[Federal Register Volume 77, Number 68 (Monday, April 9, 2012)]
[Proposed Rules]
[Pages 21018-21038]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-8332]


========================================================================
Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

========================================================================


Federal Register / Vol. 77, No. 68 / Monday, April 9, 2012 / Proposed 
Rules

[[Page 21018]]



DEPARTMENT OF AGRICULTURE

Food and Nutrition Service

7 CFR Part 226

RIN 0584-AE12


Child and Adult Care Food Program: Amendments Related to the 
Healthy, Hunger-Free Kids Act of 2010

AGENCY: Food and Nutrition Service, USDA.

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: This rule proposes to codify several provisions of the 
Healthy, Hunger-Free Kids Act of 2010 affecting the management of the 
Child and Adult Care Food Program (CACFP). The Department is proposing 
to require institutions to submit an initial CACFP application to the 
State agency and, in subsequent years, periodically update the 
information in lieu of submitting a new application; require sponsoring 
organizations to vary the timing of reviews of sponsored facilities; 
require State agencies to develop and provide for the use of a standard 
permanent agreement between sponsoring organizations and day care 
centers; allow tier II day care homes to collect household income 
information and transmit it to the sponsoring organization; modify the 
method of determining administrative payments to sponsoring 
organizations of day care homes by basing payments on a formula; and 
allow sponsoring organizations of day care homes to carry over up to 10 
percent of their administrative funding from the previous fiscal year 
into the next fiscal year. This rule also proposes to incorporate 
several changes to the application and renewal process which are 
expected to improve the management of CACFP and to make a number of 
miscellaneous technical changes.

DATES: To be assured of consideration, comments must be received on or 
before June 8, 2012.

ADDRESSES: The Food and Nutrition Service, USDA, invites interested 
persons to submit comments on this proposed rule. Comments may be 
submitted through one of the following methods:
    <bullet> Preferred method: Federal eRulemaking Portal at http://www.regulations.gov. Follow the online instructions for submitting 
comments.
    <bullet> Mail: Comments should be addressed to Julie Brewer, Chief, 
Policy and Program Development Branch, Child Nutrition Division, Food 
and Nutrition Service, Department of Agriculture, 3101 Park Center 
Drive, Room 640, Alexandria, Virginia 22302-1594.
    <bullet> Hand Delivery or Courier: Deliver comments to the Food and 
Nutrition Service, Child Nutrition Division, 3101 Park Center Drive, 
Room 640, Alexandria, Virginia 22302-1594, during normal business hours 
of 8:30 a.m.-5 p.m.
    Comments submitted in response to this proposed rule will be 
included in the record and will be made available to the public. Please 
be advised that the substance of the comments and the identity of the 
individuals or entities submitting the comments will be subject to 
public disclosure. The Department will make the comments publicly 
available on the Internet via http://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Julie Brewer at the above address or 
telephone (703) 305-2590.

SUPPLEMENTARY INFORMATION:

I. Public Comment Procedures
II. Executive Summary
III. Background and Discussion of the Proposed Rule
IV. Procedural Matters

I. Public Comment Procedures

    Your written comments on the proposed rule should be specific, 
should be confined to issues pertinent to the proposed rule, and should 
explain the reason(s) for any change you recommend or proposal(s) you 
oppose. Where possible, you should reference the specific section or 
paragraph of the proposal you are addressing. Comments received after 
the close of the comment period (refer to DATES) will not be considered 
or included in the Administrative Record for the final rule.
    Executive Order 12866 requires each agency to write regulations 
that are simple and easy to understand. We invite your comments on how 
to make these proposed regulations easier to understand, including 
answers to questions such as the following:
    (1) Are the requirements in the proposed regulations clearly 
stated?
    (2) Does the rule contain technical language or jargon that 
interferes with its clarity?
    (3) Does the format of the rule (e.g., grouping and order of 
sections, use of headings, and paragraphing) make it clearer or less 
clear?
    (4) Would the rule be easier to understand if it was divided into 
more (but shorter) sections?
    (5) Is the description of the rule in the preamble section entitled 
``Background and Discussion of the Proposed Rule'' helpful in 
understanding the rule? How could this description be more helpful in 
making the rule easier to understand?

II. Executive Summary

Purpose of the Regulatory Action

    The Department is proposing to amend the regulations for CACFP at 7 
CFR part 226 to codify several of the provisions of the Healthy, 
Hunger-Free Kids Act of 2010 (HHFKA). This proposed rule would affect 
the management and administration of CACFP for State agencies, new and 
renewing institutions, sponsoring organizations, and sponsored 
facilities. This rule also proposes to incorporate several changes to 
the application and renewal process which are expected to improve the 
management of CACFP and to make a number of miscellaneous technical 
changes to the organization of 7 CFR part 226.

Summary of the Major Provisions of the Regulatory Action

CACFP Initial Application Submission and Renewal Requirements

    Current regulations require institutions to submit an initial 
application for CACFP participation and then to reapply to the CACFP on 
a schedule determined by the State agency, but not less than every one 
to three years. Section 331(b) of the Act amended section 17(d) of the 
Richard B. Russell National School Lunch Act (NSLA) (42 U.S.C. 1766(d)) 
to require, in lieu of submitting a renewal application, that renewing 
institutions need only annually confirm that the institution is in 
compliance with the licensing

[[Page 21019]]

requirements of subsection 17(a)(5) of the NSLA (42 U.S.C. 1766(a)(5)) 
and submit to the State agency any additional necessary information, as 
specified by the Department.
    This proposal would eliminate a renewal application for renewing 
institutions; however, such institutions would be required to annually 
certify that they still meet the program requirements for continued 
participation and to provide an update of the information provided on 
the initial application if the State agency has not already been 
notified of the changes. The exception to this is the budget submission 
for sponsoring organizations, which as in current regulations, must be 
submitted annually rather than through the certification process.

Varied Timing of Reviews Conducted by Sponsoring Organizations

    Section 331(b) of the Act amended section 17(d)(2) of the NSLA (42 
U.S.C. 1766(d)(2)) to require that sponsoring organizations vary the 
timing of unannounced reviews so they are unpredictable to sponsored 
facilities. We anticipate unannounced reviews will be more effective in 
detecting CACFP integrity issues. This proposed rule would require 
sponsoring organizations to ensure that the timing of unannounced 
reviews is varied in a way that would ensure they are unpredictable to 
the facility under review.

Permanent Agreements Between Sponsoring Organizations and Sponsored 
Centers

    Section 331(c) of the Act amended section 17(j)(1) of the NSLA (42 
U.S.C. 1766(j)(1)) to require State agencies to develop and provide for 
the use of a standard permanent operating agreement between sponsoring 
organizations of centers and their sponsored centers. This rule 
proposes to require State agencies to develop standard permanent 
agreements that sponsors of child care centers, adult day care centers, 
emergency shelters, at-risk afterschool care centers, or outside school 
hours care centers will enter into with their unaffiliated sponsored 
centers.

Transmission of Income Information by Sponsored Day Care Homes

    Current regulations require a sponsoring organization, upon the 
request of a tier II day care home provider, to collect income 
eligibility applications from households (7 CFR 226.18(b)(12)). Section 
333 of the Act amended section 17(f)(3)(A)(iii)(III) of the NSLA (42 
U.S.C. 1766(f)(3)(A)(iii)(III)) to require sponsoring organizations to 
allow providers of tier II day care homes to assist in the transmission 
of household income information with the written consent of the parents 
or guardians of children in their care. This rule proposes to allow the 
tier II day care home to assist in collecting income eligibility 
applications from households and transmitting the applications to the 
sponsoring organization. The addition would limit the provider's 
assistance to collecting applications and transmitting them to the 
sponsoring organization, and prohibits tier II day care home providers 
from reviewing the applications.

Administrative Payment Rates to Sponsoring Organizations for Day Care 
Homes

    Current regulations found at 7 CFR 226.12(a) require that 
administrative cost payments to a sponsoring organization of day care 
homes may not exceed the lesser of: (1) Actual expenditures for the 
costs of administering the CACFP less income to the CACFP, 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 sponsoring organization's number 
of participating homes by the current administrative payment rate for 
day care home sponsors. In addition, current regulations specify that 
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.
    Section 334 of the HHFKA amended section 17(f)(3) of the NSLA (42 
U.S.C. 1766(f)(3)) to eliminate the ``lesser of'' cost and budget 
comparisons for calculating administrative payments to day care home 
sponsoring organizations. Instead, effective October 1, 2010, 
administrative reimbursements are determined only by multiplying the 
number of day care homes under the oversight of each sponsoring 
organization by the appropriate annually adjusted administrative 
reimbursement rate(s). This rule proposes to modify the method of 
determining administrative payments to sponsoring organizations of day 
care homes by basing payments on the formula specified in Section 17 of 
the NSLA.

Carryover of Family or Group Day Care Home Sponsoring Organization 
Administrative Payments

    Section 334 of the HHFKA amended section 17(f)(3) of the NSLA (42 
U.S.C. 1766(f)(3)) to permit day care home sponsors to carry over and 
obligate a maximum of 10 percent of administrative payments into the 
succeeding fiscal year. Under this proposal, the Department would 
require the State agency to ensure that sponsoring organizations of day 
care homes seeking to carryover administrative funds include, in their 
annual budget submission for State agency review and approval, 
estimates of the amount of administrative funds that will be carried 
over and a description of the proposed purpose(s) for which those funds 
will be used.

Miscellaneous Changes

    This proposal would make a number of changes that complement the 
requirements of the NSLA as amended by the HHFKA. Chief amongst these 
changes is a proposed re-organization of Sec.  226.6, State agency 
administrative responsibilities. The re-organization is expected to 
improve the clarity of the regulations and to provide more uniformity 
to application and renewal requirements. The proposal moves the 
existing initial application requirements and the proposed renewal 
requirements to new Sec. Sec.  226.6a and 226.6b, respectively.
Costs and Benefits
    While CACFP institutions and State agencies administering CACFP 
will be affected by this rulemaking, the economic effect will not be 
significant.

III. Background and Discussion of the Proposed Rule

    The Department is proposing to amend the regulations for CACFP at 7 
CFR part 226. These changes are intended to implement several of the 
provisions of the HHFKA affecting the management and administration of 
CACFP for State agencies, new and renewing institutions, sponsoring 
organizations, and sponsored facilities.
    The Department is proposing to require institutions to submit an 
initial CACFP application to the State agency and, in subsequent years, 
periodically update the information in lieu of submitting a new 
application; require sponsoring organizations to vary the timing of 
reviews of sponsored facilities; require State agencies to develop and 
provide for the use of a standard permanent agreement between 
sponsoring organizations and day care centers; allow tier II day care 
homes to

[[Page 21020]]

collect household income information and transmit it to the sponsoring 
organization; modify the method of determining administrative payments 
to sponsoring organizations of day care homes by basing payments on a 
formula; and, allow sponsoring organizations of day care homes to carry 
over up to 10 percent of their administrative funding from the previous 
fiscal year into the next fiscal year. This rule also proposes to 
incorporate several changes to the application and renewal process 
which are expected to improve the management of CACFP and to make a 
number of miscellaneous technical changes. The proposed amendments are 
discussed in more detail below.

CACFP Initial Application Submission and Renewal Requirements

    Current regulations require institutions to submit an initial 
application for CACFP participation then reapply to the Program on a 
schedule determined by the State agency, but not less than every one to 
three years. As a result, the State agency must periodically re-
determine if an institution is eligible to participate in the CACFP 
based on a renewal application process. Most of the requirements for 
the initial application process are currently found at Sec. Sec.  
226.6(b)(1) and 226.6(f) and most of the requirements for the renewal 
application process are found at Sec. Sec.  226.6(b)(2) and 226.6(f).
    Section 331(b) of the HHFKA amends section 17(d) of the NSLA (42 
U.S.C. 1766(d)) to require, in lieu of submitting a renewal 
application, that renewing institutions need only annually confirm that 
the institution is in compliance with the licensing requirements of 
subsection 17(a)(5) of the NSLA (42 U.S.C. 1766(a)(5)) and submit to 
the State agency any additional necessary information, as specified by 
the Department. State agencies were advised of these requirements in a 
memorandum issued April 8, 2011, Child Nutrition Reauthorization 2010: 
Child and Adult Care Food Program Applications (CACFP 19-2011).
    This provision enables the Department to determine the new renewal 
process and the information that annually must be submitted to the 
State agency. Reflecting the intent of the HHFKA, this provision to 
eliminate the renewal application, this proposal would require 
participating institutions to annually certify that they still meet the 
CACFP requirements for continued participation and to provide an update 
of the information provided on the initial application, if the State 
agency has not already been notified of the changes. Thus, even though 
management plans would be annually certified, the plans must be updated 
as necessary to ensure they provide a current reflection of CACFP 
operations. The exception to this is the budget submission for 
sponsoring organizations, which must still be submitted annually rather 
than through the certification process. These changes are expected to 
reduce current application process burden, because renewing 
institutions will no longer need to submit documentation demonstrating 
they meet CACFP requirements, but simply provide certification that 
they are still in compliance instead.
    This proposed rule outlines the complete list of information that 
institutions would need to certify as unchanged or indicate that it has 
already updated with the State agency. All institutions would be 
required to annually certify that they are not on the National 
disqualified list; they are not ineligible for other publicly funded 
programs; the institution's principals have not been convicted of a 
crime in the past seven years indicating a lack of business integrity; 
they are still compliant with performance standards; and, they are 
licensed or approved or, if a sponsoring organization, that all of 
their facilities are licensed or otherwise approved. Sponsoring 
organizations would continue to submit an annual budget and would also 
certify that: their management plan is up-to-date; their outside 
employment policy is current; and their training has been provided for 
all facilities. In addition this rule proposes to require renewing 
institutions to certify that they have no unreported less-than-arms-
length transactions or other potential conflicts of interest have 
occurred in the past year and that any anticipated less-than-arms-
length transactions or other potential conflicts of interest in the 
upcoming year have been disclosed to the State agency--both of which 
would be new requirements. If the institution cannot certify that all 
of this required information is unchanged or has already been updated, 
the institution would be required to submit any information necessary 
to notify the State agency of the change at that time.
    As noted above, two changes to the application and renewal process 
are being added to this proposed rule in order to improve CACFP 
management. In accordance with the Food and Nutrition Service (FNS) 
Instruction 796-2 Financial Management--Child and Adult Care Food 
Program, sponsoring organizations must disclose less-than-arms-length 
transactions and potential conflicts of interest. Nevertheless, the 
Department has found that this existing requirement has not adequately 
addressed the continued problems associated with these types of 
transactions. The Department's monitoring activities continue to find a 
number of sponsoring organizations that have not properly disclosed 
less-than-arms-length transactions and potential conflicts of interest, 
and that have not received the required prior approval from their State 
agencies. As a result, in many cases, CACFP funds have been used 
improperly, resulting in large overclaims against sponsoring 
organizations.
    To better address this issue, this rule proposes to specifically 
require the disclosure of anticipated less-than-arms-length 
transactions and potential conflicts of interest in both the initial 
application submitted by a new sponsoring organization and, for 
renewing sponsors, in the annual information submission process. 
Accordingly, Sec. Sec.  226.2, new 226.6a and 226.6b would incorporate 
this addition.
    The second addition would require that institutions provide State 
agencies with the full legal names and any other names previously used, 
for all principals in the initial application and whenever the 
institution adds new principals. This change would also require a 
sponsoring organization to provide the full legal names, and any other 
names previously used, for all day care home providers and by the 
principals of its sponsored centers. The proposal adds this change to 
the regulations in every instance where institutions were previously 
required to report the full names of their principals, and the 
principals of their sponsored facilities, to the State agency. Thus, 
the proposed language would require ``full legal names and any other 
names previously used'' where it currently requires ``full names.'' 
This will ensure better identification of any individuals who may be 
later placed on the National disqualified list. Accordingly, Sec. Sec.  
226.2, 226.6a and 226.6b would incorporate this addition.
    Another provision necessitated by these changes to the application 
process is the addition of a serious deficiency dealing with 
institutions that fail to submit acceptable or complete renewal 
information. The amendments made to NSLA by the HHFKA significantly 
modifying the current renewal application process means that renewing 
institutions would continue to be considered ``participating 
institutions.'' Under Sec.  226.6(c)(2) of this proposal, an 
institution's failure to

