[Federal Register Volume 73, Number 154 (Friday, August 8, 2008)]
[Rules and Regulations]
[Pages 46169-46190]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-18230]



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Rules and Regulations
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Federal Register / Vol. 73, No. 154 / Friday, August 8, 2008 / Rules 
and Regulations

[[Page 46169]]



DEPARTMENT OF AGRICULTURE

Food and Nutrition Service

7 CFR Part 250

[FNS-2007-0039]
RIN 0584-AD45


Management of Donated Foods in Child Nutrition Programs, the 
Nutrition Services Incentive Program, and Charitable Institutions

AGENCY: Food and Nutrition Service, USDA.

ACTION: Final rule.

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

SUMMARY: This final rule revises and clarifies requirements for the 
management, distribution, and use of donated foods in the National 
School Lunch Program and other child nutrition programs, in the 
Nutrition Services Incentive Program, and by charitable institutions. 
In response to an audit by the USDA Office of Inspector General, the 
rule establishes specific requirements to ensure that recipient 
agencies in child nutrition programs receive the benefit and value of 
all donated foods received and provided to food service management 
companies to conduct the food service. The rule also incorporates 
legislative changes affecting the distribution of donated foods in the 
Nutrition Services Incentive Program, and reduces reporting and 
administrative requirements for donated foods provided to charitable 
institutions. Lastly, the rule restructures and revises regulatory 
provisions in a plain language format to make them easier to read and 
understand.

DATES: Effective Date: This final rule is effective November 6, 2008.
    Implementation Date: State agencies and recipient agencies are 
required to implement the provisions of this final rule by November 6, 
2008, except for the new contract requirements in Sec. Sec.  250.50 to 
250.54. State agencies and recipient agencies must implement those 
requirements according to the implementation schedule in section II.I 
of the preamble of this rule.

FOR FURTHER INFORMATION CONTACT: Lillie F. Ragan, Assistant Branch 
Chief, Policy Branch, Food Distribution Division, Food and Nutrition 
Service, U.S. Department of Agriculture, Room 500, 3101 Park Center 
Drive, Alexandria, Virginia 22302-1594, or telephone (703) 305-2662. A 
regulatory impact analysis has been prepared for this rule. You may 
request a copy of the analysis by contacting us at the above address or 
by e-mail to <a href="/cdn-cgi/l/email-protection#aaf8c5c8cfd8de84eecfc6c5d8cfc4d0c5eaccc4d984dfd9cecb84cdc5dc"><span class="__cf_email__" data-cfemail="5d0f323f382f2973193831322f383327321d3b332e73282e393c733a322b">[email protected]</span></a>.

SUPPLEMENTARY INFORMATION:

I. Background

    On June 8, 2006, the Department of Agriculture (the Department or 
USDA) published a proposed rule in the Federal Register (71 FR 33344) 
to amend provisions in 7 CFR part 250, which contain the general 
regulations for USDA domestic food distribution. The proposals were 
intended to accomplish the following objectives:
    <bullet> Establish requirements to ensure that recipient agencies 
in child nutrition programs receive the benefit and value of all 
donated foods received and provided to food service management 
companies for use in the recipient agencies' meal service;
    <bullet> Revise and clarify requirements for the use and management 
of donated foods in the National School Lunch Program (NSLP) and other 
child nutrition programs;
    <bullet> Reduce the paperwork burden associated with the 
distribution of donated foods to charitable institutions and summer 
camps;
    <bullet> Revise provisions for the distribution of donated foods in 
the Nutrition Services Incentive Program (NSIP) to reflect legislative 
changes; and
    <bullet> Restructure and rewrite revised provisions in a plain 
language format, including new subparts and sections, to make the 
regulations easier to read and understand.

II. Analysis of Comments Received

    The Department received a total of 668 comment submissions to the 
proposed rule, including 576 schools, 7 school associations, 35 State 
agencies, 49 members of industry and outside organizations, and one 
member of Congress. The comments are discussed in detail below.

A. Definitions, 7 CFR 250.3

    In the proposed rule, we proposed to remove, add, and revise 
definitions in 7 CFR 250.3 to provide program administrators and 
recipients with a better understanding of the requirements contained in 
7 CFR part 250. We received three comments expressing general support 
for the proposed changes in definitions.
    We received one comment objecting to the proposed removal of the 
definition of ``Offer and acceptance system'', stating that it supports 
the current means of ordering donated foods through the Electronic 
Commodity Ordering System (ECOS). While true, we believe that 7 CFR 
250.58 of this final rule clearly describes the requirements for the 
distributing agency to offer, order, and provide, donated foods to 
school food authorities for their use, making the definition 
unnecessary. Since we did not receive any other comments, this final 
rule will remove definitions, as proposed, of ``Nonprofit summer camps 
for children'', ``Nonresidential child or adult care institution'', 
``Nutrition program for the elderly'', ``Offer and acceptance system'', 
``Program'', and ``Students in home economics''.
    Since we did not receive any comments in response, this final rule 
will add definitions, as proposed, of ``Adult care institution'', 
``AoA'', ``Bonus foods'', ``CACFP'', ``Child care institution'', 
``Commodity offer value'', ``DHHS'', ``Elderly nutrition project'', 
``Entitlement'', ``Entitlement foods'', ``National per-meal value'', 
``Nonprofit organization'', ``Nonprofit school food service account'', 
``NSIP'', ``NSLP'', ``Reimbursable meals'', ``SBP'', ``7 CFR part 
3016'', ``7 CFR part 3019'', ``SFSP'', ``Single inventory management'', 
and ``Summer camp''.
    We received two comments on the proposed revision of the definition 
of ``Food service management company''. One commenter was unsure if a 
company that was hired to repair refrigerators would be characterized 
as a food service management company. Another commenter questioned if a 
company operating only as a consultant would be required to credit the 
recipient agency for donated foods, in accordance with the proposed 
requirements for food

[[Page 46170]]

service management companies. Under the proposed definition, a food 
service management company is an entity that manages any aspect of a 
recipient agency's food service. We believe that this definition 
clearly excludes a company that simply repairs refrigerators, since 
this activity would not constitute management of the food service. We 
also believe that it is clear, in 7 CFR 250.51(a) of this final rule, 
that a commercial enterprise performing only a consulting service with 
respect to donated foods would not have to provide a credit for the 
value of donated foods, since they are not receiving and using such 
foods in the food service. However, to provide further clarification, 
in this final rule we refine the definition of ``Food service 
management company'' to include the statement in proposed 7 CFR 
250.50(a) that, to the extent that such management includes the use of 
donated foods, the food service management company is subject to the 
applicable requirements in this part. As discussed in section II.E of 
the preamble, we are removing the characterization of a food service 
management company in 7 CFR 250.50 of this final rule.
    We did not receive any other comments in objection to proposed 
revisions to definitions, and received one comment in support of the 
revised definition of ``Charitable institutions''. Accordingly, this 
final rule will revise definitions, as proposed, of ``Charitable 
institutions'', ``Child nutrition program'', ``Commodity school'', 
``End product'', `` Processing'', ``Processor'', ``Recipient 
agencies'', ``Recipients'', ``Section 311'', ``Service institutions'', 
and ``State Agency on Aging''.

B. Agreements and Contracts, 7 CFR 250.12

    In the proposed rule, we proposed to remove reference to agreements 
between the Department and State Agencies on Aging, in 7 CFR 250.12(a), 
and to remove 7 CFR 250.12(d), which addresses contract requirements 
with food service management companies, in conjunction with the 
proposed new requirements for the use of donated foods under such 
contracts in proposed subpart D of 7 CFR part 250. We also proposed to 
remove 7 CFR 250.12(e) and (f), as requirements relative to storage 
facility and processor contracts or agreements are currently addressed 
in 7 CFR 250.14, and in subpart C of 7 CFR part 250, respectively. 
Lastly, we proposed to revise the section heading to Agreements. Since 
we did not receive any comments in response to these proposals, this 
final rule retains the amendments to 7 CFR 250.12, as proposed.

C. Reviews, 7 CFR 250.19

    In the proposed rule, we proposed to clarify or revise required 
procedures in the distributing agency's review system in 7 CFR 
250.19(b)(1), by which the distributing agency ensures compliance with 
the requirements in 7 CFR part 250. We proposed to amend the 
introductory text to clarify that the listed requirements may apply to 
some, but not all, programs that receive donated foods. While we did 
not receive any comments in response to this proposal, we have further 
revised the introductory text in this final rule to provide additional 
clarification.
    We proposed to remove the requirement that review procedures must 
include on-site reviews of recipient agencies in NSIP, since oversight 
of this program is currently the responsibility of the Department of 
Health and Human Services (DHHS). We proposed to streamline and clarify 
the requirement to conduct on-site reviews of charitable institutions 
and summer camps, and the food service management companies under 
contract with them. Since we did not receive any comments in response 
to these proposals, this final rule retains them.
    We also proposed to include a requirement that the distributing 
agency's review procedures include on-site reviews of recipient 
agencies in NSLP, the Child and Adult Care Food Program (CACFP), and 
the Summer Food Service Program (SFSP) that have contracts with food 
service management companies in order to ensure compliance with the 
proposed requirements for the use of donated foods under such 
contracts. However, we proposed to permit the distributing agency to 
enter into an agreement with the appropriate State administering agency 
(if a different agency) to include its review as part of the State 
administering agency's required on-site review of such recipient 
agencies.
    We received thirteen comments in response to this proposal. Twelve 
of the commenters indicated that requiring State agency on-site reviews 
of recipient agencies to ensure compliance with requirements for the 
use of donated foods in food service management company contracts would 
impose a significant additional burden. Commenters indicated that State 
agencies often do not have sufficient personnel to conduct such 
reviews, or sufficient funds to permit travel throughout the State. 
Additionally, commenters noted that State agency personnel often have 
limited expertise in reviewing contract provisions and ensuring that 
the value of all Federal resources provided to school food authorities 
and other recipient agencies has accrued to them. One commenter 
indicated that the cost of conducting such reviews would likely be 
passed on to schools.
    We agree with commenters that the proposed review requirements 
would impose an additional burden on the State distributing agency, 
which does not currently conduct on-site reviews of recipient agencies 
in NSLP, CACFP, and SFSP. This would be especially true in States in 
which a large number of recipient agencies have contracts with food 
service management companies. However, the State agency responsible for 
administering these programs (usually the State Education Agency) 
currently conducts on-site reviews of these recipient agencies to 
ensure compliance with requirements set forth in contracts with food 
service management companies. Additionally, in accordance with a final 
rule published in the Federal Register on October 31, 2007 at 72 FR 
61479, such State agencies are required to review and approve all 
school food authority contracts with food service management companies 
prior to their execution. Accordingly, the proposed requirement that 
the distributing agency's review system must include an on-site review 
of recipient agencies in NSLP, CACFP, and SFSP has been removed in this 
final rule. In accordance with the removal of the proposal described 
above, this final rule removes current 7 CFR 250.19(b)(1)(v), rather 
than redesignating and revising it, as proposed.
    One commenter suggested that compliance with requirements in food 
service management company contracts should be determined by auditors, 
in accordance with Federal audit requirements under the Single Audit 
Act and Office of Management and Budget (OMB) Circular A-133, and 
codified in departmental regulations in 7 CFR part 3052. Under the 
audit requirements, a State or local government or nonprofit agency 
that expends at least $500,000 in Federal awards in a school or fiscal 
year (including the value of donated foods) must obtain a single audit 
(or, in some cases, a program-specific audit) for that year. Audits can 
be an effective tool in helping State agencies to ensure that Federal 
resources are used for the intended purpose, and in accordance with 
Federal requirements. However, auditors do not, as a rule, determine 
compliance with requirements for donated foods in contracts with food

[[Page 46171]]

service management companies in conducting the required Federal audit, 
and including such determination would likely increase the cost of 
obtaining the audits for school food authorities and other recipient 
agencies. Accordingly, we do not believe it would be in the best 
interest of the child nutrition programs served to include the audit as 
a replacement for the State agency on-site review in ensuring 
compliance with the requirements for donated foods in contracts with 
food service management companies. We also received one comment 
indicating that agreements between State agencies and recipient 
agencies should include assurance of compliance with requirements 
relating to the use of donated foods in food service management company 
contracts. However, we believe that current agreement provisions 
requiring that recipient agencies distribute and use donated foods in 
accordance with the requirements in 7 CFR part 250, and that hold them 
responsible for noncompliance with such requirements, are sufficient.
    We proposed to remove 7 CFR 250.19(d), which requires the 
monitoring of funds in NSIP to ensure purchase of only U.S. 
agricultural products. As previously indicated, DHHS is currently 
responsible for the oversight of NSIP. Since we did not receive any 
comments in response to this proposal, 7 CFR 250.19(d) is removed in 
this final rule.

D. Distributing Agency Performance Standards, 7 CFR 250.24

    In 7 CFR 250.24 of the proposed rule, we proposed to revise current 
performance standards required of the distributing agency with respect 
to the ordering of donated foods and their distribution to school food 
authorities, in accordance with proposed changes in 7 CFR 250.58. We 
proposed to revise 7 CFR 250.24(d)(8) to state that distributing 
agencies are responsible for providing recipient agencies with ordering 
options and commodity values, and considering the specific needs and 
capabilities of such agencies in ordering donated foods. We received 
four comments indicating that distributing agencies do not always 
consider the needs of recipient agencies in ordering donated foods. Two 
of the commenters indicated that distributing agencies may instead 
order those donated foods that generate higher delivery fees, or may 
charge such fees for donated foods delivered directly to a processor. 
Two other commenters suggested requiring distributing agencies to 
permit school food authorities capable of accepting full truckload 
shipments to submit donated food orders to FNS. In 7 CFR 250.58 in this 
final rule, we are requiring the distributing agency to ensure that all 
school food authorities have an opportunity to state their food 
preferences each year before the distributing agency submits donated 
food orders to FNS. The revision of 7 CFR 250.24(d)(8), as proposed, 
would ensure that the distributing agency complies with this 
requirement. However, as discussed in section II.F.3 of the preamble, 
we have chosen to reserve any revision of requirements relating to the 
distributing agency's system of donated food distribution for future 
proposed rulemaking. We received one comment stating that recipient 
agencies are guaranteed ordering options and visibility of donated food 
values through ECOS, making this performance standard unnecessary. 
However, not all distributing agencies utilize ECOS for all food 
distribution programs. Accordingly, 7 CFR 250.24(d)(8) is revised as 
proposed.
    We proposed to revise 7 CFR 250.24(d)(9) to state that distributing 
agencies are responsible for offering school food authorities 
participating in NSLP the commodity offer value of donated food 
assistance, at a minimum, and for determining an adjusted assistance 
level in consultation with school food authorities, as appropriate, in 
accordance with the proposed 7 CFR 250.58. Since we did not receive any 
comments in response to this proposal, 7 CFR 250.24(d)(9) is revised as 
proposed in this final rule.
    In 7 CFR 250.24(d)(10), we proposed to state that distributing 
agencies be responsible for providing each school food authority 
participating in the NSLP with the opportunity to order, or select, 
donated foods from the full list of available foods, and to distribute 
the selected donated foods to each school food authority, to the extent 
that distribution of such foods to, and within, the State would be 
cost-effective. In accordance with the amendments to the proposed 7 CFR 
250.58 in this final rule, we have revised 7 CFR 250.24(d)(10) in this 
final rule to state that distributing agencies are responsible for 
ensuring that all school food authorities participating in the NSLP are 
aware of the full list of available donated foods, have the opportunity 
to provide input at least annually in determining the donated foods 
from the full list that they may select for their food service, and 
receive all such selected donated foods that may be cost-effectively 
distributed to them.
    The proposed rule included a restructuring of some sections of 7 
CFR part 250, including:
    <bullet> The removal of current subpart E.
    <bullet> The revision of subpart D to include new sections with 
proposed requirements for the use and management of donated foods in 
contracts with food service management companies.
    <bullet> The addition of a new subpart E to include revisions and 
clarifications in current requirements for the use of donated foods in 
the NSLP and other child nutrition programs.
    <bullet> The addition of a new subpart F to include current 
requirements, without change, for household programs.
    <bullet> The addition of a new subpart G to include revisions and 
clarifications in requirements for the use of donated foods by 
charitable institutions and summer camps, and in NSIP, and to include 
current requirements, without change, for the use of donated foods in 
disasters and situations of distress.
    Since we received no comments in response to the proposed 
restructuring, it is retained as proposed in this final rule. The 
comments received in response to the specific new or revised 
requirements proposed in each of these subparts are described below.

