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

DEPARTMENT OF AGRICULTURE

Food and Nutrition Service

7 CFR Part 246

RIN 0584-AC64

Special Supplemental Nutrition Program for Women, Infants and

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

Formulas Rule

AGENCY: Food and Nutrition Service, USDA.

ACTION: Final rule.

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SUMMARY: This final rule amends both the food and the nutrition

services and administration (NSA) funding formulas to improve the

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

stable funding environment. The amended food funding formula helps to

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

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

available, to State agencies that are receiving a smaller portion of

funding relative to their proportion of the WIC eligible population

than other State agencies. The amended NSA funding formula simplifies

the funding formula by deleting obsolete components and revising

existing components to more equitably distribute funds among State

agencies.

EFFECTIVE DATE: This rule is effective October 1, 1999.

SUPPLEMENTARY INFORMATION:

Background

Proposed Rule

The Food and Nutrition Service (FNS) published a proposed rule on

October 13, 1998 in the Federal Register (63 FR 54629) outlining the

revisions of the food and nutrition services and administration funding

formulas for WIC. The proposed rule provided for a 90-day comment

period, which ended on January 11, 1999. Two hundred twenty-two comment

letters were received from a variety of sources, including State and

local agencies, Members of Congress, advocacy groups and other public

interest groups. FNS has given all comments careful consideration in

the development of this final rule and would like to thank all

commenters who responded to the proposal.

Need for Revisions to the WIC Funding Formulas

The WIC Program has consistently demonstrated its effectiveness in

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

infants and children at nutritionally related medical or dietary risk.

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

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

appropriate to change both the NSA and food funding formulas to enhance

their effectiveness at distributing funds fairly and equitably among

WIC State agencies in an environment in which appropriations are

relatively stable.

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

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

manage within a finite appropriation level. However, State agencies

have considerable latitude to manage program costs to accommodate

variable funding levels.

The formulas in this rule better provide State agencies with the

equal opportunity to serve eligible persons who apply for benefits.

Currently, State agency funding levels are not necessarily proportional

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

allocate funds more fairly among State agencies under a relatively

stable funding environment.

Nutrition Services and Administration (NSA) Funding Formula

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

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

funding stability while providing funding levels that enabled

equivalent services to participants across State agencies and to

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

served.

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

tremendous amount of data collection--some of which may no longer be

needed or has little impact on the actual allocation of funds. Further,

some data are not available in time to permit issuance of final grants

at the beginning of the fiscal year. As a result, FNS feels that the

current NSA funding formula is no longer the most efficient and

effective means of distributing NSA funds.

Current NSA Provisions--General

The WIC regulations at 7 CFR 246.16 (c)(2) set forth both the NSA

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

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

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

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

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

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

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

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

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

by allocating regional discretionary funds based on regional and

National priorities.

The following is a discussion of each provision, as proposed,

comments received on the proposal, and an explanation of the provisions

set forth in this final rule.

Current NSA Parity Component

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

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

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

of participants each State agency is expected to serve taking into

consideration its State-reported per participant food costs and

inflation. In addition to projected participation, three adjustments

are made to this participation-based formula to recognize factors

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

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

associated with smaller participation levels (currently an adjustment

is made at three levels: 5,000 or fewer

[[Page 56670]]

participants; 5,001-15,000 participants; and more than 15,000

participants);

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

paid within each State for employees in Public Administration, Health

and Social Services; and

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

proportion of Priority I participants served by the State agency.

Currently, eighty percent of funds available for allocation through

the parity component are allocated in accordance with projected

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

the basis of administrative grant per participant (AGP) rates that are

adjusted for the higher per participant costs associated with smaller

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

percent of funds available for the parity grant component are allocated

on the basis of differential salary levels and service to Priority I

participants.

Proposed ``Fair Share'' Component

Renaming the Parity Component. The term ``parity'' is used to

describe the basic concept of gradually moving State agencies to a

funding level that represents their respective ``fair share'' of

available funds. FNS believes that the term ``fair share'' better

describes the purpose and intent of this component and, therefore,

proposed that the current ``parity'' component be renamed the ``NSA

fair share'' component. This change would also provide continuity with

terminology used in the food funding formula.

