most of the costs resulting from the

two-tiered reimbursement system--as was the intent of PRWORA. First, as

a result of the two-tiered reimbursement system, the annual rate of

growth of the number of day care home providers participating in the

CACFP is expected to decline. This anticipated decline in the annual

rate of growth is attributed to a combination of decreased incentive

for non-low-income providers to join the program, due to the lower

reimbursement rates, and an increase in the number of these providers

leaving the program. Similarly, the decreased CACFP reimbursements may

cause some currently regulated and sponsored homes not only to drop out

of the CACFP, but also to consider moving out of licensed care

altogether.

As noted by some of the commenters, providers who remain in the

program and operate tier II day care homes will most likely respond to

their decrease in revenues from the CACFP through some combination of

raising child care fees, absorbing the loss, and reducing their

operating costs. Though many factors influence a provider's response,

including the competitiveness of the child care market in which the

provider operates, affected providers (tier II) will probably choose to

pass some of their revenue loss on to their clientele, primarily non-

low-income parents, through higher child care fees. To cut operating

costs, tier II providers may also change their management practices

relating to food service and developmental opportunities and materials.

Providers may decide 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. Among other

comparisons, the CACFP study mandated by section 708(l)(1)(E) of PRWORA

will compare the nutritional quality of meals served in post-tiering

tier II day care homes with the quality of meals served in those day

care homes before tiering.

The comments received on the provisions of the interim rule, and

the Department's response to them, are discussed in greater detail in

the preamble that follows. Although the Department carefully considered

all of the comments received, many of the changes recommended by

commenters are not feasible under the language of PRWORA. Any

provisions that are not discussed in the preamble to this final rule

were not addressed by commenters, and are retained as set forth in the

interim rule. However, in several cases, the preamble addresses

provisions on which the Department received no comments, in order to

bring to readers' attention certain significant provisions of PRWORA

and the interim rule.

Tier I Day Care Homes

Definition

The interim rule, in Sec. 226.2, defined a ``tier I day care home''

as:

(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.

The definition promulgated in the interim rule was based on the

definition

[[Page 9090]]

of ``tier I family or group day care home'' contained in section

17(f)(3)(A)(ii)(I) of the National School Lunch Act (NSLA), as amended

by section 708(e)(1) of Public Law 104-193.

No comments were received on the definition of ``tier I day care

home'' as added by Sec. 226.2 of the interim rule. Therefore, this

final rule retains the definition of ``tier I day care home'' as set

forth in the interim rule.

Provision of Area Data

Unless a provider demonstrates that household income meets the free

or reduced price eligibility standards, a sponsoring organization must

use elementary school or census data--referred to collectively in this

preamble as ``area data''--to qualify the day care home as a tier I day

care home. Section 708(e)(3) of PRWORA amended section 17(f)(3) of the

NSLA to set forth requirements pertaining to the provision of area data

for use in making tier I day care home determinations.

School Data

Based on the provisions of PRWORA, the interim rule added

Sec. 210.9(b)(20) to the NSLP regulations to require that school food

authorities provide (by March 1, 1997, and by December 31 each year

thereafter) the State agency that administers the NSLP with a list of

all elementary schools under their 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 October. Similarly,

Sec. 210.19(f) as added by the interim rule requires each State agency

that administers the NSLP to provide (by March 15, 1997, and by

February 1 each year thereafter) the State agency that administers the

CACFP with a list of all elementary schools in the State in which 50

percent or more of enrolled children have been determined eligible for

free or reduced price meals. Section 210.19(f) also requires the State

agency that administers the NSLP to provide the list to any sponsoring

organization that requests it. In addition, Sec. 226.6(f) as amended by

the interim rule requires the State agency that administers the CACFP

to provide its sponsoring organizations with this list of elementary

schools by April 1, 1997, and by February 15 each year thereafter.

The Department received 64 comments concerning the provision of

elementary school free and reduced price enrollment data for the CACFP.

Of these, five commenters objected to the requirements because they

believe that they place an unnecessary burden on school food

authorities and/or NSLP State agencies. For example, two commenters

pointed out that this requirement is unrelated to the administration of

the NSLP. The Department agrees that provision of these data is not

directly related to administration of the NSLP, and is cognizant of the

modest administrative burden it may place on State and local entities.

Nevertheless, section 17(f)(3)(E)(ii) of the NSLA, as amended by

section 708(e)(3) of PRWORA, explicitly requires that NSLP State

agencies annually provide this data in order to facilitate tier I day

care home classifications in the CACFP. Despite commenters who

indicated that this is a new reporting burden, Sec. 210.8(c) of the

NSLP regulations previously required that school food authorities

report the total number of enrolled free, reduced price, and paid

children to the NSLP State agency on the October claim for

reimbursement. In order to submit this data, school food authorities

must already consolidate the enrollment data submitted by individual

schools. In addition, while there was no prior Federal requirement that

school food authorities report the names of participating schools to

the State agency, many States already collected this information.

Finally, although PRWORA required NSLP State agencies to provide the

list directly to sponsoring organizations upon request, the interim

rule requires that NSLP State agencies also provide it to CACFP State

agencies, which will provide it to all sponsoring organizations. We

expect that this requirement will reduce the number of requests

received by NSLP State agencies from sponsoring organizations, thereby

further minimizing the burden associated with this provision. Finally,

the burden is also minimized due to the fact that more than three-

fourths of States operate the CACFP out of the same State agency as the

NSLP.

In addition, two commenters recommended that the annual February 15

date by which the CACFP State agency must provide the list of schools

to sponsoring organizations be changed to April 1 or April 15, in order

to provide the CACFP State agency additional time to assemble the data

and distribute it to sponsoring organizations. While the interim rule

requires that the CACFP State agency provide the school data to

sponsoring organizations by February 15, which is only two weeks after

its receipt from the NSLP State agency, the form in which the data is

received from the NSLP State agency should not require any work by the

CACFP State agency beyond duplicating and mailing the data to

sponsoring organizations. In the Department's opinion, two weeks is

sufficient time to perform this task. Furthermore, it is critical that

the data be provided in as timely a manner as possible after receipt by

the CACFP State agency, so that sponsoring organizations are able to

make their tiering determinations with current information.

Therefore, this final rule makes no change to Secs. 210.9(b)(20)

and 210.19(f) regarding the requirement that school food authorities

and NSLP State agencies, respectively, provide free and reduced price

enrollment data for use by CACFP sponsoring organizations. In addition,

no change is being made to the February 15 annual date by which the

CACFP State agency must provide sponsoring organizations with the

school data, contained in Sec. 226.6(f)(9).

Sixteen commenters on the interim rule indicated that the free and

reduced price enrollment data used in the CACFP should be based on a

month other than October. These commenters expressed concerns that

requiring October data will impose a new reporting burden on school

food authorities and NSLP State agencies, and that data from another

month would be more reflective of schools' free and reduced price

enrollment. With regard to whether data from another month would more

accurately reflect the free and reduced price enrollment of schools,

five commenters recommended specific months that should be used instead

of October, including January, March, May and June. Four commenters

recommended that each NSLP State agency decide on the appropriate month

for provision of data. In addition, 12 commenters questioned whether

sponsoring organizations could themselves obtain updates of free and

reduced price enrollment data from school food authorities or

individual schools more frequently than annually, and one commenter

recommended that NSLP State agencies provide updated data to sponsoring

organizations on a monthly basis. Finally, 185 commenters expressed

concern about the accuracy of the school data provided.

The Department continues to believe that October data accurately

reflects the free and reduced price enrollment of schools, and also

imposes the least burden on school food authorities. Nevertheless, in

response to commenter concerns, this final rule permits NSLP State

agencies to establish the list of schools on free and reduced price

data on data from a month other than October.

At a minimum, PRWORA and the interim rule require that free and

reduced price enrollment data be

[[Page 9091]]

provided to sponsoring organizations on an annual basis. In the

interests of minimizing any burden associated with provision of this

data, and the potential for administrative confusion which could result

from monthly fluctuations in the data, this final rule does not require

that data be provided more frequently than annually, and permits State

agencies to update the list of schools more frequently only under

unusual circumstances.

The circumstances under which State agencies may update the list

help address commenters' concerns regarding the accuracy of the data

provided. If, for example, free and reduced price data for a newly

opened school becomes available after the list has already been

provided, it would be logical for the NSLP State agency to provide to

the CACFP State agency and requesting sponsoring organizations the new

data for this particular school, and any other schools affected by its

opening. Similarly if, after the list of schools is provided, it is

discovered that data provided by a particular school food authority is

several years old, the NSLP State agency should provide new data on

those schools. However, this means that routine monthly fluctuations in

a school's free and reduced price data may not be used to qualify or

disqualify a home from tier I status after its initial determination of

eligibility has been made. Although PRWORA and the interim rule

explicitly allow a State agency to change a tier I determination if

information becomes available indicating that a home is no longer in a

qualified area, this should be done only when there has been a

substantial, sustained shift in an area's socioeconomic makeup, not

when there are minor fluctuations in a school's free and reduced price

enrollment from one month to the next. In order to ensure that all

sponsoring organizations (whose service areas often overlap) have equal

access to any updated information, and to help ensure the integrity of

the data provided, sponsoring organizations will not be permitted to

use free and reduced price information obtained directly from local

school food authorities without the express prior consent of the State

agency administering the CACFP. Sponsoring organizations that become

aware of particular circumstances that they believe would warrant the

issuance of new data should notify the CACFP State agency, which can

communicate with the NSLP State agency as necessary.

Accordingly, this final rule amends Secs. 210.9(b)(20) and

210.19(f) to permit NSLP State agencies to base the list of free and

reduced price schools for the CACFP on data as of the last operating

day of the preceding October, or another month specified by the NSLP

State agency. In order to accommodate NSLP State agencies which select

a month other than October, Sec. 210.9(b)(20) is also amended by adding

language to clarify that school food authorities must annually provide

the list of schools to the NSLP State agency by December 31, or, if

data is based on a month other than October, within 60 calendar days

following the end of the selected month. Similarly, Sec. 210.19(f) is

amended by adding language that NSLP State agencies must annually

provide the list of schools to the CACFP State agency by February 1, or

within 90 calendar days following the end of the month designated by

the NSLP State agency if data is based on a month other than October.

In addition, Sec. 226.6(f)(9) is amended to clarify that the CACFP

State agency must annually provide the list of schools to sponsoring

organizations by February 15, or within 15 calendar days of receipt of

the list from the NSLP State agency if data is based on a month other

than October. Section 210.19(f) is further amended in this final rule

to permit NSLP State agencies to provide updated free and reduced price

enrollment data on individual schools, but only when unusual

circumstances render the initial data obsolete.

In addition, the Department received 272 comments which expressed

concern about the availability or accessibility of elementary school

attendance area information, which is necessary for sponsoring

organizations to obtain in order to be able to use the free and reduced

price enrollment data.

First, many commenters suggested methods of classifying tier I day

care homes which would greatly reduce, or even eliminate the need for

attendance area information. For example, 38 commenters suggested that

State agencies be given the authority to qualify larger geographic

areas, such as cities or school districts, as tier I areas, thus

eliminating the need for individual elementary school attendance area

information for those areas. Similarly, six commenters suggested using

data from the elementary school geographically closest to the provider,

instead of data from the school serving the provider. Finally, 15

commenters recommended that sponsoring organizations be permitted to

accept a provider's self-declaration of the elementary school serving

the day care home as sufficient proof of the home's location in the

school attendance area. Several of these commenters also recommended

that sponsors be required to verify provider self-declarations through

obtaining elementary school attendance information for a sample of

their providers.

Although the Department appreciates commenters' suggestions and

recognizes that they potentially would reduce the burden of obtaining

attendance area information, none of the suggested alternatives is

permissible under the provisions of PRWORA. Due to the definition

contained in section 17(f)(3)(A)(ii)(I) of the NSLA, as added by

section 708(e)(1) of PRWORA, which describes a ``tier I day care home''

in part as a day care home ``served by a school enrolling elementary

students,'' it would be contrary to the law to permit larger geographic

areas to qualify as tier I areas, or to use data from the elementary

school geographically closest to a provider's home. In addition, as

discussed in a memorandum issued on April 25, 1997, a sponsor may not

rely on a provider's self-declaration of elementary school attendance

area for making a tier I determination. To comply with the law and the

interim rule, a sponsor must independently substantiate and document

any attendance area information obtained from its providers.

(Additional discussion of provider self-declaration of elementary

school attendance areas may be found later in this preamble under

``Documentation Requirements.'')