[[Page 21021]]

properly submit renewal information would be considered a serious 
deficiency and the State agency would be required to follow the normal 
serious deficiency process for participating institutions. The 
corrective action in this case would be for the institution to submit 
the proper or corrected renewal information to the State agency in 
accordance with established procedures. As is true under the current 
renewal application process, State agencies would continue to have 
discretion in declaring renewing institutions seriously deficient, 
based on the type and magnitude of the missing information and the 
institution's willingness to quickly submit any missing information.
    While reviewing the current regulations relating to application 
requirements, it became evident that the application and reapplication 
requirements for institutions are found in various places throughout 7 
CFR part 226. To clearly articulate the new renewal process and 
distinguish it from the initial application process, the Department 
undertook a re-organization of the application and renewal requirements 
throughout 7 CFR part 226. Because the Department has received 
complaints about the length of Sec.  226.6, the section in which the 
current application and reapplication requirements are found, the 
proposal moves the existing initial application requirements and the 
proposed renewal requirements to new Sec. Sec.  226.6a and 226.6b, 
respectively. New Sec.  226.6a is proposed to be titled ``State agency 
application requirements for new institutions'' and Sec.  226.6b is 
proposed to be titled ``State agency annual information submission 
requirements for renewing institutions.'' This means that though 
Sec. Sec.  226.6a and 226.6b do not look identical to current 
Sec. Sec.  226.6(b)(1) and (b)(2), respectively, no requirements have 
been changed except for those outlined in this preamble.
    With this new re-organization, the proposal would move the 
application or renewal requirements from the other sections in which 
they are currently located (namely Sec. Sec.  226.6(b), 226.6(f), 
226.16(b) and 226.17a(e)) to the relevant new sections. All application 
requirements contained in these sections would be deleted and, where 
necessary, would instead contain only cross references to Sec. Sec.  
226.6a and 226.6b. To assist the reader, distribution and derivation 
tables are posted on www.regs.gov and accompany this proposed rule. The 
distribution table identifies each existing section and where it would 
appear in the proposed amendatory language. The derivation table 
identifies each proposed new section and where it appears in the 
existing regulations.
    Two additional proposed changes are included to provide a more 
uniform application process for day care homes and other facilities. 
Proposed Sec. Sec.  226.6a(c)(5) and Sec.  226.6b(d)(3) would require 
the State agency to collect from each sponsoring organization a list of 
all applicant day care homes, child care centers, outside-school-hours-
care centers, at-risk afterschool care centers, and adult day care 
centers. Previously, this requirement appeared only in Sec.  226.17a, 
although it is standard operating practice. Proposed Sec.  226.6a(c)(9) 
would include requirements for facility applications for new 
institutions, these requirements are not new requirements but are 
proposed to be codified so that all application requirements are 
available in one place. Currently, facility application requirements 
are found at Sec.  226.16(b). Additionally, CACFP 01-2008, Facility 
Applications and Agreements in the Child and Adult Care Food Program 
(CACFP), published November 15, 2007 discusses CACFP application 
requirements. These two proposed changes seek to provide a more uniform 
application process.
    Finally, this rule proposes a change outside of the CACFP 
application process. In the proposed re-organization of Sec.  226.6, 
paragraph (f)(4) restates existing regulations found at Sec.  
226.6(f)(1)(viii) that require State agencies to obtain from the State 
agency that administers the NSLP, a list of ``elementary'' schools in 
the State in which at least one-half of the children enrolled are 
certified to receive free or reduced-price meals. The State agency must 
provide the list of ``elementary'' schools to sponsoring organizations 
of day care homes. However, section 121 of the HHFKA amended section 
17(f)(3)(A)(ii)(I)(bb) of the NSLA, to remove the word ``elementary'' 
from the definition of tier I day care homes. Since the proposed re-
organization at Sec.  226.6(f)(4) includes this provision, the 
Department is proposing to remove the term ``elementary'' from the 
regulatory text. The Department intends to issue a final rule that will 
make this change permanent in the near future.
    We encourage commenters to limit their comments to the new changes 
proposed in this rule and to the proposed re-organization of Sec. Sec.  
226.6, 226.6a, and 226.6b. We are interested in whether the re-
organization improves the clarity of the regulations.

Varied Timing of Reviews Conducted by Sponsoring Organizations

    Current regulations require sponsoring organizations to conduct 
three reviews per year per sponsored facility, two of which must be 
unannounced. One of the unannounced reviews must include observation of 
a meal service. No more than six months may elapse between reviews (7 
CFR 226.16(d)(4)(iii)).
    Unannounced reviews are an effective tool in ensuring CACFP 
integrity. An unannounced review gives sponsoring organizations the 
opportunity to document how the facility operates on any given day and 
to offer technical assistance. In addition, unannounced reviews offer a 
first-hand opportunity to detect and identify areas of mismanagement 
(such as inaccurate meal counts, problems with recordkeeping, and menu 
and enrollment discrepancies) and allow sponsoring organizations to 
initiate immediate corrective action, up to and including declaring a 
facility seriously deficient.
    However, unannounced reviews that follow a consistent pattern are 
predictable and, therefore, undermine the intent of the CACFP's 
unannounced review requirements. Examples of consistent patterns are 
unannounced reviews that always occur during the third week of January, 
the third week of May, and the third week of September; reviews that 
never occur during the first week of the month when claims are being 
processed; meal service observations that always occur during the lunch 
meal service or never occur on weekends or evenings. Such patterns 
hinder the sponsoring organization's ability to uncover management 
deficiencies and CACFP abuse by enabling facilities to predict when the 
sponsor review will occur.
    Section 331(b) of the HHFKA amended section 17(d)(2) of the NSLA 
(42 U.S.C. 1766(d)(2)) to require that sponsoring organizations vary 
the timing of unannounced reviews so they are unpredictable to 
sponsored facilities. The expectation is that unannounced reviews would 
be more effective in detecting CACFP integrity issues. State agencies 
were advised of this requirement in a memorandum issued April 7, 2011, 
Child Nutrition Reauthorization 2010: Varied Timing of Unannounced 
Reviews in the Child and Adult Care Food Program (CACFP 16-2011).
    The Department appreciates that it may be difficult for a 
sponsoring organization to create separate review schedules for each 
facility. However, as

[[Page 21022]]

required by the HHFKA amendments, sponsoring organizations can and 
should vary the scheduling of reviews within each month and each year 
and frequently change the intervals between reviews (e.g., 90, 105, 
120, 135 days between reviews of facilities). Similarly, sponsoring 
organizations should alternate reviews of the breakfast, lunch, and 
supper meal service in facilities being reviewed.
    To effect these changes, the proposal would revise Sec.  226.16, 
Sponsoring organization provisions, by expanding the requirements 
relating to the frequency and type of required facility reviews in 
paragraph (d)(4)(iii) of that section. The additions would require 
sponsoring organizations to ensure that the timing of unannounced 
reviews is varied in a way that would ensure they are unpredictable to 
the facility. The proposed language also makes it clear that always 
reviewing the same meal service would be considered predictable and 
would be inconsistent with the CACFP requirements.
    In addition, Sec.  226.6, State agency administrative 
responsibilities, would be amended at paragraph (m)(3) of that section 
to expand the scope of the State agency review of sponsoring 
organizations' monitoring of facilities. Under the proposal, State 
agencies would be required to assess whether the timing of the 
sponsoring organization's facility reviews are varied and 
unpredictable, as required by Sec.  226.16(d)(4)(iii). This addition 
ensures that State agencies, as part of their reviews of sponsoring 
organizations, would evaluate the timing and pattern of the facility 
reviews conducted by the sponsor to ensure that they are not 
predictable, and are in compliance with this requirement. As is 
currently the case, a sponsor's failure to comply with all of the 
requirements of Sec.  226.16(d) could lead to a determination of a 
serious deficiency.

Permanent Agreements Between Sponsoring Organizations and Sponsored 
Centers

    Current regulations require State agencies to develop and provide 
for the use of permanent agreements between sponsoring organizations 
and day care homes, but do not require such agreements for sponsoring 
organizations of centers and their sponsored centers.
    Section 331(c) of the HHFKA amended section 17(j)(1) of the NSLA 
(42 U.S.C. 1766(j)(1)) to require State agencies to develop and provide 
for the use of permanent operating agreements between sponsoring 
organizations of centers and their sponsored centers and day care 
homes. To effect these changes, Sec.  226.2, Definitions, would be 
amended by adding a definition of sponsored center. The definition 
would distinguish between affiliated and unaffiliated centers. 
Differentiating between affiliated and unaffiliated centers is 
necessary because only unaffiliated centers would be required to have 
an agreement with their sponsoring organization.
    Unlike affiliated sponsored day care centers, unaffiliated 
sponsored day care centers are legally distinct from their sponsoring 
organization. For this reason, an agreement between the sponsoring 
organization and unaffiliated sponsored centers is essential to a clear 
understanding of responsibilities for participation in the CACFP. 
Because affiliated centers are not legally distinct from their 
sponsoring organization, the Department deems a requirement for an 
agreement unnecessary for affiliated centers. However, sponsoring 
organizations may, at their discretion, require an agreement with their 
affiliated centers.
    Section 226.6, State agency administrative responsibilities, is 
proposed to be amended to include the requirement for State agencies to 
develop and provide for the use of a standard agreement between 
sponsoring organizations and unaffiliated child care centers. It also 
allows State agencies to approve an agreement developed by the 
sponsoring organization.
    Section 226.16, Sponsoring organization provisions, is proposed to 
be amended to include the requirement for sponsors of child care 
centers, adult day care centers, emergency shelters, at-risk 
afterschool care centers, or outside school hours care centers to enter 
into a permanent agreement with their unaffiliated sponsored centers. 
At a minimum, the agreement would embody the requirements and the 
rights and responsibilities of both parties as currently set forth in 
Sec.  226.17, Child care center provisions, Sec.  226.17a, At-risk 
afterschool care center provisions, Sec.  226.19, Outside-school-hours 
care center provisions and Sec.  226.19a, Adult day care center 
provisions, as applicable. Corresponding changes were also made to 
update and align the requirements and responsibilities set forth in 
Sec. Sec.  226.17, 226.17a, 226.19, and 226.19a. These include: (a) 
Requiring centers to permit visits by sponsoring organizations or State 
agencies to the center to review meal service and records and inform 
sponsoring organizations about changes in licensing status; (b) 
requiring sponsored child care centers to promptly inform the 
sponsoring organization about any change in its licensing or approval 
status; (c) establishing the right of centers to receive in a timely 
manner reimbursement from the sponsoring organizations for meals 
served; (d) requiring child care centers to meet any State agency 
approved time limit for submission of meal records; and (e) requiring 
sponsored child care centers to distribute to parents a copy of the 
sponsoring organization's notice to parents if directed to do so by the 
sponsoring organization.

Transmission of Income Information by Sponsored Day Care Homes

    Current regulations require sponsoring organizations, upon the 
request of a tier II day care home provider, to collect income 
eligibility applications from households (7 CFR Sec.  226.18(b)(12)). 
To eliminate any concerns households may have about sharing their 
income information with their provider, the current regulations 
prohibit providers from collecting the applications directly from 
households.
    Section 333 of the HHFKA amended section 17(f)(3)(A)(iii)(III) of 
the NSLA (42 U.S.C. 1766(f)(3)(A)(iii)(III)) to require sponsoring 
organizations to allow providers of tier II day care homes to assist in 
the transmission of household income information with the written 
consent of the parents or guardians of children in their care. State 
agencies were advised of this requirement in a memorandum issued April 
7, 2011, Child Nutrition Reauthorization 2010: Transmission of 
Household Income Information by Tier II Family Day Care Homes in the 
Child and Adult Care Food Program (CACFP 17-2011).
    To effect these changes, the Department proposes to amend Sec.  
226.18, Day care home provisions, by revising paragraph (b)(12) of that 
section to allow the tier II day care home to assist in collecting 
completed income eligibility applications from households and 
transmitting the applications to the sponsoring organization. As 
proposed, the addition would limit the provider's assistance to 
collecting applications and transmitting them to the sponsoring 
organization, and would prohibit tier II day care home providers from 
reviewing the completed applications.
    In addition, Sec.  226.23, Free and reduced-price meals, paragraph 
(e)(2) is proposed to be amended to specify the steps a tier II day 
care home must take when assisting in the collection and transmission 
of applications. Sponsoring organizations would be required to explain 
in the letter to the household, that the household can return the 
application to either the sponsoring organization or the day care

[[Page 21023]]

home provider. Under the proposal, the household would give written 
consent for the provider to collect and transmit the household's 
application to the sponsoring organization by signing the letter sent 
by the sponsoring organization and returning it, along with the 
application, to the tier II day care home. To ensure that tier II day 
care home providers would not be able to view the applications, the 
Department suggests that the sponsoring organization's letter to the 
household encourage households to place their applications in a sealed 
envelope prior to giving it to their provider.

