Food Stamp Program, Regulatory Review: Electronic Benefit Transfer (EBT) Provisions of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996

DEPARTMENT OF AGRICULTURE

Food and Nutrition Service

7 CFR Part 274

[Amendment No. 345]

RIN 0584-AC44

Food Stamp Program, Regulatory Review: Electronic Benefit

Transfer (EBT) Provisions of the Personal Responsibility and Work

Opportunity Reconciliation Act of 1996

AGENCY: Food and Nutrition Service, USDA.

ACTION: Proposed rule.

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SUMMARY: On August 22, 1996, the President signed the Personal

Responsibility and Work Opportunity Reconciliation Act of 1996. This

rule proposes to implement the Electronic Benefit Transfer provisions

found in Section 825 of this law which affect the Food Stamp Program.

These provisions are meant to encourage implementation of Electronic

Benefit Transfer systems to replace food stamp coupons.

DATES: Comments on this rulemaking must be received on or before July

26, 1999 to be assured of consideration.

ADDRESSES: Comments should be submitted to Jeffrey N. Cohen, Chief,

Electronic Benefit Transfer Branch, Benefit Redemption Division, Food

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

Virginia, 22302. Comments may also be datafaxed to the attention of Mr.

Cohen at (703) 305-0232. All written comments will be open for public

inspection at the office of the Food and Nutrition Service during

regular business hours (8:30 a.m. to 5 p.m., Monday through Friday) at

3101 Park Center Drive, Alexandria, Virginia, Room 718.

FOR FURTHER INFORMATION CONTACT: Questions regarding this rulemaking

should be addressed to Mr. Cohen at (703) 305-2517.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

This rule has been determined to be significant and was reviewed by

the Office of Management and Budget under Executive Order 12866.

Executive Order 12372

The Food Stamp Program is listed in the Catalog of Federal Domestic

Assistance under No. 10.551. For the reasons set forth in the final

rule in 7 CFR 3015, Subpart V and related Notice (48 FR 29115), this

Program is excluded from the scope of Executive Order 12372 which

requires intergovernmental consultation with State and local officials.

Regulatory Flexibility Act

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

Regulatory Flexibility Act of 1980 (5 U.S.C. 601-612). Shirley R.

Watkins, the Under Secretary for Food, Nutrition, and Consumer

Services, has certified that this proposed rule will not have a

significant economic impact on a substantial number of small entities.

State and local welfare agencies will be the most affected to the

extent that they administer the Food Stamp Program.

Paperwork Reduction Act

This rule does not contain additional reporting or recordkeeping

requirements other than those that have been previously approved by the

Office of Management and Budget (OMB) under the Paperwork Reduction Act

of 1995 and assigned OMB control numbers 0584-0083 and 0505-0008.

Executive Order 12988

This 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'' paragraph 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 Food Stamp Program

the administrative procedures are as follows: (1) for Program benefit

recipients--State administrative procedures issued pursuant to 7 U.S.C.

2020(e)(1) and 7 CFR 273.15; (2) for State agencies--administrative

procedures issued pursuant to 7 U.S.C. 2023 set out at 7 CFR 276.7 (for

rules related to non-quality control (QC) liabilities) or Part 283 (for

rules related to QC liabilities); (3) for Program retailers and

wholesalers--administrative procedures issued pursuant to 7 U.S.C. 2023

set out at 7 CFR 278.8.

Public Law 104-4

Title II of the Unfunded Mandates 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 the UMRA, the

Food and Nutrition 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 the UMRA generally requires the Food and

Nutrition 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 the UMRA) for State, local, and tribal

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

year. Thus today's rule is not subject to the requirements of sections

202 and 205 of the UMRA.

Background

On April 1, 1992, the Department issued a final rule establishing

standards for operation of the Food Stamp Electronic Benefit Transfer

System (EBT) as an alternative to coupons. Those regulations were

promulgated in accordance with section 1729 of the Mickey Leland

Memorial Domestic Hunger Relief Act of 1990 (Leland Act) (title XVII,

Pub. L. 101-624) as part of a package of items aimed at improving the

efficiency and effectiveness of program operations. With the exception

of some minor corrections issued September 29, 1992,

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these regulations have not been amended since their promulgation though

other proposed changes are being considered through separate

publications.