In addition, 62 of the commenters indicated that obtaining

elementary school attendance area information for schools with a free

and reduced price enrollment of 50 percent or more is burdensome and

difficult for sponsoring organizations. Another of the concerns,

expressed by nine commenters, was that school districts will not

release attendance area information to sponsoring organizations due to

concerns about liability for erroneous tier I classifications made

using school data. In addition, 11 commenters indicated that there is

no attendance area information available for some school districts, and

50 commenters indicated a concern that sponsoring organizations will

have difficulty keeping up with school boundaries because they change

frequently. Finally, 42 commenters suggested that NSLP State agencies

be required to provide attendance area information, either directly to

sponsoring organizations or through the CACFP State agency, along with

the list of elementary schools in which 50 percent or more of enrolled

children are determined eligible for free or reduced price meals. Many

of these commenters indicated that NSLP State agency provision of

attendance area information would eliminate

[[Page 9092]]

duplication of effort by sponsoring organizations, and ensure that the

information obtained and used by sponsors is consistent.

When the interim rule was drafted, it was assumed that attendance

area information would be publicly available to sponsoring

organizations. In response to concerns expressed on this issue after

publication of the interim rule, the Department issued a memorandum on

February 10, 1997, in which NSLP State agencies were asked to urge

their local school food authorities to make attendance area information

available to sponsoring organizations upon their request.

Requiring NSLP State agencies to collect attendance area

information from all elementary schools in the State with 50 percent or

more of enrolled children identified as eligible for free or reduced

price meals would, in most cases, place a substantial burden on NSLP

State agencies. In addition, the Department believes it is unnecessary

to impose an additional information collection requirement on NSLP

State agencies when the information that sponsoring organizations need

to make tier I day care home determinations is usually maintained by

the local school district, and not by the NSLP State agency. Although

NSLP State agencies are required by PRWORA and the interim rule to

collect data from school food authorities regarding schools with 50

percent or more free and reduced price enrollees, attendance area

information for individual schools is significantly more complex and

varied.

However, given the significant commenter concern regarding the

availability of attendance area information, this final rule requires

school food authorities to provide elementary school attendance area

information, when it is available for the schools under their

jurisdiction, upon request by sponsoring organizations. We are

requiring that the information be provided ``when it is available'' in

recognition of the fact that not all school districts have distinct

attendance areas attached to each of their elementary schools. The

Department wishes to emphasize that it does not intend for school food

authorities to create new information, but rather to provide sponsoring

organizations only with attendance area information that already

exists.

With regard to commenter concerns about a school district's

liability if erroneous tier I day care home classifications are made

based on school data, school districts should be assured, as previously

indicated in our February 10, 1997, memorandum, that they will not be

held financially or otherwise liable by FCS for erroneous tier I

classifications, whether due to a sponsoring organization's misuse of

attendance area information, or due to an inadvertent error by the

school district when providing the information. Conversely, sponsoring

organizations will not be liable for erroneous information obtained

from school food authorities as long as the sponsoring organization

takes action to correct misclassifications made with erroneous school

data as soon as it learns of the errors.

As indicated above, many commenters expressed concern that

sponsoring organizations will have difficulty maintaining up-to-date

boundary information because boundaries for some schools change

frequently. The Department recognizes that changes to a school's

boundaries made during a school year may not be immediately known by

the sponsor. However, the Department expects sponsoring organizations

to make reasonable efforts to use current boundary information when

making tier I determinations with school data. Therefore, this final

rule requires that sponsoring organizations obtain current attendance

area information at a minimum on an annual basis, for use in

classifying new day care homes that enter the program. However, as

discussed above with regard to changes in a school's percentage of free

and reduced price enrollment from year to year, the Department does not

expect sponsoring organizations to routinely reclassify tier I day care

homes before the three-year period has expired based on shifts in an

elementary school's boundaries.

Accordingly, this final rule amends Sec. 210.9(b)(20) by adding the

requirement that school food authorities provide elementary school

attendance area information, upon request by sponsoring organizations,

when it is available for the schools under their jurisdiction. In

addition, Sec. 226.15(f) is amended by adding the requirement that when

making tier I day care home determinations based on school data,

sponsoring organizations shall use attendance area information that has

been obtained, or verified with appropriate school officials to be

current, within the last school year.

Census Data

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

NSLA to require that the Secretary provide each CACFP State agency with

appropriate census data showing the areas of the State in which at

least 50 percent of children are from households meeting the income

standards for free or reduced price meals. In addition,

Sec. 226.6(f)(9) as amended by the interim rule requires CACFP State

agencies to make the census data available to sponsoring organizations.

A special tabulation of data showing, for each census block group

in the country, the percentage of children age 0-18 who are from

households meeting the income standards for free or reduced price meals

has been used for determining area eligibility for the Summer Food

Service Program (SFSP) since 1994. By January 1997, the Department had

provided this special tabulation to all CACFP State agencies that do

not also administer the SFSP. In addition, since the CACFP defines a

child as age 12 and under, a special tabulation of census data for

children ages 0-12 was provided to all CACFP State agencies in March

1997. Because the 0-12 tabulation was not initially made available to

State agencies, they were instructed that they could permit sponsoring

organizations to use either of the special tabulations for determining

tier I day care home eligibility for the purposes of implementation.

However, after September 30, 1997, all sponsoring organizations must

use the special tabulation of census data for children ages 0-12 since

that data corresponds with the definition of ``child'' in the CACFP.

No comments were received concerning the provision of census data.

Therefore, this final rule retains the requirement contained in

Sec. 226.6(f) as added by the interim rule that State agencies provide

sponsoring organizations census data.

Making Tier I Day Care Home Determinations

By requiring that school and census data ultimately be provided to

sponsoring organizations, PRWORA places the responsibility for

determining which day care homes are eligible as tier I day care homes

on sponsoring organizations. This is accomplished by applying the

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

determining and verifying that the households of day care home

providers are eligible for free or reduced price meals.

Appropriate Use of Area Data

With regard to using area data for making tier I day care home

determinations, the preamble to the interim rule expressed the

Department's strong preference that sponsoring organizations use

elementary school free and reduced price eligibility data over

[[Page 9093]]

census data in making tier I day care home determinations. The preamble

also stated several reasons for this preference, and indicated that the

Department would issue subsequent guidance for use by sponsoring

organizations in making tier I day care home determinations.

The Department issued guidance on the use of elementary school and

census data for making tier I day care home determinations in the form

of a March 10, 1997, memorandum, well in advance of the April 1, 1997,

regulatory deadline at Sec. 226.6(f)(2) for sponsors' submission of

management plan amendments which detailed their system for making tier

I determinations. That guidance indicated that, because it is typically

more recent and more representative of a given area's current

socioeconomic status, school data must be consulted first when using

area data to try to qualify a day care home as a tier I day care home.

The only exceptions to this rule are in cases in which busing, or other

``district-wide'' bases of attendance, such as magnet or charter

schools, result in school data not being representative of an

attendance area, or when attendance areas are not used by the school

district. In these cases, census data should generally be consulted by

sponsoring organizations instead of school data.

In addition, the guidance indicated that if, after reasonable

efforts are made, a sponsoring organization is unable to obtain local

elementary school attendance area information, as discussed above, the

sponsor may use census data to determine a day care home's eligibility

as a tier I day care home. The Department did not attempt to define

``reasonable efforts,'' but rather provided discretion to State

agencies to provide additional guidance in this area to sponsoring

organizations.

Finally, the guidance delineated circumstances in which sponsoring

organizations may consult census data after having consulted school

data which fails to support a tier I determination. These circumstances

were: (1) Rural areas with geographically large elementary school

attendance areas; or (2) other areas in which an elementary school's

free and reduced price enrollment is above 40 percent. This approach

enables sponsoring organizations to identify ``pockets of poverty''

with higher concentrations of low-income children which are not evident

when only consulting the list of schools with 50 percent or more of

enrolled children determined eligible for free or reduced price meals.

The March 10 guidance pointed out, however, that NSLP State agencies

were only required by Sec. 210.19(f), as amended by the interim rule,

to provide a list of elementary schools in the State in which at least

50 percent of enrolled children are determined eligible for free or

reduced price meals.

The Department received 166 comments on the appropriate use of

school and census data, all of which indicated that there should be no

restrictions on the use of school or census data for making tier I day

care home determinations. Thirty-one of these commenters indicated

their belief that PRWORA does not indicate a preference for one data

source over another. Forty commenters indicated that the Department's

policy restricting the use of census data to specific circumstances was

contrary to what they believed to be PRWORA's intent to serve the

maximum number of low-income children. Eleven commenters objected to

the Department's position that school data should not generally be used

in cases with significant student busing or other district-wide bases

of attendance, such as magnet schools. Two commenters indicated that

CACFP policy should not be based on comparisons to the SFSP because the

programs are very different.

The Department prefers school data over census data because, in

most cases, school data is more capable of accurately documenting an

area's current socioeconomic status. Thus, placing primary reliance on

school data for making tier I day care home determinations on the basis

of area data is necessary to achieve the targeting goals of PRWORA. In

addition, section 17(f)(3)(E)(ii)(II) of the NSLA, as amended by

section 708(e)(3) of PRWORA, requires that in determining ``whether a

home qualifies as a tier I family or group day care home under

subparagraph (A)(ii)(I),'' State agencies and sponsoring organizations

``shall use the most current available data at the time of the

determination.'' Subparagraph (A)(ii)(I) of section 17(f)(3) of the

NSLA encompasses all of the methods (i.e., elementary school data,

census data, and provider's household income) for making tier I

determinations. In most instances, free and reduced price applications

are collected annually by elementary schools. Therefore, these data are

a far more recent statement of individual and aggregate economic

circumstances than census data, which was collected in 1990.

One hundred twenty-two commenters expressed concern that elementary

school free and reduced price data does not necessarily accurately

reflect an area's economic circumstances. These commenters cited

several reasons, including that many low-income families choose not to

apply for school meal benefits, and therefore, are not included in the

school data. Although it is true that not all eligible households

submit free and reduced price school meal applications on behalf of

their school-age children, studies such as the National Evaluation of

School Nutrition Programs (Abt Associates, 1983) have demonstrated that

low-income households are more likely to apply on behalf of their

elementary-age children than low-income households with older children.

In addition, the special tabulation of census block group data is based

on data submitted by a sample drawn from one out of every six American

households. As such, it provides an excellent basis for generalizing

about poverty at the national, State, and county levels. However, the

average census block group includes approximately 400 housing units

containing about 900 persons, and the one in six income sample is drawn

randomly from all census block groups, not equally from within each

block group. As a result, there is no way of predicting how many

households within a particular block group completed and returned the

household income questionnaire to the Bureau of the Census. The average

number of households in a block group with school-age children which

returned the questionnaire is unlikely to be greater than the average

number of households with children enrolled in the local elementary

school. Thus, census data for a particular block group is typically

less accurate than school data.

Despite the shortcomings of census data, the Department believes

that its inclusion in the law as a potential source for documenting a

day care home's eligibility as a tier I day care home was purposeful

and logical. There are, as noted above, certain circumstances in which

school data does not more accurately portray the surrounding area's

socioeconomic status than census data. In addition, if an area's

socioeconomic makeup has not changed substantially since the census

data were collected in 1990, there may also be other circumstances,

such as rural and urban ``pockets of poverty,'' in which census block

group data can appropriately identify an eligible portion of an

otherwise ineligible elementary school attendance area.

With regard to commenter objections to the Department's position

that school data should not generally be used in cases with significant

student busing or

[[Page 9094]]

other district-wide bases of attendance, the Department would like to

reiterate that it promulgated this policy because in cases with

district-wide bases of attendance, the school data does not necessarily

reflect the household income levels of a particular geographic area.

However, the March 10 guidance was not intended to require that,

whenever busing occurred, census data would have to be used. Pupil

busing might be used for a small portion of the student population and

might not affect the elementary school data's ability to accurately

portray an area's household income levels. Rather, the guidance was

intended to underscore the Department's strong belief that Congress

intended sponsoring organizations to utilize area data which best

portrays the current household income levels of the area in which a

particular day care home is located. Each community's situation may be

potentially unique, and the State agency is in the best position to

determine when busing or other circumstances have diminished the school

data's ability to accurately portray an area's current household income

levels. In addition, although the two programs are different in many

operational respects, the Department believes that basing the CACFP

policy on that for the SFSP is warranted in this situation due to the

programs' similarities in establishing eligibility based on geographic

areas.