E. Subpart D--Donated Foods in Contracts with Food Service Management 
Companies

    We proposed to revise Subpart D of 7 CFR part 250 to include, in 
six new sections, specific requirements to ensure that recipient 
agencies receive the benefit and value of donated foods in contracts 
with food service management companies. As previously indicated, this 
subpart would replace the current 7 CFR 250.12(d). In the first two 
sections, we proposed to include the contract and procurement 
requirements for recipient agencies in retaining the services of a food 
service management company, and the specific activities relating to 
donated foods that a food service management company may perform in 
accordance with the contract.
    We also proposed to clarify the distinction between a food service 
management company and a processor. However, since this distinction is 
clearly made in the definitions of these two entities in 7 CFR 250.3, 
as revised in this final rule, we are removing it in this subpart. 
Consequently, we are consolidating the proposed 7 CFR 250.50 and 250.51 
into 7 CFR 250.50 in this final rule, and revising the heading of this 
section to Contract requirements and procurement. Accordingly, proposed 
7 CFR 250.52 through 250.55

[[Page 46172]]

are redesignated as 7 CFR 250.51 through 250.54, respectively, in this 
final rule. The specific comments are described below under the 
pertinent sections.
1. Contract Requirements and Procurement, 7 CFR 250.50
    We proposed to clarify that the recipient agency must enter into a 
contract with a food service management company, in accordance with 
Federal requirements in 7 CFR parts 210, 220, 225, or 226, as 
applicable, and that the contract must ensure that all donated foods 
received for use by the recipient agency in the school or fiscal year, 
as applicable, are used to benefit the recipient agency's food service. 
We proposed to require that contracts between child nutrition program 
recipient agencies and food service management companies also ensure 
compliance with other requirements in this subpart. We also proposed to 
clarify the two types of contracts--fixed-price and cost-reimbursable--
that may be used, and the differences between them. Since we did not 
receive any comments in response to these proposals, this final rule 
retains the proposed provisions relating to contract requirements and 
types of contracts in 7 CFR 250.50(a) and (b), respectively, with one 
exception. In 7 CFR 250.50(a) of this final rule, we require that the 
contract ensure that all donated foods received for use by the 
recipient agency in the school or fiscal year, as applicable, are used 
in (instead of benefit) the recipient agency's food service. This 
change is made in accordance with the revised requirements for the use 
of donated foods in 7 CFR 250.51(d) of this final rule, as discussed in 
section II.E.2 of the preamble.
    We proposed to clarify that the recipient agency must meet 
Departmental procurement requirements in 7 CFR part 3016 or 3019, and 
in 7 CFR parts 210, 220, 225, or 226, as applicable, in obtaining the 
services of a food service management company, and to require that 
procurement documents, as well as contract provisions, include the 
donated food activities that the food service management company is to 
perform. We also proposed to indicate some of the donated food 
activities that the food service management company may perform, in 
accordance with its contract, such as preparing and serving meals, and 
ordering or storing donated foods. We proposed to specifically prohibit 
a food service management company from entering into a contract or 
agreement with a processor to process donated foods or finished end 
products for use in the recipient agency's food service.
    Six commenters indicated that the food service management company 
must play a role in ordering or selecting donated foods, in order to 
ensure that the selected foods are those that may be most effectively 
used in the food service. We agree, and 7 CFR 250.50(d), as finalized 
in this rule, will permit the food service management company to order 
or select donated foods for use in the food service, in coordination 
with the recipient agency.
    Seven commenters indicated that the food service management company 
should be permitted to enter into processing contracts, or to procure 
processed end products, on behalf of recipient agencies, since it would 
permit those agencies to benefit from the food service management 
company's purchasing expertise and buying power. Two other commenters 
indicated that, as most processing agreements are between the processor 
and the distributing agency, and not the recipient agency, the 
significance of prohibiting food service management companies from 
entering into such agreements is unclear. The parties to the processing 
agreements required in subpart C of 7 CFR part 250 are usually the 
distributing agency and the processor. Such agreements permit the 
distributing agency to ensure compliance with the processing 
requirements in subpart C of 7 CFR part 250, which include the 
processing of donated foods into approved end products, compliance with 
processing yields of donated foods, and maintenance of donated food 
inventories at approved levels. The distributing agency may permit 
recipient agencies to enter into processing agreements, and to ensure 
compliance with the processing requirements. However, it would be 
inappropriate to delegate such oversight of a commercial enterprise 
(i.e., the processor) to another commercial enterprise (i.e., the food 
service management company). Hence, we retain in this final rule the 
prohibition of a food service management company from entering into the 
processing agreement with the processor required in subpart C of 7 CFR 
part 250.
    The actual procurement of processed end products from processors 
(or commercial distributors), however, is usually conducted by 
recipient agencies. Such procurement must be conducted in accordance 
with Departmental procurement requirements in 7 CFR parts 3016 or 3019, 
as applicable, and with requirements in subpart C of 7 CFR part 250. 
Although we included the payment of processing fees or remittance of 
refunds from a processor among the donated food activities that a food 
service management company may perform on behalf of a recipient agency, 
we did not specifically include the procurement of processed end 
products among such activities. However, such procurement is not 
prohibited. Furthermore, we agree with commenters that recipient 
agencies could benefit from food service management company 
procurements of processed end products on their behalf, since it would 
reduce their time and labor in conducting such activity, and may result 
in decreased purchase costs. Thus, we specifically include the 
procurement of processed end products as an activity that the food 
service management company may perform on behalf of the recipient 
agency in 7 CFR 250.50(d) of this final rule. However, we also clarify 
that such procurement must ensure compliance with the requirements in 
subpart C of 7 CFR part 250, and with the provisions of distributing or 
recipient agency processing agreements, and must ensure crediting of 
the recipient agency for the value of donated foods contained in 
processed end products at the processing agreement value. Other donated 
food activities included in the proposed rule are retained in 7 CFR 
250.50(d) of this final rule, with some consolidation.
2. Crediting for, and Use of, Donated Foods, 7 CFR 250.51
    In the proposed rule, we proposed to include requirements to ensure 
that recipient agencies in child nutrition programs receive the benefit 
and value of donated foods in the meal service provided by food service 
management companies. We proposed to require the recipient agency to 
ensure that the food service management company, in both fixed-price 
and cost-reimbursable contracts, credits it for the value of all 
donated foods received for use in the recipient agency's food service 
in a school year or fiscal year (including both entitlement and bonus 
foods), with the exception of donated foods contained in processed end 
products. We proposed to include the accepted means by which crediting 
for the value of donated foods must be achieved, the required frequency 
of such crediting, and that, in all cases, crediting be clearly 
documented.
    One commenter suggested that we require crediting for donated foods 
as they are used (rather than as they are received), to avoid a 
situation in which credit is provided for donated foods that may not be 
used during the contract

[[Page 46173]]

period--e.g., due to receipt of a shipment late in the year. However, 
requiring crediting for the value of donated foods only as they are 
used would provide a disincentive to use them. Additionally, we do not 
want to create a situation in which school food authorities with food 
service management company contracts must monitor donated food 
inventories to ensure proper crediting, as such monitoring would impose 
an additional burden, and would be very difficult under a single 
inventory management system, in which school food authorities (and, in 
accordance with 7 CFR 250.52(b) of this final rule, food service 
management companies) may commingle donated foods and commercially 
purchased foods.
    We received two comments expressing uncertainty whether crediting 
must occur for donated foods delivered to processors for processing 
into end products when the end products are delivered to the recipient 
agency, or when the food service management company uses the end 
products in the recipient agency's food service. As we described in the 
proposed rule, the processor (or commercial distributor, as applicable) 
must credit the recipient agency for donated foods contained in 
processed end products in the sale of such end products to the 
recipient agency, in accordance with the requirements in subpart C of 7 
CFR part 250. Hence, the value of the donated foods accrues to the 
recipient agency's nonprofit food service in its purchase of the 
processed end products. Although the food service management company 
must use such end products in the recipient agency's food service, it 
is not required to provide an additional credit for the value of 
donated foods contained in them when they are used, or received for 
use, in the food service. However, an exception would be if the food 
service management company's contract requires it to procure processed 
end products on behalf of the recipient agency, or to act as an 
intermediary in passing the donated food value in such end products on 
to the recipient agency, in accordance with 7 CFR 250.50(d) of this 
final rule. Hence, in 7 CFR 250.51(a) of this final rule, we clarify 
that, in such cases, the food service management company must also 
credit the recipient agency for the value of donated foods contained in 
processed end products.
    We include the proposed methods of crediting permitted, and the 
required frequency of crediting, together in 7 CFR 250.51(b) of this 
final rule, in the interest of clarity. We proposed to include ``pre-
crediting'' as an accepted means of crediting for the value of donated 
foods in fixed-price contracts. In pre-crediting, the food service 
management company deducts the value of donated foods the recipient 
agency is expected to receive from the fixed-price bid submitted during 
procurement of the food service management company to conduct the food 
service. In contracts with school food authorities, this deduction is 
usually for the per-meal value of donated food assistance established 
in accordance with section 6(c) of the Richard B. Russell National 
School Lunch Act (42 U.S.C. 1755(c)). However, school food authorities 
may receive a greater value of donated food assistance for the school 
year. This may result for a number of reasons (some of which are 
described in 7 CFR 250.58(d) of this final rule), but is most commonly 
due to the receipt of surplus, or bonus, foods purchased by the 
Department to remove market surpluses, and donated to school food 
authorities and other recipient agencies later in the year.
    As indicated in the Office of Inspector General (OIG) audit 
(<greek-i>27601-0027-CH) referenced in the proposed rule, food service 
management companies that utilize ``pre-crediting'' sometimes fail to 
credit school food authorities for the additional foods received later 
in the year. Hence, in the proposed rule, we also proposed to require 
the food service management company to provide an additional credit for 
the value of any donated foods not accounted for in the fixed-price per 
meal.
    We received nine comments indicating that this requirement would 
discourage food service management companies from efficiently using 
donated foods, since providing recipient agencies with an additional 
credit for the value of donated foods received later in the year would 
reduce their revenue. However, as the proposal would require crediting 
for all donated foods received in the school or fiscal year, and not 
just those donated foods that are actually used, it would not 
discourage the use of donated foods. We received four comments 
questioning whether a recipient agency would have to reimburse the food 
service management company if it actually received less than the pre-
credited value of donated foods. This may occur, for example, if a 
school food authority does not select donated foods offered by the 
distributing agency equal to its commodity offer value (i.e., the 
legislated per-meal value), or if selected foods may not be purchased, 
due to market conditions or other factors. However, the proposed 
requirement is intended only to ensure that the recipient agency is 
credited for the value of all donated foods received. It would not 
require reimbursement of the food service management company if such 
crediting is in excess of that value. However, such reimbursement may 
be established by the food service management company and the recipient 
agency, in accordance with their contract.
    One commenter contended that some recipient agencies are more 
interested in a guaranteed cost of the service (i.e., in the fixed-
price per meal), rather than assurance that credit is received for the 
value of all donated foods. Another commenter suggested that additional 
credits be excused when a food service management company does not 
include other related costs, such as storage, in the fixed price. 
However, permitting any exceptions to the requirement that the 
recipient agency receive credit for the value of all donated foods 
would not meet the primary intent of the regulations, or address the 
concerns expressed in the OIG audit. Notwithstanding this requirement, 
a recipient agency may consider storage or handling costs in 
establishing the value of donated foods to be used in crediting, as 
permitted in 7 CFR 250.51(c) of this final rule. Another commenter 
questioned the accuracy of the term ``fixed-price'' contract if 
deductions for the value of donated foods are required on invoices. 
While technically true, this designation is commonly used, and use of 
an alternate term would be confusing.
    We proposed to permit ``crediting by disclosure'' in cost-
reimbursable contracts. Under such contracts, the food service 
management company bills the recipient agency for costs incurred in 
conducting the food service, and also charges a fixed management fee. 
However, one commenter was unsure if crediting by disclosure meant 
disclose to the recipient agency the value of donated foods received 
during the period covered by the invoice, or actually credit funds to 
the recipient agency for such foods. We agree with the commenter that 
the meaning is not clear. Therefore, we are amending the language in 7 
CFR 250.51(b) of this final rule to clarify that, in crediting by 
disclosure, the food service management company credits the recipient 
agency for the value of donated foods by disclosing, in its billing for 
food costs submitted to the recipient agency, the savings resulting 
from the receipt of donated foods for the billing period. However, it 
does not require a reduction of the fee charged for conducting the food 
service, or any other type of payment for the value of donated foods.

