[Federal Register Volume 65, Number 193 (Wednesday, October 4, 2000)]
[Rules and Regulations]
[Pages 59105-59111]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-25364]



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Rules and Regulations
                                                Federal Register
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Federal Register / Vol. 65, No. 193 / Wednesday, October 4, 2000 / 
Rules and Regulations

[[Page 59105]]



DEPARTMENT OF AGRICULTURE

Food and Nutrition Service

7 CFR Parts 272 and 274

[Amendment No. 390]
RIN 0584-AC44


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

AGENCY: Food and Nutrition Service, USDA.

ACTION: Final rule.

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

SUMMARY: This action provides final rulemaking for a proposed rule 
published May 27, 1999. It revises Food Stamp Program regulations 
pertaining to implementation of Electronic Benefit Transfer (EBT) 
systems in accordance with the Personal Responsibility and Work 
Opportunity Reconciliation Act of 1996 (PRWORA) signed by the President 
August 22, 1996. This rule implements the EBT provisions found in 
Section 825 of PRWORA which are meant to encourage implementation of 
EBT systems to replace food stamp coupons.

DATES: This rule is effective November 3, 2000. State agencies may 
implement the provisions anytime after the effective date. However, EBT 
systems must be in place no later than October 1, 2002, unless the 
State is granted a waiver by the Secretary of Agriculture.

FOR FURTHER INFORMATION CONTACT: Jeffrey N. Cohen, Chief, Electronic 
Benefit Transfer Branch, Benefit Redemption Division, Food and 
Nutrition Service, USDA, room 718, 3101 Park Center Drive, Alexandria, 
Virginia, 22302, or telephone (703) 305-2517.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

    This rule has been determined to be significant and was reviewed by 
the Office of Management and Budget under Executive Order 12866.

Executive Order 12372

    The Food Stamp Program is listed in the Catalog of Federal Domestic 
Assistance under No. 10.551. For the reasons set forth in the final 
rule in 7 CFR 3015, Subpart V and related Notice (48 FR 29115), this 
Program is excluded from the scope of Executive Order 12372 which 
requires intergovernmental consultation with State and local officials.

Executive Order 13132, Federalism

    Executive Order 13132 requires Federal agencies to consider the 
impact of their regulatory actions on State and local governments and 
consult with them as they develop and carry out those policy actions. 
The Food and Nutrition Service (FNS) has considered the impact of this 
rule which requires mandatory implementation of Electronic Benefit 
Transfer (EBT) systems to deliver food stamp benefits in accordance 
with non-discretionary requirements set forth in the Personal 
Responsibility and Work Opportunity Reconciliation Act of 1996 
(PRWORA). In addition, FNS added the two discretionary cost neutrality 
provisions directly in response to State concerns. FNS is not aware of 
any case where any of these provisions would in fact preempt State law 
and no comments were made to that effect. Prior to drafting this final 
rule, we received input from State agencies at various times. Since the 
Food Stamp Program (FSP) is a State administered, federally funded 
program, our national headquarters staff and regional offices have 
informal and formal discussions with State and local officials on an 
ongoing basis regarding EBT implementation issues. This arrangement 
allows State agencies to provide feed back that form the basis for many 
discretionary decisions in this and other FSP rules. In addition, we 
sent representatives to regional, national, and professional 
conferences to discuss our issues and receive feedback on EBT 
implementation timeframes, cost-neutrality issues and other more 
general EBT concerns. Lastly, the comments on the proposed rule from 
State officials were carefully considered in the drafting of this final 
rule.

Regulatory Flexibility Act

    This rule has been reviewed with regard to the requirements of the 
Regulatory Flexibility Act of 1980 (5 U.S.C. 601-612). Shirley R. 
Watkins, Under Secretary for Food, Nutrition and Consumer Services, has 
certified that this rule will not have a significant economic impact on 
a substantial number of small entities. State and local welfare 
agencies will be the most affected to the extent that they administer 
the Food Stamp Program.

Paperwork Reduction Act

    This rule does not contain additional reporting or recordkeeping 
requirements other than those that have been previously approved by the 
Office of Management and Budget (OMB) under the Paperwork Reduction Act 
of 1995 and assigned OMB control numbers 0584-0083 and 0505-0008.