Therefore, despite the concerns expressed by commenters, the

Department continues to believe that school data is preferable to

census data in the majority of cases, and that the policy set forth in

the March 10 memorandum is consistent with the intent of Pub. L. 104-

193 to utilize the best available data on aggregate socioeconomic

conditions in order to better target CACFP benefits to low-income

areas. Therefore, this final rule incorporates the criteria on the

appropriate use of school and census data for making tier I day care

home determinations set forth in the March 10, 1997, memorandum.

When making tiering determinations based on area data, sponsoring

organizations are expected to make reasonable efforts to ensure that

day care homes located within the geographic limits of an eligible

school attendance area or census block group are classified as tier I

homes only when appropriate. That is, if a sponsoring organization

believes that a segment of an otherwise eligible elementary school

attendance area is non-needy, the sponsoring organization must take

additional steps to ensure that homes within the attendance area have

been appropriately classified. For example, although sponsors should

consult school data first in most circumstances, it is possible that

some socioeconomically diverse school attendance areas which meet the

50 percent threshold might include substantial segments which are well

above the criteria for free or reduced price meals. In such cases, in

accordance with the law's intent to target higher meal reimbursements

to low-income children and providers, it would be necessary for the

sponsor to consult census data as well as to determine which part of

the elementary school attendance area should be classified as tier I.

If a review of the census block group data confirms the sponsoring

organization's belief that a segment of an otherwise eligible school

attendance area is, in fact, above the criteria for free or reduced

price meals, the sponsoring organization must reclassify the homes in

that area as tier II day care homes, unless the individual providers

can document tier I eligibility on the basis of their household income.

Finally, in order to comply with the March 10 memorandum, 12

commenters requested that NSLP State agencies be required to provide

free and reduced price enrollment data on all elementary schools in the

State, or at least for all schools with 40 percent or more free or

reduced price enrollment, instead of the currently required 50 percent.

The Department will not impose a requirement on NSLP State agencies

beyond the explicit requirement in section 708(e)(3) of PRWORA that

they annually provide a list of elementary schools with 50 percent or

more free or reduced price enrollment. However, as indicated in

guidance issued by the Department on May 16, 1997, the CACFP State

agency can request that the NSLP State agency provide data for schools

with between 40 and 49 percent free and reduced price enrollment, or

even data for all elementary schools in the State. In fact, we are

aware that several NSLP State agencies have already provided the

additional data. However, sponsoring organizations which do not have

access to data for schools below 50 percent may consult census data to

attempt to qualify day care homes located in identifiable ``pockets of

poverty'' as tier I day care homes. There may also be some limited

circumstances in which using census data is appropriate to identify

``pockets of poverty'' even when elementary school free and reduced

price enrollment is below 40 percent. In both of these circumstances,

however, sponsors must first receive State agency approval to ensure

that determinations are made using the data, whether school or census,

that is most reflective of an area's current household income levels.

Accordingly, this final rule amends Sec. 226.15(f) to include the

above-described criteria on the appropriate use of school and census

data for making tier I day care home determinations.

Verification of Providers' Household Income

The definition of ``tier I day care home'' contained in section

17(f)(3)(A)(ii)(I) of the NSLA, as amended by section 708(e)(1) of

Public Law 104-193, and as added to Sec. 226.2 by the interim rule,

requires that a day care home that qualifies as a tier I day care home

on the basis of the provider's household income must have this income

verified by the sponsoring organization. Therefore, the interim rule

added to Sec. 226.23(h)(6) the requirement that sponsoring

organizations conduct verification of the provider's household income,

for all day care homes that qualify as tier I day care homes on this

basis, prior to approving the home as a tier I day care home. This

verification must be performed in accordance with the verification

performed for ``pricing programs'' in Sec. 226.23(h)(2)(i), and

consists of verifying the income information provided on the

application by collecting documentation from the household, such as pay

stubs or income tax statements.

The Department received 115 comments on the verification

requirements for tier I day care homes. Of these, 71 commenters

specifically objected to the verification requirements for tier I day

care homes because they believe that the requirements are too

burdensome. The Department received 44 comments which suggested that

verification be conducted on a sample of applications, as currently

required in the NSLP, instead of on all applications. Several of these

commenters recommended that the sample consist of 3 percent of all

applications; one commenter suggested a 50 percent sample. Three

commenters supported more stringent verification than that required in

the interim rule; for example, one commenter wanted pricing

verification conducted on the applications of households of children

enrolled in tier II day care homes. Finally, 17 commenters questioned

how to perform the verification, or requested additional guidance,

because sponsoring organizations of day care homes are unfamiliar with

this type of verification. Seven commenters made recommendations

concerning verification procedures.

[[Page 9095]]

The Department recognizes that verification of all applications for

providers whose homes qualify as tier I homes on the basis of their

household income places an additional administrative burden on

sponsoring organizations. However, given the significant financial

benefit associated with classification of a day care home as a tier I

day care home, in the form of tier I reimbursements for meals served to

all children enrolled in the home, Congress determined that it was

necessary to impose these requirements to ensure that day care homes

that are classified as tier I homes on the basis of household income

are truly low-income, despite their location in an area which would not

qualify them for tier I status. Thus, the explicit language of section

17(f)(3)(A)(ii)(I), as added by section 708(e)(1) of PRWORA, which

defines a ``tier I day care home'' as one which is operated by a

``provider whose household meets the income eligibility guidelines . .

. and whose income is verified by the sponsoring organization of the

home,'' requires that all day care homes qualifying as tier I day care

homes on the basis of the provider's household income have income

verified prior to participation as a tier I home. Conducting

verification on only a sample of the applications, as recommended by

commenters, would not meet the requirements of PRWORA. In addition,

income verification is an important control for ensuring accurate

tiering determinations.

In response to concerns expressed by sponsoring organizations and

State agencies about how to perform the required verification for

providers whose day care homes qualify as tier I homes on the basis of

household income, the Department issued verification guidance for day

care homes on May 14, 1997. This guidance was based on the verification

guidance issued for the School Nutrition Programs, which is also used

by CACFP day care centers.

Therefore, this final rule makes no changes to the requirements for

verification of the income information for providers qualifying as tier

I day care homes on the basis of their household income contained in

the definition of ``tier I day care home,'' and in Sec. 226.23(h)(6) as

added by the interim rule.

Misclassification of Tier I Day Care Homes

Based on the fact that there is a significant financial benefit

associated with the classification of a day care home as a tier I day

care home, Sec. 226.14(a) as amended by the interim rule requires State

agencies to assess overclaims against sponsoring organizations which

misclassify day care homes as tier I day care homes, unless the

misclassification is determined to be inadvertent under guidance issued

by FCS.

The Department received 66 comments on assessing overclaims for

misclassification of day care homes. Of these, 16 commenters requested

that the first six months or one year of implementation be considered a

``grace period'' during which overclaims for misclassification are not

assessed against sponsoring organizations except in cases of fraud.

Twenty-four commenters suggested that the amount under which an

overclaim can be ``disregarded'' in the CACFP, which is currently $100,

be increased. Several of these commenters recommended that the

disregard amount be based on a percentage of the sponsor's

administrative budget. In addition, 12 commenters requested

clarification or expressed concern that sponsoring organizations should

not be assessed overclaims for reclassifications made by the State

agency, in accordance with Sec. 226.6(f)(9) as amended by the interim

rule, based on information to which the sponsor could not reasonably

have had access prior to the reclassification by the State agency.

Finally, nine commenters requested guidance on how the Department will

define ``inadvertent'' errors.

In accordance with the preamble to the interim rule, the Department

issued guidance on assessing overclaims for improper tier I day care

home classifications on August 6, 1997.

With regard to commenters' concerns that overclaims not be assessed

for reclassifications made by the State agency based on information to

which the sponsor could not reasonably have had access prior to the

reclassification by the State agency, the Department wishes to stress

that assessing an overclaim in such a situation would not be in

accordance with the regulation or the August 6, 1997, guidance. In

these situations, the sponsoring organization would be directed by the

State agency to correct a home's determination, but an overclaim for

the previous classification would likely not be appropriate.

In addition, this rule does not authorize a ``grace period'' during

which State agencies would not have to assess overclaims against

sponsors except in cases of fraud. This regulation and the guidance

provided in support of this regulation do not require the establishment

of a claim when the misclassification is inadvertent. The Department

does not intend for State agencies to assess overclaims for every

tiering misclassification made by sponsors. As the guidance emphasizes,

State agencies need not assess overclaims for occasional or inadvertent

errors, but rather for widespread or recurring misclassifications, or a

systemic problem that may indicate improper management by the sponsor.

Finally, any change to the disregard amount must first be considered in

a proposed rule. Thus, the Department cannot implement commenters'

recommendations that the current disregard amount in the regulations at

Sec. 226.8(e) be changed in this final rule, but will monitor the

impact of the two-tiered reimbursement structure on administrative

payments and, if warranted, may include a change in a future proposed

rulemaking.

Therefore, this final rule makes no changes to the language in

Sec. 226.14(a) as amended by the interim rule.

Length of Determinations

Based on section 17(f)(3)(E)(iii) of the NSLA, as amended by

section 708(e)(3) of PRWORA, Sec. 226.6(f)(9) as amended by the interim

rule requires that determinations of a day care home's eligibility as a

tier I day care home be valid for three years if based on school data,

or until more recent data are available if based on census data. In

addition, Sec. 226.6(f)(9) indicates that 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.

The Department received 17 comments on the length of tier I

determinations. Of these, 12 commenters requested that the Department

clarify that State agencies should not routinely require annual

redeterminations of tiering status. In contrast, three commenters

supported annual redeterminations. Finally, several commenters

indicated that sponsors must have access to any information used by

State agencies to reclassify a home's status.

The Department agrees with commenters who indicated that

redeterminations of a day care home's eligibility as a tier I day care

home based on school area data should not routinely occur on an annual

basis. Guidance issued by the Department on March 12, 1997, clarified

that the State agency should not require that redeterminations be made

more frequently than the standards set forth in the law (i.e., three

years if based on school data, and until more recent data are available

if based on census data)

[[Page 9096]]

except in situations in which there is substantial, sustained

socioeconomic change, not minor fluctuations in school data.

Accordingly, in response to commenter concern, this final rule

amends Sec. 226.6(f)(9) and 226.15(f) to clarify that State agencies

should not routinely require annual redeterminations of the tiering

status of day care homes based on updated elementary school data.

Documentation Requirements

As discussed above, PRWORA and the interim rule clearly place the

responsibility for making tiering determinations on the sponsoring

organization. The interim rule amended Sec. 226.15(e)(3) to require

sponsoring organizations to collect and maintain documentation

sufficient to support their tier I determinations.

The Department received 15 comments on the documentation

requirements contained in the interim rule. Specifically, these

commenters supported permitting State agencies and/or sponsoring

organizations to accept a provider's self-declaration of the elementary

school serving the day care home as sufficient documentation of the

provider's residence in a particular elementary school attendance area.

In addition to the requirements discussed above, the interim rule

amended Sec. 226.6(f)(2) to require each sponsoring organization to

submit an amendment to its management plan by April 1, 1997, describing

its system for making tier I day care home classifications, subject to

review and approval by the State agency. Further, sponsoring

organizations are ultimately liable for classifications which are not

supported with proper documentation. State agencies must evaluate the

documentation used by sponsoring organizations to classify day care

homes as tier I homes as part of the review required by Sec. 226.6(l).

Finally, Sec. 226.14(a) requires State agencies to assess overclaims

against sponsoring organizations for improper classifications, unless

the misclassification is determined to be inadvertent under guidance

issued by the Department.

As stated in guidance issued by the Department on April 25, 1997, a

sponsoring organization's system of classifying a day care home as a

tier I home on the basis of elementary school data may involve a

sponsoring organization requesting that each provider identify the

elementary school serving the home. However, for the purpose of making

a tier I determination, a sponsoring organization may not rely on a

provider's self-declaration that it is located within a particular

elementary school's attendance area. To comply with PRWORA and the

regulations, a sponsor must independently substantiate and document

attendance area information obtained from its providers with official

source documentation. Most commonly, sponsors would obtain an official

school-boundary identifying map, match provider addresses to the map's

boundaries, and retain the map as documentation. If such maps were

unavailable, the sponsor might instead contact school officials to

verify the attendance area of the schools serving its providers and

document the results of this contact, either with a letter from school

officials to the sponsor, or with a memorandum to the files detailing

the information provided by school officials and the name of the

official(s) consulted.

These documentation requirements are necessary in order to ensure

that tier I classifications are being made in accordance with PRWORA,

and to ensure that sponsoring organizations, and not the individual

providers, are making tiering determinations, as required by PRWORA.

This is especially important given the significant financial benefit to

a provider associated with classifying a day care home as a tier I

home.