The majority of commenters addressing this issue agreed to change

the term ``parity'' to ``fair share''--only two commenters disagreed

with the change. The provision remains unchanged from the proposed

rule.

Food Cost Data Used in Calculating Projected Participation. The NSA

funding formula projects the number of participants to be served by

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

State-reported per participant food cost, adjusted for inflation. Prior

to fiscal year 1999, the data used was the closed-out per participant

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

June prior to the fiscal year for which the grants are being

calculated. Closed-out food cost data is usually available 150 days

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

June is not available to FNS until late November, at which time the

final grants could be calculated for release on January 1.

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

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

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

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

actual food costs and to adjust for inflationary increases that may

occur during the remainder of the fiscal year. While other time frames

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

data was necessary to take into consideration seasonal fluctuations of

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

months of food cost data used in the calculations, FNS wanted to obtain

comments concerning the change in the time frames.

Based on lengthy deliberations, it was concluded that we had the

statutory authority to use April through March closed out food cost

data for the calculation of fiscal year 1999 grants. WIC State agencies

were very supportive of this change, which allowed final grants to be

issued on October 1, 1998.

This change was further supported in the comments received on this

provision in the proposed rule. Although the time frame for the closed-

out food costs will now be April through March, the final rule will

continue to be silent on the actual dates used in the calculation for

the funding formula.

Economy of Scale/Bands. As noted above, NSA costs are affected by

economy of scale. There are certain fixed administrative costs in the

delivery of program benefits incurred by a State agency that do not

vary regardless of the size of the caseload. Therefore, State agencies

with larger participation levels are able to realize reductions in

administrative expenditures per person (AEP) as these fixed costs are

spread among more participants. Smaller State agencies, particularly

Indian Tribal Organizations (ITOs), have comparatively higher costs per

participant. Although the current NSA funding formula includes a size-

adjusted cost factor, other alternatives and adjustment factors were

examined to determine if the current adjustments adequately recognize

the various range of administrative expenditures for State agencies of

differing sizes.

The proposed rule recommended retention of the current bands until

updated NSA cost information needed to determine new band sizes is

available. It was felt that the data upon which the AEP bands are

currently based remains the best available. However, more research and

analysis is needed to understand how economies of scale actually affect

WIC NSA costs, what specific costs are most influenced, the

participation level(s) at which economies of scale vary and how much

allowance should be made at each of those levels.

Commenters were asked to provide suggestions as to how economies of

scale can be objectively and fairly determined for future

consideration. While no commenters provided concrete suggestions, the

majority of commenters were in agreement that the current bands should

be retained until further analysis could be conducted. FNS will study

the economies of scale (bands) as part of its commitment to improve the

data used in the funding formulas. Additionally, the General Accounting

Office (GAO) is conducting a three-year study on WIC NSA costs which

may provide additional data that can be utilized in determining

appropriate band sizes and adjustment factors. Therefore, until FNS'

further analysis is completed and appropriate baseline data is

available, we will continue to use the current bands of 5,000 or fewer;

5,001 to 15,000; and over 15,000. The corresponding percent adjustment

between bands will also be retained.

Salary and Priority I Participant Targeting Component. The combined

salary and targeting component determines 20 percent of a State

agency's NSA fair share target level. In an effort to simplify the

funding formula and to delete obsolete components, both the salary and

targeting components were analyzed to determine whether they have a

significant and appropriate impact on the final NSA grant allocations.

Salary Component. Salary data were incorporated into the current

funding formula in recognition that salary costs represent by far the

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

regional variations in labor costs, similar levels of service have

different salary costs. The salary data used to compute differential

salary levels for State agencies includes average annual salaries for

government workers provided by the Bureau of Labor Statistics (BLS). As

previously determined by FNS, the salary level for a GS-9, step I in

the Federal Government's General Schedule pay scale is used for those

State agencies and territories for which BLS data is unavailable. The

most current data available from BLS usually reflects average salary

levels paid two years prior to the applicable fiscal year for which

funds are allocated.