Executive Order 12988

    This rule has been reviewed under Executive Order 12778, Civil 
Justice Reform. This rule is intended to have preemptive effect with 
respect to any State or local laws, regulations or policies which 
conflict with its provisions or which would otherwise impede its full 
implementation. This rule is not intended to have retroactive effect 
unless so specified in the DATES paragraph of this preamble. Prior to 
any judicial challenge to the provisions of this rule or the 
application of its provisions, all applicable administrative procedures 
must be exhausted. In the Food Stamp Program (FSP), the administrative 
procedures are as follows: (1) For Program benefit recipients--State 
administrative procedures issued pursuant to 7 U.S.C. 2020(e)(11) and 7 
CFR 273.15; (2) for State agencies--administrative procedures issued 
pursuant to 7 U.S.C. 2023 set out at 7 CFR 276.7 (for rules related to 
non-quality control (QC) liabilities) or 7 CFR Part 283 (for rules 
related to QC liabilities); (3) for Program retailers and wholesalers--
administrative procedures issued pursuant to 7 U.S.C. 2023 set out at 7 
CFR 278.8.

[[Page 59106]]

Public Law 104-4

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Pub. 
L. 104-4, establishes requirements for Federal agencies to assess the 
effects of their regulatory actions on State, local, and tribal 
governments and the private sector. Under section 202 of the UMRA, the 
Food and Nutrition Service (FNS) generally must prepare a written 
statement, including a cost-benefit analysis, for proposed and final 
rules with ``Federal mandates'' that may result in expenditures to 
State, local, or tribal governments in the aggregate, or to the private 
sector, of $100 million or more in any one year. When such a statement 
is needed for a rule, section 205 of the UMRA generally requires FNS to 
identify and consider a reasonable number of regulatory alternatives 
and adopt the least costly, more cost-effective or least burdensome 
alternative that achieves the objectives of the rule.
    This rule contains no Federal mandates (under the regulatory 
provisions of Title II of the UMRA) for State, local, and tribal 
governments or the private sector of $100 million or more in any one 
year. Thus this rule is not subject to the requirements of sections 202 
and 205 of the UMRA.

Background

    Proposed rules were published in the Federal Register on May 27, 
1999 at 64 FR 28763 to implement the provisions of section 825 of the 
PRWORA (Pub. L. 104-193) which amended Section 7 of the Food Stamp Act 
of 1977, as amended (7 U.S.C. 2016) (the FSA). Comments on the proposed 
rule were solicited through July 26, 1999. This final action takes the 
comments received into account. Readers are referred to the proposed 
regulation for a more complete understanding of this final action.
    Eighteen comment letters were received in response to the proposed 
rule. Individual comments were received from 8 State agencies. Of the 
remaining letters, 2 were from retailer associations, 2 were from 
banking associations, 2 were from Public Interest Groups, 1 was from an 
EBT processor, 1 was from an EBT industry trade group, 1 was from a 
planning company, and 1 was from an alliance of States, networks, 
contractors, financial institutions and retailers.
    In general, the commenters supported EBT and the Department's 
efforts to encourage implementation. Various provisions of this rule: 
mandate EBT systems for food stamps; allow for implementation of off-
line EBT systems; relax cost-neutrality requirements; allow collection 
of EBT replacement card fees from client household benefit accounts; 
and identify operational limitations for including client photographs 
on EBT cards. The specific provisions are discussed below.

Mandate EBT

    The proposed rule would mandate that each State agency fully 
implement EBT statewide for issuance of food stamp benefits no later 
than October 1, 2002, unless the Secretary provided a waiver because a 
State agency faced unusual barriers to implementing an EBT system. Each 
State agency was encouraged to implement an EBT system as soon as 
practicable. Although a majority of the commenters supported the EBT 
mandate in general, several had serious concerns with this requirement.
    Three comments reflected a concern that the lack of competition in 
the current EBT environment will impede full implementation efforts. 
Three commenters expressed concern that the Department's interpretation 
of the legislation was too stringent in requiring that State agencies 
be fully implemented statewide by October 1, 2002. They felt that if a 
State agency is actively moving toward statewide implementation by the 
deadline, the regulatory requirement should be satisfied. One commenter 
suggested allowing an extra six months for full implementation, while 
another suggested short-term waivers to ensure that systems will be 
ready for reliable operation within a few months after the October 1, 
2002 date. One commenter felt that there should be a prohibition on 
implementations and system changes between October 1999 and the first 
quarter of 2000 because of Y2K considerations.
    The Department was impressed by the show of concern from State 
agencies and other interested parties about the requirement for full 
implementation by October 1, 2002. However, Congress was clear in its 
intent that State agencies must implement EBT for food stamps statewide 
by the deadline of October 1, 2002, unless they receive a waiver 
granted by the Secretary because of unusual barriers to full 
implementation.
    Three commenters felt that the rule should specify what will 
qualify as ``unusual barriers'' to implementation, and thus warrant a 
waiver. Without knowing what, if any, obstacles State agencies might 
face, the Department is not able to specify what kinds of problems 
would justify a waiver from the Secretary. The Department will need to 
evaluate any waiver requests submitted on an individual basis. However, 
the Department does not foresee any obstacles that cannot be overcome 
in order to meet the requirements that State agencies implement EBT 
systems statewide by October 1, 2002.
    The preamble of the proposed rule also stated that any State agency 
not granted a waiver and not having fully implemented EBT statewide by 
October 1, 2002, will be out of compliance with these rules and may be 
subject to disallowance of administrative funds pursuant to the 
provisions of 7 CFR 276.4. Two commenters requested clarification with 
respect to penalties that would result if States had not implemented 
EBT by the deadline. We believe that the regulations, as cited above, 
provide the State agencies sufficient detail on the disallowance of 
administrative funds to impart the importance of complying with this 
requirement.