Accordingly, in order to further clarify the documentation

requirements for tier I day care home determinations, this final rule

amends Sec. 226.15(e)(3) to indicate that sponsoring organizations must

document tier I determinations based on school data with official

source documentation obtained from the school, as discussed above.

Tier II Day Care Homes

Definition

Section 226.2 as amended by the interim rule defines a ``tier II

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

a tier I day care home. This definition is based on language contained

in section 17(f)(3)(A)(iii) of the NSLA, as amended by Sec. 708(e)(1)

of PRWORA.

No comments were received on the definition of ``tier II day care

home'' as added by Sec. 226.2 of the interim rule. Therefore, this

final rule retains the definition of ``tier II day care home'' as added

by the interim rule.

Election by Providers

In contrast to tier I day care homes, in which all meals served are

reimbursed at the same rates (tier I), meals served in tier II day care

homes may be eligible for two levels of reimbursement--the tier I rates

for meals served to identified income-eligible children, and tier II

rates, which are lower, for meals served to all other children.

Sections 17(f)(3)(A)(iii) (II) and (III) of the NSLA, as amended by

PRWORA, clearly give day care home providers, and not their sponsoring

organizations, the authority to elect whether income-eligible children

are identified by the sponsoring organization. The interim rule amended

sections 226.6(f)(2) and 226.18(b)(11) to require that sponsoring

organizations inform providers of day care homes classified as tier II

day care homes of the options available to them under PRWORA with

regard to whether income-eligible children are identified or not. The

approach that providers select determines if, and how, sponsors are to

establish the eligibility of children enrolled in tier II day care

homes.

After publication of the interim rule, the Department received

several questions concerning the reimbursement approaches available to

tier II day care homes. In response to these questions, the Department

issued a memorandum on June 2, 1997, to clarify these provisions and to

resolve any confusion on this issue created by the interim rule. The

following explanation restates the information contained in the June 2,

1997, memorandum.

Under the first approach set forth in PRWORA and discussed in the

interim rule, a day care home provider may elect to have its sponsoring

organization attempt to identify all income-eligible children enrolled

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

children who are determined by the sponsoring organization to meet the

criteria for free or reduced price meals (i.e., they are from

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

poverty guidelines), the home receives the tier I rates of

reimbursement. Meals served to all other enrolled children are

reimbursed at the tier II rates of reimbursement, which are lower.

If a provider selects this first approach, the sponsoring

organization may establish the eligibility of enrolled children in

several ways. First, a child may be identified as income-eligible based

on the sponsoring organization's receipt of a completed free and

reduced price application which demonstrates that the household's

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

guidelines. (The Department acknowledges that the term

[[Page 9097]]

``income eligibility statement'' more accurately describes the purpose

of such a form in day care homes. However, this rule refers to ``free

and reduced price applications,'' instead of ``income eligibility

statements,'' in order to maintain consistency with the terminology

contained in Sec. 226.23.) In addition, PRWORA also expanded, for tier

II day care homes only, the categorical eligibility options found in

section 9(d)(2) of the NSLA to include other Federal or State supported

child care or other benefit programs with income eligibility limits at

or below 185 percent of poverty. Meals served to a child who is a

member of a household which participates in, or is subsidized under,

such a program would also be eligible for tier I rates of

reimbursement. The categorically eligible programs used to demonstrate

the eligibility of children enrolled in tier II homes include those

programs identified in section 9(d)(2) of the NSLA (i.e., food stamps,

certain state programs for Temporary Assistance for Needy Families, and

the Food Distribution Program on Indian Reservations), as well as any

qualifying Federal programs identified by the Department, or State

programs identified by the State agency. (Section 226.23(e) of the

regulations, which contains the categorically eligible programs

identified in section 9(d)(2) of the NSLA, still contains references to

Aid to Families with Dependent Children (AFDC), which was eliminated

pursuant to PRWORA and replaced by the program for Temporary Assistance

for Needy Families (TANF). The Department will issue a future

rulemaking to incorporate the provisions of PRWORA concerning TANF into

the CACFP regulations.)

To facilitate the use of expanded categorical eligibility in tier

II day care homes, Sec. 226.6(f)(10) as amended by the interim rule

requires that State agencies provide all sponsoring organizations, on

an annual basis, a list of State-funded programs which meet the

criteria for expanded categorical eligibility. In addition, on March

18, 1997, the Department provided to State agencies a list of Federal

programs that meet the criteria. As indicated in the preamble to the

interim rule, we expect that the process of identifying eligible

programs will be ongoing at both the Federal and State levels,

especially at first. This may necessitate that the list of eligible

programs be updated more frequently than annually, as qualifying

programs are identified.

Children from households participating in, or subsidized under, one

of these programs could be identified by the sponsor in two ways.

First, instead of providing income information on the free and reduced

price application furnished by the sponsoring organization, the

household could identify itself as participating in, or subsidized

under, one of the categorically eligible programs listed on the

application. Alternatively, a free and reduced price application would

not be necessary for those children for whom the sponsoring

organization or provider knows, on the basis of documented proof, to be

categorically eligible for tier I reimbursement. This could occur when

a provider receives payment for a child's care in the form of a

subsidized voucher (and the voucher program has been identified by the

Department or State agency as meeting the income criteria for

categorically eligible programs); when the household provides the

sponsor or provider with an official letter issued by the welfare or

other office documenting the household's participation in a qualifying

program, such as the National School Lunch Program; or when the

sponsoring organization has legitimate access, for reasons unrelated to

the CACFP, to eligibility information for another qualifying program.

In these cases, a copy of the child's voucher, or other documentation

by the sponsor of the child's participation in the other qualifying

program, would be an acceptable alternative to completion of the free

and reduced price application. Thus, when a provider elects the first

option, the eligibility of each enrolled child may be established by

submission of income information on a free and reduced price

application, categorical eligibility information on a free and reduced

price application, or with a copy of a voucher or other documentation

available to the provider or sponsor.

When a household completes a free and reduced price application

identifying itself as participating in, or subsidized under, one of the

categorically eligible programs, Sec. 226.23(e)(1)(iv) and the

definition of ``Documentation'' in Sec. 226.2 as amended by the interim

rule require that such households provide the name of the enrolled

child, the name of the qualifying program, and the household's case

number for the program, along with the signature of an adult member of

the household. Several commenters asked for clarification of the

documentation requirements when the categorically eligible program in

which the household participates does not issue case numbers to

participants. Since not all programs issue case numbers, sponsors may

accept a household's identification on the free and reduced price

application of its participation in an approved Federal or State

identified categorically eligible program as sufficient documentation

for categorically eligible programs that do not utilize case numbers.

Though they are not required to do so for free and reduced price

applications collected in tier II day care homes, sponsors may verify

households' participation in these programs through contact with

officials of the categorically eligible program.

The only partial exception to this rule involves the Head Start

Program. Because of the restrictions on Head Start categorical

eligibility contained in Sec. 9(b)(6)(A)(iii) of the NSLA, the

sponsoring organization may not simply accept the household's self-

identification of a child as a Head Start participant. Specifically,

the NSLA limits Head Start categorical eligibility to Federally funded,

income-eligible participants. Because parents of Head Start

participants likely will not know whether their children are in

Federally funded slots, the sponsoring organization must obtain

documentation from the Head Start grantee which certifies that the

child is: (1) Enrolled in a Federally funded Head Start slot; and (2)

is from a household which meets Head Start's low-income criteria. The

Department will issue a rulemaking in the near future to codify this

provision of the law. However, sponsoring organizations and State

agencies must comply with this provision in the meantime because it is

explicitly contained in the law.

The second approach set forth in PRWORA recognizes that some day

care providers may not want any of the households of the children in

their care to receive free and reduced price applications, a fact

pointed out by many commenters on the interim rule. Under this

approach, the provider may elect to have the sponsor identify only

categorically eligible children, under the expanded categorical

eligibility provision, and receive tier I rates of reimbursement for

the meals served to these children. In this case, as described above,

the sponsor would identify only those children whom the sponsoring

organization or provider knows, on the basis of documented proof, to be

categorically eligible for tier I benefits, and would have on file only

copies of vouchers or other proof of participation in an eligible

program rather than free and reduced price applications.

The Department would like to emphasize that the above two

approaches to identifying income-eligible children would not permit a

provider to selectively identify for its

[[Page 9098]]

sponsoring organization those children whom the provider suspects or

believes may be income-eligible, based on the provider's personal

estimate of a household's socioeconomic status, and have its sponsoring

organization send applications only to those households. The only time

that a ``selective identification'' approach may be used is when either

the sponsor or provider already possesses documented evidence of the

child's or household's participation in, or subsidy under, a

categorically eligible program. In these cases, the documentary

evidence may be used to establish eligibility in lieu of an

application. If a provider selects the first approach discussed above,

then all enrolled children for whom the sponsor or provider does not

already possess documentation of categorical eligibility would receive

applications. Under the second approach above, no applications would be

distributed.

In addition, the Department would like to point out that the

interim rule required free and reduced price applications to be

distributed even when a voucher, or other documented evidence was being

used to establish a child's categorical eligibility. Subsequent to the

publication of the interim rule, the Department reconsidered its

position and concluded that the clear intent of PRWORA is to facilitate

identification of income-eligible children in tier II homes by

providing an approach under which a tier II day care home may receive

tier I rates of reimbursement for eligible children without the

distribution of applications to households. The Department's June 2,

1997, memorandum clarified this method, and this final rule removes

references in Sec. 226.23(e)(1)(i) to this requirement.

The preamble to the interim rule specifically requested comments on

the appropriateness of the use of direct certification to establish an

enrolled child's eligibility for tier I rates of reimbursement in a

tier II day care home, and indicated that the use of direct

certification in day care homes may be addressed in a future proposed

rulemaking based on the nature of these comments. Direct certification,

which is not permitted under the interim rule, is another method of

establishing eligibility without the use of free and reduced price

applications. The Department received 15 comments on the use of direct

certification in tier II day care homes. Of these, 14 commenters

supported direct certification, and one opposed it. Many of these

commenters noted that direct certification reduces the paperwork

associated with eligibility determinations, and several commenters also

recommended that direct certification be included in this final rule,

instead of in a future proposed rulemaking.

Under a system of direct certification, sponsoring organizations

would contact the welfare (or other qualifying program) office directly

and submit a list of children enrolled in their day care homes. From

that list, the welfare office would identify children whose households

are participating in the welfare program. It has been the Department's

experience in the School Nutrition Programs, because of time and

staffing constraints, that social service agencies may be reluctant to

respond to these types of requests even from public entities such as

school food authorities. Given that many areas are served by several

sponsoring organizations that would want eligibility information for

direct certification from the same local social service agency, it is

possible that social service agencies would not be willing, or able, to

handle all of these requests.

The key issue surrounding direct certification, however, involves

access to information and household confidentiality. Eligibility

information could only be released for programs which permit sharing of

confidential information for purposes of determining eligibility in

CACFP. A social service agency (or other government entity) may have

significant concerns about sharing confidential information on

households' eligibility. Therefore, the Department remains convinced

that, if necessary, the appropriate place to address direct

certification is in a proposed rulemaking, and not in this final rule.

Finally, under the third approach for tier II day care homes set

forth in PRWORA, providers may choose to receive tier II reimbursements

for all meals served to enrolled children. This approach recognizes

those situations in which the provider believes it to be unlikely that

any households of children in care will be income eligible for tier I

reimbursements. In this case, the sponsoring organization will not

collect any free and reduced price applications from the households of

enrolled children, nor will it identify categorically eligible children

based on provider or sponsor knowledge. Essentially, tier II homes

whose providers elect this approach will operate exactly as they did

before implementation of the two-tiered reimbursement structure, except

that they will receive lower rates of reimbursement.

Accordingly, this final rule amends Sec. 226.23(e)(1) to clarify

the procedures for determining the income eligibility of children

enrolled in tier II day care homes, particularly with respect to the

use of vouchers or other documents in lieu of free and reduced price

applications, as discussed above. In addition, Sec. 226.18(b)(11) is

amended to specify the three options for reimbursement available to

providers of tier II day care homes. Finally, Sec. 226.23(e)(1)(iv) and

the definition of ``Documentation'' contained in Sec. 226.2 are amended

to indicate that households identifying themselves as participating in,

or subsidized under, a categorically eligible program need only provide

the program's case number if applicable.