Administrative Payment Rates to Sponsoring Organizations for Day Care 
Homes

    Current regulations found at 7 CFR 226.12(a) require that 
administrative cost payments to a sponsoring organization of day care 
homes may not exceed the lesser of: (1) Actual expenditures for the 
costs of administering the CACFP less income to the CACFP, 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 sponsoring organization's number 
of participating homes by the current administrative payment rate for 
day care home sponsors. In addition, current regulations specify that 
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.
    Section 334 of the HHFKA amended section 17(f)(3) of the NSLA (42 
U.S.C. 1766(f)(3)) to eliminate the ``lesser of'' cost and budget 
comparisons for calculating administrative payments to day care home 
sponsoring organizations. Instead, effective October 1, 2010, 
administrative reimbursements are determined only by multiplying the 
number of day care homes under the oversight of each sponsoring 
organization by the appropriate annually adjusted administrative 
reimbursement rate(s). As a result of this change, the expenditures for 
cost, the amount of costs approved in the administrative budget, or the 
30 percent restriction no longer apply.
    State agencies were advised of this change in a memorandum issued 
December 22, 2010, Child Nutrition Reauthorization 2010: Administrative 
Payments to Family Day Care Home Sponsoring Organizations (CACFP 06-
2011). While this new provision will help streamline administrative 
payments to day care home sponsoring organizations and reduce reporting 
requirements, State agencies and sponsoring organizations are reminded 
that sponsoring organizations must continue to submit annual budgets 
that must be approved by the State agency. Further, sponsoring 
organizations remain responsible for correctly accounting for costs and 
for maintaining records and sufficient supporting documentation to 
demonstrate that costs charged to the Program: have actually been 
incurred; are allowable and allocable to the Program; and comply with 
applicable Program regulations and policies. State agencies must 
continue to recover reimbursements received for unallowable costs.
    To effect this provision, paragraph (a) of Sec.  226.12, 
Administrative payments to sponsoring organizations for day care homes, 
would be proposed to be revised to reflect the new formula. The 
proposal would also make technical changes to the administrative 
payment rates formula to reflect annual adjustments. These changes are 
intended only to clarify the base administrative payment rates without 
making any substantive changes to the adjustment process. In accordance 
with NSLA, the base reimbursement rates, which were published in the 
Federal Register on January 26, 1982 at 47 FR 3539, are the sum of the 
products obtained by multiplying each month the sponsoring 
organization's: Initial 50 day care homes by 42 dollars; Next 150 day 
care homes by 32 dollars; Next 800 day care homes by 25 dollars; and 
Additional day care homes by 22 dollars. The administrative payment 
rates will continue to be adjusted annually to reflect changes in the 
series for all items of the Consumer Price Index for All Urban 
Consumers, published by the Department of Labor.

Carryover of Family or Group Day Care Home Sponsoring Organization 
Administrative Payments

    Section 334 of the HHFKA amends section 17(f)(3) of the NSLA (42 
U.S.C. 1766(f)(3)) to permit day care home sponsors to carry over a 
maximum of 10 percent of administrative payments into the succeeding 
fiscal year. In accordance with the HHFKA, the 10 percent maximum on 
the amount of administrative funds that may be carried over must be 
based on the administrative payments received by the day care home 
sponsoring organization for the fiscal year. Administrative funds 
remaining at the end of the fiscal year that exceed 10 percent of that 
fiscal year's administrative payments must be returned to the State 
agency. If any remaining carryover funds are not obligated or expended 
by the sponsoring organization in the succeeding fiscal year, the 
sponsor is required to return the remaining funds to the State agency.
    State agencies were advised of this new authority in a memorandum 
issued April 8, 2011, Child Nutrition Reauthorization 2010: Carry Over 
of Unused Child and Adult Care Food Program Administrative Payments 
(CACFP 18-2011). In that memorandum, State agencies were reminded that 
day care home sponsoring organizations continue to remain responsible 
for annual budget submissions, budget amendments, correctly accounting 
for costs, and maintaining records and sufficient supporting 
documentation to demonstrate that costs charged to the CACFP have 
actually been incurred, are allowable and allocable, and comply with 
all applicable CACFP regulations and policies.
    Under this proposal, Sec.  226.6b(c) proposes to require the State 
agency to ensure that sponsoring organizations of day care homes 
seeking to carryover administrative funds include, in their annual 
budget submission for State agency review and approval, estimates of 
the amount of administrative funds that will be carried over and a 
description of the proposed purpose(s) for which those funds will be 
used. Because the final administrative claims will often not be known 
when the annual budget is submitted to the State agency, the sponsor 
should use its best estimate of the carryover amount when preparing the 
annual budget. Thus, when the budget is being prepared and submitted, 
the carryover estimate would be based on a comparison of the 
administrative payments the sponsoring organization expects to receive 
under the homes-times-rates formula with the amount of anticipated 
allowable administrative costs incurred in the current fiscal year.
    Much of the current regulatory budget approval process remains the 
same. However, this proposed rule would provide that as soon as 
possible after fiscal year closeout, the sponsoring organization would 
be required to submit an amended budget to the State agency for review 
and approval. The amended budget would identify the amount of 
administrative funds actually carried over and a description of the 
purpose(s) for which those funds have been or will be used. The 
sponsoring organization would be required to maintain documentation of 
obligations and expenditures associated with approved administrative 
carryover funds for review by the State agency. Consistent with current 
regulations, it is

[[Page 21024]]

still necessary for sponsoring organizations to use accrual accounting 
for the final claim of each fiscal year so that the end-of-year 
reconciliation and close-out can be performed.
    Under proposed amendments to Sec.  226.7, State agency 
responsibilities for financial management, paragraphs (g) and (j) of 
that section, State agencies would require the annual budget submission 
to include an estimate of the requested administrative fund carryover 
amounts and a description of the proposed purpose(s) for which those 
funds would be obligated or expended.
    In approving a sponsoring organization's carryover request, a State 
agency would be required to take into consideration whether the day 
care home sponsoring organization has a financial management system 
that meets all CACFP requirements and whether the State agency is 
satisfied that the system is capable of controlling the custody, 
documentation and disbursement of carryover funds. The State agency 
would require a sponsoring organization carrying over administrative 
funds to submit an amended budget for State agency review and approval 
as soon as possible after fiscal year close-out. The amended budget 
would identify the amount of administrative funds actually carried over 
and describe the purpose(s) for which the carryover funds have been or 
will be used.
    In addition, this rule proposes to require each State agency to 
establish procedures to recover administrative funds from sponsoring 
organizations of day care homes which are in excess of the 10 percent 
maximum carryover amount at the end of each fiscal year. Additionally, 
each State agency would also be required to establish procedures to 
recover any carryover amount not expended or obligated by the end of 
the fiscal year following the fiscal year in which the administrative 
funds were earned. As a result, State agencies would include a review 
of the documentation supporting carryover requests, obligations and 
expenditures when conducting a review of a sponsoring organization's 
administrative costs as currently required under Sec.  
226.6(m)(3)(iii). In addition, in implementing this proposed provision, 
State agencies would maintain a system that monitors the sponsoring 
organization's documentation of nonprofit status, and ensures that 
CACFP administrative funds are used principally for the benefit of 
participants. The accumulation of excessive balances in the sponsor's 
nonprofit food service account remains inconsistent with CACFP 
requirements, as described in FNS Instruction 796-2, Rev. 3, Section 
VI.
    Finally, State agencies and sponsoring organizations are reminded 
that day care home sponsoring organizations are not required to carry 
over administrative funds. Any unexpended funds remaining at the end of 
the fiscal year, which could be carried over into the succeeding fiscal 
year, may be returned to the State agency at the sponsoring 
organization's option. In addition, nothing in this provision in any 
way limits or changes the requirements that a State agency: determine 
that all institutions are financially viable; establish an overclaim if 
the sponsor has used CACFP administrative funds improperly; or declare 
an institution seriously deficient on the basis of its improper use of 
CACFP administrative funds.

IV. Procedural Matters

A. Executive Order 12866 and Executive Order 13563
    Executive Orders 12866 and 13563 direct agencies to assess all 
costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). Executive 
Order 13563 emphasizes the importance of quantifying both costs and 
benefits, of reducing costs, of harmonizing rules, and of promoting 
flexibility.
    This rule has been determined to be not significant and was not 
reviewed by the Office Management and Budget (OMB) in conformance with 
Executive Order 12866.
B. Regulatory Flexibility Act
    This proposed rule has been reviewed with regard to the 
requirements of the Regulatory Flexibility Act of 1980 (5 U.S.C. 601-
612). It has been certified that this rule will not have a significant 
impact on a substantial number of small entities. While CACFP 
institutions and State agencies administering CACFP will be affected by 
this rulemaking, the economic effect will not be significant. This rule 
is expected to reduce administrative burdens and provide additional 
flexibility.
C. Unfunded Mandates Reform Act
    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Public 
Law 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 
Department generally must prepare a written statement, including a 
cost/benefit analysis, for proposed and final rules with Federal 
mandates that may result in expenditures by State, local, or Tribal 
governments, in the aggregate, or by 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 Department 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) that impose on State, local and 
Tribal governments or the private sector of $100 million or more in any 
one year. This rule is, therefore, not subject to the requirements of 
sections 202 and 205 of the UMRA.
D. Executive Order 12372
    The Program addressed in this action is listed in the Catalog of 
Federal Domestic Assistance under No. 10.558. For the reasons set forth 
in the final rule in 7 CFR part 3015, Subpart V, and related Notice 
published at 48 FR 29115, June 24, 1983, this is included in the scope 
of Executive Order 12372, which requires intergovernmental consultation 
with State and local officials.
E. Executive Order 13132
    Executive Order 13132 requires Federal agencies to consider the 
impact of their regulatory actions on State and local governments. 
Where such actions have federalism implications, agencies are directed 
to provide a statement for inclusion in the preamble to the regulations 
describing the agency's considerations in terms of the three categories 
called for under section (6)(b)(2)(B) of Executive Order 13132. USDA 
has considered the impact of this rule on State and local governments 
and has determined that this rule does not have federalism 
implications. This rule does not impose substantial or direct 
compliance costs on State and local governments. Therefore, under 
Section 6(b) of the Executive Order, a federalism summary impact 
statement is not required.
F. Executive Order 12988
    This proposed rule has been reviewed under Executive Order 12988, 
``Civil Justice Reform.'' Although the provisions of this rule are not 
expected

[[Page 21025]]

to conflict with any State or local law, regulations, or policies, the 
rule is intended to have preemptive effect with respect to any State or 
local laws, regulations, or policies that conflict with its provisions 
or that would otherwise impede its full implementation. This rule is 
not intended to have retroactive effect. Prior to any judicial 
challenge to the provisions of this rule or the applications of its 
provisions, all applicable administrative procedures must be exhausted.
G. Civil Rights Impact Analysis
    This proposed rule has been reviewed in accordance with Department 
Regulation 4300-4, ``Civil Rights Impact Analysis,'' to identify any 
major civil rights impacts this rule might have on children on the 
basis of age, race, color, national origin, sex, or disability. A 
careful review of the rule revealed that the rule's intent does not 
affect the participation of protected individuals in CACFP.
H. Paperwork Reduction Act
    The Paperwork Reduction Act of 1995 (44 U.S.C. Chap. 35; see 5 CFR 
1320), requires that OMB approve all collections of information by a 
Federal agency from the public before they can be implemented. 
Respondents are not required to respond to any collection of 
information unless it displays a current, valid OMB control number. 
This is a new collection. The new provisions in this rule, which 
decreases current burden hours, by 595 will be merged into CACFP, OMB 
Control Number <greek-i>0584-0055, expiration date 8/31/2013. The 
current collection burden inventory for CACFP is 7,006,434. These 
changes are contingent upon OMB approval under the Paperwork Reduction 
Act of 1995. When the information collection requirements have been 
approved, the Department will publish a separate action in the Federal 
Register announcing OMB's approval.
    Comments on the information collection in this proposed rule must 
be received by June 8, 2012. Send comments to the Office of Information 
and Regulatory Affairs, OMB, Attention: Desk Officer for FNS, 
Washington, DC 20503. Please also send a copy of your comments to Lynn 
Rodgers-Kuperman, Program Analysis and Monitoring Branch, Child 
Nutrition Division, 3101 Park Center Drive, Alexandria, VA 22302. For 
further information, or for copies of the information collection 
requirements, please contact Lynn Rodgers-Kuperman at the address 
indicated above. Comments are invited on: (1) Whether the proposed 
collection of information is necessary for the proper performance of 
the Agency's functions, including whether the information will have 
practical utility; (2) the accuracy of the Agency's estimate of the 
proposed information collection burden, including the validity of the 
methodology and assumptions used; (3) ways to enhance the quality, 
utility and clarity of the information to be collected; and (4) ways to 
minimize the burden of the collection of information on those who are 
to respond, including use of appropriate automated, electronic, 
mechanical, or other technological collection techniques or other forms 
of information technology.
    All responses to this request for comments will be summarized and 
included in the request for OMB approval. All comments will also become 
a matter of public record.
    Title: Child and Adult Care Food Program: Amendments Related to the 
Healthy Hunger-Free Kids Act of 2010.
    OMB Number: 0584-New.
    Expiration Date: Not Yet Determined.
    Type of Request: New Collection.
    Abstract: This rule proposes to codify several provisions of the 
Healthy, Hunger-Free Kids Act of 2010 (HHFKA) affecting the management 
of CACFP. The Department is proposing to: require institutions to 
submit an initial CACFP application to the State agency and, in 
subsequent years, periodically update the information in lieu of 
submitting a new application; require sponsoring organizations to vary 
the timing of reviews of sponsored facilities; require State agencies 
to develop and provide for the use of a standard permanent agreement 
between sponsoring organizations and day care centers; allow tier II 
day care homes to collect household income information and transmit it 
to the sponsoring organization; modify the method of determining 
administrative payments to sponsoring organizations of day care homes 
by basing payments on a formula; and allow sponsoring organizations of 
day care homes to carry over up to 10 percent of their administrative 
funding from the previous fiscal year into the next fiscal year. These 
changes were effective October 1, 2010. This rule also proposes to 
incorporate several changes to the application and renewal process 
which are expected to improve the management of CACFP and to make a 
number of miscellaneous technical changes.
    The average burden per response and the annual burden hours are 
explained below and summarized in the charts which follow.
    Respondents for this Proposed Rule: (Business' for and not-for-
profit) Institutions.
    Estimated Number of Respondents for this Proposed Rule: 250.
    Estimated Number of Responses per Respondent for this Proposed 
Rule: (1).
    Estimated Total Annual Responses: 250.
    Estimated Total Annual Burden on Respondents for this Proposed 
Rule: (595)*.
    *This represents an overall decrease from the existing burden for 
institutions.

                                   Estimated Annual Burden for 0584--New, Child and Adult Care Food Program 7 CFR 226
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        Reporting
---------------------------------------------------------------------------------------------------------------------------------------------------------
                                                         Estimated                        Average         Average
                                      Section            number of     Frequency of       annual        burden per            Annual burden hours
                                                        respondents      response        responses       response
--------------------------------------------------------------------------------------------------------------------------------------------------------
Each new institution must      7 CFR 226.15(b)......             250               1             250               8  2000
 submit to the State agency                                                                                           *Approved in OMB# 0584-0055,
 with its application all                                                                                              remains unchanged
 information required for its
 approval. Renewing
 institutions must certify
 that they are capable of
 operating the Program.