 Off-Line Technology

    The proposed regulation would implement the statutory amendment 
which removed the prohibition against State agencies implementing off-
line EBT systems. A majority of the comments on this provision support 
the change to allow off-line systems because it provides State agencies 
greater flexibility to determine the kind of system suitable for their 
own needs. However, one commenter recommended that off-line 
technologies be implemented transitionally to protect existing 
investments by States and retailers in on-line systems. Another felt 
that, while off-line systems can make the integration of cash and non-
cash benefits more efficient and convenient for recipients, costs must 
come down before the technology can be widely implemented. Another 
raised the concern that retailers should not have to bear the cost of 
the new technology. By allowing off-line system implementation, the 
Department is offering State agencies more flexibility but is not 
endorsing off-line technology over magnetic stripe on-line technology. 
We recognize that the cost implications for State agencies and for 
retailers will largely drive the degree to which this technology is 
adopted over time.
    The proposed rule also defines an off-line EBT system as a benefit 
delivery system in which a benefit allotment can be stored on a card 
and used to purchase authorized items at a point-of-sale terminal 
without real-time authorization from a central processor. One commenter 
suggested modifying the definition of off-line systems to ``* * * a 
benefit delivery system in which a benefit allotment can be stored on a 
card or in a card access device.

[[Page 59107]]

* * *'' We are incorporating the language of the suggested definition 
into the regulation to convey that in some cases with an off-line 
system, benefits must be downloaded onto a card at the point-of-sale 
terminal or some other card access device.
    Another commenter wanted us to specify that off-line systems not be 
permitted to retain information on recipients, including food choices, 
for privacy reasons. Off-line systems are held to the same privacy 
requirements as on-line systems as found in current Food Stamp 
regulations at 7 CFR 274.12(e)(1)(ix), (redesignated by this 
publication as 7 CFR 274.12(f)(1)(ix)). This provision states that 
State agencies shall ensure the privacy of household data and provide 
benefit and data security. Retailers, for instance, are not permitted 
to store any information on EBT cards or accounts, on-line or off-line. 
Because of the existing protections, we have not made any further 
changes to the rule with regard to this issue.
    The rule did not propose standards specific to off-line systems but 
did solicit comments from the public to provide input into our decision 
regarding what standards we should propose in the future. One commenter 
disagreed with this approach and suggested that national uniform 
standards must be developed before off-line systems can be implemented. 
The Department has already tested off-line technology for EBT and sees 
no reason not to allow State agencies to move in this direction if they 
choose. However, we understand the limitations of not having standards 
in place and will continue to work with the State agencies and other 
interested parties to keep apprised of advances being made toward 
standards in the off-line industry as it evolves.