FNS is proposing this rule to implement the provisions of section

825 of the Personal Responsibility and Work Opportunity Reconciliation

Act of 1996 (PRWORA) (Pub. L. 104-193) on August 22, 1996, which amends

Section 7 of the Food Stamp Act of 1977, as amended (7 U.S.C. 2016(i))

(the Act). The specific provisions are discussed below.

Mandate EBT

The Leland Act established EBT systems as operational issuance

systems to provide food stamp benefits to eligible households. The

PRWORA goes further by mandating that each State agency implement EBT

for issuance of food stamp benefits no later than October 1, 2002,

unless the Secretary provides a waiver for a State agency that faces

unusual barriers to implementing an EBT system. Each State agency is

encouraged to implement an EBT system as soon as practicable.

In order to meet the requirement, State agencies must be issuing

EBT benefits for food stamps statewide by October 1, 2002. Currently,

all but a very few State agencies have submitted planning documents for

the eventual implementation of EBT systems. Therefore, we expect that

only a small pool of States or territories will be forced to take

action as a result of this provision or request a waiver from the

Secretary for timely implementation of EBT under the law. This rule

proposes adding language in Section 274.12 (a), to mandate that each

State agency implement an EBT system by the specified date unless a

waiver is granted to the State. Any State agency that is not granted a

waiver and is not fully implemented by October 1, 2002, will be out of

compliance with these rules and may be subject to disallowance of

administrative funds pursuant to the provisions of 7 CFR 276.4.

Off-Line Technology

7 CFR 274.12 established rules for the approval, implementation and

operation of on-line EBT systems for food stamps. The Leland Act did

not authorize the utilization of off-line EBT technology in which a

self-contained benefit access device, such as a microprocessor card,

commonly known as a smartcard, is used to access benefits. Off-line

systems could only be approved under the waiver authority of section 17

of the Act (7 U.S.C. 2026) as a demonstration project.

The term ``on-line'' is deleted from the Act by section 825 of

PRWORA, thereby eliminating the requirement that EBT systems be on-line

systems. This rule proposes to amend 7 CFR 274.3 to define an off-line

EBT system as a benefit delivery system in which a benefit allotment

can be stored on a card and used to purchase authorized items at a

point-of-sale terminal without real-time authorization from a central

processor.

The system architecture and functionality of off-line payment

systems differs from that of on-line applications. As such, some of the

technical standards codified in the existing rule may require revisions

to relax or broaden language, supplement stated standards, or introduce

new standards and requirements. Because industry standards for off-line

electronic payment systems are still evolving, the Department is not in

the position to propose standards specific to off-line systems in this

rulemaking. However, we are interested in soliciting comments from the

public at this time to provide input into our decision regarding what

changes we should propose in the future as standards for off-line

systems. We will also be looking at the experience gained in off-line

demonstration projects in Ohio and Wyoming as we assess the need for

further standards.

In the meantime, this rule proposes the regulations be amended to

simply allow for the implementation of off-line EBT systems by adding

language to that effect. Pending publication of new off-line standards,

proposals from State agencies to implement off-line systems will be

evaluated on a case-by-case basis. The Department will base approvals

on the on-line standards currently in our rules where they apply, on

the most current off-line industry information available and on

knowledge gained from off-line EBT systems operating at the time.

Cost Neutrality

This section proposes several changes to the regulations. First, we

are removing the requirement that EBT systems be cost neutral in any

one year, since the requirement that cost neutrality be measured on an

annual basis was removed from the Act by PRWORA. Section 7(i)(2)(A) of

the Act prior to the PRWORA stated that EBT systems must be cost

neutral to the Federal government. The regulations require State

agencies to calculate a coupon issuance cap and at 7 CFR

274.12(c)(3)(vi)(B) require that State agencies be responsible for the

post-EBT implementation issuance costs that exceed the coupon issuance

cap in any one year. Section 825 of PRWORA amends the Act to strike the

language, ``in any 1 year'', effectively providing more flexibility in

the determination and tracking of cost neutrality. The regulations are

being modified to reflect this change. The State agencies will,

however, still be required to submit an issuance cost cap, and the

Federal Government will still be required to verify the cost cap

submitted.