[[Page 21026]]

 
                                                               (119)             (1)           (119)             (5)  (595)
                                                                                                                      **decrease of 595 from existing
                                                                                                                       burden as a result of eliminating
                                                                                                                       burden associated with renewing
                                                                                                                       institutions.)
Total Reporting for Proposed   .....................           (119)               1           (119)             (5)  (595)
 Rule.
Total Existing Reporting       .....................  ..............  ..............  ..............  ..............  6,274,964
 Burden for 0584-0055, Part
 226.
Total Reporting Burden         .....................  ..............  ..............  ..............  ..............  -595
 Decrease with Proposed Rule.
Total Reporting Burden for     .....................  ..............  ..............  ..............  ..............  6,274,369
 0584-0055, Part 226 with
 Proposed Rule.
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Prior to the issuance of this Rule entitled ``Child and Adult Care 
Food Program: Amendments Related to the Healthy Hunger-Free Kids Act of 
2010,'' 7 CFR 226.15(b) required that, all institutions submit to the 
State agency with its application all information required for its 
approval as set forth in 226.6(b) and 226.6(f). This rule eliminates 
the requirement for renewing institutions to submit an annual 
application for renewal; however, these institutions must demonstrate 
that they are capable of operating the Program in accordance with this 
part as set forth in Sec.  226.6b(b).
    Therefore, the burden associated with the renewing institutions to 
submit an annual application has been removed as a result of this Rule. 
A program adjustment will be made to the 7 CFR Part 226 Child and Adult 
Care Food Program information collection package (OMB control number 
0584-0055) prior to its renewal date of August 31, 2013.

                                                                      Recordkeeping
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                             Estimated                        Average         Average
                                                       Section               number of     Frequency of       annual        burden per     Annual burden
                                                                            respondents      response        responses       response          hours
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sponsoring organizations maintain           7 CFR 226.16(h)(1)..........             200               1             200              *0              *0
 agreements with unaffiliated sponsored
 centers.
Total Recordkeeping for Proposed Rule.....  ............................             200               1             200              *0              *0
Total Existing Recordkeeping Burden for     ............................  ..............  ..............  ..............  ..............         731,470
 0584-0055, Part 226.
Total Recordkeeping Burden for 0584-0055,   ............................  ..............  ..............  ..............  ..............         731,470
 Part 226 with Proposed Rule.
--------------------------------------------------------------------------------------------------------------------------------------------------------
* The amount of additional burden is negligible.

     7 CFR 226.6, 226.15 and 226.16 require that, in order to 
participate in CACFP, State agencies and institutions must maintain 
records to demonstrate compliance with Program requirements. The 
regulations further require that State agencies and institutions 
maintain records for a period of three years.

                Summary of Burden (OMB <greek-i>0584-NEW)
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Total number of respondents.................................         250
Average number of responses per respondent..................         (1)
Total annual responses......................................         250
Average hours per response..................................           8
Total burden hours for part 226 with proposed rule..........   7,005,839
Current OMB inventory for part 226..........................   7,006,434
Difference (new burden decrease requested with proposed           *(595)
 rule)......................................................
------------------------------------------------------------------------
* Burden is decreased from existing burden (595) due to the elimination
  of burden associated with renewing institutions.

I. E-Government Act Compliance
    The Department is committed to complying with the E-Government Act 
2002 to promote the use of the Internet and other information 
technologies to provide increased opportunities for citizen access to 
Government information and services, and for other purposes.
J. Executive Order 13175
    Executive Order 13175 requires Federal agencies to consult and 
coordinate with Tribes on a government-to-government basis on policies 
that have Tribal implications,

[[Page 21027]]

including regulations, legislative comments or proposed legislation, 
and other policy statements or actions that have substantial direct 
effects on one or more Indian Tribes, on the relationship between the 
Federal Government and Indian Tribes, or on the distribution of power 
and responsibilities between the Federal Government and Indian Tribes.
    In the spring of 2011, FNS offered opportunities for consultation 
with Tribal officials or their designees to discuss the impact of the 
HHFKA on tribes or Indian Tribal governments. The consultation sessions 
were coordinated by FNS and held on the following dates and locations:

1. HHFKA Consultation Webinar & Conference Call--April 12, 2011
2. HHFKA Consultation In-Person--Rapid City, SD--March 23, 2011
3. HHFKA Consultation Webinar & Conference Call--June, 22, 2011
4. Tribal Self-Governance Annual Conference In-Person Consultation 
in Palm Springs, CA--May 2, 2011
5. National Congress of American Indians Mid-Year Conference In-
Person Consultation, Milwaukee, WI--June 14, 2011

    The five consultation sessions in total provided the opportunity to 
address Tribal concerns related to school meals. There were no comments 
about this regulation during any of the aforementioned Tribal 
Consultation sessions. Reports from these consultations are part of the 
USDA annual reporting on Tribal consultation and collaboration. FNS 
will respond in a timely and meaningful manner to Tribal government 
requests for consultation concerning this rule. Currently, FNS provides 
regularly scheduled quarterly consultation sessions through the end of 
FY2012 as a venue for collaborative conversations with Tribal officials 
or their designees.

List of Subjects in 7 CFR Part 226

    Accounting, Aged, Day care, Food assistance programs, Grant 
programs, Grant programs--health, American Indians, Individuals with 
disabilities, Infants and children, Intergovernmental relations, Loan 
programs, Reporting and recordkeeping requirements, Surplus 
agricultural commodities.

    Accordingly, 7 CFR part 226 is proposed to be amended as follows:

PART 226--CHILD AND ADULT CARE FOOD PROGRAM

    1. The authority citation for 7 CFR Part 226 continues to read as 
follows:

    Authority: Secs. 9, 11, 14, 16, and 17, Richard B. Russell 
National School Lunch Act, as amended (42 U.S.C. 1758, 1759a, 1762a, 
1765 and 1766).

    2. In Sec.  226.2,
    a. Revise definitions of ``For-profit center'', ``New 
institution'', ``Renewing institution'', and ``State agency list''; and
    b. Add new definitions ``Less-than-arms-length transaction'', 
``Participating institution'', and ``Sponsored center''.
    The additions and revisions read as follows:


Sec.  226.2  Definitions.

* * * * *
    For-profit center means a child care center, outside-school-hours 
care center, or adult day care center providing nonresidential care to 
adults or children that does not qualify for tax-exempt status under 
the Internal Revenue Code of 1986. For-profit centers serving adults 
must meet the criteria described in paragraph (a) of this definition. 
For-profit centers serving children must meet the criteria described in 
paragraphs (b)(1) or (b)(2) of this definition, except that children 
who only participate in the at-risk afterschool snack and/or meal 
component of the Program must not be considered in determining the 
percentages under paragraphs (b)(1) or (b)(2) of this definition.
    (a) A for-profit center serving adults must meet the definition of 
Adult day care center as defined in this section and, during the 
calendar month preceding initial application and during any month that 
it claims reimbursement, the center receives compensation from amounts 
granted to the States under title XIX or title XX and twenty-five 
percent of the adults enrolled in care are beneficiaries of title XIX, 
title XX, or a combination of titles XIX and XX of the Social Security 
Act.
    (b) A for-profit center serving children must meet the definition 
of Child care center or Outside-school-hours care center as defined in 
this section and one of the following conditions during the calendar 
month preceding initial application and during any month that it claims 
reimbursement:
    (1) Twenty-five percent of the children in care (enrolled or 
licensed capacity, whichever is less) are eligible for free or reduced-
price meals; or
    (2) Twenty-five percent of the children in care (enrolled or 
licensed capacity, whichever is less) receive benefits from title XX of 
the Social Security Act and the center receives compensation from 
amounts granted to the States under title XX.
* * * * *
    Less-than-arms-length transaction means a transaction under which 
one party to the transaction is able to control or substantially 
influence the actions of the other(s), as defined in FNS Instruction 
796-2 (``Financial Management--Child and Adult Care Food Program'').
* * * * *
    New institution means an institution making an initial application 
to participate in the Program or an institution applying to participate 
in the Program after a lapse in participation.
* * * * *
    Participating institution means an institution that holds a current 
Program agreement with the State agency to operate the Program. This 
includes renewing institutions.
* * * * *
    Renewing institution means an institution that is participating in 
the Program at the time it submits renewal information.
* * * * *
    Sponsored center means a child care center, at-risk afterschool 
care center, adult day care center, emergency shelter, or outside-
school-hours care center that operates the Program under the auspices 
of a sponsoring organization. The two types of sponsored centers are as 
follows:
    (a) An affiliated center is a part of the same legal entity as 
CACFP sponsoring organization; or
    (b) An unaffiliated center is legally distinct from the sponsoring 
organization.
* * * * *
    State agency list means an actual paper or electronic list, or the 
retrievable paper records, maintained by the State agency, that 
includes a synopsis of information concerning seriously deficient 
institutions and providers terminated for cause in that State. The list 
must be made available to FNS upon request, and must include the 
following information:
    (a) Institutions determined to be seriously deficient by the State 
agency, including the names and mailing addresses of the institutions, 
the basis for each serious deficiency determination, and the status of 
the institutions as they move through the possible subsequent stages of 
corrective action, proposed termination, suspension, agreement 
termination, and/or disqualification, as applicable;
    (b) Responsible principals and responsible individuals who have 
been disqualified from participation by the State agency, including 
their full legal names and any other names previously used, mailing 
addresses, and dates of birth; and
    (c) Day care home providers whose agreements have been terminated 
for cause by a sponsoring organization in

[[Page 21028]]

the State, including their full legal names and any other names 
previously used, mailing addresses, and dates of birth.
* * * * *


Sec.  226.4  [Amended]

    3. In Sec.  226.4, amend paragraph (f) by revising the citation 
``Sec.  226.12(a)(3)'' to read ``Sec.  226.12(a)''.
    4. In Sec.  226.6:
    a. Remove paragraph (b) introductory text and revise paragraphs 
(b)(1) through (3) and (b)(4)(i);
    b1. Amend paragraph (b)(4)(ii) introductory text by removing the 
words ``,except that:'' and adding a period in their place; and by 
adding a third sentence.
    b2. Remove paragraphs (b)(4)(ii)(A) through (C);
    c. Amend paragraph (c)(1)(i) by removing the words ``paragraph (b) 
of this section and in Sec. Sec.  226.15(b) and 226.16(b)'' in the 
first sentence and adding the citation ``Sec.  226.6a'' in its place;
    d. Amend paragraph (c)(1)(ii) introductory text by revising the 
first sentence;
    e. Amend paragraph (c)(1)(iii)(A)(8) by adding the words ``full 
legal names and any other names previously used and'' both after the 
phrase ``possess the'' and after the word ``person's'';
    f. Amend paragraph (c)(1)(iii)(B)(1)(i) by removing the word 
``defer'' and adding the word ``deferred'' in its place;
    g. Amend paragraphs (c)(1)(iii)(C) introductory text and 
(c)(1)(iii)(C)(1) by removing the words ``the institution's'' each time 
they appear and adding the words ``the new institution's'' in their 
place ;
    h. Amend paragraph (c)(1)(iii)(E) in the last sentence by adding 
the words ``full legal names and any other names previously used,'' 
before the word ``mailing''.
    i. Revise paragraph (c)(2);
    j. Revise paragraphs (c)(3)(ii) introductory text and 
(c)(3)(ii)(A);
    k. Redesignate paragraphs (c)(3)(ii)(B) through (c)(3)(ii)(U) as 
paragraphs (c)(3)(ii)(C) through (c)(3)(ii)(V) and add new paragraph 
(c)(3)(ii)(B);
    l. Amend newly redesignated paragraph (c)(3)(ii)(D) by removing the 
words ``paragraphs (b)(1)(xviii) and (b)(2)(vii) of this section'' and 
adding the citation ``Sec.  226.6a(b)(6)'' in its place;
    m. Amend newly redesignated paragraph (c)(3)(ii)(U) by removing the 
period at the end of the first sentence and adding ``, as defined in 
paragraph (c)(1)(ii)(A) of this section; or'' in its place; and by 
removing the second sentence;
    n. Amend paragraph (c)(3)(iii)(A)(7) by adding the words ``full 
legal names and any other names previously used and the'' before the 
word ``date'' each time it appears in the paragraph;
    o. Revise paragraph (c)(3)(iii)(B);
    p. Amend paragraph (c)(3)(iii)(C)(4) by removing the words 
``application denial'' and adding the words ``proposed termination'' in 
its place;
    q. Amend paragraph (c)(3)(iii)(D) introductory text by removing the 
phrase ``institution must renew its application, or its'' and adding 
the word ``institution's'' in its place;
    r. Revise paragraph (c)(3)(iii)(D)(2);
    s. Amend paragraph (c)(3)(iii)(D)(3) by removing the semicolon at 
the end of the sentence and adding a period in its place;
    t. Amend paragraph (c)(3)(iii)(E)(3) by adding the words ``full 
legal names and any other names previously used,'' before the word 
``mailing'';
    u. Amend paragraph (c)(5)(i)(C)(3) by adding the words ``full legal 
names and any other names previously used,'' before the word 
``mailing'';
    v. Amend the second sentence of paragraph (c)(7)(ii) by removing 
the phrase ``paragraphs (b)(1)(xii) and (b)(2)(ii) of this section'' 
and adding the citation ``Sec.  226.6a(b)(2)'' in its place; removing 
the word ``must'' the first time it appears; and removing the words 
``or renewing'' between the words ``new'' and ``institution'';
    w. Revise the second sentence of paragraph (c)(7)(iii);
    x. Amend the first sentence of paragraph (c)(7)(iv)(A) by removing 
the phrase ``paragraphs (b)(1)(xii) and (b)(2)(ii) of this section'' 
and adding the citation ``Sec.  226.6a(b)(2)''in its place; by removing 
the word ``must'' the first time it appears; by removing the words ``or 
renewing'' between the words ``new'' and ``institution''; and by 
removing the citation ``(c)(3)(ii)(B)'' and adding the citation 
``(c)(3)(ii)(C)'' in its place;
    y. Amend paragraph (c)(7)(iv)(B) by removing the phrase ``Sec.  
226.16(b) and paragraphs (b)(1)(xii) and (b)(2)(ii) of this section'' 
and adding the citation ``Sec.  226.6a(b)(2)'' in its place;
    z. Amend paragraph (c)(7)(C) by removing the phrase ``Sec.  
226.16(b) and paragraphs (b)(1)(xii) and (b)(2)(ii) of this section'' 
and adding the citation ``Sec.  226.6a(b)(2)'' in its place;
    aa. Amend paragraph (c)(8)(i)(B) by removing the word ``names'' and 
adding the words ``full legal names and any other names previously 
used'' in its place;
    bb. Amend paragraph (c)(8)(i)(C) by removing the word ``names'' and 
adding the words ``full legal names and any other names previously 
used'' in its place;
    cc. Amend paragraph (c)(8)(ii) by removing the word ``name'' and 
adding the words ``full legal names and any other names previously 
used'' in its place;
    dd. Revise paragraph (f);
    ee. Revise paragraph (k)(2)(i);
    ff. Amend paragraph (k)(2)(iii) by removing the citation 
``(c)(2)(iii)(C),'' and removing the words ``renewing institutions,'';
    gg. Amend paragraph (k)(2)(iv) by removing the citation 
``(c)(2)(iii)(C),'' and ``, renewing,'';
    hh. Amend paragraph (k)(3)(ii) by removing the citation 
``(c)(2)(iii)(A),''; removing ``, renewing,''; and removing the word 
``participating'' the last time it appears;
    ii. Amend paragraph (k)(3)(iv) by removing the citation 
``(c)(2)(iii)(E),'' and removing ``, renewing,'';
    jj. Revise paragraph (k)(9);
    kk. Amend paragraph (k)(10)(iii) by removing the words ``denial of 
a renewing institution's application,'' and removing the citation 
``(c)(2)(iii)(D),'';
    ll. Amend paragraph (m)(3), by redesignating paragraphs (m)(3)(vii) 
through (xii) as paragraphs (viii) through (xiii), respectively;
    mm. Add new paragraph (m)(3)(vii);
    nn. Amend newly redesignated paragraph (m)(3)(ix) by removing the 
semicolon and adding at the end, the words ``, including whether the 
timing of its facility reviews was varied and unpredictable, as 
required by Sec.  226.16(d)(4)(iii);''; and
    oo. Revise paragraph (p).
    The revisions and additions read as follows:


Sec.  226.6  State agency administrative responsibilities.