Cost Neutrality

    This rule implements two discretionary changes (offers option of a 
national issuance cost cap and allows for prospective certification of 
EBT systems), and one non-discretionary change (removes requirement 
that EBT systems be cost neutral in any one year) to the EBT cost 
neutrality requirements of 7 CFR 274.12(c). Most of the comments that 
we received on the proposed rule were in response to the cost 
neutrality section. In general, the comments reflect that cost 
neutrality continues to be a source of concern and frustration for 
State agencies and other stakeholders, even as we strive to make the 
requirements less burdensome.
    Three of the commenters acknowledged general support of these 
provisions because they offer State agencies more flexibility to 
determine and track cost neutrality; however, a majority of the 
commenters expressed the belief that the Department needs to go further 
to reduce the impact of cost neutrality requirements. Four commenters 
recommend exempting certain EBT activities and associated costs from 
the cost neutrality determination, such as farmers' market 
participation in the FSP. Similarly, two commenters complained that the 
cost cap does not take into consideration certain State costs which are 
not related to coupon issuance but are required for EBT or by FSP 
regulations, e.g., an annual Statement of Auditing Standards (SAS) 70 
audit of EBT systems. Three commenters said that FNS should take into 
consideration the increased costs to operate EBT and the States' 
limited financial resources. Four commenters mentioned that the lack of 
EBT competition has meant higher costs; therefore, further relaxation 
of cost neutrality requirements are needed. One commenter suggests that 
State agencies with smaller caseloads need flexibility in choosing a 
contractor, because it is harder for them to be cost neutral.
    The Department has similar concerns about the costs related to EBT 
and how they impact on a State's cost neutrality. For instance, the 
Department has decided to exempt all SAS 70 audit costs from State 
agencies' cost neutrality determinations, and we will continue to 
examine activities and costs with an eye to whether they should be part 
of EBT cost neutrality consideration. However, we believe that, by 
implementing the changes in this rule, a majority of the concerns about 
the implications of Federal cost neutrality can be overcome.
    Two comments specifically welcomed the non-discretionary change to 
remove the annual cost neutrality assessment of EBT compared to paper 
systems. However, one comment letter reflected some misunderstanding by 
questioning whether there is any change to the time periods for 
calculating cost neutrality under an EBT contract since there are so 
few billable case months in the first year or so of a first generation 
EBT system. With the legislative removal of the annual cost neutrality 
requirement, State agencies will now assess the cost neutrality of the 
entire contract period, not year to year. This provision should greatly 
reduce the likelihood that State agencies are held responsible for 
costs exceeding the cost cap, because they are able to spread them out 
over the full contract period.
    The national cap is a case-month issuance amount calculated by FNS 
to be $2.42 for fiscal year 2000. The amount is based on nationwide 
State and Federal coupon issuance costs as validated by FNS. State 
agencies may opt for this method for determining the cost neutrality of 
their EBT systems rather than derive their own coupon issuance cost 
cap. One commenter generally supported the provision. Another commenter 
suggested that the national cap be lowered or eliminated if it becomes 
apparent that EBT contractors are tying project bids to the cap rather 
than competing aggressively. This also included the suggestion of not 
publishing the national cap for this reason. The Department does not 
foresee this being a problem because each State agency has its own cost 
constraints to doing EBT that may in fact be lower than the national 
cost cap. Contractors will have to be sensitive to how much the 
individual States can spend on an EBT system when submitting bid 
proposals, regardless of the national cost cap.
    Only one commenter reacted specifically to the proposal on 
prospective certification. The commenter suggested that FNS deny 
prospective certification to State agencies with contracts containing 
troublesome provisions such as a contractor's ability to increase unit 
costs if caseloads fall below expectations but not reducing those unit 
costs in the event a recession or other event causes caseloads to rise. 
The Department agrees that these contract provisions can sometimes be 
questionable; however, the State agency would have to take such 
contractual impacts into account when submitting the prospective 
analysis for FNS approval.
    Three comments requested clarification on how the proposed cost 
neutrality changes will impact on a re-bid contract. The Department 
does not foresee making any distinction between first time contracts 
and re-bid contracts when doing cost neutrality assessments. In both 
cases, the State agency will choose to either: (1) calculate their own 
State cost cap which is based on individual States' statewide coupon 
issuance costs, multiplied by the percentage of Federal financial 
participation, plus Federal only coupon issuance costs, and then 
validated by FNS; or (2) use the national cap which is calculated by 
FNS. The State agency then projects the costs of the EBT system for the 
life of the system; i.e., the contract period. If the State agency can 
demonstrate up front that the system will be cost neutral, no further 
cost assessment of the project during the contract period is necessary, 
unless the State agency makes significant changes to the system which 
increase contract or

[[Page 59108]]

other costs enough to warrant a reassessment.
    Clarification was requested by several other commenters. One 
commenter wanted to know if validated cost caps would have to be 
recalculated. If the State agency already has a validated cost cap, it 
may use that cap or switch to the national cap, whichever it wants to 
use. Another commenter wanted to be able to exclude residual coupon 
costs from assessment when the State agency is operating statewide. In 
fact, this is already permitted. State agencies may request that 
residual coupon costs be taken into consideration as they are rolling 
out an EBT system, but there are no residual coupon costs once the EBT 
system is implemented statewide.
    Another commenter wanted a more equitable method of determining the 
cost of off-line systems since off-line systems suffer under current 
requirements. The Department does not intend to change cost neutrality 
requirements to fit off-line systems. We recognize that those systems 
still tend to cost more than on-line systems, but this will likely 
change if off-line technology advances in the market place.
    Two commenters specifically requested clarification of the 
distinction between direct and indirect costs. After review of the 
comments, we have determined that the level of detail on direct and 
indirect costs in the proposed rule, as well as much of the detail on 
process and procedures related to calculating cost neutrality, is more 
appropriately handled through guidance to the State agencies. FNS is 
currently developing the cost neutrality guidance for distribution to 
the State agencies shortly after publication of this rule. We have 
revised the cost neutrality section of the final regulation extensively 
to reflect this.