National Cap. As a discretionary change, the Department is also

proposing to amend the regulations at 7 CFR 274.12(c)(3)(i) to

establish a national issuance cost cap figure. The Department would

calculate the national issuance cost cap based on the State issuance

costs that have been approved by FNS and on the direct Federal costs

that are attributable to coupon issuance. The rule would allow State

agencies to use the National issuance cost cap instead of conducting

their own cap analysis. State agencies would still have the option of

calculating their own cost cap if they wanted to do so. The current

regulations at 7 CFR 274.12(c)(3)(i) through (vi), which specifically

delineate the cost neutrality guidelines and the procedures for

calculating the State coupon issuance cap, have been a repeated source

of misunderstanding for States. Therefore, in the interest of

clarifying these provisions, this section has been redrafted and

reorganized to be more explicit.

Prospective Certification. Finally, the Department is proposing a

second discretionary provision to assess whether State agencies have

met Federal cost neutrality requirements through prospective

certification at the time the cap is submitted, eliminating the need to

track operational costs throughout the life of the system. Currently,

at the end of the EBT contract period, the State agencies are required

to compare the actual EBT operational costs for the life of the EBT

system to the coupon issuance cost cap to see that the actual costs do

not exceed the cap. Prospective cost neutrality certification for EBT

would follow the same approach that has been used for State eligibility

systems, whereby the EBT cost projections are compared to a coupon

issuance cap before system implementation to assess the cost neutrality

of the system. If the comparison demonstrates the proposed system will

cost less than the coupon system, no further measurement will be

required for the life of the EBT system unless there is a substantial

increase in system costs due to contract re-negotiation or some other

change. Any such cost increase will require prior

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approval and submittal of an Implementation APD Update. Cost neutrality

will be reassessed for any significant cost increases during system

life, and for any subsequent EBT systems the State agency may develop

and implement. This method will significantly simplify the process used

to determine a State's EBT system cost neutrality.

Differentiate Food Stamp Eligible Items

The PRWORA requires, to the extent practicable, the establishment

of system approval standards for measures that permit a system to

differentiate items of food that may be bought using food stamps from

items that may not. This resulted in a study to determine to what

extent optical scanner technology, the only technology currently able

to differentiate between eligible and non-eligible items, could be used

in tandem with EBT to meet this requirement. A report of the study was

delivered to Congress in August 1998, explaining there must also be a

linkage of the scanner to an electronic cash register at the point-of-

sale (POS) so that the information from scanned and eligible items can

be passed to the EBT system. Technically, this is feasible in about 95

percent of all authorized retailers. However, this would be cost

prohibitive, requiring the introduction of hardware and software in all

Food Stamp authorized stores at an estimated initial cost of $4.60

billion, of which $3.30 billion is for the estimated 68 percent of

program authorized stores that do not currently scan. To maintain this

functionality, an additional $752 million annually is estimated. Based

on this information, no regulatory change is being proposed.

Replacement Card Fee

The PRWORA amends the Act to allow a State agency to collect a

charge for replacement of an EBT card by reducing the monthly allotment

of the household receiving the replacement card. Prior to the enactment

of the PRWORA, the EBT regulations allowed for approval of a card

replacement fee; however, the fee could not be collected from a

household's food stamp benefit allotment. This rule proposes to amend

current regulations at 7 CFR 274.12 (f)(5)(v) to add this provision.

State agencies with currently operating EBT systems need to inform

FNS if they intend to institute a process for collection of replacement

card fees from client households' allotments. If a State agency is in

the process of developing an EBT system and intends to charge

households for replacement cards, they must include the procedure for

collection of the fees in their EBT system design documents. FNS will

need to know how replacement card fees will be accounted for by the

State agencies.