[[Page 46174]]

    We proposed to require the recipient agency to ensure that 
crediting for the value of donated foods be performed not less 
frequently than annually. Two commenters were unsure if the food 
service management company must credit the recipient agency for the 
value of donated foods when such foods are delivered to the recipient 
agency, or when the food service management company actually uses the 
donated foods in the recipient agency's food service. The proposal did 
not include a specific time that crediting must be performed, only that 
it be performed at least annually. Hence, the recipient agency may 
require a food service management company to credit it for donated 
foods upon delivery, quarterly, or all at once at the end of the year 
(provided that, for a school food authority, such a one-time credit 
would not result in its cash resources exceeding the limits established 
in 7 CFR 210.9(b)(2)). The recipient agency may also permit crediting 
for donated foods as they are used in the food service. However, the 
recipient agency must ensure that the food service management company 
credits it for the value of all donated foods received during the year; 
permitting the food service management company to credit for donated 
foods as they are used may not ensure that this requirement is met. 
Additionally, it may be difficult to track donated foods as they are 
used if the entity responsible for storing them is using a single 
inventory management system.
    Another commenter indicated that it should be clear exactly when 
crediting for the value of donated foods must be achieved, as a food 
service management company might offer to provide an upfront payment 
for such value as an inducement to winning the bid for the contract. 
However, such an upfront payment for the value of donated foods would 
be acceptable if this method of crediting were provided for in 
procurement documents and in contract provisions, as required in this 
final rule. It would be unlikely, though, to include crediting for all 
donated foods received in the school or fiscal year, and would, 
therefore, necessitate additional crediting at a later time.
    Accordingly, we have retained the allowed methods of crediting for 
donated foods, as proposed, in 7 CFR 250.51(b) of this final rule, with 
the clarification of crediting by disclosure in cost-reimbursable 
contracts. We have also retained, as proposed, the required frequency 
of crediting, and the requirement that all forms of crediting provide 
clear documentation of the value received from the donated foods. As in 
the proposed rule, we have indicated that a school food authority must 
also ensure that the required method and frequency of crediting does 
not cause its cash resources to exceed the limits established in 7 CFR 
210.9(b)(2).
    In the proposed rule, we proposed to provide some flexibility in 
determining the value of donated foods to be used in crediting, in 
order to permit the recipient agency to ensure that the donated foods 
received provide a good value to its food service. Hence, rather than 
require use of the donated food value utilized by the distributing 
agency in crediting the recipient agency's donated food ``entitlement'' 
(as described in 7 CFR 250.58(e) of this final rule), we proposed to 
permit the use of an alternate value determined by the recipient 
agency, and approved by the distributing agency. We proposed to require 
that the method of determining the donated food values to be utilized 
in crediting be included in procurement documents and in the contract. 
We received two comments stating that the donated food values used by 
food service management companies in crediting school food authorities 
should be the same as the values used by distributing agencies in 
crediting the school food authority's donated food ``entitlement''. 
Three commenters indicated that school food authorities do not have the 
time or expertise to determine alternate donated food values. We agree 
that most school food authorities would not have the time or expertise 
to determine alternate donated food values for use in crediting, and 
will likely use the values established by the distributing agency. 
However, we believe that having the flexibility to use alternate values 
may benefit some school food authorities or other recipient agencies. 
We received three comments indicating that the proposed flexibility in 
valuation of donated foods, while commendable, may be confusing to the 
parties responsible (e.g., the distributing agency or the State 
administering agency) for ensuring that recipient agencies have 
received credit for the value of all donated foods. We agree that the 
use of different values in crediting may be confusing to such parties. 
However, as previously indicated, most recipient agencies will likely 
use the values established by the distributing agency, rather than use 
alternate values--which, in any case, would have to be approved by the 
distributing agency. Additionally, in 7 CFR 250.54(a) of this final 
rule, we require recipient agencies to maintain a record of the donated 
food values used in crediting, which will help State agencies or other 
entities to determine compliance with requirements for crediting of the 
donated food value.
    Accordingly, we have included the options for valuing donated foods 
as proposed in 7 CFR 250.51(c) of this final rule. We have included, as 
proposed, the requirement that the method of determining the donated 
food values to be utilized in crediting be included in procurement 
documents and in the contract. We have also included, as proposed, the 
requirement that the method of valuation specified must result in the 
determination of actual values, and may not permit any negotiation of 
such values. Lastly, we have included, as proposed, the requirement 
that the recipient agency must ensure that the specified method of 
valuation of donated foods permits crediting to be achieved in 
accordance with regulatory requirements and the provisions of the 
contract.
    We also proposed to provide some flexibility in the use of donated 
foods by the food service management company, especially in its 
contracts with school food authorities to conduct the meal service. 
Under the proposal, the food service management company would not be 
required to use those donated foods that are not included in school 
menu plans, with a few exceptions (although it must provide a credit 
for all donated foods received). Rather, the food service management 
company could use its food purchasing capacity to provide other foods 
that meet nutritional requirements in place of those donated foods that 
do not fit easily into the school menu plans. We received 641 comments 
in opposition to this proposal. Almost all of them indicated that food 
service management companies should be required to use all donated 
foods in the school food service, or should use either the donated 
foods or a commercial substitute of the same type, of U.S. origin, and 
of equal or better quality (as required of processors under subpart C 
of 7 CFR part 250). Many commenters saw the proposal as providing 
school food authorities under contract with food service management 
companies with the opportunity to receive cash in exchange for donated 
foods (i.e., for those donated foods not used in the food service)--an 
option not available to school food authorities that operate their own 
food service. Some of the commenters feared that this might lead to a 
``cash-out'' of NSLP. Other commenters feared that the proposal would 
permit sale of donated foods on the open market and wondered if the 
Federal government would be liable for donated foods that went out-

[[Page 46175]]

of-condition and were sold by a food service management company to 
another party.
    In the proposal, we sought to provide school food authorities and 
food service management companies with the flexibility needed to 
integrate donated foods into the food service as effectively as 
possible. It was not meant to provide an advantage to school food 
authorities with food service management company contracts, or to 
signal a move to discontinue the distribution of donated foods in NSLP, 
and provide cash instead. However, we are sensitive to the perception 
that the proposal would provide a ``cash for food'' option, and would 
create an unfair playing field, to the disadvantage of those school 
food authorities that operate their own food service. Therefore, we 
have amended the proposed requirements for the use of donated foods by 
food service management companies in 7 CFR 250.51(d) of this final 
rule. We require that the food service management company use all 
donated ground beef, donated ground pork, and all end products, in the 
recipient agency's food service. We also require that the food service 
management company use all other donated foods, or commercially 
purchased foods of the same generic identity, of U.S. origin, and of 
equal or better quality than the donated foods, in the recipient 
agency's food service. However, the recipient agency may choose to 
prohibit the food service management company from using commercial 
substitutes in place of the donated foods, in accordance with its 
contract.
    In the proposed rule, we addressed the disposition of donated foods 
upon termination of the contract in this section. However, in the 
interest of clarity, we have moved this provision to the next section, 
which includes requirements for storage and inventory management of 
donated foods, in this final rule.
3. Storage and Inventory Management of Donated Foods, 7 CFR 250.52
    In the proposed rule, we proposed to include requirements for the 
storage and inventory management of donated foods by food service 
management companies. We did not receive any comments in response to 
the proposal that the food service management company comply with the 
general storage and inventory management requirements in 7 CFR 250.14. 
Therefore, we have retained this requirement, as proposed, in 7 CFR 
250.52(a) of this final rule. However, as the general storage and 
inventory requirements are in 7 CFR 250.14(b), we have amended the 
regulatory citation accordingly in this final rule in the interest of 
clarity.
    We proposed to permit the food service management company to store 
and inventory donated foods together with commercially purchased foods-
i.e., utilize a single inventory management system, as defined in this 
final rule-if allowed in its contract with the recipient agency. 
However, we proposed to require that the food service management 
company store donated ground beef, donated ground pork, and all end 
products in a manner that ensures they will be used in the recipient 
agency's food service. We received one comment stating that ensuring 
the use of donated ground beef and ground pork, and end products, under 
a single inventory management system will be impractical. Another 
commenter stated that single inventory management should apply to all 
school food authorities, irrespective of their contracts with food 
service management companies. In single inventory management, a school 
food authority may store and inventory its donated foods together with 
its commercially purchased foods, unless the distributing agency 
requires the donated foods to be distinguished from commercially 
purchased foods in storage and inventoried separately. This applies to 
all school food authorities, with or without food service management 
company contracts. Likewise, a food service management company may 
store and inventory donated foods together with foods it has purchased 
commercially for use in the school food authority's food service. 
However, it may store and inventory such foods together with other 
foods only to the extent that such a system may ensure compliance with 
the requirements for the use of donated foods in 7 CFR 250.51(d)--i.e., 
use all donated ground beef and ground pork, and all end products in 
the food service, and use all other donated foods or commercially 
purchased foods of the same generic identity, of U.S. origin, and of 
equal or better quality than the donated foods, in the food service. In 
the interest of clarity, we have included this revised language in 7 
CFR 250.52(b) of this final rule. We have also included, without 
change, the requirement that, in cost-reimbursable contracts, the 
system of inventory management must ensure that the recipient agency is 
not charged for donated foods.
    We proposed that, upon termination of the contract, the food 
service management company return all unused donated ground beef, 
donated ground pork, and end products, and that it return other donated 
foods, at the recipient agency's discretion, or pay the recipient 
agency for the value of the donated foods. One commenter indicated that 
the recipient agency should take ownership of all unused donated foods 
upon termination of the contract, in accordance with the contention 
that all donated foods should be used in the recipient agency's food 
service. However, if the food service management company is storing 
donated foods together with foods purchased commercially for the 
recipient agency, as permitted in this final rule, the return of 
donated foods remaining in inventory upon termination of the contract 
may be achieved only if all such foods ``owned'' by the recipient 
agency are returned. Such disposition of unused foods would be a matter 
for the recipient agency and the food service management company to 
resolve, in accordance with their contract. Therefore, in 7 CFR 
250.52(c) of this final rule, we have retained the requirement that the 
food service management company return all unused donated ground beef, 
donated ground pork, and end products, and that it return other donated 
foods at the recipient agency's discretion. However, rather than 
providing the option of payment for the value of the donated foods, we 
have included the requirement that the recipient agency must ensure 
that the food service management company has credited it for the value 
of all donated foods received for use in its food service in the school 
or fiscal year. Accordingly, we have revised the heading of this 
section to Disposition of donated foods and credit reconciliation upon 
termination of the contract.
4. Contract Provisions, 7 CFR 250.53
    In the proposed rule, we proposed to require specific contract 
provisions to ensure compliance with the proposed requirements for the 
use of donated foods in contracts with food service management 
companies. The provisions of 7 CFR 250.53 of this final rule include 
those contract provisions required to ensure compliance with such 
requirements in this final rule. It clarifies that the contract must 
include any activities relating to donated foods that the food service 
management company will be responsible for, in accordance with 7 CFR 
250.50(d), and assurance that such activities will be performed in 
accordance with the applicable requirements in 7 CFR part 250. It also 
clarifies that contract provisions must assure compliance with storage 
and inventory requirements for donated foods, and that an on-site 
review of the food service management

[[Page 46176]]

company's operation may include a review of required records.
    One commenter indicated that the proposed contract provisions will 
require State agencies to amend prototype contracts, or to communicate 
the new requirements to recipient agencies to ensure their inclusion in 
their contracts with food service management companies, which will 
impose an additional burden on State agencies. We agree that it will 
require additional work for State and recipient agencies to implement 
the new contract requirements. However, once implemented, the 
additional burden would be minimal. As previously indicated, the 
inclusion of the contract provisions is necessary to ensure compliance 
with the requirements in this subpart. Additionally, in accordance with 
a final rule published in the Federal Register on October 31, 2007 at 
72 FR 61479, the State administering agency is required to review and 
approve all school food authority contracts with food service 
management companies prior to their execution.
5. Recordkeeping and Reviews, 7 CFR 250.54
    In the proposed rule, we proposed to include specific recordkeeping 
requirements for recipient agencies and food service management 
companies in order to clearly document compliance with the requirements 
in this subpart. We did not receive any comments in response to the 
proposals. However, in accordance with 7 CFR 250.51(a) of this final 
rule, we clarify, in 7 CFR 250.54(a) and (b), that documentation of 
crediting for the value of donated foods must include crediting for 
such foods in processed end products, as applicable. Additionally, in 
accordance with 7 CFR 250.50(d) of this final rule, we clarify, in 7 
CFR 250.54(b), that the food service management company must include 
documentation of its procurement of processed end products on behalf of 
the recipient agency, as applicable.
    We also proposed to include specific review requirements for 
recipient agencies and distributing agencies, in order to ensure 
compliance with the requirements in this subpart. We proposed to 
require that the recipient agency include a review of food service 
management company activities relating to the use of donated foods as 
part of its required monitoring of the food service operation, in 
accordance with 7 CFR parts 210, 220, 225, or 226, as applicable. We 
also proposed to require that the recipient agency conduct a 
reconciliation to ensure that the food service management company has 
credited it for the value of all donated foods received for use in the 
food service in the school or fiscal year, as applicable.
    One commenter indicated that the reconciliation process should be 
formalized to provide clear guidance on accounting for donated foods, 
including beginning and ending inventories, processing yields, and 
theft or damage. However, the recipient agency is not required to 
monitor the food service management company's beginning and ending 
donated food inventories as part of the proposed review requirement, or 
to make a separate accounting of donated food loss. Although the 
recipient agency would have to ensure crediting for donated foods 
contained in processed end products procured by the food service 
management company on its behalf, it would not have to monitor 
processing yields as part of its reconciliation. We received two 
comments indicating that the food service management company and the 
school food authority must receive accurate and timely data on food 
values to ensure that crediting for the value of donated foods is 
accurate. While true, the distributing agency is required to provide 
recipient agencies with information on donated food values, in 
accordance with 7 CFR 250.24(d)(8) of this final rule.
    We received seven comments indicating that the proposed review 
requirements would impose additional costs on school food authorities, 
and that such requirements should be reviewed for their impact on 
schools. Another commenter suggested that FNS test the proposals to 
assess their impact on a cost-benefit basis. We agree that the proposed 
requirement to ensure crediting for the value of donated foods through 
a reconciliation process would require school personnel to commit more 
time to this activity, and thus has the potential to increase costs. 
However, we believe the flexibility provided in the method and 
frequency of crediting for donated foods will permit school food 
authorities to minimize such an impact. A school food authority may 
find that it works best to require a one-time refund for the value of 
all donated foods near the end of the year, or may choose to require 
that donated food value be credited each month or quarter through 
reductions on invoices. In short, we expect that school food 
authorities will find the method that is most cost-effective and 
efficient for them. Hence, in 7 CFR 250.54(c) of this final rule, we 
retain the review requirements for recipient agencies as proposed. 
However, we clarify that the required reconciliation must also ensure 
crediting for the value of donated foods contained in processed end 
products, in accordance with the requirements in 7 CFR 250.51(a), and 
that such reconciliation must be conducted at least annually, and upon 
termination of the contract.
    In accordance with the removal of the proposal in this final rule 
that the distributing agency's review system include an on-site review 
of recipient agencies in NSLP, CACFP, and SFSP with food service 
management company contracts, as described in section II.C of the 
preamble, this final rule removes the proposed reference to such review 
requirement in this section.
    Lastly, we proposed to indicate that the Department may also 
conduct reviews of food service management company operations with 
respect to the use and management of donated foods, in order to ensure 
compliance with the requirements of 7 CFR part 250. As we did not 
receive any comments in response to this proposal, it is retained in 7 
CFR 250.54(d) of this final rule.