Differentiate Food Stamp Eligible Items

    As discussed in the preamble of the proposed rule, PRWORA requires, 
to the extent practicable, the establishment of system approval 
standards for measures that permit a system to differentiate items of 
food that may be bought using food stamps from items that may not be 
bought using food stamps. This resulted in a report to Congress in 
August of 1998 explaining that we would have to require scanners at all 
authorized food stamp retailers to accomplish this and, while it is 
technically feasible, it is cost prohibitive to do so at this time. No 
regulatory change was proposed. We received seven comments supporting 
this position.

Replacement Card Fee

    The proposed rule would provide State agencies with the option to 
collect a charge for replacement of an EBT card by reducing the monthly 
allotment of the household. We received five comments generally 
supporting this provision. Two commenters suggested that we allow 
collection of future months' benefits for replacement cards. The 
Department does not see why it should be necessary for a State agency 
to collect a replacement card fee from a household's future months' 
benefits. There is currently no prohibition against waiting until funds 
are available in the benefit account before collecting the fee for 
replacing the card.
    One commenter felt that, since replacing cards is an administrative 
function, this should not be considered program income. All 
administrative functions are shared costs and, therefore, if the State 
agency is being reimbursed for a cost that the Department has already 
shared in through payment to the EBT contractor, the fee collected must 
be treated as program income and shared with the Department. Another 
commenter suggested that State agencies should offer one free 
replacement per year similar to the credit card industry. State 
agencies have the flexibility to implement a provision with this kind 
of leniency if they wish, but the Department will not mandate it.
    One commenter had several suggestions to restrict the provision in 
ways to further protect food stamp households. One point was that, in 
order to be in compliance with the Americans with Disabilities Act of 
1990, as amended (ADA), State agencies should not charge fees to 
clients with disabilities who frequently request replacement cards, 
because this is an indication that the client needs better training or 
help obtaining an authorized representative. It was further recommended 
that State agencies be required to waive the replacement fee if a 
client shows good cause.
    The Department shares the commenter's concerns for recipients that 
experience difficulties keeping up with their EBT cards because of 
disabilities or those that can otherwise show good cause reasons for 
requesting a replacement card. Therefore, we strongly urge State 
agencies to consider the circumstances surrounding the recipients' need 
for a replacement card. Furthermore, we recommend that each State 
agency develop their own good cause policy for card replacement fees. 
Such policies would allow free replacement cards in instances of fires 
or other household emergencies, robbery or other crimes, and for 
recipients with disabilities that significantly impair their ability to 
secure the card. We have added regulatory language to emphasize these 
concerns.
    It should be noted, however, that EBT card replacement is 
significantly different from replacement of coupons lost as a result of 
household emergencies or mail theft. When coupons are replaced, the 
actual benefits which were lost are replaced. When a household reports 
an EBT card lost or stolen, a hold is placed on the benefits remaining 
on that card, thereby protecting the household from unauthorized access 
to those benefits. When the card is replaced, the household will have 
access to the benefits that were on the card at the time it was 
reported lost or stolen.
    Another suggestion was to establish a cap on the fee amount which 
would be announced annually and for FNS to refuse to grant training 
waivers (i.e., allow States to mail EBT training to food stamp 
households rather than conduct hands-on sessions) to State agencies 
that charge a fee. The Department does not believe that these 
recommendations are necessary or required under the law. Therefore, we 
are not changing the regulatory language further in response to this 
comment. However, FNS will continue to review State agencies' plans for 
replacement card fee collection to ensure that households are not being 
charged exorbitant fees and are not being treated unfairly.