[[Page 56671]]

FNS recognizes that the salary component is a controversial area

and that there are strong opinions and arguments supporting both the

inclusion and deletion of the salary component in the NSA funding

formula. The proposed rule retained the current salary component, which

would continue to equal 10 percent of the NSA fair share component of

the NSA funding formula. However, comments on whether the current

salary factor contributes to an appropriate and fair allocation of NSA

funds were welcomed.

As anticipated, there were many comments on this provision. The

majority of the commenters thought this provision should be retained.

These commenters generally stated that the salary component is needed

due to their States' higher cost of living and that salaries constitute

the largest component of administrative budgets. However, States

opposing the provision argued that the BLS data does not accurately

reflect the cost of salaries paid to WIC staff and that many other

factors, such as a state's geography or multilingual needs, affect the

cost of providing services. Therefore, they believe it would be more

appropriate to make grant adjustments based on these other factors when

determining NSA funding needs.

After much consideration of this provision, FNS has decided to

retain the current salary component. The salary component would

continue to equal 10 percent of the NSA fair share component of the NSA

funding formula. The provision is reflected at revised

Sec. 246.16(c)(2)(i) of program regulations.

Targeting Component. The targeting component was originally

designed to provide an incentive for targeting benefits to the highest

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

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

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

formula also included a targeting component. In a time when WIC was not

able to meet the need for program benefits of the highest risk

individuals, targeting funds to those State agencies that were serving

a greater proportion of high-risk individuals was a necessary

objective. Now, however, based on estimates derived from State-reported

participation data, nationwide, virtually all fully eligible infants

are receiving services through the WIC Program and most fully eligible

women are participating at some point during their pregnancies.

Therefore, FNS proposed that the targeting component be deleted since

it is no longer needed to encourage and support service to Priority I

participants.

The majority of commenters supported the deletion of the targeting

component. Reasons cited by the commenters to support deletion included

simplification, the effect on the overall NSA grant is negligible, and

that it would promote consistency with the food funding formula, which

deleted its targeting component in 1994. Therefore, the final rule

retains the provision to delete the targeting component. This deletion

is reflected at revised Sec. 246.16(c)(2)(i) of program regulations.

The deletion of the targeting components allows 100 percent of the NSA

fair share funds to be allocated based on projected participation

levels, adjusted for State agency size and salaries (90 percent) and

salary differentials (10 percent).

NSA Stability Funds

Throughout the deliberations on the possible revisions to the NSA

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

funding is the stability component. The stability grant helps to

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

continuity that acknowledges that State agencies have fixed NSA costs

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

continued Program operations. In the event that available funding is

insufficient to fund State agencies at their stability funding level,

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

done with the food funding formula.

The stability component was continued in the proposed rule, with

modification. The modification concerned the use of discretionary

funding decisions when calculating the State agency's NSA stability

grant level. Currently, discretionary funds become a permanent part of

a State agency's stability grant the following year. Over time,

discretionary funding decisions made by FNS may have unnecessarily

inflated the grant allocations provided to particular States due to

additional funding allocated for large one-time capital expenditures.

Therefore, FNS proposed changes to the stability, or base, grant

calculation to eliminate consideration of discretionary funding (or, as

described below, ``operational adjustment'' funding) allocations made

in the prior fiscal year.

The majority of the commenters agreed that the NSA base funding

level should be the prior year formula calculated grant prior to any

discretionary funding adjustments. Commenters agreed that this change

would eliminate the impact of large discretionary allocations made to

States for one-time capital expenditures. Revised Sec. 246.16(c)(2)(ii)

reflects the provision as proposed, which provides each State agency a

base funding level equal to its NSA grant from the previous year prior

to any operational adjustment funding allocations for that year. As is

currently the case, each State agency's base funding level would be

reduced by a pro-rata share if insufficient funds were available.

As a result of this change in the calculation of the NSA base

funding level, we believe the term stability no longer accurately

reflects this component of the NSA funding formula. Therefore, the term

NSA base funding level will be used, and represents the State agency's

prior year formula calculated grant before any operational adjustment

funding allocations are made. This change is reflected in the final

rule in Sec. 246.2 of program regulations, from which is deleted the

definition of stability funds, and also in Sec. 246.16 (c)(2) from

which are deleted references to the term stability and the concept of

stability funding.