F. Subpart E--National School Lunch Program (NSLP) and Other Child 
Nutrition Programs

    In the proposed rule, we proposed to provide a clearer, more 
comprehensive, description of the requirements relating to donated 
foods in NSLP and other child nutrition programs in a new subpart E of 
7 CFR part 250, which includes seven new sections. This subpart would 
replace the current 7 CFR 250.48, 250.49, and 250.50. Since we received 
no comments in response to the proposed restructuring of these 
requirements, it is retained in this final rule. Comments received in 
response to proposed revisions or clarifications of specific 
requirements are discussed below in the pertinent sections.
1. Provision of Donated Foods in NSLP, 7 CFR 250.56
    In 7 CFR 250.56 of the proposed rule, we proposed to include a 
general description of the provision of donated foods in NSLP, 
including the types and amounts provided, and to reference applicable 
regulatory requirements, in addition to 7 CFR part 250. We also 
included a streamlined description of the quantity of donated foods 
provided to distributing agencies each school year, in accordance with 
Section 6(c) of the Richard B. Russell National School Lunch Act (42 
U.S.C. 1755(c)), and the values of donated foods utilized in 
determining the quantities provided. Lastly, we included the current 
description of the cash option offered to States previous to 1974, in 
lieu of receiving donated foods. We received

[[Page 46177]]

one comment indicating that the general description, and the types and 
amounts of donated foods provided, do not add any value to the 
regulations, and are, therefore, unnecessary. However, we believe that 
these provisions help to clarify the role of donated foods in NSLP, and 
have retained them, as proposed, in 7 CFR 250.56 of this final rule.
2. Commodity Schools, 7 CFR 250.57
    In 7 CFR 250.57 of the proposed rule, we proposed to describe the 
provision of donated foods to commodity schools, including a 
streamlined description of the determination of the quantity of donated 
foods provided to distributing agencies for commodity schools each 
school year, in accordance with section 6(c) of the Richard B. Russell 
National School Lunch Act (42 U.S.C. 1755(c)). We also included the 
types of donated foods available to commodity schools. Since we 
received no comments in response to the proposals, 7 CFR 250.57 is 
retained in this final rule as proposed.
3. Ordering Donated Foods and Their Provision to School Food 
Authorities, 7 CFR 250.58
    In 7 CFR 250.58 of the proposed rule, we proposed to describe the 
means by which the distributing agency orders donated foods and 
provides them to school food authorities for use in the school food 
service. We included, in 7 CFR 250.58(a), a description of ECOS, the 
web-based system implemented in 2003 to permit the distributing agency 
to submit donated food orders to FNS. We proposed to require that, 
before submitting orders to FNS, the distributing agency provide the 
school food authority with the opportunity to order, or select, donated 
foods for its food service from the full list of available donated 
foods. We received eighteen comments indicating that, because of the 
wide variety of donated foods available, this proposal is impractical, 
and would impose a significant additional burden on distributing 
agencies. Many orders submitted by school food authorities could not be 
fulfilled, since they would not constitute full truckload shipments, 
and would necessitate the submission of alternate selections. This 
would make the process of submitting food orders to FNS more time-
consuming and work-intensive. Several commenters also indicated that, 
in current practice, distributing agencies ``filter out'' some foods 
from the full list, using information received in advance from school 
food authorities with respect to those foods that are most desired and 
useful for their food service. Such information may be obtained through 
annual advisory councils, periodic surveys, or by other means. Seven 
commenters supported the proposal, indicating the importance of having 
a ``request-driven'' ordering system, in which all school food 
authorities have input, and of providing all schools with the 
opportunity to order and receive the donated foods that they need and 
want.
    We have amended the proposal in response to the comments received. 
In 7 CFR 250.58(a) of this final rule, we have required the 
distributing agency, before submitting orders to FNS, to ensure that 
all school food authorities are aware of the full list of available 
donated foods, and have the opportunity to provide input at least 
annually in determining the donated foods from the full list that are 
made available to them for ordering or selection. This requirement will 
ensure that all school food authorities have a chance to submit to the 
distributing agency their food preferences each year, with knowledge of 
the full list of foods available, while also permitting the 
distributing agency to ``filter out'' some foods from that list, based 
on the input received, in order to ensure efficient ordering and 
distribution of donated foods.
    We also proposed to require that the distributing agency ensure 
distribution of all donated foods selected by the school food authority 
that may be cost-effectively distributed to it, and that the 
distributing agency explore all available storage and distribution 
options to determine if such distribution may be performed cost-
effectively. In making such determination, the distributing agency may 
not prohibit the use of split shipments--i.e., donated food shipments 
with more than one stop-off or delivery location. We received five 
comments in support of the proposal that the distributing agency may 
not prohibit the use of split shipments. We received two comments 
indicating that the distributing agency may not be aware of, or have 
the capacity to explore, all available storage and distribution 
options, and to determine the most cost-effective option. The 
commenters recommended that the distributing agency be required to 
permit school food authorities to accept full truckload shipments, 
rather than use the State distribution system. Two other commenters 
indicated that the distributing agency should be required to permit 
recipient agencies to divert donated foods to processors for 
processing. Another commenter indicated that requiring the distributing 
agency to explore other storage and distribution options would 
necessitate costly logistics studies.
    The proposal to require the distributing agency to explore all 
available storage and distribution options was intended to help ensure 
that school food authorities receive the donated foods that they 
desired, and could most effectively use in their food service. A few 
States currently order limited varieties of donated foods for delivery 
to a distributing agency storage facility with limited storage space, 
rather than permit direct shipments to school food authorities or to 
processors. For example, one commenter stated that permitting school 
food authorities to order from the full list of donated foods would 
increase the amount of storage space that the State must rent, and that 
the additional cost would be passed on to school food authorities. 
However, we agree with commenters that requiring the exploration of all 
available storage and distribution options could be costly and time-
consuming for the distributing agency. Furthermore, the comments 
received reveal the issue of the cost-effectiveness of the food 
distribution system to be more complex than simply assuring that school 
food authorities have access to the donated foods that they desire for 
their food service. In light of these concerns, this final rule does 
not require that, in determining the cost-effectiveness of 
distribution, the distributing agency must explore all available 
storage and distribution options. However, we have retained in this 
final rule the proposed requirement, in 7 CFR 250.58(a), that the 
distributing agency must ensure distribution to school food authorities 
of all such selected donated foods that may be cost-effectively 
distributed to them, and may not prohibit the use of split shipments in 
determining such cost-effectiveness. Since we have consolidated the 
requirements for ordering and distribution of donated foods in 7 CFR 
250.58(a) of this final rule, we have revised the section heading to 
Ordering and distribution of donated foods. We will review current 
requirements in 7 CFR 250.14 for the distributing agency to evaluate 
its storage and distribution system to ensure cost-effective delivery 
of donated foods to recipient agencies, and may include any proposals 
for change in future rulemaking as appropriate.
    We proposed to remove the current regulatory provision that permits 
the distributing agency to utilize an ``offer and refusal'' system, 
which provides school food authorities with a more limited assurance of 
receiving the donated foods that they desire for their food service. 
Since we did not receive

[[Page 46178]]

any comments in response to this proposal, that provision is removed in 
this final rule.
    We proposed to describe the value of donated foods that the 
distributing agency must offer to school food authorities each school 
year, in accordance with section 6(c)(2) of the Richard B. Russell 
National School Lunch Act (42 U.S.C. 1755(c)(2)), and the value of 
donated foods that the distributing agency must offer to commodity 
schools each school year, in accordance with section 14(f) of the 
Richard B. Russell National School Lunch Act (42 U.S.C. 1762(f)). We 
also included the eligibility of the school food authority to receive 
bonus foods in addition to the Section 6 foods. We proposed to remove 
the current option provided to the distributing agency to use another 
method to determine the value of donated foods offered to school food 
authorities that would provide them with an equitable share of foods. 
Since we received no comments in response to these proposals, they are 
retained in 7 CFR 250.58(b) of this final rule as proposed.
    For the purpose of clarity, we proposed to describe some factors 
that might result in a school food authority receiving less than the 
commodity offer value of donated foods, or an ``adjusted assistance 
level'', and to describe circumstances in which a school food authority 
might receive more than the commodity offer value of donated foods. We 
received two comments indicating that, if a school food authority does 
not utilize its full commodity offer value, the distributing agency 
should be required to permit it to carry over the remaining value into 
the next school year. If the school food authority does not utilize 
such value in that year, then it must be offered in the following year 
to other school food authorities on a fair-share basis. Currently, the 
regulations do not restrict the distributing agency in allocating the 
remaining value of donated foods if a school food authority does not 
utilize its full commodity offer value. School food authorities are not 
``entitled'' to receive a specific amount of donated foods but must 
only be offered the commodity offer value. Accordingly, the 
distributing agency may choose to permit the school food authority to 
carry over the remaining donated food value into the next year, or may 
reallocate it in the current year to other school food authorities. 
Since the distributing agency is in the best position to determine how 
donated foods may be most efficiently utilized, we have concluded that 
the regulations should not restrict such decision-making. Therefore, we 
have retained the proposed list of factors relating to receipt of the 
commodity offer value in 7 CFR 250.58(c) and (d) in this final rule 
without change.
    We proposed to include the current options in 7 CFR 250.13(a)(5) 
that the distributing agency may use to value donated foods in 
crediting school food authorities for the commodity offer value (or 
adjusted assistance level), but to clarify the meaning of the USDA 
purchase price. Since we received no comments in response to the 
proposal, these options are included in 7 CFR 250.58(e) of this final 
rule as proposed.
4. Storage and Inventory Management of Donated Foods, 7 CFR 250.59
    In 7 CFR 250.59 of the proposed rule, we proposed to include the 
requirements for the storage and inventory management of donated foods, 
including the general requirements in current 7 CFR 250.14, and the 
specific requirements for distributing agencies and school food 
authorities. Since we received no comments in response to the reference 
to the general storage and inventory requirements, it is retained in 7 
CFR 250.59(a) of this final rule.
    In accordance with 7 CFR 250.14(b)(4), the distributing agency, or 
subdistributing agency, must store and inventory donated foods in a 
manner that permits donated foods to be distinguished from commercially 
purchased foods or other foods. However, a school food authority may 
utilize single inventory management--i.e., may commingle donated foods 
and commercially purchased foods in storage, and maintain a single 
inventory record of such commingled foods, unless the distributing 
agency imposes other storage and inventory requirements. We received 
one comment indicating that single inventory management should also be 
permitted for distributing agencies, since it would save money in 
contracting with commercial distributors. However, the distributing (or 
subdistributing) agency must remain accountable for donated foods in 
its storage facilities, or in those of its commercial distributors, and 
ensure their distribution to school food authorities. Such 
accountability cannot be achieved if donated foods are commingled with 
other foods at the distributing agency level. While retaining the 
storage and inventory requirements for the distributing agency, as 
proposed, we have amended 7 CFR 250.59(b) in this final rule to clarify 
that such storage must permit donated foods to be distinguished from 
commercially purchased foods or other foods (rather than actual 
physical separation at the storage facility) in order to ensure 
compliance with the requirements for the distribution and control of 
donated foods in this part. In a similar manner, we have retained the 
single inventory management option for the school food authority, as 
proposed, in 7 CFR 250.59(c) of this final rule. Such option may be 
exercised unless the distributing agency requires donated foods to be 
distinguished from commercially purchased foods in storage and 
inventoried separately at the school food authority level.
    We also proposed to clarify that a commercial storage facility 
under contract with the school food authority may store and inventory 
donated foods together with commercially purchased foods it is storing 
for the school food authority, unless prohibited in its contract. 
However, the commercial enterprise may not commingle foods it is 
storing for a school food authority with foods it is storing for a 
commercial enterprise or other entity, since this might jeopardize the 
use of the donated foods provided in the school food service. Since we 
received no comments in response to the proposal, 7 CFR 250.59(d) is 
retained in this final rule as proposed.
5. Use of Donated Foods in the School Food Service, 7 CFR 250.60
    In 7 CFR 250.60 of the proposed rule, we proposed to include the 
requirements for school food authorities in the use of donated foods in 
the school food service. We proposed to require that the school food 
authority use donated foods, as far as practical, in the school 
lunches, but that they may also use donated foods in other nonprofit 
school food service activities. Such activities are listed in 7 CFR 
250.60(a), and include, for example, school breakfasts, a la carte 
foods sold to children, and meals served to adults directly involved in 
the operation and administration of the food service. Revenues received 
from all such activities must accrue to the school food authority's 
nonprofit school food service account. We proposed to state that 
donated foods should not be used in food service activities that do not 
benefit primarily schoolchildren, such as banquets or catered events. 
However, we recognized that their use in such activities may not always 
be avoided--e.g., if a school food authority utilizes a single 
inventory management system. Hence, we proposed to require that the 
school food authority ensure reimbursement to the nonprofit school food 
service account for the value of the

[[Page 46179]]

donated foods used in such activities, in addition to its 
responsibility to ensure reimbursement for any other resources utilized 
from that account.
    The only comment received in response to the proposals indicated 
that school food authorities should be permitted to use donated foods 
only in those a la carte meals that may be claimed as reimbursable 
meals, in accordance with the nutritional requirements for such meals 
in 7 CFR part 210. However, the intent of the proposal was to ensure 
that schoolchildren receive the nutritional benefits provided by the 
donated foods, which they would receive whether those foods were 
included in the reimbursable meals or in the a la carte foods provided. 
Therefore, we have retained the requirements in 7 CFR 250.60(a) and (b) 
of this final rule as proposed, with one clarification. In addition to 
permitting donated foods to be used in meals served to adults directly 
involved in the operation and administration of the food service, this 
final rule permits their use in meals served to other school staff as 
well.
    We proposed to include in this section the option for the school 
food authority to use donated foods in a contract with a food service 
management company to provide meals for use in its food service, in 
accordance with the requirements in subpart D of 7 CFR part 250. We 
proposed to require the school food authority to assure that a food 
service management company ensures reimbursement to the nonprofit food 
service account for donated foods used in catered meals or other 
activities outside of the nonprofit school food service. We also 
proposed to state that a school food authority may use donated foods to 
provide a meal service to other school food authorities, in accordance 
with an agreement between the parties. Under such an agreement, a 
school food authority providing the food service may commingle its own 
donated foods and the donated foods of the other school food 
authorities that are parties to the agreement. Since we received no 
comments in response to the proposals, they are retained in 7 CFR 
250.60(c) and (d) of this final rule as proposed, except that the 
reference to ``catered meals'' in 7 CFR 250.60(c) is changed to ``meals 
for banquets or catered events'', in order to be consistent with the 
use of this term in 7 CFR 260.60(b).
6. Donated Foods in CACFP, 7 CFR 250.61
    In 7 CFR 250.61 of the proposed rule, we proposed to describe the 
provision of donated foods in CACFP, through the distributing agency, 
for use in serving lunches and suppers to eligible participants in 
child care and adult care institutions. We proposed to include, in 
streamlined form, the determination of the minimum value of donated 
foods provided for distribution to such institutions participating in 
CACFP, in accordance with section 6(c) of the Richard B. Russell 
National School Lunch Act (42 U.S.C. 1755(c)). We proposed to indicate 
that the number of reimbursable lunches and suppers may be adjusted 
during, or at the end of the year, in accordance with 7 CFR part 226. 
We also proposed to include the types of donated foods that the 
distributing agency may receive for distribution to child and adult 
care institutions. Since we did not receive any comments in response to 
the proposals, they are retained in 7 CFR 250.61(a) and (b) of this 
final rule as proposed, with only the following clarification. In 7 CFR 
250.61(b), we clarify that, for each school year, the distributing 
agency receives, at a minimum, the national per-meal value of donated 
food assistance, or cash in lieu of donated foods, for each lunch and 
supper served in the previous year.
    We proposed to include the responsibility of the State 
administering agency to determine whether child care and adult care 
institutions wish to receive donated foods or cash, and to work with 
the distributing agency (if a different agency) to ensure that donated 
foods are provided to those institutions that wish to receive them. We 
also proposed to include in this section the option for child care and 
adult care institutions to use donated foods in a contract with a food 
service management company to provide meals for use in its food 
service, in accordance with the requirements in subpart D of 7 CFR part 
250. Lastly, we proposed to indicate that the requirements in this 
subpart relating to the ordering, storage and inventory management, and 
use of donated foods in NSLP, also apply to CACFP, except that a child 
care or adult care institution that uses donated foods to prepare and 
provide meals to other such institutions is considered a food service 
management company. Since we received no comments in response to the 
proposals, they are retained in 7 CFR 250.61(c), (d), and (e) of this 
final rule.
7. Donated Foods in SFSP, 7 CFR 250.62
    In 7 CFR 250.62 of the proposed rule, we proposed to describe the 
provision of donated foods to service institutions participating in 
SFSP for use in serving meals to needy children primarily in the summer 
months, in their nonprofit food service programs. We proposed to 
describe the types and quantities of donated foods received by the 
distributing agency in SFSP. We proposed to indicate that the 
distributing agency provides donated foods to service institutions 
based on the number of meals served that are eligible for donated food 
support, in accordance with 7 CFR part 225. We also proposed to include 
in this section the option for service institutions to use donated 
foods in a contract with a food service management company to provide 
meals for use in its food service, in accordance with the requirements 
in subpart D of 7 CFR part 250. Lastly, we proposed to indicate that 
the requirements in this subpart relating to the ordering, storage and 
inventory management, and use of donated foods in NSLP, also apply to 
SFSP. Since we received no comments in response to the proposals, they 
are retained in 7 CFR 250.62 of this final rule.