Photograph on EBT Card

    The proposed regulation specifies that State agencies may require 
that EBT cards contain a photograph of one or more members of a 
household but that the State agency must establish procedures to ensure 
that any other appropriate member of the household or any authorized 
representative of the household may utilize the EBT card if a photo is 
used. Four commenters generally supported the provision to use a photo 
on the card at State agency option. One comment specifically supported 
the Department's concern that all eligible household members must still 
be able to use the card. One commenter remarked that putting a photo on 
the card may reduce card replacements and selling of cards to non-
beneficiaries and that any State doing so would need to have uniform 
procedures in place as part of their EBT program.
    One commenter suggested that State agencies be required to place 
photos on the EBT card similar to how photos

[[Page 59109]]

appear on credit cards so as not to make it obvious that a client is 
using a food stamp card. The Department does not intend to dictate how 
the photo should be placed on the EBT card.
    Another commenter suggested that placing a photo on the card will 
create confusion for retailers and shift burden of policing the program 
to the stores. The Department has no intention of shifting the burden 
of monitoring the compliance of food stamp program recipients to the 
retail community. That is why the regulation is explicit in requiring 
State agencies to have a plan in place to ensure that all appropriate 
household members or authorized representatives can access benefits 
from the account as necessary. This plan might include retailer 
training to ensure that they understand someone other than the client 
pictured on the card may be entitled to use the card.

Anti-tying Restrictions

    In the preamble of the proposed rule we discussed the anti-tying 
provision in PRWORA and the Department's response to it. To summarize, 
after consulting with the Federal Reserve System Board of Governors, 
the Department learned that anti-tying prevents the conditioning of any 
service on the purchase of another service or product. Since EBT is 
non-conditioned and, therefore, must be offered to retailers at no 
cost, the Federal Reserve agrees that the existing anti-tying laws are 
not relevant in the EBT environment. A majority of the commenters to 
this section agreed with the Department's position.
    Two commenters did not agree and felt that USDA needs to do more to 
find a means to implement the intent of section 825 pertaining to anti-
tying for the sake of promoting competition for Point of Sale (POS) 
services. They suggest that the Department use its expertise to ensure 
maximum competition and that perhaps prohibiting EBT contractors from 
offering commercial equipment in the States where they hold contracts 
is a cost effective and a pro-competitive approach. The Department has 
no evidence that this is a problem in the current EBT environment, a 
position which is supported by the Federal Reserve Board of Governors, 
as well as a majority of the commenters. However, we will continue to 
look at this issue to determine if further action may be necessary in 
the future.

System Compatibility

    The preamble language in the proposed rule spoke to the sense of 
Congress that State agencies should operate their EBT systems in a 
manner that makes them compatible with one another. It further went on 
to say that, since current rules already require system compatibility, 
no regulatory change was necessary. Several commenters wanted us to 
interpret the term ``system compatibility'' to be synonymous with 
system interoperability and took this opportunity to express their 
support of system interoperability; i.e., the ability for food stamp 
households in one State to use their EBT benefits in another State.
    Three comments say we must achieve or require interoperability. Two 
other commenters want the Department to require interoperability and to 
specify who pays for it. One commenter supports interoperability and 
believes the Department should pay for it. Another three commenters 
merely state their support of interoperability while one other noted 
that without interoperability, cash-out should be allowed when 
recipients move from State to State. Interoperability legislation has 
now been passed by Congress and the Department published an interim 
rule on interoperability in the Federal Register August 15, 2000 at 65 
FR 49719, entitled Food Stamp Program: EBT Systems Interoperability and 
Portability.
    Three commenters expressed concern about transaction processing 
standards being inconsistent with commercial standards. The Department 
continues to work with State agencies, EBT processors, and other 
interested parties through forums like the EBT Industry Council, a 
subgroup of the Electronic Funds Transfer Association (EFTA), and the 
National Automated Clearing House Association (NACHA) to see if better 
standards for transaction processing can be developed. Under current 
regulations at 7 CFR 273.12(h), State agencies do have the option to 
request prior written approval from FNS to use the prevailing regional 
industry standards rather than the standards specified in this section. 
One commenter expressed concern that customer service and help line 
performance standards are also inconsistent with commercial standards. 
FNS does not prescribe standards in these areas, giving State agencies 
the flexibility to set their own requirements in individual contracts 
for EBT services.
    One commenter requested FNS consider reviewing the pay-phone access 
issue and adjustments with an eye toward system compatibility. Another 
comment said that we need to ensure that other programs like the State 
food stamp programs can be added to existing systems in a cost 
effective manner. A final comment suggested that nationwide system 
compatibility at all levels would greatly enhance EBT systems. We 
appreciate these broader comments but felt they did not fit within the 
scope of this rule. The Department will, however, continue to look at 
how system compatibility can be enhanced with the ongoing evolution of 
EBT.

Regulation E

    As stated in the preamble of the proposed regulation, Section 907 
of the PRWORA amends Section 904 of the Electronic Funds Transfer Act, 
commonly known as Regulation E, to exempt from coverage government EBT 
accounts held for recipients of State-administered needs-tested 
assistance programs, including the FSP. Because this provision does not 
amend the FSA, we did not propose changes to our current regulations. 
We received only two comments on this issue. One commenter supported 
FNS's position; the other believed we must reserve further action on 
this issue until the effects of abrogating Reg E are clear.