If FNS is already sharing in the cost for replacement cards with

the State agency through an existing contract, the amount collected

must be reported as program income on the SF-269 report. Alternatively,

the State agency's EBT processor may handle collection of the

replacement card fee and reduce the billing to the State by the amount

collected. At the State agency's request, FNS can establish a special

authorization number in the FNS retailer database to be utilized by the

State agency for the purpose of reconciling the funds drawn for the

replacement fees.

Photograph on EBT Card

The PRWORA specifies that State agencies may require that EBT cards

contain a photograph of one or more members of a household. This does

not change what is allowable under current regulations. However, the

language in the PRWORA further specifies that the State agency must

establish procedures to ensure that any other appropriate member of the

household or any authorized representative of the household may utilize

the EBT card if a photo is used. Any State agency wishing to use photos

on the EBT cards should specify in their plans how they intend to

address this concern of the Agency. This rule proposes to amend the

current regulations accordingly by adding paragraph (iv) at CFR

274.12(h)(6).

Anti-Tying Restrictions

Section 825 of the PRWORA includes the following provision: A

company may not sell or provide EBT services, or fix or vary the

consideration for EBT services, on the condition or requirement that

the customer obtain some additional point-of sale service from the

company or an affiliate of that company; or not obtain some additional

point-of-sale service from a competitor of the company or competitor of

any affiliate of the company. The law also states that the Department

must consult with the Board of Governors of the Federal Reserve System

before promulgating any regulations regarding this provision. After

consultation with the Federal Reserve, the Department has determined

that this provision serves no purpose in the EBT environment.

It is the Department's understanding that this anti-tying provision

was intended to prevent large EBT contractors that might underprice

their commercial service offerings from squeezing smaller banks out of

the point-of-sale marketplace. Some had hoped this language would

diminish the competitive advantage of a State agency's chosen EBT

contractor to provide these other commercial point-of-sale services at

retail locations for which they were already providing EBT services.

However, the legislative language states that the cost of EBT services

cannot be varied, rather than the cost of commercial services cannot be

varied. In fact, there is already no way to tie EBT services to

receiving additional commercial point-of-sale services when EBT is

provided by the Government at no cost to authorized retailers. Anti-

tying prevents the conditioning of any service on the purchase of

another service or product. Since EBT is non-conditioned, the Federal

Reserve agrees that the existing anti-tying laws are not relevant in

the EBT environment. Therefore, the Department is not proposing any

regulation change at this time, but does welcome any comments on the

anti-tying provision.

System Compatibility

PRWORA included that it is the sense of Congress that States

operate EBT systems in a manner that is compatible with one another.

The Department is not proposing any changes since the current

regulations already require system compatibility. EBT regulations at 7

CFR 274.12(h) Performance and Technical Standards, require that States

ensure EBT systems comply with point of sale (POS) technical standards

as established by the American National Standards Institute (ANSI) or

International Organization for Standardization (ISO), where applicable.

FNS has further worked to develop a technical specification for EBT

food stamp transactions from a POS by bringing together a Technical

Specification Committee comprised of EBT processors in association with

the Electronic Funds Transfer Association (EFTA) EBT Operating Rules

Committee. The purpose of creating this specification was to provide a

standard POS/EBT system interface that retailers could use in multi-

state retail operations and to allow for interstate transactions.

Also, 7 CFR 274.12(h)(5) Third Party Processors, requires State

agencies to afford retailers the opportunity to use third party

processors and to provide interface specifications and certification

standards in order for the third party processors to participate in the

EBT system. Because most third party processors operate in more than

one State, we are supporting compatibility

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by requiring access for third party processors. FNS also supports

compatibility by working with the National Automated Clearing House

Association (NACHA) EBT Council on issues related to interoperability

including the recent implementation of a test to determine the volume

and cost of interstate transactions.

Regulation E

Section 907 of the PRWORA amends Section 904 of the Electronic

Funds Transfer Act, commonly known as Regulation E, to exempt from

coverage government EBT accounts held for recipients of State-

administered needs-tested assistance programs, including the Food Stamp

Program. This provision does not amend the Food Stamp Act and

therefore, there is no change proposed to our current regulations.

Implementation

The Department is proposing that the provisions of this rulemaking

become effective no later than 30 days after publication of the final

rule. State agencies may implement the provisions anytime after

publication, however, EBT systems must be in place no later than

October 1, 2002, unless the State is granted a waiver by the

Department.

