# Improved Targeting of Day Care Home Reimbursements

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## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** February 24, 1998
- **Citation:** 63 FR 9087

## Text

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A98-4407. Public record. Not legal advice.