NSA Residual Funds

Currently, after NSA stability grants are determined, any remaining

funds available for allocation are referred to as residual funds and

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

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

cover NSA costs associated with increases in projected participation,

or (2) moves State agencies closer to their parity, or, under the

revised regulations, their fair share target funding level. The fair

share for NSA funds is an administrative grant per person (AGP) for

each projected participant, adjusted for factors that affect NSA costs.

FNS proposed that priority for residual funds should be given only

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

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

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

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

part of the current regulatory provision that provides funds on the

basis of increased participation countervails the fair share objective

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

share funding level.

Therefore, FNS proposed that the NSA formula grant for each State

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

funding level, which considers the difference between the estimated

cost of projected

[[Page 56672]]

participation (NSA fair share target level) and the prior year NSA base

funding level. If a State agency's NSA fair share target funding level

is greater than its base funding level, the State agency would be

eligible to receive additional NSA funds proportionate to their

respective shortfall from the fair share target funding level.

Only 15 comments were received with respect to this provision. Over

half the commenters supported the deletion of the component of the NSA

funding formula regulations that distributes NSA funding based on

increases in projected participation. Those in support of deletion

cited simplification as the primary justification. Therefore, FNS

retains the provision as proposed as reflected in revised

Sec. 246.16(c)(2)(iii). As a result of this deletion, the term

``residual funds'' is deleted from Sec. 246.2--Definitions.

Discretionary Funds

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

flexibility of the program to accommodate individual State needs and

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

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

provide for program innovation becomes more critical.

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

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

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

1999, these pools amounted to over $100 million nationally. Each FNS

regional office then allocates the discretionary funds back to State

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

agencies and national guidelines. Through the regional allocation of

discretionary administrative funds, the funding process can satisfy

many of the administrative and structural needs not accounted for in

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

management information systems).

FNS considered the discretionary funding allocation process and the

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

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

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

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

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

adjustment'' (OA) funds. It was felt that this change will help clarify

that the use of the funds are for both capital investments as well as

operational activities, and that, in many cases, the funds are a

critical part of a State agency's WIC grant and are needed to support

ongoing operations.

All commenters on this proposal agreed to change the name

``discretionary'' funds to ``operational adjustment'' funds. The

commenters felt that the new term better describes how the funds are

used. Therefore, this provision of the final rule will stand as

proposed.

The degree to which FNS regions have been inconsistent in the

methodology used to award discretionary fund allocations and the

adherence to national guidelines was also considered. While some

regions have used a competitive process to award the majority of

available discretionary funds, other regions simply returned a large

portion of the available discretionary funds to the State agencies in

their region according to the distribution allocated through the

funding formula. This inconsistency has caused concern as funding for

projects becomes more competitive and funding levels for the program

are being scrutinized. Further, FNS regions that include large State

agencies that contribute significant amounts of funding to the regional

fund have more flexibility than regions with smaller State agencies.

FNS recognizes that regions have various funding resources and needs

and, for most regions, the process employed for discretionary funds

allocation is a mutually acceptable one in which the State agencies and

the regions are satisfied with the process. These views were reflected

in the proposed rule, which allowed up to 10 percent of the total

regional NSA funds to be used for OA funding (formerly discretionary

fund) allocations. However, regions would be given the authority to

withhold less than 10 percent of the total regional NSA funds available

if deemed appropriate for that region's needs.

The majority of commenters agreed with the proposal that OA

allocations should be equal to up to 10 percent of the total regional

NSA funds and that regions should be given the authority to withhold

less than ten percent if deemed appropriate. Commenters believe that

this allows the FNS regions to make decisions based on the needs of WIC

State agencies. The final provision will stand as proposed and is

reflected in revised Sec. 246.16(c)(2)(iv) of program regulations.

Food Funding Formula

Current Food Funding Provisions--General

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

developed for use during a time of participation growth and annual

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

Provide a greater share of funds to State agencies receiving

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

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

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

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

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

appropriations are not likely. The emphasis must now be placed on

shifting available funds among State agencies to reflect changes in

distribution of the eligible population and to reach the maximum number

of participants possible with available program resources.