List of Subjects in 7 CFR Part 274

Administrative practice and procedure, Food stamps, Fraud, Grant

programs--social programs, Reporting and recordkeeping requirements,

State liabilities.

Accordingly, 7 CFR part 274 is proposed to be amended as follows:

PART 274--ISSUANCE AND USE OF COUPONS

1. The authority citation for 7 CFR part 274 continues to read as

follows:

Authority: 7 U.S.C. 2011-2032.

2. In Sec. 274.3, a new paragraph (a)(5) is added to read as

follows:

Sec. 274.3 Issuance systems.

(a) * * *

(5) An off-line Electronic Benefit Transfer system in which benefit

allotments can be stored on a card and used to purchase authorized

items at a point-of-sale terminal without real-time authorization from

a central processor.

* * * * *

3. In Sec. 274.12:

a. Paragraph (a) is revised.

b. Paragraph (b)(1) is amended by removing the second sentence and

removing the word ``However,'' from the third sentence.

c. Paragraphs (c)(3)(i) through (c)(3)(vi) are removed.

d. Paragraphs (e), (f), (g), (h), (i), (j), (k), (l), and (m) are

redesignated as paragraphs (f), (g), (h), (i), (j), (k), (l), (m), and

(n), respectively, and a new paragraph (e) is added.

e. Newly redesignated paragraph (g)(5)(v) is revised.

f. In newly redesignated paragraph (i), a new paragraph (i)(6)(iv)

is added.

The revisions and additions read as follows:

Sec. 274.12 Electronic Benefit Transfer issuance system approval

standards.

(a) General. This section establishes rules for the approval,

implementation and operation of Electronic Benefit Transfer (EBT)

systems for the Food Stamp Program as an alternative to issuing food

stamp coupons. State agencies must implement EBT systems no later than

October 1, 2002, unless the Secretary provides a waiver for a State

agency that faces unusual barriers to implementing an EBT system. In

general, these rules apply to both on-line and off-line EBT systems,

unless stated otherwise herein, or unless FNS determines otherwise for

off-line systems during the system planning and development process.

* * * * *

(e) Cost Neutrality. The State agency must operate its EBT system

in a cost-neutral manner, whereby the Federal cost of issuing benefits

in the State after implementation of the EBT system does not exceed the

Federal cost of delivering coupon benefits under the previous coupon

issuance system. The amount up to which the State agency may consider

its EBT system cost neutral is defined by the coupon issuance cap. The

issuance cost cap is expressed in terms of a cost per case month

derived by dividing the annual total cost of issuance by the total

number of households issued food stamp benefits during the year the

costs were incurred. In determining its coupon issuance cap, the State

agency shall use either the national issuance cap, as determined by

FNS, or calculate a coupon issuance cap based on the State agency's

statewide issuance costs under the current coupon issuance system.

(1) The National Coupon Issuance Cap is a case-month issuance

amount, as calculated by FNS. The national issuance cost cap is based

on nationwide Federal coupon issuance costs, as validated by FNS, and

includes the issuance costs identified in paragraphs (e)(2)(i) and

(e)(2)(ii) of this section. FNS will make the national cost cap figure

available to State agencies who opt for this method of determining the

cost neutrality of their EBT systems.

(2) A State Coupon Issuance Cap is based upon individual States'

statewide coupon issuance costs, multiplied by the percentage of

Federal financial participation, plus Federal-only coupon issuance

costs. Such costs, to be represented as a cost per case-month, shall be

calculated using State issuance costs for the four consecutive Federal

fiscal quarters preceding the submission of the EBT Implementation APD.

An alternative base period may be used with approval from FNS, if the

State agency can demonstrate that the alternative period would be more

accurate or other circumstances prevent the use of the required base

period. A State agency may also request approval from FNS to develop

coupon issuance caps based on costs from individual counties, selected

project areas, or other subdivision of the State operating EBT which

will then be combined into a blended statewide coupon issuance cap

prior to statewide EBT implementation.