Implementation

    This rule is effective November 3, 2000. State agencies may 
implement the provisions anytime after the effective date. However, EBT 
systems must be in place statewide no later than October 1, 2002, 
unless the State is granted a waiver by the Secretary of Agriculture.

List of Subjects

7 CFR Part 272

    Alaska, Civil Rights, Food Stamps, Grant Programs-social programs, 
Reporting and recordkeeping requirements.

7 CFR Part 274

    Administrative practice and procedure, Food stamps, Fraud, Grant 
programs-social programs, Reporting and recordkeeping requirements, 
State liabilities.

    Accordingly, for the reasons set forth in the preamble, 7 CFR parts 
272 and 274 are amended as follows:
    1. The authority citation for 7 CFR parts 272 and 274 continues to 
read as follows:

    Authority: 7 U.S.C. 2011-2036.

PART 272--REQUIREMENTS FOR PARTICIPATING STATE AGENCIES

    2. In Sec. 272.1, paragraph (g)(164) is added to read as follows:


Sec. 272.1  General terms and conditions.

* * * * *
    (g) Implementation. * * *

[[Page 59110]]

    (164) Amendment No. 390. The provisions of Amendment No. 390 are 
effective November 3, 2000. State agencies may implement the provisions 
anytime after the effective date. However, Electronic Benefit Transfer 
(EBT) systems must be in place statewide no later than October 1, 2002, 
as required by the Personal Responsibility and Work Opportunity 
Reconciliation Act of 1996.

PART 274--ISSUANCE AND USE OF COUPONS

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


Sec. 274.3  Issuance systems.

    (a) * * *
    (5) An off-line Electronic Benefit Transfer system in which benefit 
allotments can be stored on a card or in a card access device and used 
to purchase authorized items at a point-of-sale terminal without real-
time authorization from a central processor.
* * * * *
    4. In Sec. 274.12:

    a. Paragraph (a) is revised.
    b. Paragraph (b)(1) is amended by removing the second sentence and 
by removing the words ``However the'' and adding ``The'' in its place 
in the third sentence.
    c. Paragraphs (c)(3)(i) through (c)(3)(vi) are removed.
    d. Paragraphs (e), (f), (g), (h), (i), (j), (k), (l), and (m) are 
redesignated as paragraphs (f), (g), (h), (i), (j), (k), (l), (m), and 
(n), respectively, and a new paragraph (e) is added.
    e. Newly redesignated paragraph (g)(5)(v) is revised.
    f. In newly redesignated paragraph (i), a new paragraph (i)(6)(iv) 
is added.
    g. Newly redesignated paragraph (l)(6) is removed.
    The revisions and additions read as follows:


Sec. 274.12  Electronic Benefit Transfer issuance system approval 
standards.