The following is a discussion of each provision, as proposed, and

an explanation of the provisions set forth in this final rule:

Current Food Stability Component

The stability component of the current food funding formula

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

adjusted for full inflation, contingent on available resources. If

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

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

rata reduction of funds.

The current stability component, in a stable funding environment,

results in little if any additional funding to assist State agencies

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

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

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

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

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

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

funding equity among State agencies. In a relatively stable funding

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

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

of State agencies to fully utilize available funding to maximize

participation.

[[Page 56673]]

Proposed Stability Component

Long consideration was given to stability food funding and whether

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

agencies were not funded with full inflation, prior fiscal year

participation levels may not be sustained, thereby forcing some State

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

objective of making available, to the extent possible, additional

funding to under-fair-share State agencies. This would provide those

States the opportunity to add participants to bring them closer to the

level of service provided by State agencies that have received

allocations at or above their fair share.

After exploring options available, FNS proposed to modify

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

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

remaining after guaranteeing prior year-end grant levels would be

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

inflation allowance based on the fair share funding level allocated

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

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

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

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

include current year appropriated funds and unspent recoverable funds

from the prior fiscal year.

These changes to the stability component would help to ensure that

even in a funding environment in which the program receives only a

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

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

increase in funding relative to over fair share State agencies.

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

FNS proposed that State agencies would initially receive their prior

year end food grant as their stability grant. As is currently done, if

funds are insufficient to fund all State agencies at the prior year end

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

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

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

agency for inflation. FNS proposed that an inflation allowance be

calculated based on the difference between each State agency's inflated

appropriated fair share grant level and their appropriated fair share

grant level. The remaining 50 percent of available funds would be

allocated to under-fair-share State agencies proportionate to their

shortfall from their fair share target funding level. Once all State

agencies have received their target food inflation level, 100 percent

of all available funds would be allocated to under fair share State

agencies. If sufficient funding is available to fund inflation and all

under fair share State agencies up to their fair share target levels of

funding, additional funds would be allocated according to Sec. 246.16

(c)(3)(iii)(B) to any State agency requesting additional food funds.

Approximately 99 percent of the 194 commenters on this provision

were strongly opposed to the 50/50 split. The majority of commenters

felt the 50/50 split was seriously flawed and strongly supported the

original 80/20 split, i.e., 80 percent for inflation, 20 percent for

under fair share State agencies, that was discussed during meetings

between FNS and its State and local partners. Only two commenters

favored the 50/50 split and one commenter suggested a 60/40 split of

the remaining funds. Additionally, approximately 99 percent of the

commenters opposed the calculation of inflation based on the fair share

target funding level. The commenters were in support of calculating

inflation based on prior year grants.

The primary reason cited by the commenters supporting the 80/20

split was that the 50/50 split would provide too few funds to State

agencies for inflation. Commenters felt strongly that the 50/50

distribution of funds could lead to reductions in current participation

levels in over-fair-share State agencies.

The commenters were equally concerned with the methodology used to

calculate inflation. Of those responding to this provision, it was

unanimously agreed upon that basing inflation levels on each State

agency's fair share target grant level would further threaten to reduce

the funds to over-fair-share States and would jeopardize current

participation levels.

FNS is persuaded by the concerns raised by commenters on this

aspect of the proposed rule. Therefore, this final rule provides at

Sec. 246.16(c)(3)(iii) that if funds are available in excess of prior

year-end grant levels, 80 percent of such funds would be made available

to each State agency for inflation. An inflation allowance will be

calculated based on the prior year-end grant. The remaining 20 percent

of available funds would be allocated to under-fair-share State

agencies proportionate to their shortfall from their fair share target

funding level.

Many commenters recommended that the term ``prior year grant'' be

used instead of ``stability'' funding. It was felt that the term

``stability'' connotes ``adequate'' funding, which may not be the case.

Commenters also felt for clarity we should identify this funding level

as what it is, which is the prior year grant.

FNS concurs with this suggestion. Therefore, the final rule uses

the term ``prior year grant'' instead of ``stability funding'' and

Secs. 246.2 and 246.16(c)(3)(iii) are modified accordingly.