G. Subpart F--Household Programs

    In the proposed rule, we proposed to include, in a new subpart F of 
7 CFR part 250, current requirements in 7 CFR 250.45, 250.46, 250.47, 
and 250.51, and redesignate them as 7 CFR 250.63 through 250.66, 
respectively, but otherwise without change. Since we received no 
comments in response to the proposed restructuring, it is included in 
this final rule as proposed.

H. Subpart G--Other Donated Food Outlets

    In the proposed rule, we proposed to add a new subpart G of 7 CFR 
part 250 to include the distribution of donated foods to other outlets, 
including charitable institutions, NSIP, and to organizations assisting 
in situations of disasters and distress. In this new subpart, we 
proposed to include requirements for the distribution of donated foods 
to charitable institutions and to summer camps together in 7 CFR 
250.67, which would replace current 7 CFR 250.40 and 250.41. We 
proposed to include requirements for the distribution of donated foods 
in NSIP in 7 CFR 250.68, which would replace the current 7 CFR 250.42. 
We proposed to include the current requirements in 7 CFR 250.43 and 
250.44 for the distribution of donated foods in disasters and 
situations of distress in redesignated 7 CFR 250.69 and 250.70, but 
otherwise without change. Since we received no comments in response to 
the proposed redesignation and restructuring, it is included in this 
final rule as proposed. The following sections describe the specific 
changes to the current requirements for charitable institutions and 
NSIP.

[[Page 46180]]

1. Charitable Institutions, 7 CFR 250.67
    In the proposed rule, we proposed to remove current requirements 
that a charitable institution's agreement with the distributing agency 
include information on the institution's days of operation and number 
of participants and meals served, data relating to the number of needy 
persons served, and a statement assuring that proper inventory controls 
will be maintained. We also proposed to remove current requirements 
that a summer camp's agreement with the distributing agency include 
data on the number of adults participating at camps relative to the 
number of children. We proposed to list some types of charitable 
institutions that may receive donated foods, if they meet the 
eligibility requirements in this section (including summer camps that 
do not participate in child nutrition programs), as well as some 
organizations that may not receive donated foods as charitable 
institutions. We proposed to streamline the qualifying criteria with 
respect to the rehabilitation programs of adult correctional 
institutions, which determine if such institutions may receive donated 
foods as charitable institutions. Since we received no comments in 
response to the proposals, they are retained in 7 CFR 250.67(a) and (b) 
of this final rule.
    We proposed to include the appropriate data for the distributing 
agency to use in determining if an institution or organization serves 
predominantly needy persons, which is a requirement to meet the revised 
definition of ``Charitable institution'' in this final rule. The 
distributing agency may use, for example, socioeconomic data on the 
area in which the organization is located, or on the clientele served 
by the organization. We received one comment indicating that the 
proposal seems cumbersome considering the amount of donated foods 
provided to charitable institutions; for example, summer camps are 
often located in remote economically poor areas, but some participants 
may be from financially secure families. However, such a summer camp 
would be eligible to receive donated foods under the proposed 
requirements. The wide array of data permitted to determine if an 
institution serves predominantly needy persons would be considerably 
less of a burden on a distributing agency than the currently required 
submission and review of data on meals and participants served, or, for 
summer camps, data on the number of adults compared to the number of 
children at the camp. Thus, the proposals are retained in 7 CFR 
250.67(c) of this final rule without change.
    We proposed to include the types of donated foods that charitable 
institutions are eligible to receive--i.e., surplus donated foods, as 
available, which may be purchased under section 4(a), 32, 416, or 709. 
We proposed to include the requirement that the distributing agency 
distribute donated foods to charitable institutions based on the 
amounts that they may effectively utilize without waste, and the total 
amounts available for distribution to such institutions. Since we 
received no comments in response to the proposals, they are retained in 
7 CFR 250.67(d) of this final rule.
    Lastly, we proposed to include the option that a charitable 
institution may use donated foods in a contract with a food service 
management company, which must ensure that all donated foods received 
for use by the charitable institution in a fiscal year are used to 
benefit the charitable institution's food service. We did not receive 
any comments in response to this proposal. However, in accordance with 
the amended requirement in7 CFR 250.50(a) of this final rule, we have 
amended 7 CFR 250.67(e) in this final rule to require that all such 
donated foods must be used in (instead of benefit) the charitable 
institution's food service.
2. Nutrition Services Incentive Program (NSIP), 7 CFR 250.68
    As described in the proposed rule, amendments to the Older 
Americans Act of 1965 (42 U.S.C. 3030a) in 2000 and 2003 made changes 
in the allocation of resources in, and the administration of, NSIP. In 
order to incorporate the legislative changes, we proposed to revise 
current requirements to indicate the role of the DHHS Administration on 
Aging (AoA) in administering the allocation of resources in NSIP, and 
the USDA role in purchasing and providing donated foods to those State 
Agencies on Aging requesting them as part of their NSIP grant. However, 
since the publication of the proposed rule, further amendments to the 
Older Americans Act of 1965 have been made. The Older Americans Act 
Amendments of 2006 (Pub. L. 109-365), enacted on October 17, 2006, 
removed the option for State Agencies on Aging to receive all or part 
of their NSIP grant as donated foods for fiscal year 2007. The 
enactment of the Older Americans Reauthorization Technical Corrections 
Act (Pub. L. 110-19), on April 23, 2007, restored this option for 
fiscal year 2008 and subsequent years. The latter legislation also 
requires a transfer of funds from AoA to FNS for the cost of purchasing 
donated foods and for expenses related to such purchases, rather than 
provide for reimbursement for such expenses. Lastly, the legislation 
authorizes FNS to carry over unused funds to make donated food 
purchases for the appropriate State Agencies on Aging in the subsequent 
fiscal year, rather than require the return of such funds to AoA for 
disbursal to State Agencies on Aging. Other procedures for the purchase 
and distribution of donated foods in NSIP were not changed by 
legislation, nor did we receive any comments in response to the 
clarification of such procedures in the proposed rule. Accordingly, 7 
CFR 250.68, as finalized in this rule, incorporates the 
nondiscretionary legislative changes, as follows:
    (1) 7 CFR 250.68(a) describes the transfer of funds from AoA to FNS 
for the purpose of purchasing donated foods and for related expenses; 
and
    (2) 7 CFR 250.68(e) describes the carryover of any unused funds 
that have been transferred, to make donated food purchases in the 
following fiscal year, rather than the return of such funds to AoA.

I. Implementation of New Requirements

    We received ten comments indicating that FNS should provide 
adequate time for implementation of new requirements, for updating of 
program information, and for amendment of agreements between 
distributing and recipient agencies. We received two comments 
indicating that extensive training will be needed to ensure effective 
implementation of the requirements. We agree that the requirements 
imposed by this final rule may necessitate some changes in procedures, 
including those related to recordkeeping and reviews, for distributing 
and recipient agencies, as well as amendments to agreements. Therefore, 
we have made this final rule effective 90 days after its publication in 
the Federal Register, rather than the more common 30- or 60-day period, 
to provide additional time to implement new procedures and agreement 
provisions. We are also committed to providing any necessary training 
to ensure effective implementation of the new requirements, and will 
work closely with distributing agencies, FNS Regional Offices, and with 
other parties, as appropriate, to ensure that such training is 
provided.
    We received seven comments questioning how the proposed changes in 
food service management company contract requirements would affect 
existing contracts and contract

[[Page 46181]]

extensions. In a final rule published in the Federal Register on 
October 31, 2007 at 72 FR 61479, an implementation schedule was 
established to balance the need for prompt implementation of new food 
service management company contract requirements established in that 
rule with consideration of the need to honor existing contracts and 
procurements. The schedule was established in accordance with the one-
year duration of food service management company contracts, with an 
option for up to four additional one-year renewals. In the interest of 
consistency, we will use the same basic implementation schedule for the 
new contract requirements established in this final rule, as follows:
    (1) The requirements will be applicable for all new procurement 
solicitations initiated on or after the effective date of this final 
rule.
    (2) For all procurement solicitations for contracts issued prior to 
the effective date of this final rule:
    a. Recipient agencies and State agencies with contracts with a term 
of 12 months or fewer remaining are exempt from applying the provisions 
of this rulemaking to those contracts; and
    b. With State administering agency approval, recipient agencies 
with contracts that have annual renewal provisions may delay 
implementation until expiration of the current contract plus one 12-
month renewal period.
    As in the final rule referenced in the previous paragraph, the 
State administering agency may choose to establish shorter time frames 
for implementation, or may require some recipient agencies to implement 
the requirements sooner than others. However, in no case may a 
recipient agency be permitted to delay implementation beyond the 
timeframes specified above.

III. Procedural Matters

A. Executive Order 12866

    This rule has been determined to be significant and was reviewed by 
the Office of Management and Budget (OMB) in conformance with Executive 
Order 12866.

B. Regulatory Impact Analysis

1. Need for Action
    This action is needed to respond to an OIG audit, which found that, 
in contracting with food service management companies, school food 
authorities did not always receive the full value of the donated foods 
provided for use in the NSLP. It also incorporates amendments to the 
Older Americans Act of 1965 (42 U.S.C. 3030a) that affect the NSIP, and 
revises and clarifies other requirements to ensure the efficient and 
effective management and use of donated foods.
2. Benefits
    The regulatory changes help to ensure that recipient agencies 
receive the full benefit and value of donated foods provided to food 
service management companies for use in the recipient agencies' meals 
programs. The changes also remove reporting requirements used to 
determine the amount of surplus donated foods that charitable 
institutions may receive for service to needy persons. FNS quantified 
these benefits using audit results reported by the OIG. If the size and 
nature of the accounting problems uncovered by the OIG are indicative 
of problems with FSMC contracts nationwide, then an effective rule 
could generate benefits as high as $36 million over five years. 
However, given that the OIG did not choose a nationally representative 
sample for audit, this estimate is subject to considerable uncertainty.
3. Costs
    This action is not expected to significantly increase costs of 
State and local agencies, or their commercial contractors, in using 
donated foods. FNS estimates five-year costs of roughly $243,000. 
Despite uncertainty with the estimate of potential benefits, the rule 
is undoubtedly cost-effective.

C. Regulatory Flexibility Act

    This rule has been reviewed with regard to the requirements of the 
Regulatory Flexibility Act (5 U.S.C. 601-612). The Under Secretary of 
Food, Nutrition, and Consumer Services, Nancy Montanez Johner, has 
certified that this action will not have a significant economic impact 
on a substantial number of small entities. Although the rule requires 
specific procedures for food service management companies, State 
distributing agencies, and recipient agencies to follow in using 
donated foods, USDA does not expect them to have a significant impact 
on such entities.

D. Unfunded Mandates Reform Act

    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, 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) that impose costs on 
State, local, or 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.

E. Executive Order 12372

    The donation of foods in USDA food distribution and child nutrition 
programs, and to charitable institutions and elderly nutrition projects 
in NSIP, is included in the Catalog of Federal Domestic Assistance 
under 10.550. For the reasons set forth in the final rule in 7 CFR part 
3015, subpart V and related Notice published at 48 FR 29114, June 24, 
1983, the donation of foods in such programs is included in the scope 
of Executive Order 12372, which requires intergovernmental consultation 
with State and local officials.

F. Federalism Summary Impact Statement

    In accordance with Executive Order 13132, FNS has considered the 
impact of the regulatory actions on State and local governments. The 
following paragraphs describe FNS's considerations in terms of the 
three categories called for under section (6)(b)(2)(B) of Executive 
Order 13132.
1. Prior Consultation With State Officials
    The programs affected by the regulatory proposals in this rule are 
all State-administered, Federally-funded programs. FNS headquarters and 
regional offices have formal and informal discussions with State and 
local officials on an ongoing basis regarding program issues relating 
to the distribution of donated foods. FNS meets annually with the 
American Commodity Distribution Association, a national group with 
State, local, and industry representation, and the School Nutrition 
Association, to discuss issues relating to donated foods.

[[Page 46182]]

2. Nature of Concerns and the Need to Issue This Rule
    The rule addresses concerns identified in an OIG audit with respect 
to the benefit and value of donated foods received by recipient 
agencies in their contracts with food service management companies. 
While the regulatory requirements imposed by this rule may increase the 
workload of State and local agencies to a certain extent, the 
provisions will help to ensure that recipient agencies receive the 
benefit and value of the donated foods provided for their use.
3. Extent to Which We Meet those Concerns
    FNS has considered the impact of this final rule on State and local 
agencies. FNS has established compliance timeframes that give due 
consideration to the need for changes in contract requirements and in 
the procedures necessary to assure compliance with such requirements.

G. Executive Order 12988

    This rule has been reviewed under Executive Order 12988, Civil 
Justice Reform. This rule is intended to have preemptive effect with 
respect to any State or local laws, regulations, or policies which 
conflict with its provisions or which would otherwise impede its full 
implementation. This rule is not intended to have retroactive effect. 
Prior to any judicial challenge to the provisions of this rule or the 
application of its provisions, all applicable administrative procedures 
must be exhausted.