Confidentiality of Household Income Information

The interim rule amended Sec. 226.23(e)(1)(i) to require that

sponsoring organizations keep eligibility information concerning

individual households confidential. Specifically, sponsoring

organizations are prohibited from making this information available to

day care home providers. The interim rule does, however, permit

sponsoring organizations to inform tier II day care homes of the number

of identified income-eligible children, but not the names of these

children. As discussed in the preamble to the interim rule, these

requirements were promulgated to carry out the clear intent of PRWORA

to protect the confidentiality of the households of children enrolled

in day care homes.

The preamble to the interim rule specifically requested comments on

how best to balance the confidentiality of the households of enrolled

children with the needs of tier II day care home providers. The

Department received 230 comments on this provision. Of these, 175

commenters expressed their belief that day care providers need to know

the eligibility status of each child in their care, so that they can

know the exact amount that should be in their reimbursement check each

month. Many of these commenters also indicated their belief that the

confidentiality of households can be protected as long as the

sponsoring organization does not release specific income information

from individual households, but only whether or not children in those

households have been determined eligible. Others expressed concern that

a check on fiscal accountability will be lost if providers do not know

how much their sponsors should pay them. Three commenters indicated

that providers will leave the program if they cannot know the exact

amount to expect in their reimbursement payment. In addition,

[[Page 9099]]

seven commenters recommended that sponsors be permitted to include a

parent waiver of confidentiality on the free and reduced price

application distributed to households. Finally, 31 commenters expressed

their support for the interim rule, under which providers are not

permitted to know the eligibility status of enrolled children.

Unlike the households of children participating in other Child

Nutrition Programs, households whose children are in care in CACFP day

care homes do not apply to the home in order to obtain food benefits.

Rather, the primary purpose of applying to the day care home is to

secure care for their children. Although the children receive the

nutritional benefits of the meals provided through the CACFP, the

direct financial benefits associated with applying for meals go to

participating providers and sponsoring organizations. The household

receives only an indirect financial benefit in that the provider's

receipt of higher meal reimbursements helps to keep overall day care

fees lower. Thus, the Department strongly believes that it would be

irresponsible to compromise the confidentiality of these households

solely for the administrative convenience of providers or sponsoring

organizations.

Further, while it might be convenient for providers to have

information on the income status of the households of children in care,

it is not necessary for the purposes of administering the Program. In

accordance with PRWORA, the sponsoring organization has the

responsibility for using the eligibility information to file

reimbursement claims with the State agency, and for subsequently paying

each provider based on the number of meals served in the home.

Many commenters expressed concern that under the interim rule

providers will have no way of ensuring that their reimbursement

payments are correct, as mentioned above. The Department recognizes

that provider payments must be reliable and accurate. The Department

fully expects that State agencies are already examining sponsor payment

procedures during administrative reviews to ensure proper payments. In

addition, providers who believe that their payments are incorrect may

also bring the matter to the attention of the State agency. If a State

agency receives repeated complaints from a particular sponsor's

providers, it would be appropriate to conduct a special review of that

sponsor.

With regard to whether free and reduced price applications may

contain a household waiver of confidentiality which would permit

sponsoring organizations to divulge the eligibility status of enrolled

children, the Department strongly discourages such a practice due to

PRWORA's emphasis on household confidentiality. However, if a State

agency chooses to distribute an application which includes a household

confidentiality waiver statement, or allows its sponsoring

organizations to do so, this final rule requires that the form also

include a statement informing the household that its participation in

the program is not in any way dependent upon signing the waiver. Thus,

a household may complete the application and choose not to have the

information released to the day care home provider.

Accordingly, this final rule amends Sec. 226.23(e)(1)(i) to require

that applications that include a household confidentiality waiver

statement must also include a statement informing the household that

its participation in the program is not dependent upon signing such a

waiver.

Finally, the Department would like to point out, as several

commenters did, that this provision will not affect the ability of all

tier II day care homes with identified income-eligible children to

calculate their reimbursement payments, but rather only those tier II

day care homes with identified income-eligible children whose

sponsoring organizations select the actual count method for reimbursing

their homes. For those tier II day care homes whose sponsors select

either claiming percentages or blended rates, knowing the claiming

percentage or blended rate will enable providers to calculate the

precise amount of the reimbursement they will receive each month.

(Additional discussion of the reimbursement methods available to

sponsoring organizations is contained in the ``Meal Counting and

Claiming Procedures'' section of the preamble below.)

At this time, the Department is not aware of any alternative to the

system set forth in the interim rule that would protect the

confidentiality of households. Therefore, this final rule retains the

provision in the interim rule that prohibits sponsoring organizations

from making free and reduced price eligibility information concerning

individual households available to day care home providers.

With regard to the process of distributing and collecting free and

reduced price applications from the households of children enrolled in

tier II day care homes, the Department received 90 comments. Of these,

25 commenters indicated that this activity was burdensome for

sponsoring organizations. Nineteen commenters expressed their concern

that the households will not return completed applications because they

have no financial incentive to do so. In addition, 35 commenters wanted

providers to be involved in the process of distributing and/or

collecting free and reduced price applications from the households of

enrolled children, indicating their belief that provider involvement

will facilitate return of the statements. Four commenters requested

that the applications collected for the first year be valid through

September 30, 1998, in order to coincide with the fiscal year.

The Department would like to point out that PRWORA's inclusion of

``expanded categorical eligibility'' for use in tier II day care homes,

as previously discussed in this preamble, is one method which is

intended to simplify the income eligibility determination process, and

thus, encourage the return of completed applications by households. In

addition, under the interim rule, as well as guidance issued by the

Department on January 24, 1997, it is permissible for sponsors to have

their day care home providers distribute free and reduced price

applications to individual households of enrolled children, as long as

the completed forms are returned by the households directly to the

sponsor. If sponsoring organizations choose to have their providers

distribute applications to the households of enrolled children, the

Department recommends and would anticipate that providers will take the

opportunity to explain the purpose of the form and to stress the

importance of the household completing the form and returning it to the

sponsor. This type of procedure could facilitate the household's return

of eligibility information to the sponsoring organization, while at the

same time maintaining the confidentiality of the income information

provided by the households. However, the Department would also like to

point out that either State agencies or sponsors which believe that

providers should not have any role in the process of distributing

applications to households may prohibit such activity.

Several of the commenters who indicated that providers should be

involved in the process of distributing and/or collecting free and

reduced price applications recommended that sponsors be allowed to

inform providers which of the households of enrolled children have

returned applications. Providers, in turn, could periodically urge

those households that had not returned the forms to do so. Although

[[Page 9100]]

actual income information on individual households would not be

released under such a scenario, the Department has serious concerns

about this procedure and believes that simply knowing a household has

returned a free and reduced price application may lead to assumptions

about a family's income status. Therefore, the Department issued

guidance on March 12, 1997, informing State agencies and sponsors that

sponsors may not be permitted to inform their providers about which of

the households of enrolled children have returned applications, as it

would be inconsistent with the confidentiality provision of

Sec. 226.23(e)(1)(i).

Finally, as indicated above, four commenters recommended that free

and reduced price applications collected during implementation be valid

through September 30, 1998, to coincide with the fiscal year. In order

to facilitate sponsors' implementation of the two-tiered reimbursement

system, the Department already has permitted free and reduced price

applications which were collected from households between March 1,

1997, and June 30, 1997, to be effective for a one-year period

beginning July 1, 1997. Depending on when the applications were

actually collected by sponsoring organizations, the information on the

applications could be as much as 16 months old when they expire on July

1, 1998. Therefore, although sponsors may collect applications before

the end of the one-year period that begins July 1, 1997, in order to

have redeterminations coincide with the fiscal year cycle, free and

reduced price applications which become effective upon implementation

of the two-tiered system on July 1, 1997, may not be valid for more

than a one-year period. This requirement helps ensure that individual

eligibility determinations are based on up-to-date information, and is

also consistent with policy in the other Child Nutrition Programs.

Meal Counting and Claiming Procedures

The two-tiered structure of reimbursement set forth under PRWORA

necessitates new meal counting and claiming procedures for use by

sponsoring organizations and those tier II day care homes in which

there are a mix of income-eligible and non-income-eligible children.

The interim rule amended Sec. 226.13(d) to set forth three methods

by which sponsoring organizations may reimburse their tier II day care

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

actual meal counts, claiming percentages, and blended rates. The

interim rule permits sponsoring organizations to select which of the

three methods they will use, though each sponsor must use only one

method for all of its homes, and may change this method no more

frequently than annually. In addition, if a sponsoring organization

selects claiming percentages or blended rates, the interim rule

requires that they be recalculated for each home 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 recalculation because it has reason to believe that a home's

percentage of income-eligible children has changed significantly or was

incorrectly established in the previous calculation.

The preamble to the interim rule requested comments on the

``reimbursement categories'' method set forth in the law and discussed

in the preamble, but not included as an option in the interim rule due

to the Department's opinion that it does not offer any distinct

advantages over claiming percentages and blended rates. Under the

``reimbursement categories'' method, sponsoring organizations would

either: (1) Establish multiple reimbursement rates within the range

defined by the tier I and tier II rates, and then assign a home one of

these rates based on the percentage of income-eligible children in the

home; or (2) using only the tier I and tier II rates, reimburse all

meals served in homes with 50 percent or more income-eligible children

at the tier I rates, and all homes with less than 50 percent income-

eligible children at the tier II rates. (The preamble to the interim

rule describes the ``reimbursement categories'' method in more detail.)

In addition, the interim rule also requested suggestions on other

systems of meal counting and claiming that would not place an 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.

The interim rule also amended Sec. 226.13(d) to set forth the meal

counting requirements for day care homes. Under these regulations,

providers of tier II day care homes whose sponsoring organization uses

the actual count method of reimbursement are required to record and

submit to the sponsoring organization the number and types of meals

served each day to each enrolled child by name. Providers whose

sponsoring organization uses either claiming percentages or blended

rates must submit the total number of meals served, by type, to

enrolled children.

The Department received 62 comments on the meal counting and

claiming provisions. Of these, 25 commenters commented on whether a

State agency could require all sponsoring organizations in the State to

use the same method for reimbursing tier II day care homes with a mix

of income-eligible and non-income-eligible children: 19 commenters

opposed the State selecting one method for all sponsors; six commenters

supported it. Several commenters who supported State agency selection

of the reimbursement method indicated that allowing sponsoring

organizations to select the method would promote unhealthy competition

among sponsoring organizations. Many commenters also indicated that

State agencies already require providers to keep actual daily meal

counts. These commenters believed that such requirements would

necessarily force sponsoring organizations to utilize actual counts,

thus depriving them of a meaningful choice of reimbursement method.

In response to commenter concern on this issue, the Department

would like to reiterate that the choice of reimbursement method is the

sponsoring organization's, and not the State agency's. In accordance

with Sec. 226.13(d)(3) as added by the interim rule, each sponsoring

organization selects the method--either actual counts, claiming

percentages, or blended rates--for reimbursing its tier II day care

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

As discussed in the preamble to the interim rule, the Department

decided to allow sponsoring organizations maximum flexibility by

permitting them to select the reimbursement method in order to

accommodate the varying levels of management sophistication among

sponsors. State agencies may not require all sponsors in the State to

use the same method.

With regard to commenters' concern that permitting sponsoring

organizations to select the method of reimbursement would promote

unhealthy competition among sponsoring organizations, none of the

methods offers a financial advantage over the other to providers.

Providers will choose, as they do now, the sponsoring organization

whose services best meet their needs. The Department expects that this

decision will be based on a variety of factors, and not exclusively the

reimbursement method used by the sponsor.

[[Page 9101]]

However, State agencies may require--and many already do, for the

purpose of monitoring compliance with licensing requirements concerning

the number and ages of children in care, or for integrity or other

purposes--that day care home providers maintain actual daily meal

counts by child. When a State agency institutes such a requirement,

sponsoring organizations still may select either actual counts,

claiming percentages, or blended rates as the method they use to

reimburse their tier II day care homes with a mix of income-eligible

and non-income-eligible children. Sponsors selecting claiming

percentages or blended rates will only use total meal counts by type of

meal (i.e., breakfast, lunch/supper, supplement), rather than the daily

meal counts by child, to calculate a home's reimbursement. Perhaps most

significantly, use of claiming percentages or blended rates offers the

additional advantage that sponsoring organizations do not have to

immediately assess the eligibility status of each newly enrolled child

in a day care home. Eligibility determinations for children new to a

home need only be done by the time the recalculation of the claiming

percentage or blended rate is necessary, which is at least every six

months.