    (a) General. This section establishes rules for the approval, 
implementation and operation of Electronic Benefit Transfer (EBT) 
systems for the Food Stamp Program as an alternative to issuing food 
stamp coupons. By October 1, 2002, State agencies must have EBT systems 
implemented statewide, unless the Secretary provides a waiver for a 
State agency that faces unusual barriers to implementing an EBT system. 
In general, these rules apply to both on-line and off-line EBT systems, 
unless stated otherwise herein, or unless FNS determines otherwise for 
off-line systems during the system planning and development process.
* * * * *
    (e) Cost neutrality. To receive full Federal reimbursement for food 
stamp administrative costs, the State agency must operate its EBT 
system in a cost-neutral manner, whereby the Federal cost of issuing 
benefits in the State after implementation of the EBT system does not 
exceed the Federal cost of delivering coupon benefits under the 
previous coupon issuance system. The issuance cost cap is expressed in 
terms of a cost per case month derived by dividing the annual total 
cost of issuance by the total number of households issued food stamp 
benefits during the year the costs were incurred. In determining its 
coupon issuance cap, the State agency shall use either: the National 
Coupon Issuance Cap, as determined by FNS, or calculate a State Coupon 
Issuance Cap based on the State agency's statewide issuance costs under 
the coupon issuance system. FNS will not reimburse the State agency for 
any costs incurred above the approved coupon issuance cap.
    (1) The National Coupon Issuance Cap is a case-month issuance 
amount, as calculated by FNS.
    (2) A State Coupon Issuance Cap is a case-month issuance amount, as 
calculated by the State agency based on guidance provided by FNS. The 
State agency must provide narrative explanations and satisfactory 
supporting documentation to clarify each cost item, its relationship to 
the coupon issuance function, and how it was calculated. All issuance 
costs included in the State coupon issuance cap must have been charged 
to the Federal government and are subject to validation by FNS.
    (3) The State agency shall submit its State coupon issuance cap or 
indicate it has opted to use the National Coupon Issuance Cap as part 
of the Implementation APD process. The State coupon issuance cap must 
be approved by FNS prior to implementation of the pilot, and shall be 
effective from the first date benefits are issued to households through 
the EBT system during the pilot project.
    (4) Each State agency's approved State issuance coupon cap and the 
National Coupon Issuance Cap will be adjusted each Federal fiscal year 
based on the percentage change in the most recently published Gross 
Domestic Product Implicit Price Deflator Index (GDP Price Deflator) 
calculated from the percentage change in the index between the first 
quarter of the current calendar year and the first quarter of the 
previous year, as published each June by the Bureau of Economic 
Analysis.
    (5) The determination of cost neutrality will be assessed on a 
prospective basis; that is, FNS will make a determination whether the 
EBT system will be cost neutral based on a comparison of the coupon 
issuance costs to the projected costs of the EBT system. The State 
agency may choose how they determine coupon issuance costs either 
according to paragraph (e)(1) or paragraph (e)(2) of this section. 
After approval of its coupon cost cap, the State agency shall submit to 
FNS an analysis, completed according to FNS guidance, comparing the 
coupon issuance costs to the projected EBT costs over the contract 
period for system operation which defines the life of the system. If 
the State agency uses the National Coupon Issuance Cap, Statewide cost 
projections for issuance costs after EBT implementation must include 
all contract costs and all other direct EBT issuance costs. If the 
State agency develops their own State issuance cost cap, Statewide cost 
projections for issuance costs after EBT implementation must include 
all of the direct EBT costs, and projections for all categories of 
allocated costs which were included in the coupon cost cap calculation 
using the same allocation methodology as in the cost cap calculation.
    (i) EBT planning costs are to be excluded from the cost neutrality 
assessment and shall include costs attributed to the preparation of the 
Planning APD, all activities leading to the development of the EBT 
implementation plan, and the completion of the documentation contained 
in the FNS approved Implementation APD.
    (ii) The cost neutrality assessment must include pre-issuance 
costs, which can include system design, development and start-up costs, 
and operations costs. The operations phase is defined as beginning with 
the first EBT issuance in the pilot area.
    (iii) If the comparison demonstrates the proposed system will cost 
less than the coupon issuance system, no further measurement will be 
required for the life of the system unless there is a substantial 
increase in EBT costs requiring prior approval as described in 
Sec. 277.18 (c)(2)(ii)(C) of this chapter and the submittal of an 
Implementation APD Update as outlined in the FNS Handbook 901 (APD 
Handbook).
    (iv) Any State agency that cannot demonstrate cost neutrality 
prospectively will be required to track EBT costs throughout the life 
of the system according to FNS guidance, and reimburse FNS for any 
excess at the end of the defined system life.

[[Page 59111]]

    (6) The State agency is required to provide an updated cost 
neutrality assessment for all subsequent EBT systems developed or 
implemented, incorporating the revised costs of the new system.
* * * * *
    (g) * * *
    (5) * * *
    (v) The State agency may impose a replacement fee by reducing the 
monthly allotment of the household receiving the replacement card; 
however, the fee may not exceed the cost to replace the card. If the 
State agency intends to collect the fee by reducing the monthly 
allotment, it must follow FNS reporting procedures for collecting 
program income. State agencies currently operating EBT systems must 
inform FNS of their proposed collection operations. State agencies in 
the process of developing an EBT system must include the procedure for 
collection of the fee in their system design document. All plans must 
specify how the State agency intends to account for card replacement 
fees and include identification of the replacement threshold, 
frequency, and circumstances in which the fee shall be applicable. 
State agencies may establish good cause policies that provide exception 
rules for cases where replacement card fees will not be collected.
* * * * *
    (i) * * *
    (6) * * *
    (iv) State agencies may require the use of a photograph of one or 
more household members on the card. If the State agency does require 
the EBT cards to contain a photo, it must establish procedures to 
ensure that all appropriate household members or authorized 
representatives are able to access benefits from the account as 
necessary.
* * * * *

    Dated: September 21, 2000.
Shirley R. Watkins,
Under Secretary for Food, Nutrition and Consumer Services.
[FR Doc. 00-25364 Filed 10-3-00; 8:45 am]
BILLING CODE 3410-30-P