H. Civil Rights Impact Analysis

    FNS has reviewed this rule in accordance with the Department 
Regulation 4300-4, ``Civil Rights Impact Analysis'', to identify and 
address any major civil rights impacts the rule might have on 
minorities, women, and persons with disabilities. After a careful 
review of the rule's intent and provisions, FNS has determined that 
this rule will not in any way limit or reduce the ability of 
participants to receive the benefits of donated foods in food 
distribution programs on the basis of an individual's or group's race, 
color, national origin, sex, age, or disability. FNS found no factors 
that would negatively and disproportionately affect any group of 
individuals.

I. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. Chap. 35; see 5 CFR 
part 1320) requires that the Office of Management and Budget (OMB) 
approve all collections of information by a Federal agency before they 
can be implemented. In the publication of the proposed rule on June 8, 
2006, FNS solicited comments on the burden estimate; the need for the 
information; its practical utility; ways to enhance its quality, 
utility and clarity; and ways to minimize the burden on respondents, 
including the use of automated collection techniques or other forms of 
information technology. Although FNS sought public comments specific to 
the estimated reporting and recordkeeping burden detailed in the 
proposed rule, no comments were received and the information collection 
burden associated with the proposed rule, OMB No. 0584-0293, was 
approved on August 8, 2006. However, since the publication of the 
proposed rule, FNS has found that the total estimated annual burden for 
OMB No. 0584-0293 should reflect a decrease to 1,070,452 hours, rather 
than the decrease to 1,085,814 hours included in the proposed rule. The 
discrepancy is a result of mathematical errors in calculating the 
burden hours. Additionally, in the most recent survey of school food 
authorities (SFAs) conducted in school year 2003-04, it was estimated 
that 13.4 percent of SFAs had contracts with FSMCs. Hence, for school 
year 2005-06, it is estimated that 2,783 of the 20,770 SFAs 
participating in NSLP had such contracts, rather than the 1,765 
included in the proposed rule. This adjustment results in an increase 
of 1,272 burden hours for this particular activity, making the total 
estimated annual burden for OMB No. 0584-0293 1,071,724 hours, which is 
still a decrease from the proposed rule. The resulting changes in the 
reporting and recordkeeping burdens associated with food service 
management contracts, from both current levels, and those included in 
the proposed rule, are shown in the following table.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                              Number
                  Section                                                    Number of     responses per   Total annual      Hours per      Total hours
                                                                            respondents     respondent       responses       response
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        Reporting
--------------------------------------------------------------------------------------------------------------------------------------------------------
250.12(d).................................  Current.....................             300            0.25              75            0.33           24.75
250.54....................................  Proposed....................           1,765               1           1,765               1           1,765
250.53....................................  Final.......................           2,783               1           2,783               1           2,783
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                      Recordkeeping
--------------------------------------------------------------------------------------------------------------------------------------------------------
250.12(d).................................  Current.....................             300  ..............  ..............            0.08              24
250.54/250.55.............................  Proposed....................           1,765  ..............  ..............            0.25             442
250.53/250.54.............................  Final.......................           2,783  ..............  ..............            0.25             696
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Estimated total number of respondents: 18,552.
    Estimated total annual responses: 1,160,746.
    Estimated annual burden: 1,071,724.
    FNS will request an adjustment in the total annual burden 
associated with OMB No. 0584-0293 to reflect the changes indicated 
above. Additionally, these requirements will not become effective until 
approved by OMB. When these information collection requirements have 
been approved, FNS will publish separate action in the Federal Register 
announcing OMB's approval.

J. E-Government Act Compliance

    FNS is committed to compliance with the E-Government Act, 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.

List of Subjects in 7 CFR Part 250

    Administrative practice and procedure, Food assistance programs, 
Grant programs, Social programs, Indians, Reporting and recordkeeping 
requirements, Surplus agricultural commodities.


0
Accordingly, 7 CFR part 250 is amended as follows:

[[Page 46183]]

PART 250--DONATION OF FOODS FOR USE IN THE UNITED STATES, ITS 
TERRITORIES AND POSSESSIONS AND AREAS UNDER ITS JURISDICTION

0
1. The authority citation for part 250 continues to read as follows:

    Authority: 5 U.S.C. 301; 7 U.S.C. 612c, 612c note, 1431, 1431b, 
1431e, 1431 note, 1446a-1, 1859, 2014, 2025; 15 U.S.C. 713c; 22 
U.S.C. 1922; 42 U.S.C. 1751, 1755, 1758, 1760, 1761, 1762a, 1766, 
3030a, 5179, 5180.


0
2. In Sec.  250.3:
0
a. Remove definitions of Nonprofit summer camps for children, 
Nonresidential child or adult care institution, Nutrition program for 
the elderly, Offer-and-acceptance system, Program, and Students in home 
economics.
0
b. Revise definitions of Charitable institutions, Child nutrition 
program, Commodity school, End product, Food service management 
company, Processing, Processor, Recipient agencies, Recipients, Section 
311, Service institutions, and State Agency on Aging.
0
c. Add definitions, in the appropriate alphabetical order, of Adult 
care institution, AoA, Bonus foods, CACFP, Child care institution, 
Commodity offer value, DHHS, Elderly nutrition project, Entitlement, 
Entitlement foods, National per-meal value, Nonprofit organization, 
Nonprofit school food service account, NSIP, NSLP, Reimbursable meals, 
SBP, 7 CFR part 3016, 7 CFR part 3019, SFSP, Single inventory 
management, and Summer camp.
    The revisions and additions read as follows:


Sec.  250.3  Definitions.

    Adult care institution means a nonresidential adult day care center 
that participates independently in CACFP, or that participates as a 
sponsoring organization, in accordance with an agreement with the 
distributing agency.
    AoA means the Administration on Aging, which is the DHHS agency 
that administers NSIP.
    Bonus foods means Section 32, Section 416, and Section 709 donated 
foods, as defined in this section, which are purchased under surplus 
removal or price support authority, and provided to distributing 
agencies in addition to legislatively authorized levels of assistance.
    CACFP means the Child and Adult Care Food Program, 7 CFR part 226.
    Charitable institutions means public institutions or nonprofit 
organizations, as defined in this section, that provide a meal service 
on a regular basis to predominantly needy persons in the same place 
without marked changes. Charitable institutions include, but are not 
limited to, emergency shelters, soup kitchens, hospitals, retirement 
homes, elderly nutrition projects; schools, summer camps, service 
institutions, and child and adult care institutions that do not 
participate in a child nutrition program, or as a commodity school, as 
they are defined in this section; and adult correctional institutions 
that conduct rehabilitation programs for a majority of inmates.
    Child care institution means a nonresidential child care center 
that participates independently in CACFP, or that participates as a 
sponsoring organization, in accordance with an agreement with the 
distributing agency.
    Child nutrition program means NSLP, CACFP, SFSP, or SBP.
* * * * *
    Commodity offer value means the minimum value of donated foods that 
the distributing agency must offer to a school food authority 
participating in NSLP each school year. The commodity offer value is 
equal to the national per-meal value of donated food assistance 
multiplied by the number of reimbursable lunches served by the school 
food authority in the previous school year.
    Commodity school means a school that operates a nonprofit food 
service, in accordance with 7 CFR part 210, but that receives 
additional donated food assistance rather than the cash assistance 
available to it under Section 4 of the Richard B. Russell National 
School Lunch Act (42 U.S.C. 1753).
* * * * *
    DHHS means the United States Department of Health and Human 
Services.
* * * * *
    Elderly nutrition project means a recipient agency selected by the 
State or Area Agency on Aging to receive donated foods in NSIP, for use 
in serving meals to elderly persons.
    End product means a food product that contains processed donated 
foods.
    Entitlement means the value of donated foods a distributing agency 
is authorized to receive in a specific program, in accordance with 
program legislation.
    Entitlement foods means donated foods that USDA purchases and 
provides in accordance with levels of assistance mandated by program 
legislation.
* * * * *
    Food service management company means a commercial enterprise, 
nonprofit organization, or public institution that is, or may be, 
contracted with by a recipient agency to manage any aspect of a 
recipient agency's food service, in accordance with 7 CFR parts 210, 
225, or 226, or, with respect to charitable institutions, in accordance 
with this part. To the extent that such management includes the use of 
donated foods, the food service management company is subject to the 
applicable requirements in this part. However, a school food authority 
participating in NSLP that performs such functions is not considered a 
food service management company. Also, a commercial enterprise that 
uses donated foods to prepare meals at a commercial facility, or to 
perform other activities that meet the definition of processing in this 
section, is considered a processor in this part, and is subject to the 
requirements in subpart C of this part.
* * * * *
    National per-meal value means the value of donated foods provided 
for each reimbursable lunch served in NSLP in the previous school year, 
and for each reimbursable lunch and supper served in CACFP in the 
previous school year, as established in Section 6(c) of the Richard B. 
Russell National School Lunch Act.
* * * * *
    Nonprofit organization means a private organization with tax-exempt 
status under the Internal Revenue Code. Nonprofit organizations 
operated exclusively for religious purposes are automatically tax-
exempt under the Internal Revenue Code.
* * * * *
    Nonprofit school food service account means the restricted account 
in which all of the revenue from all food service operations conducted 
for the school food authority principally for the benefit of school 
children is retained and used only for the operation or improvement of 
the nonprofit school food service.
    NSIP means the Nutrition Services Incentive Program, which is 
administered by the United States Department of Health and Human 
Services, in accordance with Section 311 of the Older Americans Act of 
1965 (42 U.S.C. 3030a).
    NSLP means the National School Lunch Program, 7 CFR part 210.
* * * * *
    Processing means a commercial enterprise's use of a commercial 
facility to:
    (a) Convert donated foods into an end product;
    (b) Repackage donated foods; or
    (c) Use donated foods in the preparation of meals.

[[Page 46184]]

    Processor means a commercial enterprise that processes donated 
foods at a commercial facility.
    Recipient agencies means agencies or organizations that receive 
donated foods, in accordance with agreements signed with a distributing 
agency, or with another recipient agency.
    Recipients means persons receiving donated foods, or meals 
containing donated foods, provided by recipient agencies.
* * * * *
    Reimbursable meals means meals that meet the nutritional standards 
established in Federal regulations pertaining to NSLP, SFSP, and CACFP, 
and that are served to eligible recipients.
    SBP means the School Breakfast Program, 7 CFR part 220.
* * * * *
    Section 311 means Section 311 of the Older Americans Act of 1965 
(42 U.S.C. 3030a), which authorizes State Agencies on Aging under Title 
III of that Act, and any Title VI grantee (Indian Tribal Organization) 
under that Act, to receive all, or part, of their NSIP grant as donated 
foods.
* * * * *
    Service institutions means recipient agencies that participate in 
SFSP.
    7 CFR part 3016 means the Department's regulations establishing 
uniform administrative requirements for Federal grants and cooperative 
agreements and subawards to State, local, and Indian tribal 
governments.
    7 CFR part 3019 means the Department's regulations establishing 
uniform administrative requirements for Federal grants and cooperative 
agreements awarded to institutions of higher education, hospitals, and 
other nonprofit organizations.
    SFSP means the Summer Food Service Program, 7 CFR part 225.
* * * * *
    Single inventory management means the commingling in storage of 
donated foods and foods from other sources, and the maintenance of a 
single inventory record of such commingled foods.
* * * * *
    State Agency on Aging means:
    (a) The State agency that has been designated by the Governor and 
approved by DHHS to administer the Nutrition Services Incentive 
Program; or
    (b) The Indian Tribal Organization that has been approved by DHHS 
to administer the Nutrition Services Incentive Program.
* * * * *
    Summer camp means a nonprofit or public camp for children aged 18 
and under.
* * * * *

0
3. In Sec.  250.12:
0
a. Revise the section heading to read, as set forth below.
0
b. Remove the last sentence in paragraph (a).
0
c. Remove paragraphs (d), (e), and (f).
    The revision reads as follows:


Sec.  250.12   Agreements.

* * * * *

0
4. In Sec.  250.19:
0
a. Revise the introductory text of paragraph (b)(1).
0
b. Remove paragraphs (b)(1)(i) and (b)(1)(v), and redesignate 
paragraphs (b)(1)(ii), (b)(1)(iii), and (b)(1)(iv), as paragraphs 
(b)(1)(i), (b)(1)(ii), and (b)(1)(iii), respectively.
0
c. Revise newly redesignated paragraph (b)(1)(i).
0
d. Remove paragraph (d).
    The revision reads as follows:


Sec.  250.19  Reviews.

* * * * *
    (b) * * * (1) As part of its review system, each distributing 
agency must establish procedures to ensure compliance with the 
requirements of this part, and with other Federal regulations, as 
applicable. Such procedures must include, for example, requirements 
relating to eligibility of recipient agencies and recipients, ordering, 
storage, and inventory of donated foods, reporting and recordkeeping, 
and civil rights, as they apply to specific programs. They must also 
include:
    (i) An on-site review of all charitable institutions, or the food 
service management companies under contract with them, at a minimum, 
whenever the distributing agency identifies actual or probable 
deficiencies in the use of donated foods by such institutions, or by 
their contractors, through audits, investigations, complaints, or any 
other information.
* * * * *

0
5. In Sec.  250.24, revise paragraphs (d)(8), (d)(9), and (d)(10), to 
read as follows:


Sec.  250.24   Distributing agency performance standards.

* * * * *
    (d) * * *
    (8) Providing recipient agencies with ordering options and 
commodity values, and considering the specific needs and capabilities 
of such agencies in ordering donated foods;
    (9) Offering school food authorities participating in NSLP, or as 
commodity schools, the commodity offer value of donated food 
assistance, at a minimum, and determining an adjusted assistance level 
in consultation with school food authorities, as appropriate, in 
accordance with Sec.  250.58; and
    (10) Ensuring that all school food authorities in NSLP are aware of 
the full list of available donated foods, have the opportunity to 
provide input at least annually in determining the donated foods from 
the full list that they may select for their food service, and receive 
all such selected donated foods that may be cost-effectively 
distributed to them.
* * * * *

0
6. Add the heading for new subpart F to read as follows:

Subpart F--Household Programs

0
7. Redesignate Sec. Sec.  250.45, 250.46, 250.47, and 250.51, as 
Sec. Sec.  250.63, 250.64, 250.65, and 250.66, respectively, and 
transfer them from subpart D to new subpart F.

0
8. Add a new subpart G, consisting of Sec. Sec.  250.67 and 250.68, to 
read as follows:

Subpart G--Other Donated Food Outlets


Sec.  250.67   Charitable institutions.