In addition, 14 commenters on the meal counting and claiming

provisions indicated their belief that sponsoring organizations should

only be required to recalculate each home's claiming percentage or

blended rate on an annual basis, rather than semiannually as required

in the interim rule. Most of these commenters pointed out that PRWORA

required only annual recalculation. Four commenters indicated that

requiring recalculation on a semiannual basis would add unnecessary

paperwork for sponsoring organizations. Finally, two commenters

indicated that any integrity concerns surrounding annual

redeterminations of claiming percentages or blended rates were already

adequately addressed in Sec. 226.13(d)(3) as added by the interim rule,

which permits State agencies to require sponsoring organizations to

recalculate the claiming percentage or blended rate at any time, as

discussed above.

Several commenters were concerned, as mentioned above, that PRWORA

and the interim rule were in conflict because PRWORA requires annual

redeterminations of claiming percentages or blended rates, while the

interim rule requires semiannual redeterminations. The Department would

like to point out that section 17(f)(3)(A)(iii)(IV) of the NSLA, as

amended by section 708(e)(1) of PRWORA, sets forth two possible

alternatives that may be used by the Secretary for simplified meal

counting and claiming, and also gives the Secretary the authority to

develop his own simplified procedures. While the alternative of

claiming percentages/blended rates as set forth in PRWORA does indicate

that the claiming percentage or blended rate be set on an annual basis,

PRWORA does not require the Secretary to use either of these specific

alternatives. In selecting claiming percentages and blended rates, and

by requiring that recalculations be made on a semiannual basis, the

discretion provided to the Secretary in PRWORA was being exercised.

Among the reasons for requiring semiannual recalculations was the

Department's concern, as discussed in the preamble to the interim rule,

that the simplified methods set forth in PRWORA, including claiming

percentages and blended rates, do not adequately capture the frequent

enrollment changes that are common in many day care homes. Despite one

commenter's belief that the policy for recalculations in day care homes

should be consistent with that for CACFP centers, the enrollment

changes in day care homes affect the claiming percentage or blended

rate much more dramatically than enrollment changes in centers do,

simply because of the smaller number of children enrolled in a family

day care home. Requiring that the claiming percentages and blended

rates be recalculated on a semiannual, rather than annual, basis helps

balance the need to account for the effects of these enrollment changes

by ensuring more current numbers with the Department's desire to

minimize administrative burden on sponsors. In addition, the Department

is also concerned about the potential for abuse with claiming

percentages and blended rates. Again, requiring semiannual instead of

annual recalculations, as well as providing the State agency the

authority to require a sponsoring organization to perform

recalculations any time it has reason to believe that a home's

percentage of income-eligible children has changed significantly or was

incorrectly established in the previous calculation, will help minimize

the potential for abuse associated with this method. Finally, despite

commenters who indicated their belief that providing State agencies the

authority to require recalculations would adequately address integrity

concerns, the Department believes that requiring semiannual

recalculations, in conjunction with providing State agencies this

authority, is much more effective in promoting program integrity and

maximizing the accuracy of the claiming process.

In response to the request in the interim rule for comments on the

``reimbursement categories'' method, as well as any alternative methods

of reimbursement, the Department received five comments. Two commenters

supported the reimbursement categories method. In addition, two

commenters recommended the reimbursement categories method discussed in

the preamble to the interim rule under which a tier II day care home

would receive tier I rates of reimbursement for all meals served as

long as at least 50 percent of enrolled children were determined

eligible for free or reduced price meals. Finally, one commenter

recommended that three tiers of reimbursement be instituted, with the

middle tier applicable for all tier II homes with a mix of income-

eligible and non-income-eligible children.

These comments did not persuade the Department to relinquish its

concerns about the accuracy, complexity, and integrity of the

alternative methods of reimbursement. The Department continues to hold

the position that neither of the reimbursement categories methods

described in PRWORA is acceptable as a means of reimbursing tier II day

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

children, since they are much less accurate in accomplishing the law's

goal of targeting reimbursements to low-income children than either

claiming percentages or blended rates.

Accordingly, this final rule makes no change in the requirement set

forth in the interim rule that sponsoring organizations that select

claiming percentages or blended rates as the method for reimbursing

their tier II day care homes perform recalculations of the percentages

or rates on at least a semiannual basis.

When a sponsoring organization chooses claiming percentages or

blended rates for reimbursing its tier II day care homes with a mix of

income-eligible and non-income-eligible children, Sec. 226.13(d)(3)(ii)

as added by the interim rule requires that the claiming percentage or

blended rate be based on ``one month's data concerning the number of

enrolled children determined eligible for free or reduced price

meals.'' (This provision of the regulations was corrected in a docket

published in the Federal Register on February 6, 1997 (62 FR 5519)).

The preamble to the corrected interim rule

[[Page 9102]]

discussed two methods available to sponsoring organizations for making

these calculations--attendance lists and enrollment lists--and

requested comments on whether both of these alternative methods should

continue to be permitted in the final rule.

The sponsoring organization, after having determined the income

eligibility of enrolled children, uses the information on the

attendance or enrollment list to calculate the home's claiming

percentage or blended rate. As discussed in the preamble to the interim

rule, the primary difference between attendance and enrollment lists is

that attendance lists produce weighted results of participation. That

is, an attendance list shows, whether based on days or meals, the rate

of participation of each child, by name, in the home in the month. In

contrast, an enrollment list provides no measure of the rate of

participation: a child who participates only one day during the month

is counted the same for purposes of the calculation as a child who

participates every day during the month. As indicated in the preamble

to the interim rule, though the attendance list may impose an

additional burden on the sponsor and its day care homes, it provides a

higher level of accuracy than an enrollment list. Furthermore, an

attendance list based on meals, rather than days, is an actual count of

meals provided, by child, for one month, therefore providing the most

accurate results on which to base the home's claiming percentage or

blended rate.

The Department received three comments on the use of attendance and

enrollment lists. Two commenters indicated a preference for attendance

lists over enrollment lists. One commenter suggested that each State

agency be permitted to decide which method all sponsors in the State

will use, instead of sponsors. Since sponsoring organizations have the

choice of which method to use for reimbursing their tier II day care

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

sponsors choosing claiming percentages or blended rates also may select

which method--either attendance list or enrollment list--to use in

calculating claiming percentages or blended rates for their homes. The

Department believes that permitting sponsoring organizations to select

the method, instead of the State agency, will provide flexibility to

sponsoring organizations, in recognition of their varying sizes and

levels of management sophistication. Therefore, this final rule retains

both attendance lists and enrollments lists as the methods for

sponsoring organizations to use in calculating claiming percentages or

blended rates for their homes. In light of the limited commenter input,

the Department will attempt to gather information based on operating

experience from State and local program administrators concerning the

ramifications of allowing sponsors to choose either method, and may

consider proposing changes in this area in a future rulemaking.

In addition, questions were raised subsequent to the publication of

the interim rule regarding how to define ``attendance'' and

``enrollment'' for the purposes of making these calculations. The

Department would like to clarify that, for the purposes of calculations

made using either an attendance list or an enrollment list, sponsoring

organizations and providers may consider a child ``in attendance'' or

``enrolled'' only when the child: (1) Is officially enrolled for care

(i.e., the provider has the requisite enrollment paperwork for the

child); (2) is present in the home for the purpose of child care; and

(3) has eaten at least one meal with the other children in care during

the claiming period. Thus, the difference between the two methods is

not a function of a difference in definitions; rather, it is that an

attendance list reflects weighted participation (i.e., the frequency of

either the child's attendance or the number of meals eaten by the

child) and is, therefore, a more mathematically accurate portrayal of

the home's meal service during the month.

Accordingly, Secs. 226.13(d)(3)(ii) and (iii) are amended by adding

specific reference to attendance lists and enrollment lists as the

methods available to sponsoring organizations for calculating each

home's claiming percentage or blended rate. In addition, in order to

ensure consistency of application among all sponsoring organizations,

this final rule amends Sec. 226.2 to include the above-discussed

definition of enrollment/attendance under the current definition of

``enrolled child.''

Administrative Funds for Sponsoring Organizations

In accordance with Sec. 226.12(a), during any fiscal year,

administrative payments for sponsoring organizations may not exceed the

lesser of: (1) Actual expenditures for the costs of administering the

Program less income to the Program; or (2) the amount of administrative

costs approved by the State agency in the sponsoring organization's

budget; or (3) the sum of the products obtained by multiplying each

month the number of homes administered by the sponsoring organization

by a set of fixed reimbursement rates. In addition, Sec. 226.12(a) of

the regulations indicates that ``during any fiscal year, administrative

payments to a sponsoring organization may not exceed 30 percent of the

total amount of administrative payments and food service payments for

day care home operations.'' The interim rule did not make any changes

to the regulations concerning administrative payments, including the

requirement limiting a sponsor's administrative funds.

Nevertheless, the Department received 14 comments on this provision

of the regulations, all of which expressed concern that lower food

service payments resulting from the two-tiered reimbursement system

will result in some sponsoring organizations being reimbursed for less

than their full cost of administering the Program because of the 30

percent cap. Most commenters suggested changing the maximum limit on

administrative payments to a figure higher than 30 percent. Some

recommended that this regulatory provision be ``suspended'' until such

time as its impact on sponsoring organization operations can be

determined. In addition, 28 commenters indicated that sponsoring

organizations need additional administrative funds to effectively

administer the two-tiered reimbursement system. Finally, six commenters

requested that State agencies continue to be required to make

administrative fund advances available to sponsoring organizations, a

former requirement of State agencies which was made optional under

section 708(f) of Pub. L. 104-193.

No changes were made by the interim rule to the provision limiting

administrative payments to 30 percent of administrative and food

service payments because it is the Department's position that the

current limitation on administrative payments is reasonable. Further,

the current limitation on administrative payments, by maintaining an

appropriate balance between the amount spent by sponsoring

organizations on administrative and program meal expenses, helps

achieve the Program goal of serving meals to enrolled children within

reasonable fiscal limits. The Department recognizes that a limited

number of sponsoring organizations, such as those with few homes, a

high percentage of tier II day care homes, and a high percentage of

non-income-eligible children in these homes, may be affected by this

limitation under the two-tiered

[[Page 9103]]

reimbursement system. However, at this time the Department does not

foresee that this possible consequence of the law will be widespread

enough to warrant changing or suspending the current limitation. The

study mandated by section 708(l) of PRWORA requires the Department to

monitor the number of sponsoring organizations in the CACFP and

consider whether changes need to be proposed in a future rulemaking.

Absent such evidence, the Department is unwilling to make a change to

the administrative reimbursement limit. For similar reasons, it is

premature for the Department to propose any change to the current

administrative rates paid to sponsors.

As indicated above, section 708(f) of Pub. L. 104-193 amended

section 17(f) of the NSLA to make payment of advances to CACFP

institutions, including administrative advances to sponsoring

organizations of day care homes, optional. Although this provision of

PRWORA is already in effect due to its nondiscretionary nature, the

Department will make a conforming change to include this provision in

the regulations in a future rulemaking. Due to this legislative

provision, it is beyond the authority of the Department to require that

State agencies continue to make advances available to sponsors.

Therefore, sponsoring organizations should address concerns regarding

advances to their State agencies.

Accordingly, this final rule makes no changes to the regulations

governing administrative payments, including the requirement in

Sec. 226.12(a) regarding the limitation on administrative payments to

sponsoring organizations.

Verification Requirements for Tier II Homes

As discussed in the preamble to the interim rule, no changes were

made to the verification requirements for State agencies. Because day

care homes are considered ``nonpricing programs'' (i.e., there is no

separate identifiable charge made for meals served to participants),

State agencies must follow the provisions of Sec. 226.23(h)(1), for

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

providers'' own children, as well as the applications of households of

children enrolled in tier II day care homes. This section requires that

State agencies review all free and reduced price applications on file

to ensure that: (1) The application has been correctly and completely

executed by the household; (2) the sponsoring organization has

correctly determined and classified the eligibility of enrolled

children; and (3) the sponsoring organization has accurately reported

to the State agency the number of enrolled children who meet the

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

not. This section also permits State agencies to conduct additional

verification to determine the validity of information supplied by

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

the verification procedures for ``pricing programs.'' In addition,

State agencies may conduct the required verification in conjunction

with the reviews required by Sec. 226.6(l).

The Department received two comments on the verification

requirements for applications collected from the households of children

enrolled in tier II day care homes. Commenters expressed concern

regarding the burden associated with a State agency review of all

applications on file, and suggested that State agencies instead be

required to review a sample of the applications.