(i) State coupon issuance costs shall include, but not be limited

to, direct allowable costs for personnel, fringe benefits, travel,

equipment, supplies, contracts, construction and other direct costs

associated with coupon issuance. Such costs may be direct charges to

the State agency for Food Stamp Program administration that have been

allocated from a larger cost pool to the Food Stamp Program and to the

coupon issuance function. Indirect costs, defined as costs which are

included in the State agency's indirect cost proposal and approved for

cost charging through an indirect cost rate, shall not be included in

determining the cap.

(ii) Federal coupon issuance costs associated with coupon issuance

in the State agency that shall include:

(A) Costs for coupon printing, shipping, processing and

reconciliation. The case-month figure associated with these costs is

provided by FNS;

(B) Monthly mail issuance losses up to the tolerance limit approved

by FNS;

(C) Monthly duplicate issuance losses, except for mail issuance

losses, absorbed by FNS; and

(D) Allowable State coupon issuance costs multiplied by the

applicable percentage rate of Federal financial participation.

(iii) The State agency shall provide narrative explanations and

satisfactory supporting documentation to clarify each cost item and how

it was calculated. When allocated costs are included in the coupon

issuance cap, the State agency must provide a narrative explanation of

how the charge was allocated to the Food Stamp Program and to coupon

issuance. The allocation method must be objective,

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demonstrate a reasonable cause and effect relationship between the type

of cost and the basis for the allocation, and represent consistent

application for all similar costs. If time studies are used as the

basis for allocation of costs to issuance, FNS must approve the

definition of issuance used in the instructions to study participants.

(iv) All issuance costs included in the coupon issuance cap are

subject to validation by FNS prior to FNS approval. Validation entails

the review of the State's accounting system and applicable source

documentation to determine that the costs were actually incurred, were

reasonable, were allocated properly to the Food Stamp Program and to

the issuance functional category, and were reported to FNS on the

standard financial Status Report (Form SF-269).

(3) The State agency should submit its coupon issuance cap or

indicate it has opted to use the national coupon issuance cap as part

of the Implementation APD process. The coupon issuance cap must be

approved prior to implementation of the pilot, and shall be effective

from the first date benefits are issued to households through the EBT

system during the pilot project.

(4) Coupon Issuance Cap Inflation. Each State's approved issuance

cap and the national cost cap will be adjusted each Federal fiscal year

based on the percentage change in the most recently published Gross

Domestic Product Implicit Price Deflator Index (GDP Price Deflator)

calculated from the percentage change in the index between the first

quarter of the current calendar year and the first quarter of the

previous year, as published each June by the Bureau of Economic

Analysis. FNS will compute the inflated cap for each State each year

and provide the revised cap to State agencies annually.

(5) Calculating Cost Neutrality. The determination of cost

neutrality will be assessed on a prospective basis; that is, FNS will

make a determination prior to system implementation whether the

proposed EBT system will be cost neutral based on a comparison of the

coupon issuance costs to the projected costs of the EBT system as

proposed in the Implementation APD. The State Agency may choose how

they determine coupon issuance costs; either according to paragraph

(e)(1) or paragraph (e)(2) of this section. After approval of its

coupon cost cap and prior to system implementation, the State agency

shall submit to FNS an analysis comparing the coupon issuance costs to

the projected EBT costs over the seven years of system operation or

other specified period of time defining the life of the system. The

State shall project the statewide issuance costs including EBT system

design, development, start-up and operations through the defined life

of the system. For cost per case month comparisons, the projection will

include the same caseload estimates as the coupon cap calculation.

Statewide cost projections for issuance costs after EBT implementation

must include all of the direct EBT costs, and projections for all

categories of allocated costs which were included in the coupon cost

cap calculation using the same allocation methodology as in the cost

cap calculation. The State agency may request approval to limit the

issuance cost comparison for cost neutrality purposes to only the costs

incurred for the area served by EBT and to not include residual coupon

issuance costs; that is, costs associated with issuing coupons to

recipients in areas not yet converted to EBT. Cost neutrality would

then be measured by comparing the coupon issuance cap multiplied by the

number of EBT cases to the EBT cost of operation. With the addition of

each new area served by EBT, the State agency would then be required to

recalculate a blended State cap figure, incorporating the coupon

issuance costs of the newly added area with the previously approved

issuance cap, for use in comparison to the EBT costs for the areas

served by EBT. The projection shall include any costs allocated to an

EBT cost pool if applicable.