    (a) Distribution to charitable institutions. The Department 
provides donated foods to distributing agencies for distribution to 
charitable institutions, as defined in this part. A charitable 
institution must have a signed agreement with the distributing agency 
in order to receive donated foods, in accordance with Sec.  250.12(b). 
However, the following organizations may not receive donated foods as 
charitable institutions:
    (1) Schools, summer camps, service institutions, and child and 
adult care institutions that participate in child nutrition programs or 
as commodity schools; and
    (2) Adult correctional institutions that do not conduct 
rehabilitation programs for a majority of inmates.
    (b) Types of charitable institutions. Some types of charitable 
institutions that may receive donated foods, if they meet the 
requirements of this section, include:
    (1) Hospitals or retirement homes;
    (2) Emergency shelters, soup kitchens, or emergency kitchens;
    (3) Elderly nutrition projects or adult day care centers;
    (4) Schools, summer camps, service institutions, and child care 
institutions that do not participate in child nutrition programs; and
    (5) Adult correctional institutions that conduct rehabilitation 
programs for a majority of inmates.
    (c) Determining service to predominantly needy persons. To 
determine if a charitable institution

[[Page 46185]]

serves predominantly needy persons, the distributing agency must use:
    (1) Socioeconomic data of the area in which the organization is 
located, or of the clientele served by the organization;
    (2) Data from other public or private social service agencies, or 
from State advisory boards, such as those established in accordance 
with 7 CFR 251.4(h)(4); or
    (3) Other similar data.
    (d) Types and quantities of donated foods distributed. A charitable 
institution may receive donated foods under Section 4(a), Section 32, 
Section 416, or Section 709, as available. The distributing agency must 
distribute donated foods to charitable institutions based on the 
quantities that each may effectively utilize without waste, and the 
total quantities available for distribution to such institutions.
    (e) Contracts with food service management companies. A charitable 
institution may use donated foods in a contract with a food service 
management company. The contract must ensure that all donated foods 
received for use by the charitable institution in a fiscal year are 
used in the charitable institution's food service. However, the 
charitable institution is not subject to the other requirements in 
subpart D of this part relating to the use of donated foods under such 
contracts.


Sec.  250.68   Nutrition Services Incentive Program (NSIP).

    (a) Distribution of donated foods in NSIP. The Department provides 
donated foods in NSIP to State Agencies on Aging and their selected 
elderly nutrition projects, for use in providing meals to elderly 
persons. NSIP is administered at the Federal level by DHHS' 
Administration on Aging (AoA), which provides an NSIP grant each year 
to State Agencies on Aging. The State agencies may choose to receive 
all, or part, of the grant as donated foods, on behalf of its elderly 
nutrition projects. The Department is responsible for the purchase of 
the donated foods and their delivery to State Agencies on Aging. AoA is 
responsible for transferring funds to the Department for the cost of 
donated food purchases and for expenses related to such purchases.
    (b) Types and quantities of donated foods distributed. Each State 
Agency on Aging, and its elderly nutrition projects, may receive any 
types of donated foods available in food distribution or child 
nutrition programs, to the extent that such foods may be distributed 
cost-effectively. Each State Agency on Aging may receive donated foods 
with a value equal to its NSIP grant. Each State Agency on Aging and 
elderly nutrition projects may also receive donated foods under Section 
32, Section 416, and Section 709, as available, and under Section 14 
(42 U.S.C. 1762(a)).
    (c) Role of distributing agency. The Department delivers NSIP 
donated foods to distributing agencies, which distribute them to 
elderly nutrition projects selected by each State or Area Agency on 
Aging. The distributing agency may only distribute donated foods to 
elderly nutrition projects with which they have signed agreements. The 
agreements must contain provisions that describe the roles of each 
party in ensuring that the desired donated foods are ordered, stored, 
and distributed in an effective manner.
    (d) Donated food values used in crediting a State Agency on Aging's 
NSIP grant. FNS uses the average price (cost per pound) for USDA 
purchases of a donated food made in a contract period in crediting a 
State Agency on Aging's NSIP grant.
    (e) Coordination between FNS and AoA. FNS and AoA coordinate their 
respective roles in NSIP through the execution of annual agreements. 
The agreement ensures that AoA transfers funds to FNS sufficient to 
purchase the donated foods requested by State Agencies on Aging, and to 
meet expenses related to such purchases. The agreement also authorizes 
FNS to carry over any such funds that are not used in the current 
fiscal year to make purchases of donated foods for the appropriate 
State Agencies on Aging in the following fiscal year.


Sec. Sec.  250.43 and 250.44   [Redesignated as Sec. Sec.  250.69 and 
250.70]

0
9. Redesignate Sec. Sec.  250.43 and 250.44 as Sec. Sec.  250.69 and 
250.70, respectively, and transfer them from subpart D to new subpart 
G.

0
10. Revise subparts D and E to read as follows:
Subpart D--Donated Foods in Contracts with Food Service Management 
Companies
250.50 Contract requirements and procurement.
250.51 Crediting for, and use of, donated foods.
250.52 Storage and inventory management of donated foods.
250.53 Contract provisions.
250.54 Recordkeeping and reviews.
Subpart E--National School Lunch Program (NSLP) and Other Child 
Nutrition Programs
250.56 Provision of donated foods in NSLP.
250.57 Commodity schools.
250.58 Ordering donated foods and their provision to school food 
authorities.
250.59 Storage and inventory management of donated foods.
250.60 Use of donated foods in the school food service.
250.61 Child and Adult Care Food Program (CACFP).
250.62 Summer Food Service Program (SFSP).

Subpart D--Donated Foods in Contracts With Food Service Management 
Companies


Sec.  250.50   Contract requirements and procurement.

    (a) Contract requirements. Prior to donated foods being made 
available to a food service management company, the recipient agency 
must enter into a contract with the food service management company. 
The contract must ensure that all donated foods received for use by the 
recipient agency for a period specified as either the school year or 
fiscal year are used in the recipient agency's food service. Contracts 
between recipient agencies in child nutrition programs and food service 
management companies must also ensure compliance with other 
requirements in this subpart relating to donated foods, as well as 
other Federal requirements in 7 CFR parts 210, 220, 225, or 226, as 
applicable. Contracts between other recipient agencies--i.e., 
charitable institutions and recipient agencies utilizing TEFAP foods--
and food service management companies are not subject to the other 
requirements in this subpart.
    (b) Types of contracts. Recipient agencies may enter into a fixed-
price or a cost-reimbursable contract with a food service management 
company, except that recipient agencies in CACFP are prohibited from 
entering into cost-reimbursable contracts, in accordance with 7 CFR 
part 226. Under a fixed-price contract, the recipient agency pays a 
fixed cost per meal provided or a fixed cost for a certain time period. 
Under a cost-reimbursable contract, the food service management company 
charges the recipient agency for food service operating costs, and also 
charges fixed fees for management or services.
    (c) Procurement requirements. The recipient agency must meet 
Departmental procurement requirements in 7 CFR parts 3016 or 3019, as 
applicable, in obtaining the services of a food service management 
company, as well as applicable requirements in 7 CFR parts 210, 220, 
225, or 226. The recipient agency must ensure that procurement 
documents, as well as contract provisions, include any donated food 
activities that a food service management company is to perform, such 
as those activities listed in paragraph (d) of this section. The 
procurement and contract must also specify the method used to determine 
the donated food values to be used in

[[Page 46186]]

crediting, or the actual values assigned, in accordance with Sec.  
250.51. The method used to determine the donated food values may not be 
established through a post-award negotiation, or by any other method 
that may directly or indirectly alter the terms and conditions of the 
procurement or contract.
    (d) Activities relating to donated foods. A food service management 
company may perform specific activities relating to donated foods, such 
as those listed in this paragraph (d), in accordance with procurement 
documents and its contract with the recipient agency. Such activities 
may also include the procurement of processed end products on behalf of 
the recipient agency. Such procurement must ensure compliance with the 
requirements in subpart C of this part and with the provisions of the 
distributing or recipient agency's processing agreements, and must 
ensure crediting of the recipient agency for the value of donated foods 
contained in such end products at the processing agreement value. 
Although the food service management company may procure processed end 
products on behalf of the recipient agency, it may not itself enter 
into the processing agreement with the processor required in subpart C 
of this part. Other donated food activities that the food service 
management company may perform include:
    (1) Preparing and serving meals;
    (2) Ordering or selection of donated foods, in coordination with 
the recipient agency, and in accordance with Sec.  250.58(a);
    (3) Storage and inventory management of donated foods, in 
accordance with Sec.  250.52; and
    (4) Payment of processing fees or submittal of refund requests to a 
processor on behalf of the recipient agency, or remittance of refunds 
for the value of donated foods in processed end products to the 
recipient agency, in accordance with the requirements in subpart C of 
this part.


Sec.  250.51  Crediting for, and use of, donated foods.

    (a) Crediting for donated foods. In both fixed-price and cost-
reimbursable contracts, the food service management company must credit 
the recipient agency for the value of all donated foods received for 
use in the recipient agency's meal service in a school year or fiscal 
year (including both entitlement and bonus foods). Such requirement 
includes crediting for the value of donated foods contained in 
processed end products if the food service management company's 
contract requires it to:
    (1) Procure processed end products on behalf of the recipient 
agency; or
    (2) Act as an intermediary in passing the donated food value in 
processed end products on to the recipient agency.
    (b) Method and frequency of crediting. The recipient agency may 
permit crediting for the value of donated foods through invoice 
reductions, refunds, discounts, or other means. However, all forms of 
crediting must provide clear documentation of the value received from 
the donated foods--e.g., by separate line item entries on invoices. If 
provided for in a fixed-price contract, the recipient agency may permit 
a food service management company to pre-credit for donated foods. In 
pre-crediting, a deduction for the value of donated foods is included 
in the established fixed price per meal. However, the recipient agency 
must ensure that the food service management company provides an 
additional credit for any donated foods not accounted for in the fixed 
price per meal--e.g., for donated foods that are not made available 
until later in the year. In cost-reimbursable contracts, crediting may 
be performed by disclosure; i.e., the food service management company 
credits the recipient agency for the value of donated foods by 
disclosing, in its billing for food costs submitted to the recipient 
agency, the savings resulting from the receipt of donated foods for the 
billing period. In all cases, the recipient agency must require 
crediting to be performed not less frequently than annually, and must 
ensure that the specified method of valuation of donated foods permits 
crediting to be achieved in the required time period. A school food 
authority must also ensure that the method, and timing, of crediting 
does not cause its cash resources to exceed the limits established in 7 
CFR 210.9(b)(2).
    (c) Donated food values required in crediting. The recipient agency 
must ensure that, in crediting it for the value of donated foods, the 
food service management company uses the donated food values determined 
by the distributing agency, in accordance with Sec.  250.58(e), or, if 
approved by the distributing agency, donated food values determined by 
an alternate means of the recipient agency's choosing. For example, the 
recipient agency may, with the approval of the distributing agency, 
specify that the value will be the average price per pound for a food, 
or for a group or category of foods (e.g., all frozen foods or cereal 
products), as listed in market journals over a specified period of 
time. However, the method of determining the donated food values to be 
used in crediting must be included in procurement documents and in the 
contract, and must result in the determination of actual values; e.g., 
the average USDA purchase price for the period of the contract with the 
food vendor, or the average price per pound listed in market journals 
over a specified period of time. Negotiation of such values is not 
permitted. Additionally, the method of valuation must ensure that 
crediting may be achieved in accordance with paragraph (b) of this 
section, and at the specific frequency established in procurement 
documents and in the contract.
    (d) Use of donated foods. The food service management company must 
use all donated ground beef, donated ground pork, and all processed end 
products, in the recipient agency's food service, and must use all 
other donated foods, or commercially purchased foods of the same 
generic identity, of U.S. origin, and of equal or better quality than 
the donated foods, in the recipient agency's food service (unless the 
contract specifically stipulates that the donated foods, and not such 
commercial substitutes, be used).


Sec.  250.52  Storage and inventory management of donated foods.

    (a) General requirements. The food service management company must 
meet the general requirements in Sec.  250.14(b) for the storage and 
inventory management of donated foods.
    (b) Storage and inventory with commercially purchased foods. The 
food service management company may store and inventory donated foods 
together with foods it has purchased commercially for the school food 
authority's use (unless specifically prohibited in the contract). It 
may store and inventory such foods together with other commercially 
purchased foods only to the extent that such a system ensures 
compliance with the requirements for the use of donated foods in Sec.  
250.51(d)--i.e., use all donated ground beef and ground pork, and all 
end products in the food service, and use all other donated foods or 
commercially purchased foods of the same generic identity, of U.S. 
origin, and of equal or better quality than the donated foods, in the 
food service. Additionally, under cost-reimbursable contracts, the food 
service management company must ensure that its system of inventory 
management does not result in the recipient agency being charged for 
donated foods.
    (c) Disposition of donated foods and credit reconciliation upon 
termination

[[Page 46187]]

of the contract. When a contract terminates, and is not extended or 
renewed, the food service management company must return all unused 
donated ground beef, donated ground pork, and processed end products, 
and must, at the recipient agency's discretion, return other unused 
donated foods. The recipient agency must ensure that the food service 
management company has credited it for the value of all donated foods 
received for use in the recipient agency's meal service in a school 
year or fiscal year, as applicable.


Sec.  250.53  Contract provisions.

    (a) Required contract provisions in fixed-price contracts. The 
following provisions relating to the use of donated foods must be 
included, as applicable, in a recipient agency's fixed-price contract 
with a food service management company. Such provisions must also be 
included in procurement documents. The required provisions are:
    (1) A statement that the food service management company must 
credit the recipient agency for the value of all donated foods received 
for use in the recipient agency's meal service in the school year or 
fiscal year (including both entitlement and bonus foods), and including 
the value of donated foods contained in processed end products, in 
accordance with the contingencies in Sec.  250.51(a);
    (2) The method and frequency by which crediting will occur, and the 
means of documentation to be utilized to verify that the value of all 
donated foods has been credited;
    (3) The method of determining the donated food values to be used in 
crediting, in accordance with Sec.  250.51(c), or the actual donated 
food values;
    (4) Any activities relating to donated foods that the food service 
management company will be responsible for, in accordance with Sec.  
250.50(d), and assurance that such activities will be performed in 
accordance with the applicable requirements in 7 CFR part 250;
    (5) A statement that the food service management company will use 
all donated ground beef and ground pork products, and all processed end 
products, in the recipient agency's food service;
    (6) A statement that the food service management company will use 
all other donated foods, or will use commercially purchased foods of 
the same generic identity, of U.S. origin, and of equal of better 
quality than the donated foods, in the recipient agency's food service;
    (7) Assurance that the procurement of processed end products on 
behalf of the recipient agency, as applicable, will ensure compliance 
with the requirements in subpart C of 7 CFR part 250 and with the 
provisions of distributing or recipient agency processing agreements, 
and will ensure crediting of the recipient agency for the value of 
donated foods contained in such end products at the processing 
agreement value;
    (8) Assurance that the food service management company will not 
itself enter into the processing agreement with the processor required 
in subpart C of 7 CFR part 250;
    (9) Assurance that the food service management company will comply 
with the storage and inventory requirements for donated foods;
    (10) A statement that the distributing agency, subdistributing 
agency, or recipient agency, the Comptroller General, the Department of 
Agriculture, or their duly authorized representatives, may perform 
onsite reviews of the food service management company's food service 
operation, including the review of records, to ensure compliance with 
requirements for the management and use of donated foods;
    (11) A statement that the food service management company will 
maintain records to document its compliance with requirements relating 
to donated foods, in accordance with Sec.  250.54(b); and
    (12) A statement that extensions or renewals of the contract, if 
applicable, are contingent upon the fulfillment of all contract 
provisions relating to donated foods.
    (b) Required contract provisions in cost-reimbursable contracts. A 
cost-reimbursable contract must include the same provisions as those 
required for a fixed-price contract in paragraph (a) of this section. 
Such provisions must also be included in procurement documents. 
However, a cost-reimbursable contract must also contain a statement 
that the food service management company will ensure that its system of 
inventory management will not result in the recipient agency being 
charged for donated foods.