The Department recognizes that the requirement at Sec. 226.23(h)(1)

that a State agency review all of the applications maintained by a

sponsoring organization could place a significant burden on a State

agency, especially when the State agency is conducting a review of a

large sponsoring organization with a large number of tier II day care

homes for which applications have been collected. Since the

verification required for applications collected from the households of

children enrolled in tier II day care homes does not include

verification of the income information provided by the households (or,

for categorically eligible children, confirmation of participation in

the categorically eligible programs) as discussed above, it is the

Department's position that conducting the required verification on less

than 100 percent of the applications strikes a balance between the need

for detecting widespread or significant problems and the burden of

reviewing all applications on file. Unlike most child care centers or

sponsoring organizations of centers, the total number of applications

for a sponsoring organization of day care homes may be quite large.

Therefore, this final rule requires State agencies to conduct

verification, in accordance with Sec. 226.23(h)(1), only of the

applications for enrolled children in those tier II day care homes that

are selected for inclusion in the required review of the sponsoring

organization, in accordance with Secs. 226.6(l) (1) and (2), instead of

for all of the sponsor's tier II day care homes. However, to help

ensure that widespread or significant problems are identified, this

final rule requires State agencies to ensure that the homes selected

for review are representative of the sponsor's proportion of tier I,

tier II, and tier II day care homes with a mix of income-eligible and

non-income-eligible children, and that at least 10 percent of all

applications on file in the sponsorship are reviewed as part of the

State agency's review. The review requirements for sponsoring

organizations and their day care homes are set forth in Sec. 226.6(l).

This rule also adds language to clarify that these verification

requirements also apply to situations in which vouchers or other

documentation are used in lieu of applications, in which case the State

agency would review the voucher or other documentation on file.

Finally, the interim rule does not require sponsoring organizations

to perform pricing program verification of income eligibility

information for children enrolled in day care homes. However, the

Department has been asked whether sponsoring organizations have the

authority to verify the income information provided by the households

of children enrolled in day care homes if they have reason to question

the validity of the information. In order to help ensure Program

integrity and appropriately targeted reimbursement rates, it is the

Department's opinion that sponsoring organizations should have this

authority.

Accordingly, this final rule amends Sec. 226.23(h)(6) to explicitly

provide sponsoring organizations the authority to conduct pricing

verification of the income information provided by the households of

children enrolled in day care homes. In addition, this final rule

amends Sec. 226.23(h)(1) to require State agencies to conduct

nonpricing verification only for the applications of enrolled children

in day care homes that are included in the required review of the

sponsoring organization.

Other Amendments

This rule also makes technical changes to the definition of

``Documentation'' in Sec. 226.2, and to Secs. 226.23(e)(1) (i) and

(iv), to include amendments which were made to these sections in an

interim rule published on May 1, 1997 (62 FR 23613), but inadvertently

eliminated from the Code of Federal Regulations when the January 7,

1997, interim rule (62 FR 889) on the two-tiered reimbursement system

went into effect on July 1, 1997.

List of Subjects

7 CFR Part 210

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

Social

[[Page 9104]]

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, the interim rule amending 7 CFR parts 210 and 226

which was published at 62 FR 889 on January 7, 1997, is adopted as a

final rule with the following changes:

PART 210--NATIONAL SCHOOL LUNCH PROGRAM

1. The authority citation for part 210 continues to read as

follows:

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

2. In Section 210.9, paragraph (b)(20) is revised 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 the preceding October. The

State agency may designate a month other than October for the

collection of this information, in which case the list must be provided

to the State agency within 60 calendar days following the end of the

month designated by the State agency. In addition, each school food

authority shall provide, when available for the schools under its

jurisdiction, and upon the request of a sponsoring organization of day

care homes of the Child and Adult Care Food Program, information on the

boundaries of the attendance areas for the elementary schools

identified as having 50 percent or more of enrolled children certified

eligible for free or reduced price meals.

* * * * *

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

Sec. 210.19 Additional responsibilities.

* * * * *

(f) Cooperation with the Child and Adult Care Food Program. On an

annual basis, 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 previous October, or other month specified by the

State agency. The first list shall be provided by March 15, 1997;

subsequent lists shall be provided by February 1 of each year or, if

data is based on a month other than October, within 90 calendar days

following the end of the month designated by the State agency. The

State agency may provide updated free and reduced price enrollment data

on individual schools to the State agency which administers the Child

and Adult Care Food Program only when unusual circumstances render the

initial data obsolete. 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. Paragraphs (b), (c), and (d) of the definition of

``Documentation'' are revised; and

b. The definition of ``Enrolled child'' is amended by adding a

sentence at the end.

The revisions and addition read as follows:

Sec. 226.2 Definitions

* * * * *

Documentation means: * * *

(b) For a child who is a member of a food stamp or FDPIR household

or an AFDC assistance unit, ``documentation'' means the completion of

only the following information on a free and reduced price application:

(1) The name(s) and appropriate food stamp, FDPIR or AFDC case

number(s) for the child(ren); and

(2) The signature of an adult member of the household; or

(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 or reduced price meals:

(1) The name(s), appropriate case number(s) (if the program

utilizes case numbers), and name(s) of the qualifying program(s) for

the child(ren), and the signature of an adult member of the household;

or

(2) If the sponsoring organization or day care home possesses it,

official evidence of the household's participation in a qualifying

program (submission of a free and reduced price application by the

household is not required in this case); or

(d) For an adult participant who is a member of a food stamp or

FDPIR household or is an SSI or Medicaid participant, as defined in

this section, ``documentation'' means the completion of only the

following information on a free and reduced price application:

(1) The name(s) and appropriate food stamp or FDPIR case number(s)

for the participant(s) or the adult participant's SSI or Medicaid

identification number, as defined in this section; and

(2) The signature of an adult member of the household.

Enrolled child means * * * In addition, for the purposes of

calculations made by sponsoring organizations of family day care homes

in accordance with Secs. 226.13(d)(3)(ii) and 226.13(d)(3)(iii),

``enrolled child'' (or ``child in attendance'') means a child whose

parent or guardian has submitted a signed document which indicates that

the child is enrolled for child care; who is present in the day care

home for the purpose of child care; and who has eaten at least one meal

during the claiming period.

* * * * *

3. In Sec. 226.6, paragraph (f)(9) is amended by removing the

second sentence of the paragraph and by adding a new sentence in its

place, and by adding a new sentence at the end to read as follows:

Sec. 226.6 State agency administrative responsibilities.

* * * * *

(f) * * *

(9) * * * The State agency shall provide the list to sponsoring

organizations by April 1, 1997, and by February 15 of each year

thereafter, unless the State agency that administers the National

School Lunch Program has elected to base data for the list on a month

other than October, in which case the State agency shall provide the

list to sponsoring organizations within 15 calendar days of its receipt

from the State agency that administers the National School Lunch

Program. * * * The State agency shall not routinely require annual

redeterminations of the tiering status of tier I day care homes based

on updated elementary school data.

* * * * *

4. In Sec. 226.13:

[[Page 9105]]

a. Paragraph (d)(3)(ii) is amended by adding a new sentence after

the first sentence; and

b. The first sentence of paragraph (d)(3)(iii) is revised.

The addition and revision read as follows:

Sec. 226.13 Food service payments to sponsoring organizations for day

care homes.

* * * * *

(d) * * *

(3) * * *

(ii) * * * Sponsoring organizations shall obtain one month's data

by collecting either enrollment lists (which show the name of each

enrolled child in the day care home), or attendance lists (which show,

by days or meals, the rate of participation of each enrolled child in

the day care home).* * *

(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 rates of reimbursement

for each category (tier I and tier II) by the claiming percentage for

that category, as established in accordance with paragraph (d)(3)(ii)

of this section.* * *

* * * * *

5. In Sec. 226.15:

a. Paragraph (e)(3) is revised; and

b. Paragraph (f) is amended by adding seven new sentences after the

second sentence, and by adding a new sentence at the end.

The additions 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, including official

source documentation obtained from school officials when the

classification is based on elementary school data; 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) * * * When using elementary school or census data for making

tier I day care home determinations, a sponsoring organization shall

first consult school data, except in cases in which busing or other

bases of attendance, such as magnet or charter schools, result in

school data not being representative of an attendance area's household

income levels. In these cases, census data should generally be

consulted instead of school data. A sponsoring organization may also

use census data if, after reasonable efforts are made, as defined by

the State agency, the sponsoring organization is unable to obtain local

elementary school attendance area information. A sponsoring

organization may also consult census data after having consulted school

data which fails to support a tier I day care home determination for

rural areas with geographically large elementary school attendance

areas, for other areas in which an elementary school's free and reduced

price enrollment is above 40 percent, or in other cases with State

agency approval. However, if a sponsoring organization believes that a

segment of an otherwise eligible elementary school attendance area is

above the criteria for free or reduced price meals, then the sponsoring

organization shall consult census data to determine whether the homes

in that area qualify as tier I day care homes based on census data. If

census data does not support a tier I classification, then the

sponsoring organization shall reclassify homes in segments of such

areas as tier II day care homes unless the individual providers can

document tier I eligibility on the basis of their household income.

When making tier I day care home determinations based on school data, a

sponsoring organization shall use attendance area information that it

has obtained, or verified with appropriate school officials to be

current, within the last school year. * * * The State agency shall not

routinely require annual redeterminations of the tiering status of tier

I day care homes based on updated elementary school data.

* * * * *

6. In Sec. 226.18, paragraph (b)(11) is amended by adding a new

sentence at the end of the paragraph to read as follows:

Sec. 226.18 Day care home provisions.

* * * * *

(b) * * *

(11) * * * These options include: electing to have the sponsoring

organization attempt to identify all income-eligible children enrolled

in the day care home, through collection of free and reduced price

applications and/or possession by the sponsoring organization or day

care home of other proof of a child or household's participation in a

categorically eligible program, and receiving tier I rates of

reimbursement for the meals served to identified income-eligible

children; electing to have the sponsoring organization identify only

those children for whom the sponsoring organization or day care home

possess documentation of the child or household's participation in a

categorically eligible program, under the expanded categorical

eligibility provision contained in Sec. 226.23(e)(1), and receiving

tier I rates of reimbursement for the meals served to these children;

or receiving tier II rates of reimbursement for all meals served to

enrolled children.

* * * * *

7. In Sec. 226.23:

a. Paragraph (e)(1)(i) is amended by removing the third sentence

and adding a new sentence in its place, by adding the words ``or

FDPIR'' after the words ``food stamp'' each time they appear in the

sixth sentence, and by adding a new sentence to the end;

b. Paragraph (e)(1)(iv) is revised;

c. A new paragraph (e)(1)(vi) is added;

d. Paragraph (h)(1) is revised; and

e. Paragraph (h)(6) is amended by adding a new sentence to the end.

The additions and revision read as follows:

Sec. 226.23 Free and reduced price meals.

* * * * *

(e)(1) * * *

(i) * * * 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 the households of all

children enrolled in the home, except that applications need not be

distributed to the households of enrolled children that the sponsoring

organization determines eligible for free and reduced price meals under

the circumstances described in paragraph (e)(1)(vi) of this section. *

* * If a State agency distributes, or chooses to permit its sponsoring

organizations to distribute, applications to the households of children

enrolled in tier II day care homes which include household

confidentiality waiver statements, such applications shall include a

statement informing households that their participation in the program

is not dependent upon signing the waivers.

* * * * *

(iv) If they so desire, households applying on behalf of children

who are members of food stamp or FDPIR households or AFDC assistance

units may apply under this paragraph rather than under the procedures

described in paragraph (e)(1)(ii) of this section. In

[[Page 9106]]

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 or FDPIR households; AFDC

assistance units; or for children enrolled in tier II day care homes,

other qualifying Federal or State program, shall be required to

provide:

(A) For the child(ren) for whom automatic free meal eligibility is

claimed, their names and food stamp, FDPIR, or AFDC case number; or for

the households of children enrolled in tier II day care homes, their

names and other program case numbers (if the program utilizes case

numbers); 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

children not receiving food stamp, FDPIR, or AFDC benefits; 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.

* * * * *

(vi) A sponsoring organization of day care homes may identify

enrolled children eligible for free and reduced price meals (i.e., tier

I rates), without distributing free and reduced price applications, by

documenting the child's or household's participation in or receipt of

benefits 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 and reduced price meals.

Documentation shall consist of official evidence, available to the tier

II day care home or sponsoring organization, and in the possession of

the sponsoring organization, of the household's participation in the

qualifying program.