Adjustments for Higher Cost Areas

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

current regulations permit an adjustment for the higher cost of food

for State agencies located outside of the 48 contiguous States and the

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

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

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

five State agencies receive this adjustment. Current regulations allow

for these adjustments after a State agency demonstrates that it has

successfully implemented voluntary cost containment measures, such as

improved vendor management practices, participation in multi-state

agency infant formula rebate contracts or other cost containment

efforts.

FNS believes that the current adjustments and conditions under

which adjustments may be applied are consistent with program objectives

and consistent with high cost adjustments available to States in the

National School Lunch Program and the School Breakfast Program. No

comments were received on this component of the funding formula.

Therefore, the final rule reflects no changes at

Sec. 246.16(c)(3)(i)(B).

Food Spending Performance Standard

The current food spending performance standard was implemented in

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

adjustment of the current year grant. The current standard requires

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

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

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

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

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

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

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

they cannot determine the program's actual

[[Page 56674]]

food costs until the vouchers and checks have been redeemed and

processed.

While FNS recognizes that the structure of the program may cause

some State agencies to have difficulty meeting this expenditure

standard, the majority of State agencies should be able to expend at

least 97 percent of its food funds in a stable funding environment. No

comments were received on this provision of the proposed rule.

Therefore, the 97 percent food spending performance standard will be

retained in this final rule at Sec. 246.16(e)(2)(i) and the obsolete

references to the performance standards for fiscal years 1995-1997 will

be deleted.

Eligibility Data

Data on the number of individuals estimated to be income eligible

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

level estimates of income-eligible infants and children are produced

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

fair share funding levels for WIC food grants.

Much consideration was given as to the reliability and accuracy of

the income eligible data. Current regulations stipulate at

Sec. 246.16(c)(3)(i) that the income eligible data be calculated by FNS

using the best available, nationally uniform, indicators. FNS continues

to believe that the current methodology is the best available data and

proposes no changes at this time. However, FNS will reevaluate the

method for estimating the potential eligible population if new data

sources or methods become available that could improve the current

estimation process.

All commenters addressing this section were in support of continued

work in estimating the potential eligible data. FNS is committed to

ensuring that WIC eligibles estimates are developed using the best data

and methods available. In prior years the agency has devoted

substantial resources to research and analysis of data sources and

technical approaches to eligibles estimation, and the estimation

approaches have been improved as a result of these efforts. We fully

anticipate that such efforts will continue and FNS will continue to

update and improve the estimation process over time.

Executive Order 12866

This rule has been determined to be significant under Executive

Order 12866, and has been reviewed by the Office of Management and

Budget. An impact analysis statement has been prepared and is available

upon request.

Public Law 104-4

Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) (2

U.S.C. 1531 et seq.) 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 (2 U.S.C. 1532), FNS generally must prepare a written statement,

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

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

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

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

for a rule, section 205 of the UMRA (2 U.S.C. 1535) generally requires

FNS to identify and consider a reasonable number of regulatory

alternatives and adopt the least costly, most 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, or 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 the UMRA.

Regulatory Flexibility Act

This final rule has been reviewed with regard to the requirements

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

Watkins, Under Secretary, Food, Nutrition and Consumer Services, has

certified that this rule will not have a significant economic impact on

a substantial number of small entities. This rule affects how FNS

calculates food and NSA grant allocations for State agencies. State

agencies are not small entities under the Regulatory Flexibility Act.

Paperwork Reduction Act

This final rule does not contain reporting or record keeping

requirements subject to approval by the Office of Management and Budget

under section 3507 of the Paperwork Reduction Act of 1995 (44 U.S.C.

3507).

Executive Order 12372

The Special Supplemental Nutrition Program for Women, Infants and

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

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

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

program is included in the scope of Executive Order 12372 which

requires intergovernmental consultation with State and local officials.

Executive Order 12988

This final rule has been reviewed under Executive Order 12988,

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

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

conflict with its provisions or which would otherwise impede its full

implementation. This rule is not intended to have retroactive effect

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

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

applications of its provisions, all applicable administrative

procedures must be exhausted (7 U.S.C 6912(e)).