(i) EBT planning costs are to be excluded from the cost neutrality

assessment and shall include costs attributed to the preparation of the

Planning APD, all activities leading to the development of the EBT

implementation plan and the completion of the documentation contained

in the FNS approved Implementation APD.

(ii) The cost neutrality assessment must include system design and

development and start-up costs . For assigning the costs to start-up,

the start-up period for the EBT project shall begin from the approval

date of the Implementation APD or with the ratification of a contract

for EBT services, whichever is earlier and end with the first EBT

benefit issuance in the pilot area.

(iii) The operations phase is defined as beginning with the first

EBT issuance in the pilot area. The State agency shall identify the

allowable EBT operational costs which include, as appropriate, but are

not limited to: labor hours and costs by job category and by program

for each unit, direct non-labor costs by program for each agency,

vendor charges, if any, computer usage (CPU, disk storage, tapes,

printing), the equipment amortization/lease and maintenance (including

POS hardware and installation costs), telecommunications installations,

recurring telecommunications costs, benefit card stock and equipment,

supplies, printing and reproduction, travel, postage, automated

clearinghouse charges, wire transfer fees and other such settlement

fees, and other direct costs. Indirect costs, as defined in paragraph

(e)(2)(i) of this section, shall not be included as EBT system

operational costs.

(iv) For the purposes of claiming Federal financial participation

in State capital expenditures and for the purposes of projecting the

cost to EBT, costs for EBT equipment purchased directly by the State

agency shall be charged from the time operations begin in accordance

with Sec. 277.18(i)(3) of this chapter and Sec. 277.18, Appendix A of

this chapter. Equipment costs shall include the cost of installation

and shall be separate from those transaction costs identified in the

EBT contract. Costs for EBT equipment purchased directly by the State

agency shall be identified in the EBT system budget as a separate

component, both for the pilot and the fully operational system and

shall be applied to the issuance funding cap as amortized.

(6) FNS must review and approve the cost neutrality analysis

submitted by the State.

(i) If the comparison demonstrates the proposed system will cost

less than the coupon issuance system, no further measurement will be

required for the life of the system unless there is a substantial

increase in system costs requiring prior approval as described in

Sec. 277.18(c)(2)(ii)(C) of this chapter and the submittal of an

Implementation APD Update as outlined in the FNS Handbook 901 (APD

Handbook).

(ii) Any State agency that cannot show cost neutrality will be

required to track EBT costs throughout the life of the system and

reimburse FNS for any excess at the end of the defined system life.

(iii) Any subsequent EBT systems developed or implemented will

require an updated cost neutrality assessment incorporating the revised

costs of the new system.

* * * * *

(g) * * *

(5) * * *

(v) The State agency may impose a replacement fee by reducing the

monthly allotment of the household receiving the replacement card,

however the fee may not exceed the cost to

[[Page 28768]]

replace the card. If the State agency intends to collect the fee by

reducing the monthly allotment, it must follow FNS reporting procedures

for collecting program income. States agencies currently operating EBT

systems must inform FNS of their proposed collection operations. States

in the process of developing an EBT system must include the procedure

for collection of the fee in their system design document. All plans

must specify how the State agency intends to account for card

replacement fees and include identification of the replacement

threshold, frequency and circumstances in which the fee shall be

applicable.

* * * * *

(i) * * *

(6) * * *

(iv) State agencies may require the use of a photograph of one or

more household members on the card. If the State agency does require

the EBT cards to contain a photo, it must establish procedures to

ensure that all appropriate household members or authorized

representatives are able to access benefits from the account as

necessary.

* * * * *

Dated: May 17, 1999.

Shirley R. Watkins,

Under Secretary for Food, Nutrition, and Consumer Services.

[FR Doc. 99-13554 Filed 5-26-99; 8:45 am]

BILLING CODE 3410-30-U