* * * * *

(h) * * *

(1) Verification procedures for nonpricing programs. Except for

sponsoring organizations of family day care homes, State agency

verification procedures for nonpricing programs shall consist of a

review of all approved free and reduced price applications on file. For

sponsoring organizations of family day care homes, State agency

verification procedures shall consist of a review only of the approved

free and reduced price applications (or other documentation, if

vouchers or other documentation are used in lieu of free and reduced

price applications) on file for those day care homes that are required

to be reviewed when the sponsoring organization is reviewed, in

accordance with the review requirements set forth in section 226.6(l)

of this Part. However, the State agency shall ensure that the day care

homes selected for review are representative of the proportion of tier

I, tier II, and tier II day care homes with a mix of income-eligible

and non-income-eligible children in the sponsorship, and shall ensure

that at least 10 percent of all free and reduced price applications (or

other documentation, if applicable) on file for the sponsorship are

verified. The review of applications shall ensure that:

(i) The application has been correctly and completely executed by

the household;

(ii) The institution has correctly determined and classified the

eligibility of enrolled participants for free or reduced price meals

or, for family day care homes, for tier I or tier II reimbursement,

based on the information included on the application submitted by the

household;

(iii) The institution has accurately reported to the State agency

the number of enrolled participants meeting the criteria for free or

reduced price meal eligibility or, for day care homes, the number of

participants meeting the criteria for tier I reimbursement, and the

number of enrolled participants that do not meet the eligibility

criteria for those meals; and

(iv) In addition, the State agency may conduct further verification

of the information provided by the household on the approved

application for program meal eligibility. If this effort is undertaken,

the State agency shall conduct this further verification for nonpricing

programs in accordance with the procedures described in paragraph

(h)(2) of this section.

* * * * *

(6) * * * Sponsoring organizations of day care homes may verify the

information on applications submitted by households of children

enrolled in day care homes in accordance with the procedures contained

in paragraph (h)(2)(i) of this section.

Dated: February 13, 1998.

Shirley R. Watkins,

Under Secretary, Food, Nutrition and Consumer Services.

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 (Pub. L. 104-193)

3. Rulemaking Background

The interim and final rules amend the Child and Adult Care Food

Program (CACFP) 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

(Pub. L. 104-193). These provisions better target assistance to low

income children by reducing the reimbursement 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. The rules target 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. The rules retain essentially

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,

although the lower rates are still high enough that participation in

CACFP is expected to remain strong and new day care homes will continue

to join CACFP. The interim rule became effective July 1, 1997; the

final rule becomes effective 60 days after publication in the Federal

Register.

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4. Motivation for Statutory Changes and Summary of Findings

Until 1978, eligibility for free and reduced price meals in the

Child and Adult Care Food Program (CACFP) was based on essentially the

same income thresholds and procedures as those used in the National

School Lunch Program: children in households at or below 130 percent of

the Federal income poverty guidelines were eligible to have meals

served to them reimbursed at the ``free'' (highest) rate while children

in households with incomes above 130 but not exceeding 185 percent of

the guidelines were eligible to have their meals reimbursed at the

``reduced price'' (middle) rate. In 1978, about 70 percent of CACFP

enrolled children were from households at or below 185 percent of the

Federal income poverty guidelines. The Child Nutrition Amendments of

1978 (Pub. L. 95-627) eliminated individual free and reduced price

eligibility determinations (means tests) in CACFP day care homes, which

substantially reduced program burden, and established a single

reimbursement rate for each type of meal served in day care homes.

Public Law 95-627 made no comparable changes to CACFP day care centers.

The day care home meal reimbursement rates were set (by rulemaking)

slightly below the rates used for meals served to children in CACFP

centers with documented incomes below 130 percent of the Federal income

poverty guidelines (``free'' rates). The burden reduction and single

rates in day care homes had the effect of promoting program growth.

However, that growth turned out to be primarily among non-needy

children (above 185 percent of Federal income poverty guidelines). By

the late 1980's, just 30 percent of children in CACFP day care homes

were from households with incomes at or below 185 percent of the

Federal income poverty guidelines, and by 1995, the proportion had

fallen to 22 percent. Public Law 95-627's elimination of individual

means testing in CACFP day care homes thus produced a program at odds

with the Child Nutrition Program's historical focus of targeting higher

benefits to low-income children.

The President and Congress proposed to re-target benefits in CACFP

day care homes by retaining the current day care home rates for meals

served to low-income children and establishing new, lower rates for

meals served to the non-needy. The Personal Responsibility and Work

Opportunity Reconciliation Act of 1996 (Pub. L. 104-193) sought to re-

target benefits but, to keep program administration burdens down, did

not call for a reinstatement of individual means testing of all day

care home participants. Public Law 104-193 effectively retained the

current meal reimbursements for meals served in tier I CACFP day care

homes, i.e., day care homes operated by low income providers or located

in low income areas. In all other CACFP day care homes, tier II homes,

a lower rate was established, as these children are less likely to be

low income. Public Law 104-193 provides for low income children in tier

II day care homes by allowing the higher meal reimbursements to be

claimed for all meals served to the children in tier II homes who are

individually means tested and found to be needy. These changes, along

with others called for by Public Law 104-193, are being implemented by

this rule and the interim rule. Public Law 104-193's two tier rate

structure is estimated to produce a six year savings of $1.7 billion

(fiscal years 1997-2002).

Despite the reduction in reimbursement rates, the numbers of tier I

and tier II day care homes participating in the CACFP are both expected

to grow, although at slower rates than projected before Public Law 104-

193. That CACFP day care home participation is expected to remain

strong is important since welfare reform will lead more low-income

parents to enter the workforce, which will increase the demand for day

care. Tier I homes will continue to effectively receive the pre-Public

Law 104-193 reimbursement rates. While the reimbursements available to

tier II homes have been reduced--CACFP weekly revenue for an average

tier II home with no documented low income children will drop from $82

to $41--CACFP meal reimbursements still represent another source of

income for day care homes and in many cases will provide ample

incentive to participate in the CACFP. Some would-be tier II providers

will find that the lower rates offer insufficient incentive to remain

in the CACFP and will leave the program; however, FCS expects that most

tier II providers will remain in the CACFP and accommodate the reduced

rates through some combination of absorbing the loss, raising child

care fees, and making cost-saving operational changes. In addition,

there is about a 20 percent annual turnover of homes offering day care

services, and these homes regularly offer a fresh group of homes that

will probably choose to participate in the CACFP.

Other CACFP organizations are also affected by Public Law 104-193

and this rulemaking. Organizations that sponsor day care homes

(sponsors), which have agreements with State CACFP agencies to operate

the CACFP in day care homes have new burdens due to the two tier

system. The new sponsor burdens are associated with classifying day

care homes as tier I or tier II, determining whether children in tier

II homes have incomes below 185 percent of the Federal income poverty

guidelines, informing homes of their new rights and responsibilities

under this rule, and performing the other administrative duties imposed

by this rule. The Department estimates that for sponsors considered as

a group, the new, recurring burdens (one-time implementation burdens

were not estimated) will represent an average increase of about 2

percent over current burden levels. However, as with any average, some

sponsors will realize more than a 2 percent increase in recurring

burden (while others will realize less than a 2 percent increase). In

addition, implementation burdens during the first year or two of

tiering may be significant. State CACFP agencies will see a noticeable

increase in recurring burden associated with complying with new tiering

related sponsor review requirements, providing sponsors with school and

census area-eligibility information, and providing sponsors tiering

related technical assistance. State agencies administering the NSLP and

school districts also have new responsibilities under this rulemaking,

although these responsibilities do not entail substantial new burdens.

5. Comparison of Final Analysis With Interim Analysis

The final analysis makes few technical changes to the interim

analysis (in terms of numbers used and assumptions made). All technical

changes are based on new CACFP program data, a recently completed study

of the CACFP, or comments received on the interim analysis. Updating

the analysis with the new program and study data produces improved cost

and burden estimates. The changes significantly decrease the total

Federal savings expected from the two tier system, with projected six

year savings, fiscal years 1997-2002, declining from $2.2 to $1.7

billion. Essentially no changes have been made to the analysis'

assessment of the effects that the two tier system will have on

particular providers, parents, and children.

New CACFP program data was used to update several numbers in the

analysis, including the number of CACFP participating day care homes

(DCHs), the number of DCH sponsors,

[[Page 9108]]

and the average number of DCHs served by sponsors. These updates have a

negligible effect on the findings of the analysis.

Since the publication of the interim analysis on January 1, 1997,

the Food and Consumer Service has completed the Early Childhood and

Child Care Study \1\ (ECCCS). The ECCCS is a nationally representative

evaluation of the CACFP and includes household income data for DCH

providers and children enrolled in DCHs. The data on provider's and

enrolled children's household incomes are appreciably different from

the figures used in the interim analysis. ECCCS found that 38 percent

of DCH providers are low-income while only 22 percent of children

enrolled in DCHs are low-income. The interim analysis, based on the

best data available at that time, indicated that 22 percent of DCH

providers and 30 percent of DCH enrolled children were low-income,

which understated the number of low-income providers and overstated the

number of low-income DCH children. Together with the provider income

data, the income data for DCH enrolled children indicate that low-

income providers will probably serve a substantial number of non-low-

income children, since 38 percent of providers are low-income while

only 22 percent of DCH enrolled children are.

The ECCCS income data have several implications for the analysis.

The provider data imply there are more low-income providers than

estimated in the interim analysis. This change increases the percentage

of DCH meals that will be reimbursed at the higher meal reimbursement

rates and is the piece of data responsible for improving the accuracy

of the estimate of Federal savings from tiering. The increased

percentage of low-income providers also has implications for sponsor

burdens. Since sponsors are responsible for identifying which DCHs are

eligible for the higher reimbursement rates (tier I) and for verifying

the DCHs' tier I eligibility, the increased proportion of DCHs eligible

for the higher rates will increase the burden on sponsors for making

DCH tier I eligibility determination burdens.

The final analysis is organized nearly the same as the interim, and

the analytic section appearing in the interim analysis (numbered 6 in

the final analysis and 4 in the interim) has effectively been left

unchanged. Section 3, Rulemaking Background, in the final analysis is

the same as Section 3, Background, in the interim analysis. Sections 4

and 5, Motivation for Statutory Changes and Summary of Findings and

Comparison of Final Analysis with Interim Analysis, respectively, are

new to the final analysis. Section 7, Requirements for Regulatory

Analyses, as Established by Regulatory Flexibility Act, is an expanded

version of the corresponding section in the interim analysis (numbered

5 there) and now includes a discussion of comments received on the

interim analysis. Portions of the analytic section were altered to

ensure that the analysis accurately describes the two tier system

established by the interim and final rules. Since most changes made by

the final rule are minor, these changes did not effect significant

changes to the analysis. However, three changes made by the final rule

are worth noting because they change burden estimates. These changes

concern sponsors' income documentation requirements for low-income

children in tier II DCHs, requirements for State agency reviews of low-

income documentation during States' reviews of sponsors, and the

requirement that school food authorities (SFAs) provide sponsors with

school attendance area boundary information.

The final rule attempts to mitigate sponsor burdens on income

determination by allowing sponsors to establish the low-income status

of a DCH enrolled child through official evidence, in the sponsor's or

provider's possession, that the child's household participates in a

Federal or State benefits program with an income eligibility limit not

exceeding 185 percent of the Federal income poverty guidelines. This

change reduces burden for sponsors by allowing them to establish

eligibility for children for whom they have such information without

having to contact the children's households to ask for evidence of low-

income status.

The final rule also lessens review requirements for State reviews

of sponsors' documentation for low-income children. The interim rule

required States, as part of sponsor reviews, to verify that the income

application (or other acceptable documentation) for every child

classified by the sponsor as low-income is complete and supports the

eligibility determination made by the sponsor. The final rule lessens

the documentation review burden for States by requiring that States

review at least 10 percent of all applications on file with a sponsor,

where application refers to whatever documentation establishes the

income-eligibility of a child. The final rule stipulates that States

draw the 10 percent of applications from those DCHs the State must

review as part of its sponsor review, but if those DCHs provide less

than 10 percent of all applications, then States must draw additional

applications until the 10 percent requirement is met.

The third change made by the final rule concerns provision of

school attendance area boundary information. The interim rule assumed

this information would be readily available, since it is public

information and public schools are public institutions. A number of

commenters told FCS that the information is not readily available.

Boundary information is essential for sponsors to accurately determine

whether a DCH should be approved for the higher meal reimbursement

rates based on whether the DCH is circumscribed by the attendance area

of a school with at least 50 percent of its enrollment approved for

free or reduced price meals. The final rule, recognizing sponsors'

critical need for this information, requires SFAs to provide boundary

information on school attendance areas when sponsors request it. This

represents a new burden for SFAs.

Responses to comments received on the interim analysis are located

in Section 7, Requirements for

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