List of Subjects in 7 CFR Part 246

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

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

Nutrition education, Public assistance programs, WIC, Women.

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

follows:

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

AND CHILDREN

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

follows:

Authority: 42 U.S.C. 1786.

Sec. 246.2 [Amended]

2. In Sec. 246.2, the definitions of Residual funds and Stability

funds are removed.

3. In Sec. 246.16:

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

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

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

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

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

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

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

the words ``discretionary funds'' and adding, in their place, the words

``operational adjustment funds''.

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

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

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

h. The heading of paragraph (c)(3)(iii)and paragraph (c)(3)(iii)(A)

are revised.

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

[[Page 56675]]

The revisions and an addition read as follows:

Sec. 246.16 Distribution of funds.

* * * * *

(c) * * *

(2) * * *

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

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

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

average monthly participation level for the fiscal year for which

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

receives an adjustment to account for the higher per participant costs

associated with small participation levels and differential salary

levels relative to a national average salary level. The formula shall

be adjusted to account for these cost factors in the following manner:

90 percent of available funds shall provide compensation based on rates

which are proportionately higher for the first 15,000 or fewer

participants, as projected by FNS, and 10 percent of available funds

shall provide compensation based on differential salary levels, as

determined by FNS.

(ii) Base funding level. To the extent funds are available and

subject to the provisions of paragraph (c)(2)(iv) of this section, each

State agency shall receive an amount equal to 100 percent of the final

formula-calculated NSA grant of the preceding fiscal year, prior to any

operational adjustment funding allocations made under paragraph

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

State agencies with their base funding level, all State agencies shall

have their base funding level reduced by a pro-rata share as required

by the shortfall of available funds.

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

allocation for NSA after the base funding level required by paragraph

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

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

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

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

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

funding level and the base funding level, which are determined in

accordance with paragraphs (c)(2)(i) and (c)(2)(ii) of this section,

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

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

share of the available fair share allocation funds each State agency

shall receive.

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

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

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

operational adjustment fund. The Regions shall allocate these funds to

State agencies according to national guidelines and shall consider the

varying needs of State agencies within the region.

* * * * *

(3) * * *

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

State agency, FNS will establish a fair share target funding level

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

share of the national aggregate population of persons who are income

eligible to participate in the Program based on the 185 percent of

poverty criterion. * * *

* * * * *

(ii) Prior year grant level allocation. To the extent funds are

available, each State agency shall receive a prior year grant

allocation equal to its final authorized grant level as of September 30

of the prior fiscal year. If funds are not available to provide all

State agencies with their full prior year grant level allocation, all

State agencies shall have their full prior year grant level allocation

reduced by a pro-rata share as required by the shortfall of available

funds.

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

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

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

paragraph (c)(3)(iii). First, FNS will calculate a target inflation

allowance by applying the anticipated rate of food cost inflation, as

determined by the Department, to the prior year grant funding level.

Second, FNS will allocate 80 percent of the available funds to all

State agencies in proportionate shares to meet the target inflation

allowance. Third, FNS will allocate 20 percent of the available funds

to each State agency which has a prior year grant level allocation, as

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

inflation as determined in this paragraph (c)(3)(iii), which is still

less than its fair share target funding level. The amount of funds

allocated to each State agency shall be based on the difference between

its prior year grant level allocation plus target inflation funds and

the fair share funding target level. Each State agency's difference

shall be divided by the sum of the differences for all such State

agencies, to determine the percentage share of the 20 percent of

available funds each State agency shall receive. In the event a State

agency declines any of its allocation under either this paragraph

(c)(3)(iii) or paragraph (c)(3)(ii) of this section, the declined funds

shall be reallocated in the percentages and manner described in this

paragraph (c)(3)(iii). Once all State agencies receive allocations

equal to their full target inflation allowance, any remaining funds

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

paragraph (c)(3)(iii), to those State agencies still under their fair

share target funding level.

* * * * *

(e) * * *

(2) * * *

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

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

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

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

*

* * * * *

Dated: October 13, 1999.

Shirley R. Watkins,

Under Secretary, Food, Nutrition and Consumer Services.

[FR Doc. 99-27431 Filed 10-20-99; 8:45 am]

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