* * * * *
    (b) Program applications and agreements. (1) Application 
requirements for new institutions. Each State agency must establish 
application review procedures, as described in Sec.  226.6a, to 
determine the eligibility of new institutions and facilities for which 
applications are submitted by sponsoring organizations. The State 
agency must enter into written agreements with institutions in 
accordance with paragraph (b)(4) of this section.
    (2) Information submission requirements for renewing institutions. 
Each State agency must establish renewal information review procedures, 
as described in Sec.  226.6b, to determine the continued eligibility of 
renewing institutions.
    (3) State agency notification requirements. (i) Any new institution 
applying for participation in the

[[Page 21029]]

Program must be notified in writing of approval or disapproval by the 
State agency, within 30 calendar days of the State agency's receipt of 
a complete application. Whenever possible, State agencies should 
provide assistance to institutions that have submitted an incomplete 
application. Any disapproved applicant institution or day care home 
must be notified of the reasons for its disapproval and its right to 
appeal under paragraph (k) or (l), respectively, of this section.
    (ii) Any renewing institution must be provided written notification 
indicating whether it has completely and sufficiently met all renewal 
information requirements within 30 days of the submission of renewal 
information.
    (4) * * *
    (i) The State agency must require each institution that has been 
approved for participation in the Program to enter into an agreement 
governing the rights and responsibilities of each party. The State 
agency may allow a renewing institution to amend its existing Program 
agreement in lieu of executing a new agreement. The existence of a 
valid agreement, however, does not eliminate the need for a renewing 
institution to comply with the information submission requirements and 
related provisions of Sec.  226.6b.
    (ii) * * * The State agency and an institution that is a school 
food authority must enter into a single permanent agreement for all 
child nutrition programs administered by the school food authority and 
the State agency.
* * * * *
    (c) * * *
    (1) * * *
    (ii) * * * The list of serious deficiencies is not identical for 
each category of institution (new or participating) because the type of 
information likely to be available to the State agency is different for 
new and participating institutions.* * *
* * * * *
    (2) Insufficient renewal information submissions. If an institution 
submits renewal information that is incomplete, deficient, unapprovable 
or contains false information, this is considered a serious deficiency, 
and the State agency should follow the procedures for serious 
deficiencies committed by participating institutions outlined in 
paragraph (c)(3)(iii) of this section.
    (3) * * *
    (ii) List of serious deficiencies for participating institutions. 
The list of serious deficiencies is not identical for each category of 
institution (new or participating) because the type of information 
likely to be available to the State agency is different for new and 
participating institutions. Serious deficiencies for participating 
institutions are:
    (A) Submission of false information on the institution's 
application or in its annual renewal submission, including but not 
limited to a determination that the institution has concealed a 
conviction for any activity that occurred during the past seven years 
and that indicates a lack of business integrity, as defined in 
paragraph (c)(1)(ii)(A) of this section.
    (B) Failure to provide complete, adequate, or approvable 
information as part of the information submission process for renewing 
institutions;
* * * * *
    (iii) * * *
    (B) Successful corrective action. (1) If corrective action has been 
taken to fully and permanently correct the serious deficiency(ies) 
within the allotted time and to the State agency's satisfaction, the 
State agency must notify the institution's executive director and 
chairman of the board of directors, and the responsible principals and 
responsible individuals, that the State agency has temporarily deferred 
its serious deficiency determination.
    (2) If corrective action is complete for the institution but not 
for all of the responsible principals and responsible individuals (or 
vice versa), the State agency must:
    (i) Continue with the actions (as set forth in paragraph 
(c)(3)(iii)(C) of this section) against the remaining parties; and
    (ii) At the same time the notice is issued, the State agency must 
also update the State agency list to indicate that the serious 
deficiency(ies) has(ve) been corrected and provide a copy of the notice 
to the appropriate FNSRO.
    (3) If the State agency initially determines that the institution's 
corrective action is complete, but later determines that the serious 
deficiency(ies) has recurred, the State agency must move immediately to 
issue a notice of intent to terminate and disqualify the institution, 
in accordance with paragraph (c)(2)(iii)(C) of this section.
* * * * *
    (D) * * *
    (2) During this period, the State agency must base administrative 
payments on the formula set forth in Sec.  226.12(a); and
* * * * *
    (7) * * *
    (iii) * * * As noted in Sec.  226.6a(b)(2), a State agency is 
prohibited from approving an application submitted by a sponsoring 
organization on behalf of a sponsored facility, and either the facility 
or any of its principals is on the National disqualified list.
* * * * *
    (f) Miscellaneous responsibilities. State agencies must require 
institutions to comply with the applicable provisions of this part and 
must provide or collect the information specified in this paragraph. 
Each State agency must:
    (1) Annually inform institutions that are pricing programs of their 
responsibility to ensure that free and reduced-price meals are served 
to participants unable to pay the full price;
    (2) Annually provide to all institutions a copy of the income 
standards to be used by institutions for determining the eligibility of 
participants for free and reduced-price meals under the Program;
    (3) Annually require each institution to issue a media release, 
unless the State agency has issued a Statewide media release on behalf 
of all its institutions;
    (4) Comply with the following requirements for tiering of day care 
homes:
    (i) Coordinate with the State agency that administers the National 
School Lunch Program (the NSLP State agency) to ensure the receipt of a 
list of schools in the State in which at least one-half of the children 
enrolled are certified eligible to receive free or reduced-price meals. 
The State agency must provide the list of schools to sponsoring 
organizations of day care homes by February 15th each year unless the 
NSLP State agency has elected to base data for the list on a month 
other than October. In that case, the State agency must provide the 
list to sponsoring organizations of day care homes within 15 calendar 
days of its receipt from the NSLP State agency.
    (ii) For tiering determinations of day care homes that are based on 
school or census data, the State agency must ensure that sponsoring 
organizations of day care homes use the most recent available data, as 
described in Sec.  226.15(f).
    (iii) For tiering determinations of day care homes that are based 
on the provider's household income, the State agency must ensure that 
sponsoring organizations annually determine the eligibility of each day 
care home, as described in Sec.  226.15(f).
    (iv) The State agency must provide all sponsoring organizations of 
day care homes in the State with a listing of State-funded programs, 
participation in which by a parent or child will qualify a meal served 
to a child in a tier II home for the tier I rate of reimbursement.

[[Page 21030]]

    (v) The State agency must require each sponsoring organization of 
day care homes to submit to the State agency a list of day care home 
providers receiving tier I benefits on the basis of their participation 
in the SNAP. Within 30 days of receiving this list, the State agency 
will provide this list to the State agency responsible for the 
administration of the SNAP.
    (vi) As described in Sec.  226.15(f), tiering determinations are 
valid for five years if based on school data. The State agency must 
ensure that the most recent available data are used if the 
determination of a day care home's eligibility as a tier I day care 
home is made using school data. The State agency must not routinely 
require annual redeterminations of the tiering status of tier I day 
care homes based on updated school data. However, a sponsoring 
organization, the State agency, or FNS may change the determination if 
information becomes available indicating that a day care home is no 
longer in a qualified area.
    (5) Comply with the following requirements for determining the 
eligibility of at-risk afterschool care centers:
    (i) Coordinate with the NSLP State agency to ensure the receipt of 
a list of elementary, middle, and high schools in the State in which at 
least one-half of the children enrolled are certified eligible to 
receive free or reduced-price meals. The State agency must provide the 
list of elementary, middle, and high schools to independent at-risk 
afterschool care centers and sponsoring organizations of at-risk 
afterschool care centers upon request. The list must represent data 
from the preceding October, unless the NSLP State agency has elected to 
base data for the list on a month other than October. If the NSLP State 
agency chooses a month other than October, it must do so for the entire 
State.
    (ii) The State agency must determine the area eligibility for each 
independent at-risk afterschool care center and each sponsored at-risk 
afterschool center based on the documentation submitted by the 
sponsoring organization in accordance with Sec.  226.15(g). The State 
agency must use the most recent data available, as described in 
paragraph (f)(5)(i) of this section. The State agency must use 
attendance area information that it has obtained, or verified with the 
appropriate school officials to be current, within the last school 
year. Area eligibility determinations are valid for five years for at-
risk afterschool care centers that are already participating in the 
Program. The State agency may determine the date in the fifth year when 
the next five-year cycle of area eligibility will begin. The State 
agency must not routinely require annual redeterminations of area 
eligibility based on updated school data during the five-year period. 
However, a sponsoring organization, the State agency, or FNS may change 
the determination if information becomes available indicating that an 
at-risk afterschool care center is no longer area eligible.
    (iii) The State agency must determine whether the afterschool care 
programs of at-risk afterschool care centers meet the at-risk 
eligibility requirements of Sec.  226.17a(b) before the centers begin 
participating in the Program.
    (iv) The State agency must determine whether institutions already 
participating as at-risk afterschool care centers continue to meet the 
eligibility requirements, described in Sec.  226.17a(b).
    (6) Upon receipt of census data from FNS (on a decennial basis), 
the State agency must provide each sponsoring organization of day care 
homes with census data showing areas in the State in which at least 50 
percent of the children are from households meeting the income 
standards for free or reduced-price meals.
    (7) At intervals and in a manner specified by the State agency, but 
not more frequently than annually, the State agency may:
    (i) Require independent centers to submit a budget with 
sufficiently detailed information and documentation to enable the State 
agency to make an assessment of the independent center's qualifications 
to manage Program funds. Such budget must demonstrate that the 
independent center will expend and account for funds in accordance with 
regulatory requirements, FNS Instruction 796-2 (``Financial 
Management--Child and Adult Care Food Program''), and parts 3015, 3016, 
and 3019 of this title and applicable Office of Management and Budget 
circulars;
    (ii) Request institutions to report their commodity preference;
    (iii) Require a private nonprofit institution to submit evidence of 
tax exempt status in accordance with Sec.  226.15(a);
    (iv) Require for-profit institutions to submit documentation on 
behalf of their centers of:
    (A) Eligibility of at least 25 percent of children in care 
(enrolled or licensed capacity, whichever is less) for free or reduced-
price meals; or
    (B) Compensation received under title XX of the Social Security Act 
of nonresidential day care services and certification that at least 25 
percent of children in care (enrolled or licensed capacity, whichever 
is less) were title XX beneficiaries during the most recent calendar 
month.
    (v) Require for-profit adult care centers to submit documentation 
that they are currently providing nonresidential day care services for 
which they receive compensation under title XIX or title XX of the 
Social Security Act, and certification that not less than 25 percent of 
enrolled participants in each such center during the most recent 
calendar month were title XIX or title XX beneficiaries;
    (vi) Request each institution to indicate its choice to receive 
all, part or none of advance payments, if the State agency chooses to 
make advance payments available; and
    (vii) Perform verification in accordance with Sec.  226.23(h) and 
paragraph (m)(4) of this section. State agencies verifying the 
information on free and reduced-price applications must ensure that 
verification activities are conducted without regard to the 
participant's race, color, national origin, sex, age, or disability.
* * * * *
    (k) * * *
    (2) * * *
    (i) Application denial. Denial of a new institution's application 
for participation (see Sec.  226.6a, for State agency review of an 
institution's application, and paragraph (c)(1) of this section, for 
State agency denial of a new institution's application);
* * * * *
    (9) Abbreviated administrative review. The State agency must limit 
the administrative review to a review of written submissions concerning 
the accuracy of the State agency's determination if the application was 
denied or the State agency proposes to terminate the institution's 
agreement because:
    (i) The information submitted on the application was false (refer 
to paragraphs (c)(1)(ii)(A) and (c)(3)(ii)(A) of this section);
    (ii) The institution, one of its sponsored facilities, or one of 
the principals of the institution or its facilities is on the National 
disqualified list (refer to Sec.  226.6a(b)(2));
    (iii) The institution, one of its sponsored facilities, or one of 
the principals of the institution or its facilities is ineligible to 
participate in any other publicly funded program by reason of violation 
of the requirements of the program (refer to paragraph (c)(3)(ii)(T) of 
this section and Sec.  226.6a(b)(3)); or
    (iv) The institution, one of its sponsored facilities, or one of 
the

[[Page 21031]]

principals of the institution or its facilities has been convicted for 
any activity that indicates a lack of business integrity (refer to 
paragraph (c)(3)(ii)(U) of this section and Sec.  226.6a(b)(4)).
* * * * *
    (m) * * *
    (3) * * *
    (vii) Compliance with the requirements for submitting and ensuring 
the accuracy of the annual renewal information;
* * * * *
    (p) Sponsoring organization agreement. (1) Each State agency shall 
develop and provide for the use of a standard form of written permanent 
agreement between each sponsoring organization and the day care homes 
or unaffiliated child care centers participating in the Program under 
such organization. The agreement shall specify the rights and 
responsibilities of both parties. The State agency may, at the request 
of the sponsor, approve an agreement developed by the sponsor. Nothing 
in this paragraph shall be construed to limit the ability of the 
sponsoring organization to suspend or terminate the permanent agreement 
in accordance with Sec.  226.16(l).
    (2) The State agency must also include in this agreement its policy 
to restrict transfers of day care homes between sponsoring 
organizations. The policy must restrict the transfers to no more 
frequently than once per year, except under extenuating circumstances, 
such as termination of the sponsoring organization's agreement or other 
circumstances defined by the State agency.
* * * * *
    5. Add Sec. Sec.  226.6a and 226.6b to read as follows:


Sec.  226.6a  State agency application requirements for new 
institutions.

    (a) Application procedures for new institutions. Each State agency 
must establish application procedures to determine the eligibility of 
new institutions under this part. For new private nonprofit and for-
profit child care institutions, such procedures must also include a 
pre-approval visit by the State agency to confirm the information in 
the institution's application and to further assess the institution's 
ability to manage the Program. In addition, the State agency's 
application review procedures must ensure that the institution complies 
with the provisions in this section.
    (b) Institution application requirements. The State agency's 
application review procedures must ensure that the following 
information is included in a new institution's application:
    (1) Budget. The State agency must review and approve each 
institution's budget. The budget must demonstrate the institution's 
ability to manage Program funds in accordance with Sec.  226.7, FNS 
Instruction 796-2, (``Financial Management--Child and Adult Care Food 
Program''), parts 3015, 3016, and 3019 of this title, and applicable 
Office of Management and Budget circulars. If the institution does not 
intend to use non-CACFP funds to support any required CACFP functions, 
the institution's budget must identify a source of non-Program funds 
that could be used to pay overclaims or other unallowable costs. If the 
institution intends to use any non-Program resources to meet CACFP 
requirements, these non-Program funds should be accounted for in the 
institution's budget, and the institution's budget must identify a 
source of non-Program funds that could be used to pay overclaims or 
other unallowable costs. Other information that must be in the budget 
includes:
    (i) For sponsors, projected CACFP administrative earnings and 
expenses.
    (ii) For sponsoring organizations of centers, all administrative 
costs, whether incurred by the sponsoring organization or its sponsored 
centers. If at any point a sponsoring organization determines that the 
meal reimbursements estimated to be earned during the budget year will 
be lower than that estimated in its administrative budget, the 
sponsoring organization must amend its administrative budget to stay 
within 15 percent of meal reimbursements estimated or actually earned 
during the budget year, unless the State agency grants a waiver in 
accordance with Sec.  226.7(g)(1). Failure to do so will result in 
appropriate fiscal action in accordance with Sec.  226.14(a).
    (2) Presence on the National disqualified list. If an institution 
or one of its principals is on the National disqualified list and 
submits an application, the State agency may not approve the 
application. If a sponsoring organization submits an application on 
behalf of a facility, and either the facility or any of its principals 
is on the National disqualified list, the State agency may not approve 
the application. In accordance with Sec.  226.6(k)(3)(vii), in this 
circumstance, the State agency's refusal to consider the application is 
not subject to administrative review.
    (3) Ineligibility for other publicly funded programs. (i) General. 
A State agency is prohibited from approving an institution's 
application if, during the past seven years, the institution or any of 
its principals have been declared ineligible for any other publicly 
funded program by reason of violating that program's requirements. 
However, this prohibition does not apply if the institution or the 
principal has been fully reinstated in, or determined eligible for, 
that program, including the payment of any debts owed.
    (ii) State agencies must collect from institutions:
    (A) A statement listing the publicly funded programs in which the 
institution and its principals have participated in the past seven 
years; and
    (B) A certification that, during the past seven years, neither the 
institution nor any of its principals have been declared ineligible to 
participate in any other publicly funded program by reason of violating 
that program's requirements; or
    (C) In lieu of the certification, documentation that the 
institution or the principal previously declared ineligible was later 
fully reinstated in, or determined eligible for, the program, including 
the payment of any debts owed.
    (iii) Follow-up. If the State agency has reason to believe that the 
institution or its principals were determined ineligible to participate 
in another publicly funded program by reason of violating that 
program's requirements, the State agency must follow up with the entity 
administering the publicly funded program to gather sufficient evidence 
to determine whether the institution or its principals were, in fact, 
determined ineligible.
    (4) Information on criminal convictions. (i) A State agency is 
prohibited from approving an institution's application if any of the 
institution's principals have been convicted of any activity during the 
past seven years that indicated a lack of business integrity, as 
defined in Sec.  226.6(c)(1)(ii)(A); and
    (ii) State agencies must collect from institutions a certification 
that neither the institution nor any of its principals have been 
convicted of any activity during the past seven years that indicated a 
lack of business integrity, as defined in Sec.  226.6(c)(1)(ii)(A);
    (5) Certification of truth of applications and submission of names 
and addresses. State agencies must collect from institutions a 
certification that all information on the application is true and 
correct, along with the full legal names and any other names previously 
used, mailing address, and date of birth of the institution's executive 
director and chairman of the board of directors or, in the case of a 
for-profit center that does not have an

[[Page 21032]]

executive director or is not required to have a board of directors, the 
owner of the for-profit center;
    (6) Compliance with performance standards. State agencies must 
collect from each new institution, information sufficient to document 
that it is financially viable, is administratively capable of operating 
the Program in accordance with this part, and has internal controls in 
effect to ensure accountability. To document this, any new institution 
must demonstrate in its application that it is capable of operating in 
conformance with the following performance standards. The State agency 
must only approve the applications of those new institutions that meet 
these performance standards, and must deny the applications of those 
new institutions that do not meet the standards. In ensuring compliance 
with these performance standards, the State agency should use its 
discretion in determining whether the institution's application, in 
conjunction with its past performance in CACFP, establishes to the 
State agency's satisfaction that the institution meets the following 
performance standards.
    (i) Performance Standard 1--Financial viability and financial 
management. The new institution must be financially viable. Program 
funds must be expended and accounted for in accordance with the 
requirements of this part, FNS Instruction 796-2 (``Financial 
Management--Child and Adult Care Food Program''), and parts 3015, 3016, 
and 3019 of this title. To demonstrate financial viability, the new 
institution must document that it meets the following criteria:
    (A) Description of need and recruitment. A new sponsoring 
organization must demonstrate in its management plan that its 
participation will help ensure the delivery of Program benefits to 
otherwise unserved facilities or participants, in accordance with 
criteria developed by the State agency pursuant to paragraph (c)(6) of 
this section. A new sponsoring organization must demonstrate that it 
will use appropriate practices for recruiting facilities, consistent 
with Sec.  226.6(p) and any State agency requirements;
    (B) Fiscal resources and financial history. A new institution must 
demonstrate that it has adequate financial resources to operate CACFP 
on a daily basis, has adequate sources of funds to continue to pay 
employees and suppliers during periods of temporary interruptions in 
Program payments and/or to pay debts when fiscal claims have been 
assessed against the institution, and can document financial viability 
(for example, through audits, financial statements, etc.); and
    (C) Budgets. Costs in the institution's budget must be necessary, 
reasonable, allowable, and appropriately documented;
    (ii) Performance Standard 2--Administrative capability. The new 
institution must be administratively capable. Appropriate and effective 
management practices must be in effect to ensure that the Program 
operates in accordance with this part. To demonstrate administrative 
capability, the new institution must document that it meets the 
following criteria:
    (A) Has an adequate number and type of qualified staff to ensure 
the operation of the Program in accordance with this part;
    (B) If a sponsoring organization, documents in its management plan 
that it employs staff sufficient to meet the ratio of monitors to 
facilities, taking into account the factors that the State agency will 
consider in determining a sponsoring organization's staffing needs, as 
set forth in (c)(1) of this section; and
    (C) If a sponsoring organization has Program policies and 
procedures in writing that assign Program responsibilities and duties, 
and ensure compliance with civil rights requirements; and
    (iii) Performance Standard 3--Program accountability. The new 
institution must have internal controls and other management systems in 
effect to ensure fiscal accountability and to ensure that the Program 
will operate in accordance with the requirements of this part. To 
demonstrate Program accountability, the new institution must document 
that it meets the following criteria:
    (A) Governing board of directors. Has adequate oversight of the 
Program by an independent governing board of directors as defined at 
Sec.  226.2;
    (B) Fiscal accountability. Has a financial system with management 
controls specified in writing. For new sponsoring organizations, these 
written operational policies must assure:
    (1) Fiscal integrity and accountability for all funds and property 
received, held, and disbursed;
    (2) The integrity and accountability of all expenses incurred;
    (3) That claims will be processed accurately, and in a timely 
manner;
    (4) That funds and property are properly safeguarded and used, and 
expenses incurred, for authorized Program purposes; and
    (5) That a system of safeguards and controls is in place to prevent 
and detect improper financial activities by employees;
    (C) Recordkeeping. Maintains appropriate records to document 
compliance with Program requirements, including budgets, accounting 
records, approved budget amendments, and, if a sponsoring organization, 
management plans and appropriate records on facility operations;
    (D) Sponsoring organization operations. If a new sponsoring 
organization, documents in its management plan that it will:
    (1) Provide adequate and regular training of sponsoring 
organization staff and sponsored facilities in accordance with 
Sec. Sec.  226.15(e)(12) and (e)(14) and 226.16(d)(2) and (d)(3);
    (2) Perform monitoring in accordance with Sec.  226.16(d)(4), to 
ensure that sponsored facilities accountably and appropriately operate 
the Program;
    (3) If a sponsor of day care homes, accurately classify day care 
homes as tier I or tier II in accordance with Sec.  226.15(f); and
    (4) Have a system in place to ensure that administrative costs 
funded from Program reimbursements do not exceed regulatory limits set 
forth in Sec. Sec.  226.6a(b)(1) and 226.12(a).
    (E) Meal service and other operational requirements. Independent 
centers and facilities will follow practices that result in the 
operation of the Program in accordance with the meal service, 
recordkeeping, and other operational requirements of this part. These 
practices must be documented in the independent center's application or 
in the sponsoring organization's management plan and must demonstrate 
that independent centers or sponsored facilities will:
    (1) Provide meals that meet the meal patterns set forth in Sec.  
226.20;
    (2) Comply with licensing or approval requirements set forth in 
Sec.  226.6(d);
    (3) Have a food service that complies with applicable State and 
local health and sanitation requirements;
    (4) Comply with civil rights requirements;
    (5) Maintain complete and appropriate records on file; and
    (6) Claim reimbursement only for eligible meals.
    (7) Nondiscrimination statement. Institutions must submit their 
nondiscrimination policy statement and a media release, unless the 
State agency has issued a Statewide media release on behalf of all 
institutions;
    (8) Documentation of tax-exempt status. All private nonprofit 
institutions must document their tax-exempt status; and
    (9) Preference for commodities or cash-in-lieu of commodities. 
Institutions must state their preference to receive

[[Page 21033]]

commodities or cash-in-lieu of commodities.
    (c) Sponsoring organization application requirements. In addition 
to the application requirements contained in paragraph (b) of this 
section, the State agency's application review procedures must ensure 
that the following information is included in a new sponsoring 
organization's application:
    (1) Management plan. The State agency must establish factors, 
consistent with this section, that it will consider in determining 
whether a new sponsoring organization has sufficient staff to perform 
required monitoring responsibilities at all of its sponsored 
facilities. State agencies must collect from sponsoring organizations a 
complete management plan that includes:
    (i) Detailed information on the organization's management and 
administrative structure;
    (ii) A list or description of the staff assigned to Program 
monitoring. Each sponsoring organization of day care homes must 
document that, to perform monitoring, it will employ the equivalent of 
one full-time staff person for each 50 to 150 day care homes it 
sponsors. A sponsoring organization of centers must document that, to 
perform monitoring, it will employ the equivalent of one full-time 
staff person for each 25 to 150 centers it sponsors. It is the State 
agency's responsibility to determine the appropriate level of staffing 
for monitoring for each sponsoring organization, consistent with these 
specified ranges and factors that the State agency will use to 
determine the appropriate level of monitoring staff for each sponsor. 
The monitoring staff equivalent may include the employee's time spent 
on scheduling, travel time, review time, follow-up activity, report 
writing, and activities related to the annual updating of children's 
enrollment forms;
    (iii) The procedures to be used by the organization to administer 
the Program in, and disburse payments to, the child care facilities 
under its sponsorship;
    (iv) For sponsoring organizations of day care homes, a description 
of the system for making tier I day care home determinations, and a 
description of the system of notifying tier II day care homes of their 
options for reimbursement; and
    (v) Any additional information necessary to document the sponsoring 
organization's compliance with the performance standards set forth at 
paragraph (b)(6) of this section.
    (2) Outside employment policy. State agencies must collect from 
sponsoring organizations an outside employment policy. The policy must 
restrict other employment by employees that interferes with an 
employee's performance of Program-related duties and responsibilities, 
including outside employment that constitutes a real or apparent 
conflict of interest. The policy will be effective unless disapproved 
by the State agency;
    (3) Bond. Sponsoring organizations must submit a bond, if such bond 
is required by State law, regulation, or policy. If the State agency 
requires a bond for sponsoring organizations pursuant to State law, 
regulation, or policy, the State agency must submit a copy of that 
requirement and a list of sponsoring organizations posting a bond to 
the appropriate FNSRO on an annual basis;
    (4) Day care home enrollment information. State agencies must 
collect from sponsoring organizations of day care homes current 
information on:
    (i) The total number of children enrolled in all homes in the 
sponsorship;
    (ii) An assurance that day care home providers' own children whose 
meals are claimed for reimbursement in the Program are eligible for 
free or reduced-price meals;
    (iii) The total number of tier I and tier II day care homes that it 
sponsors;
    (iv) The total number of children enrolled in tier I day care 
homes;
    (v) The total number of children enrolled in tier II day care 
homes; and
    (vi) The total number of children in tier II day care homes that 
have been identified as eligible for free or reduced-price meals;
    (5) Facility lists. The State agency must collect from each 
sponsoring organization a list of all their applicant day care homes, 
child care centers, outside-school-hours-care centers, at-risk 
afterschool care centers, and adult day care centers;
    (6) Providing benefits to unserved facilities or participants. (i) 
Criteria. The State agency must develop criteria for determining 
whether a new sponsoring organization's participation will help ensure 
the delivery of benefits to otherwise unserved facilities or 
participants, and must disseminate these criteria to new sponsoring 
organizations when they request information about applying to the 
Program; and
    (ii) Documentation. The State agency must collect from the new 
sponsoring organization documentation that its participation will help 
ensure the delivery of benefits to otherwise unserved facilities or 
participants in accordance with the State agency's criteria;
    (7) Notice to parents. The State agency must collect a copy of the 
sponsoring organization's notice to parents, in a form and, to the 
maximum extent practicable, language easily understandable by the 
participant's parents or guardians. The notice must inform them of 
their facility's participation in CACFP, the Program's benefits, the 
name and telephone number of the sponsoring organization, and the name 
and telephone number of the State agency responsible for administration 
of CACFP;
    (8) Serious deficiency procedures. If the sponsoring organization 
chooses to establish procedures for determining a day care home 
seriously deficient that supplement the procedures in paragraph Sec.  
226.16(l), the State agency must collect a copy of those supplemental 
procedures in the application. If the State agency has made the 
sponsoring organization responsible for the administrative review of a 
proposed termination of a day care home's agreement for cause, pursuant 
to Sec.  226.6(l)(1), the State agency must collect a copy of the 
sponsoring organization's administrative review procedures. The 
sponsoring organization's supplemental serious deficiency and 
administrative review procedures must comply with Sec. Sec.  226.16(l) 
and 226.6(l);
    (9) Facility applications. The State agency must ensure collection 
and review of the following information for every sponsored facility:
    (i) An application for participation for each child care and adult 
day care facility accompanied by all necessary supporting 
documentation;
    (ii) Timely information concerning the eligibility status of child 
care and adult day care facilities (such as licensing or approval 
actions);
    (iii) For sponsoring organizations of day care homes, the full 
legal names and any other names previously used, mailing address, and 
date of birth of each provider;
    (iv) Documentation that all day care homes and sponsored centers 
meet Program licensing or approval requirements; and
    (v) The State agency must ensure that no facilities are 
participating under more than one sponsoring organization; and
    (10) Disclosure of potential conflicts of interest. The State 
agency must require sponsoring organizations to disclose any less-than-
arms-length transactions in the operation of CACFP that are anticipated 
in the upcoming year. The State agency approval of such transactions 
must be consistent with FNS Instruction 796-2 (``Financial

[[Page 21034]]

Management--Child and Adult Care Food Program''). Sponsoring 
organizations also must disclose to the State agency any other 
potential conflicts of interest, such as relationships among officers, 
board members, and employees.
    (d) Application requirements for independent and sponsored centers. 
State agencies must obtain and review the following additional 
information from centers:
    (1) Participant eligibility information. State agencies must 
collect current information on the number of enrolled participants 
eligible for free, reduced-price and paid meals;
    (2) Documentation of licensing/approval. State agencies must 
collect documentation demonstrating that each center meets Program 
licensing or approval requirements;
    (3) Documentation of for-profit center eligibility. State agencies 
must collect documentation that each for-profit center meets the 
definition set forth in Sec.  226.2, For-profit center; and
    (4) At-risk afterschool care centers. In addition to the general 
CACFP application requirements, State agencies must collect 
documentation from at-risk institutions demonstrating that each at-risk 
afterschool care center meets the program eligibility requirements in 
Sec. Sec.  226.17a(a) and 226.17a(b), and sponsoring organizations must 
submit documentation that each sponsored at-risk afterschool care 
center meets the area eligibility requirements in Sec.  226.17a(f).


Sec.  226.6b  State agency annual information submission requirements 
for renewing institutions.

    (a) Annual information submission requirements for renewing 
institutions. Each State agency must establish annual information 
submission procedures to confirm the continued eligibility of renewing 
institutions under this part. Renewing institutions must not be 
required to submit a free and reduced-price policy statement or a 
nondiscrimination statement unless substantive changes are made to 
either statement. In addition, the State agency's review procedures 
must ensure that institutions annually submit information or certify 
that certain information is still true based on the requirements of 
this section. For information that must be certified, any new changes 
made in the past year and not previously reported to the State agency 
must be updated in the renewal information submission. Any additional 
information submitted in the renewal must be certified by the 
institution to be true. This section contains the information that must 
be submitted, certified or updated annually.
    (b) Eligibility certification for institutions. The State agency 
must ensure that all renewing institutions certify the following:
    (1) Presence on National disqualified list. The State agency must 
ensure that renewing institutions certify that neither the institution 
nor its principals are on the National disqualified list. The State 
agency must also ensure that renewing sponsoring organizations certify 
that no sponsored facility or facility principal is on the National 
disqualified list. The State agency must compare the institution's 
certification with the National disqualified list to ensure its 
accuracy at the time of renewal;
    (2) Ineligibility for other publicly funded programs. The State 
agency must ensure that renewing institutions submit a list of the 
publicly funded programs in which the institution and its principals 
have participated in the past seven years that have not been previously 
reported to the State agency. Institutions must certify that the 
institution and the institution's principals have not been declared 
ineligible for any other publicly funded program by reason of violating 
that program's requirements in the past seven years. In lieu of 
certification, if not previously submitted, the institution may submit 
documentation that the institution or the principal previously declared 
ineligible has been fully reinstated in, or determined eligible for, 
that program and has repaid any debts owed. If the State agency has 
reason to believe that the renewing institution or any of its 
principals were determined ineligible to participate in another 
publicly funded program by reason of violating that program's 
requirements, the State agency must follow up with the entity 
administering the publicly funded program to gather sufficient evidence 
to determine whether the institution or its principals were, in fact, 
determined ineligible;
    (3) Information on criminal convictions. The State agency must 
ensure that renewing institutions certify that the institution's 
principals have not been convicted of any activity that occurred during 
the past seven years and that indicates a lack of business integrity, 
as defined in Sec.  226.6(c)(1)(ii)(A);
    (4) Submission of names and addresses. The State agency must ensure 
that renewing institutions submit a certification that the full legal 
names and any other names previously used, mailing address, and date of 
birth of the institution's executive director and chairman of the board 
of directors or, in the case of a for-profit center that does not have 
an executive director or is not required to have a board of directors, 
the owner of the for-profit center;
    (5) Compliance with performance standards. The State agency must 
ensure that each renewing institution certifies that it is still in 
compliance with the performance standards described in Sec.  
226.6a(b)(6), meaning it is financially viable, is administratively 
capable of operating the Program, and has internal controls in effect 
to ensure accountability;
    (6) Licensing. The State agency must ensure that each independent 
center certifies that its licensing or approval status is up-to-date 
and that it continues to meet the licensing requirements outlined in 
Sec. Sec.  226.6(d) and (e). Sponsoring organizations must certify that 
the licensing/approval status of their facilities is up-to-date and 
that they continue to meet the licensing requirements outlined in 
Sec. Sec.  226.6(d) and (e). If the independent center or facility has 
a new license not previously on file with the State agency, a copy must 
be submitted unless the State agency has other means of confirming the 
licensing or approval status of any independent center or facility 
providing care; and
    (7) At-risk information. The State agency must ensure that 
independent at-risk afterschool care centers or sponsoring 
organizations of at-risk afterschool care centers certify that they 
still meet the requirements of Sec.  226.17a(b). Sponsoring 
organizations of at-risk afterschool care centers must provide area 
eligibility data in compliance with the provisions of Sec.  226.15(g). 
In accordance with Sec.  226.6(f)(5)(ii), State agencies must determine 
the area eligibility of each independent at-risk afterschool care 
center that is already participating in the Program.
    (c) Administrative budget submission for sponsoring organizations. 
The State agency must ensure that renewing sponsoring organizations 
submit an administrative budget for the upcoming year with sufficiently 
detailed information concerning projected CACFP administrative earnings 
and expenses, as well as other non-Program funds to be used in Program 
administration, for the State agency to determine the allowability, 
necessity, and reasonableness of all proposed expenditures, and to 
assess the sponsoring organization's capability to manage Program 
funds. The administrative budget must demonstrate that the sponsoring 
organization will expend and account for funds in accordance with 
regulatory

[[Page 21035]]

requirements, FNS Instruction 796-2, (``Financial Management--Child and 
Adult Care Food Program''), parts 3015, 3016, and 3019 of this title, 
and applicable Office of Management and Budget circulars. In addition, 
the administrative budget submitted by a sponsor of centers must 
demonstrate that the administrative costs to be charged to the Program 
do not exceed 15 percent of the meal reimbursements estimated or 
actually earned during the budget year, unless the State agency grants 
a waiver in accordance with Sec.  226.7(g)(1). For sponsoring 
organizations of day care homes seeking to carry over administrative 
funds in accordance with Sec.  226.12(a)(3), the budget must include an 
estimate of requested administrative fund carryover amounts and a 
description of the proposed purpose(s) for which those funds will be 
obligated or expended.
    (d) Eligibility certification for sponsoring organizations. In 
addition to the certification requirements in paragraph (b) of this 
section, the State agency must ensure that renewing sponsoring 
organizations certify the following:
    (1) Management plan. The State agency must ensure that renewing 
sponsoring organizations certify that the sponsor has reviewed its 
current management plan on file with the State agency and that it is 
complete and up-to-date. If the management plan has changed, the 
sponsor must submit updates that meet the requirements of Sec.  
226.6a(c)(1). The State agency must establish factors, consistent with 
Sec.  226.6a(c)(1), that it will consider in determining whether a 
renewing sponsoring organization has sufficient staff to perform 
required monitoring responsibilities at all of its sponsored 
facilities. As part of the annual review of the renewing sponsoring 
organization's management plan, the State agency must determine the 
appropriate level of staffing for the sponsoring organization, 
consistent with the staffing range of monitors set forth at Sec.  
226.6a(c)(1) and the factors the State agency has established.
    (2) Outside employment policy. The State agency must ensure that 
renewing sponsoring organizations certify that the outside employment 
policy most recently submitted to the State agency remains current and 
in effect or the sponsor must submit an updated outside employment 
policy at the time of renewal. The policy must restrict other 
employment by employees that interferes with an employee's performance 
of Program-related duties and responsibilities, including outside 
employment that constitutes a real or apparent conflict of interest.
    (3) Facility lists. The State agency must ensure that each 
sponsoring organization certifies that the list of all of their 
applicant day care homes, child care centers, outside-school-hours care 
centers, at-risk afterschool care centers, and adult day care centers 
on file with the State agency is current and up-to-date.
    (4) Facility training. The State agency must ensure that renewing 
sponsoring organizations certify that all facilities under their 
sponsorships have adhered to the training requirements set forth in 
Program regulations.
    (5) Disclosure of potential conflicts of interest. The State agency 
must ensure that sponsoring organizations certify that no unreported 
less-than-arms-length transactions or any other potential conflicts of 
interest have occurred in the last year and disclose any that are 
anticipated in the upcoming year. The State agency approval of 
anticipated less-than-arms-length transactions must be consistent with 
FNS Instruction 796-2 (``Financial Management--Child and Adult Care 
Food Program'').
    6. In Sec.  226.7 by revising paragraph (g) and adding a sentence 
at the end of paragraph (j) to read as follows:


Sec.  226.7  State agency responsibilities for financial management.

* * * * *
    (g) Budget approval. The State agency must review institution 
budgets as described in Sec. Sec.  226.6a(b)(1) and 226.6b(c) and must 
limit allowable administrative claims by each sponsoring organization 
to the administrative costs approved in its budget, except as provided 
in this section. The budget must demonstrate the institution's ability 
to manage Program funds in accordance with this part, FNS Instruction 
796-2 (``Financial Management--Child and Adult Care Food Program''), 
parts 3015, 3016, and 3019 of this title, and applicable Office of 
Management and Budget circulars. Sponsoring organizations must submit 
an administrative budget to the State agency annually, and independent 
centers must submit budgets as frequently as required by the State 
agency. Budget levels may be adjusted to reflect changes in Program 
activities. If the institution does not intend to use non-CACFP funds 
to support any required CACFP functions, the institution's budget must 
identify a source of non-Program funds that could be used to pay 
overclaims or other unallowable costs. If the institution intends to 
use any non-Program resources to meet CACFP requirements, these non-
Program funds should be accounted for in the institution's budget, and 
the institution's budget must identify a source of non-Program funds 
that could be used to pay overclaims or other unallowable costs.
    (1) For sponsoring organizations of centers, the State agency is 
prohibited from approving the sponsoring organization's administrative 
budget, or any amendments to the budget, if the administrative budget 
shows the Program will be charged for administrative costs in excess of 
15 percent of the meal reimbursements estimated to be earned during the 
budget year. However, the State agency may waive this limit if the 
sponsoring organization provides justification that it requires Program 
funds in excess of 15 percent to pay its administrative costs and if 
the State agency is convinced that the institution will have adequate 
funding to provide meals meeting the requirements of Sec.  226.20. The 
State agency must document all waiver approvals and denials in writing, 
and must provide a copy of all such letters to the appropriate FNSRO.
    (2) For sponsoring organizations of day care homes seeking to carry 
over administrative funds in accordance with Sec.  226.12(a)(3), the 
State agency must require the budget to include an estimate of the 
requested administrative fund carryover amount and a description of the 
proposed purpose(s) for which those funds will be obligated or expended 
by the end of the fiscal year following the fiscal year in which they 
were received. In approving a carryover request, State agencies must 
consider whether the sponsoring organization has a financial management 
system that meets Program requirements and is capable of controlling 
the custody, documentation and disbursement of carryover funds. As soon 
as possible after fiscal year close-out, the State agency must require 
sponsoring organizations carrying over administrative funds to submit 
an amended budget for State agency review and approval. The amended 
budget must identify the amount of administrative funds actually 
carried over and describe the purpose(s) for which the carryover funds 
have been or will be used.
* * * * *
    (j) * * * In addition, each State agency must establish procedures 
to recover administrative funds from sponsoring organizations of day 
care homes which are not properly payable under FNS Instruction 796-2 
(``Financial Management--Child and

[[Page 21036]]

Adult Care Food Program''), are in excess of the 10 percent maximum 
carryover amount, or any carryover amounts not expended or obligated by 
the end of the fiscal year following the fiscal year in which they were 
received.
* * * * *
    7. In Sec.  226.9, redesignate paragraphs (c) and (d) as paragraphs 
(d) and (e), respectively; and add new paragraph (c) to read as 
follows:


Sec.  226.9  Assignment of rates of reimbursement for centers.

* * * * *
    (c) If the State agency is allowing the use of claiming percentages 
or a blended per-meal rate of reimbursement as described in paragraph 
(b) of this section, the State agency must require centers to submit 
current eligibility information on enrolled participants, in order to 
calculate a blended rate or claiming percentage.
* * * * *


Sec.  226.10  [Amended]

    8. In Sec.  226.10, amend paragraph (a) by removing the 
citation``Sec.  226.6(f)(3)(iv)(F)'' in the first sentence and adding 
the citation ``Sec.  226.6(f)(7)(vi)'' in its place.
    9. In Sec.  226.12, revise paragraph (a) to read as follows:


Sec.  226.12  Administrative payments to sponsoring organizations for 
day care homes.

    (a) General. Sponsoring organizations of day care homes receive 
payments for administrative costs, subject to the following conditions:
    (1) Sponsoring organizations shall receive reimbursement for the 
administrative costs of the sponsoring organization in an amount that 
is not less than the product obtained each month by multiplying:
    (i) The number of day care homes of the sponsoring organization 
submitting a claim for reimbursement during the month, by
    (ii) The appropriate administrative rate(s) announced annually in 
the Federal Register.
    (2) FNS determines these administrative reimbursement rates by 
annually adjusting the following base administrative rates as set forth 
in Sec.  226.4(i):
    (i) Initial 50 day care homes, 42 dollars;
    (ii) Next 150 day care homes, 32 dollars;
    (iii) Next 800 day care homes, 25 dollars;
    (iv) Additional day care homes, 22 dollars.
    (3) With State agency approval, a sponsoring organization may carry 
over a maximum of 10 percent of administrative funds received under 
paragraph (a)(1) of this section for use in the following fiscal year. 
If such funds are not obligated or expended in the following fiscal 
year, they must be returned to the State agency in accordance with 
Sec.  226.7(j).
    (4) State agencies must recover any administrative funds not 
properly payable in accordance with FNS Instruction 796-2 (``Financial 
Management--Child and Adult Care Food Program'').
* * * * *
    10. In Sec.  226.15:
    a. Revise paragraphs (b) and (e)(1); and
    b. Amend paragraph (g) by removing ``Sec.  226.6(f)(1)(ix)'' in the 
last sentence and adding ``Sec.  226.6(f)(5)'' in its place.
    The revisions read as follows:


Sec.  226.15  Institution provisions.

* * * * *
    (b) New applications and renewals. Each new institution must submit 
to the State agency with its application all information required for 
its approval as set forth in Sec.  226.6a. Such information must 
demonstrate that a new institution has the administrative and financial 
capability to operate the Program in accordance with this part and with 
the performance standards set forth in Sec.  226.6a(b)(6). Renewing 
institutions must certify that they are capable of operating the 
Program in accordance with this part and as set forth in Sec.  
226.6b(b).
* * * * *
    (e) * * *
    (1) Copies of the initial application, renewal information 
submissions, and supporting documents submitted to the State agency;
* * * * *
    11. In Sec.  226.16:
    a. Revise paragraph (b);
    b. Amend paragraph (d) introductory text by removing the words 
``paragraph (b)(1) of this section'' in the second sentence and adding 
``Sec.  226.6a(c)(1)'' in its place;
    c. Amend paragraph (d)(4)(iii)(C) by removing the word ``and'' from 
the end of paragraph;
    d. Amend paragraph (d)(4)(iii)(D) by removing the period from the 
end of the paragraph and adding a semicolon in its place;
    e. Add new paragraphs (d)(4)(iii)(E) and (F);
    f. Amend paragraph (f) by revising the citation ``Sec.  
226.6(b)(4)(ii)(A)'' to read ``Sec.  226.6(b)(4)(ii)'';
    g. Revise paragraph (h); and
    h. Revise paragraph (l)(2)(vii).
    The additions and revisions read as follows:


Sec.  226.16  Sponsoring organization provisions.

* * * * *
    (b) Each new sponsoring organization must submit to the State 
agency with its application all information required for its approval, 
and the approval of the facilities under its jurisdiction, as set forth 
in Sec.  226.6a. The application must demonstrate that the institution 
has the administrative and financial capability to operate the Program 
in accordance with the Program regulations. Renewing sponsoring 
organizations must submit information in accordance with Sec.  226.6b.
* * * * *
    (d) * * *
    (4) * * *
    (iii) * * *
    (E) The timing of unannounced reviews must be varied so that they 
are unpredictable to the facility; and
    (F) All types of meal service must be subject to review and 
sponsoring organizations must vary the meal service reviewed.
* * * * *
    (h) Sponsoring organizations of child care centers, adult day care 
centers, emergency shelters, at-risk afterschool care centers, or 
outside-school-hours care centers shall:
    (1) Enter into a permanent agreement with unaffiliated sponsored 
centers and sponsored day care homes that at a minimum addresses the 
requirements set forth in the provisions of Sec. Sec.  226.17, 226.17a, 
226.18, 226.19, and 226.19a, as applicable. Nothing in the preceding 
sentence shall be construed to limit the ability of the sponsoring 
organization to suspend or terminate the permanent agreement in 
accordance with this part; and
    (2) Make payments of program funds within five working days of 
receipt from the State agency, on the basis of the management plan 
approved by the State agency, and may not exceed the Program costs 
documented at each facility during any fiscal year; except in those 
States where the State agency has chosen the option to implement a 
meals times rates payment system. In those States which implement this 
optional method of reimbursement, such disbursements may not exceed the 
rates times the number of meals documented at each facility during any 
fiscal year.
* * * * *
    (l) * * *
    (2) * * *
    (vii) A determination that the day care home has been convicted of 
any activity

[[Page 21037]]

that occurred during the past seven years and that indicated a lack of 
business integrity, as defined in Sec.  226.6(c)(1)(ii)(A).
* * * * *
    12. Section 226.17 is revised to read as follows:


Sec.  226.17  Child care center provisions.

    (a) Child care centers may participate in the Program either as 
independent centers or under the auspices of a sponsoring organization; 
provided, however, public and private nonprofit centers shall not be 
eligible to participate in the Program under the auspices of a for-
profit sponsoring organization. Child care centers participating as 
independent centers shall comply with the provisions of Sec.  226.15.
    (b) All child care centers, independent or sponsored, shall meet 
the following requirements:
    (1) Child care centers must have Federal, State, or local licensing 
or approval to provide day care services to children. Child care 
centers, which are complying with applicable procedures to renew 
licensing or approval, may participate in the Program during the 
renewal process, unless the State agency has information that indicates 
that renewal will be denied. If licensing or approval is not available, 
a child care center may participate if it demonstrates compliance with 
CACFP child care standards or any applicable State or local child care 
standards to the State agency. At-risk afterschool care centers shall 
comply with licensing requirements set forth in Sec.  226.17a(d).
    (2) Except for for-profit centers, child care centers shall be 
public, or have tax exempt status under the Internal Revenue Code of 
1986.
    (3) Each child care center participating in the Program must serve 
one or more of the following meal types--breakfast; lunch; supper; and 
snack. Reimbursement must not be claimed for more than two meals and 
one snack or one meal and two snacks provided daily to each child. At-
risk afterschool care centers shall comply with limits on daily 
reimbursement set forth in Sec.  226.17a(h).
    (4) Each child care center participating in the Program shall claim 
only the meal types specified in its approved application in accordance 
with the meal pattern requirements specified in Sec.  226.20. For-
profit child care centers may not claim reimbursement for meals served 
to children in any month in which less than 25 percent of the children 
in care (enrolled or licensed capacity, whichever is less) were 
eligible for free or reduced-price meals or were title XX 
beneficiaries. However, children who only receive at-risk afterschool 
snacks and/or at-risk afterschool meals must not be included in this 
percentage. Menus and any other nutritional records required by the 
State agency shall be maintained to document compliance with such 
requirements.
    (5) A child care center with preschool children may also be 
approved to serve a breakfast, snack, and supper to school-age children 
participating in an outside-school-hours care program meeting the 
criteria of Sec.  226.19(b) that is distinct from its day care program 
for preschool-age children. The State agency may authorize the service 
of lunch to such participating children who attend a school that does 
not offer a lunch program, provided that the limit of two meals and one 
snack, or one meal and two snacks, per child per day is not exceeded.
    (6) A child care center with preschool children may also be 
approved to serve a snack or meal to school-age children participating 
in an at-risk afterschool care program meeting the requirements of 
Sec.  226.17a that is distinct from its day care program for preschool 
children, provided that the limit of two meals, and one snack, or one 
meal and two snacks, per child per day is not exceeded.
    (7) A child care center may utilize existing school food service 
facilities or obtain meals from a school food service facility, and the 
pertinent requirements of this part must be addressed in a written 
agreement between the child care center and school. The center shall 
maintain responsibility for all Program requirements set forth in this 
part.
    (8) Each child care center, except at-risk afterschool care 
centers, shall collect and maintain documentation of the enrollment of 
each child, including information used to determine eligibility for 
free and reduced-price meals in accordance with Sec.  226.23(e)(1). In 
addition, Head Start participants need only have a Head Start statement 
of income eligibility, or a statement of Head Start enrollment from an 
authorized Head Start representative, to be eligible for free meal 
benefits under CACFP. Such documentation of enrollment must be updated 
annually, signed by a parent or legal guardian, and include information 
on each child's normal days and hours of care and the meals normally 
received while in care.
    (9) Each child care center, except at-risk afterschool care 
centers, must maintain daily records of time of service meal counts by 
type (breakfast, lunch, supper, and snacks) served to enrolled 
children, and to adults performing labor necessary to the food service. 
At-risk afterschool care centers must maintain records as required by 
Sec.  226.17a(k).
    (10) Each child care center must require key staff, as defined by 
the State agency, to attend Program training prior to the center's 
participation in the Program, and at least annually thereafter, on 
content areas established by the State agency.
    (11) Each child care center must permit the Department, the State 
agency, and the sponsoring organization, if applicable, to visit the 
child care center and review its meal service and records during its 
hours of child care operations.
    (12) Sponsored child care centers must promptly inform the 
sponsoring organization about any change in its licensing or approval 
status.
    (13) Unaffiliated sponsored child care centers have the right to 
receive in a timely manner reimbursement for meals served to eligible 
children for which the sponsoring organization has received payment 
from the State agency. However, if, with the child care center's 
consent, the sponsoring organization will incur costs for the provision 
of program foodstuffs or meals on behalf of the center, and subtract 
such costs from Program payments to the center, the particulars of this 
arrangement shall be specified in the agreement. The sponsoring 
organization must not withhold Program payments to any child care 
center for any other reason, except that the sponsoring organization 
may withhold from the child care center any amounts that the sponsoring 
organization has reason to believe are invalid, due to the child care 
center having submitted a false or erroneous meal count.
    (14) The State agency and an independent child care center have the 
right to terminate the agreement for cause or, subject to Sec.  
226.6(c), convenience. Sponsoring organizations and unaffiliated 
sponsored centers have the right to terminate the agreement for cause 
or convenience.
    (15) If the State agency has approved a time limit for submission 
of meal records by child care centers, child care centers must be in 
compliance.
    (16) If so instructed by its sponsoring organization, sponsored 
child care centers must distribute a copy of the sponsoring 
organization's notice to parents.
    (c) Unaffiliated sponsored child care centers shall enter into a 
written permanent agreement with the sponsoring organization which 
specifies the rights and responsibilities of both parties. At a 
minimum, the agreement

[[Page 21038]]

shall embody the provisions set forth in paragraph (b) of this section.
    (d) Independent child care centers shall enter into a written 
permanent agreement with the State agency which specifies the rights 
and responsibilities of both parties as required by Sec.  226.6(b)(4). 
At a minimum, the agreement shall embody the applicable provisions set 
forth in paragraph (b) of this section.
    (e) Each child care center shall comply with the recordkeeping 
requirements established in Sec.  226.10(d), paragraph (b) of this 
section and, if applicable, Sec.  226.15(e). Failure to maintain such 
records shall be grounds for the denial of reimbursement.
    (f) Nothing in this section shall be construed to limit the ability 
to terminate the permanent agreement with an independent or 
unaffiliated sponsored center in accordance with this part.
    13. In Sec.  226.17a:
    a. Revise paragraph (a)(1) introductory text;
    b. Remove paragraphs (a)(1)(v), (e), (f), (g), and (l), redesignate 
paragraphs (h) through (k) as paragraphs (e) through (h), respectively, 
and redesignate paragraphs (m) through (q) as paragraphs (i) through 
(m) respectively;
    c. Amend paragraph (b)(1)(iv) by removing the words ``paragraph 
(i)'' and adding ``paragraph (f)'' in their place;
    d. Amend newly redesignated paragraph (f)(3) by removing the words 
``, except in cases where the State agency has determined it is most 
efficient to incorporate area eligibility decisions into the three-year 
application cycle'' from the third sentence; and
    e. Add new paragraph (n).
    The addition and revision read as follows:


Sec.  226.17a  At-risk afterschool care center provisions.

    (a) * * *
    (1) Eligible organizations. To receive reimbursement for at-risk 
afterschool snacks and at-risk afterschool meals, organizations must 
meet the criteria below.
* * * * *
    (n) Permanent agreements. Unaffiliated sponsored at-risk 
afterschool care centers shall enter into a written permanent agreement 
with the sponsoring organization which specifies the rights and 
responsibilities of both parties. At a minimum, the agreement shall 
embody the provisions set forth in Sec.  226.17(b).
    14. In Sec.  226.18, revise paragraph (b)(12) as follows:


Sec.  226.18  Day care home provisions.

* * * * *
    (b) * * *
    (12) The responsibility of the sponsoring organization, upon the 
request of a tier II day care home, to collect applications and 
determine the eligibility of enrolled children for free or reduced-
price meals and the ability of the tier II day care home to assist in 
collecting applications from households and transmitting the 
applications to the sponsoring organization. However a tier II day care 
home may not review the collected applications and sponsoring 
organizations may prohibit a tier II day care home from assisting in 
collection and transmittal of applications if the day care home does 
not comply with the process as described in Sec.  226.23(e)(2)(viii);
* * * * *
    15. In Sec.  226.19, add paragraph (d) as follows:


Sec.  226.19  Outside-school-hours care center provisions.

* * * * *
    (d) Unaffiliated sponsored outside-school-hours-care centers shall 
enter into a written permanent agreement with the sponsoring 
organization which specifies the rights and responsibilities of both 
parties. At a minimum, the agreement must address the provisions set 
forth in Sec.  226.17(b).
    16. In Sec.  226.19a, add paragraph (d) as follows:


Sec.  226.19a  Adult day care center provisions.

* * * * *
    (d) Unaffiliated sponsored adult day care centers shall enter into 
a written permanent agreement with the sponsoring organization which 
specifies the rights and responsibilities of both parties. At a 
minimum, the agreement must address the provisions set forth in Sec.  
226.17(b).
    17. In Sec.  226.23,
    a. Amend paragraph (e)(2)(vi), by removing the word ``and'' from 
the end of the paragraph;
    b. Amend paragraph (e)(2)(vii)(B), by removing the period and 
adding ``; and'' in its place; and
    c. Add paragraph (e)(2)(viii).
    The addition reads as follows:


Sec.  226.23  Free and reduced-price meals.

* * * * *
    (e) * * *
    (2) * * *
    (viii) If a tier II day care home elects to assist in collecting 
and transmitting the applications to the sponsoring organization, it is 
the responsibility of the sponsoring organization to establish 
procedures to ensure the provider does not review or alter the 
application. The household consent form must explain that:
    (A) The household is not required to complete the income 
eligibility form in order for their children to participate in CACFP;
    (B) The household may return the application to either the 
sponsoring organization or the day care home provider;
    (C) By signing the letter and giving it the day care home provider, 
the household has given the day care home provider written consent to 
collect and transmit the household's application to the sponsoring 
organization; and
    (D) The application will not be reviewed by the day care home 
provider.
* * * * *

     Dated: April 2, 2012.
Robin D. Bailey, Jr.,
Acting Administrator, Food and Nutrition Service.
[FR Doc. 2012-8332 Filed 4-6-12; 8:45 am]
BILLING CODE 3410-30-P