Sec.  250.54  Recordkeeping and reviews.

    (a) Recordkeeping requirements for the recipient agency. The 
recipient agency must maintain the following records relating to the 
use of donated foods in its contract with the food service management 
company:
    (1) The donated foods and processed end products received and 
provided to the food service management company for use in the 
recipient agency's food service;
    (2) Documentation that the food service management company has 
credited it for the value of all donated foods received for use in the 
recipient agency's food service in the school or fiscal year, 
including, in accordance with the requirements in Sec.  250.51(a), the 
value of donated foods contained in processed end products; and
    (3) The actual donated food values used in crediting.
    (b) Recordkeeping requirements for the food service management 
company. The food service management company must maintain the 
following records relating to the use of donated foods in its contract 
with the recipient agency:
    (1) The donated foods and processed end products received from, or 
on behalf of, the recipient agency, for use in the recipient agency's 
food service;
    (2) Documentation that it has credited the recipient agency for the 
value of all donated foods received for use in the recipient agency's 
food service in the school or fiscal year, including, in accordance 
with the requirements in Sec.  250.51(a), the value of donated foods 
contained in processed end products; and
    (3) Documentation of its procurement of processed end products on 
behalf of the recipient agency, as applicable.
    (c) Review requirements for the recipient agency. The recipient 
agency must ensure that the food service management company is in 
compliance with the requirements of this part through its monitoring of 
the food service operation, as required in 7 CFR parts 210, 225, or 
226, as applicable. The recipient agency must also conduct a 
reconciliation at least annually (and upon termination of the contract) 
to ensure that the food service management company has credited it for 
the value of all donated foods received for use in the recipient 
agency's food service in the school or fiscal year, including, in 
accordance with the requirements in Sec.  250.51(a), the value of 
donated foods contained in processed end products.
    (d) Departmental reviews of food service management companies. The 
Department may conduct reviews of food service management company 
operations, as necessary, to ensure compliance with the requirements of 
this part with respect to the use and management of donated foods.

[[Page 46188]]

Subpart E--National School Lunch Program (NSLP) and Other Child 
Nutrition Programs


Sec.  250.56  Provision of donated foods in NSLP.

    (a) Distribution of donated foods in NSLP. The Department provides 
donated foods in NSLP to distributing agencies. Distributing agencies 
provide donated foods to school food authorities that participate in 
NSLP for use in serving nutritious lunches or other meals to 
schoolchildren in their nonprofit school food service. The distributing 
agency must confirm the participation of school food authorities in 
NSLP with the State administering agency (if different from the 
distributing agency). In addition to requirements in this part relating 
to donated foods, distributing agencies and school food authorities in 
NSLP must adhere to Federal regulations in 7 CFR part 210, as 
applicable.
    (b) Types of donated foods distributed. The Department purchases a 
wide variety of foods for distribution in NSLP each school year. A list 
of available foods is posted on the FNS Web site, for access by 
distributing agencies and school food authorities. In addition to 
Section 6 foods (42 U.S.C. 1755) as described in paragraph (c) of this 
section, the distributing agency may also receive Section 14 donated 
foods (42 U.S.C. 1762(a)), and donated foods under Section 32 (7 U.S.C. 
612c), Section 416 (7 U.S.C. 1431), or Section 709 (7 U.S.C. 1446a-1), 
as available.
    (c) National per-meal value of donated foods. For each school year, 
the distributing agency receives, at a minimum, the national per-meal 
value of donated foods, as established by Section 6(c) of the Richard 
B. Russell National School Lunch Act (42 U.S.C. 1755(c)), multiplied by 
the number of reimbursable lunches served in the State in the previous 
school year. The donated foods provided in this manner are referred to 
as Section 6 foods, or entitlement foods. The national per-meal value 
is adjusted each year to reflect changes in the Bureau of Labor 
Statistic's Producer Price Index for Foods Used in Schools and 
Institutions, in accordance with the Richard B. Russell National School 
Lunch Act. The adjusted value is published in a notice in the Federal 
Register in July of each year. Reimbursable lunches are those that meet 
the nutritional standards established in 7 CFR part 210, and that are 
reported to FNS, in accordance with the requirements in that part.
    (d) Donated food values used to credit distributing agency 
entitlement levels. FNS uses the average price (cost per pound) for 
USDA purchases of donated food made in a contract period to credit 
distributing agency entitlement levels.
    (e) Cash in lieu of donated foods. States that phased out their 
food distribution facilities prior to July 1, 1974, are permitted to 
choose to receive cash in lieu of the donated foods to which they would 
be entitled in NSLP, in accordance with the Richard B. Russell National 
School Lunch Act (42 U.S.C. 1765) and with 7 CFR part 240.


Sec.  250.57  Commodity schools.

    (a) Categorization of commodity schools. Commodity schools are 
schools that operate a nonprofit school food service in accordance with 
7 CFR part 210, but receive additional donated food assistance rather 
than the general cash payment available to them under Section 4 of the 
Richard B. Russell National School Lunch Act (42 U.S.C. 1753). In 
addition to requirements in this part relating to donated foods, 
commodity schools must adhere to Federal regulations in 7 CFR part 210, 
as applicable.
    (b) Value of donated foods for commodity schools. For participating 
commodity schools, the distributing agency receives donated foods 
valued at the sum of the national per-meal value and the value of the 
general cash payment available to it under Section 4 of the Richard B. 
Russell National School Lunch Act (42 U.S.C. 1753), multiplied by the 
number of reimbursable lunches served by commodity schools in the 
previous school year. From the total value of donated food assistance 
for which it is eligible, a commodity school may elect to receive up to 
5 cents per meal in cash to cover processing and handling expenses 
related to the use of donated foods. In addition to Section 6 and 
Section 14 foods under the Richard B. Russell National School Lunch Act 
(42 U.S.C. 1755 and 1762(a)), the distributing agency may also receive 
donated foods under Section 32 (7 U.S.C. 612c), Section 416 (7 U.S.C. 
1431), or Section 709 (7 U.S.C. 1446a-1), as available, for commodity 
schools.


Sec.  250.58  Ordering donated foods and their provision to school food 
authorities.

    (a) Ordering and distribution of donated foods. The distributing 
agency orders donated foods through a Web-based system called the 
Electronic Commodity Ordering System (ECOS). Through ECOS, the 
distributing agency places orders directly into a centralized computer 
system. Before submitting orders for donated foods to FNS, the 
distributing agency must ensure that all school food authorities are 
aware of the full list of available donated foods, and have the 
opportunity to provide input at least annually in determining the 
donated foods from the full list that are made available to them for 
ordering or selection. The distributing agency must ensure distribution 
to school food authorities of all such selected donated foods that may 
be cost-effectively distributed to them, and may not prohibit the use 
of split shipments in determining such cost-effectiveness.
    (b) Value of donated foods offered to school food authorities. In 
accordance with Section 6(c) of the Richard B. Russell National School 
Lunch Act (42 U.S.C. 1755(c)), the distributing agency must offer the 
school food authority, at a minimum, the national per-meal value of 
donated food assistance multiplied by the number of reimbursable 
lunches served by the school food authority in the previous school 
year. This is referred to as the commodity offer value. For a commodity 
school, the distributing agency must offer the sum of the national per-
meal value of donated foods and the value of the general cash payment 
available to it under Section 4 of the Richard B. Russell National 
School Lunch Act (42 U.S.C. 1753), multiplied by the number of 
reimbursable lunches served by the school in the previous school year. 
The school food authority may also receive bonus foods, as available, 
in addition to the Section 6 foods.
    (c) Receipt of less donated foods than the commodity offer value. 
In certain cases, the school food authority may receive less donated 
foods than the commodity offer value in a school year. This 
``adjusted'' value of donated foods is referred to as the adjusted 
assistance level. For example, the school food authority may receive an 
adjusted assistance level if:
    (1) The distributing agency, in consultation with the school food 
authority, determines that the school food authority cannot efficiently 
utilize the commodity offer value of donated foods; or
    (2) The school food authority does not order, or select, donated 
foods equal to the commodity offer value that can be cost-effectively 
distributed to it.
    (d) Receipt of more donated foods than the commodity offer value. 
The school food authority may receive more donated foods than the 
commodity offer value if the distributing agency, in consultation with 
the school food authority, determines that the school food authority 
may efficiently utilize more donated foods than the commodity offer 
value, and more donated foods are available for distribution. This may 
occur, for example, if other school food

[[Page 46189]]

authorities receive less than the commodity offer value of donated 
foods for one of the reasons described in paragraph (c) of this 
section.
    (e) Donated food values required in crediting school food 
authorities. The distributing agency must use one of the following 
values for donated foods in crediting the school food authority for its 
commodity offer value or adjusted assistance level:
    (1) The USDA purchase price (cost per pound), which may be an 
average price for purchases made for the duration of the contract with 
the food vendor;
    (2) Estimated cost-per-pound data provided by the Department, as 
included in commodity survey memoranda; or
    (3) The USDA commodity file cost as of a date specified by the 
distributing agency.


Sec.  250.59  Storage and inventory management of donated foods.

    (a) General requirements. Distributing agencies, subdistributing 
agencies, and school food authorities must meet the requirements for 
storage and inventory of donated foods in Sec.  250.14, in addition to 
the requirements in this section.
    (b) Storage at distributing agency level. The distributing or 
subdistributing agency, or storage facilities with which they have 
contracts, must store donated foods in a manner that permits them to be 
distinguished from commercially purchased foods or other foods, in 
order to ensure compliance with the requirements for the distribution 
and control of donated foods in this part.
    (c) Storage by school food authorities. The school food authority 
may store and inventory donated foods together with commercially 
purchased foods and other foods, under a single inventory management 
system, as defined in this part, unless the distributing agency 
requires donated foods to be distinguished from commercially purchased 
foods in storage and inventoried separately.
    (d) Storage by storage facilities under contract with school food 
authorities. A storage facility under contract with a school food 
authority may store and inventory donated foods together with 
commercially purchased foods it is storing for the school food 
authority, unless its contract with the school food authority prohibits 
this. However, the storage facility may not commingle foods it is 
storing for a school food authority with foods it is storing for a 
commercial enterprise or other entity.


Sec.  250.60  Use of donated foods in the school food service.

    (a) Use of donated foods in school lunches and other meals or 
activities. The school food authority should use donated foods, as far 
as practical, in the lunches served to schoolchildren, for which they 
receive an established per-meal value of donated food assistance each 
school year. However, the school food authority may also use donated 
foods in other nonprofit school food service activities. Revenues 
received from such activities must accrue to the school food 
authority's nonprofit school food service account. Some examples of 
other activities in which donated foods may be used include:
    (1) School breakfasts or other meals served in child nutrition 
programs;
    (2) A la carte foods sold to children;
    (3) Meals served to adults directly involved in the operation and 
administration of the nonprofit food service, and to other school 
staff; and
    (4) Training in nutrition, health, food service, or general home 
economics instruction for students.
    (b) Use of donated foods outside of the nonprofit school food 
service. The school food authority should not use donated foods in 
meals or food service activities that do not benefit primarily 
schoolchildren, such as banquets or catered events. However, their use 
in such meals or activities may not always be avoided, e.g, for a 
school food authority utilizing single inventory management. In all 
cases, the school food authority must ensure reimbursement to the 
nonprofit school food service account for the value of donated foods 
used in such activities, in addition to reimbursement for other 
resources utilized from that account. Since school food authorities 
utilizing single inventory management cannot reimburse the nonprofit 
school food service account based on actual usage of donated foods 
outside of the nonprofit school food service, they must establish an 
alternate method--e.g., by including the current per-meal value of 
donated food reimbursement in the price charged for the food service 
activities.
    (c) Use of donated foods in a contract with a food service 
management company. A school food authority may use donated foods in a 
contract with a food service management company to conduct the food 
service. The contract must meet the requirements in subpart D of this 
part with respect to donated foods, and must also meet requirements in 
7 CFR part 210 and 7 CFR parts 3016 or 3019, as applicable, with 
respect to the procurement of such contracts. The school food authority 
must also ensure that a food service management company providing meals 
for banquets or catered events, or other food service activities that 
do not benefit primarily schoolchildren, ensure reimbursement to the 
nonprofit school food service account for donated foods used in such 
activities, in accordance with paragraph (b) of this section.
    (d) Use of donated foods in providing a meal service to other 
school food authorities. A school food authority may use donated foods 
to provide a meal service to other school food authorities, under an 
agreement between the parties. A school food authority providing such a 
service may commingle its own donated foods and the donated foods of 
other school food authorities that are parties to the agreement.


Sec.  250.61  Child and Adult Care Food Program (CACFP).

    (a) Distribution of donated foods in CACFP. The Department provides 
donated foods in CACFP to distributing agencies, which provide them to 
child care and adult care institutions participating in CACFP for use 
in serving nutritious lunches and suppers to eligible recipients. 
Distributing agencies and child care and adult care institutions must 
also adhere to Federal regulations in 7 CFR part 226, as applicable.
    (b) Types and quantities of donated foods distributed. For each 
school year, the distributing agency receives, at a minimum, the 
national per-meal value of donated food assistance (or cash in lieu of 
donated foods) multiplied by the number of reimbursable lunches and 
suppers served in the State in the previous school year, as established 
in Section 6(c) of the Richard B. Russell National School Lunch Act (42 
U.S.C. 1755(c)). The national per-meal value is adjusted each year to 
reflect changes in the Bureau of Labor Statistic's Producer Price Index 
for Foods Used in Schools and Institutions. The adjusted per-meal value 
is published in a notice in the Federal Register in July of each year. 
Reimbursable lunches and suppers are those meeting the nutritional 
standards established in 7 CFR part 226. The number of reimbursable 
lunches and suppers may be adjusted during, or at the end of the school 
year, in accordance with 7 CFR part 226. In addition to Section 6 
entitlement foods (42 U.S.C. 1755(c)), the distributing agency may also 
receive Section 14 donated foods (42 U.S.C. 1762(a)), and donated foods 
under Section 32 (7 U.S.C. 612c), Section 416 (7 U.S.C. 1431), or 
Section 709 (7 U.S.C. 1446a-1), as available, for distribution to child 
care and adult care institutions participating in CACFP.

[[Page 46190]]

    (c) Cash in lieu of donated foods. In accordance with the Richard 
B. Russell National School Lunch Act, and with 7 CFR part 226, the 
State administering agency must determine whether child care and adult 
care institutions participating in CACFP wish to receive donated foods 
or cash in lieu of donated foods, and ensure that they receive the 
preferred form of assistance. The State administering agency must 
inform the distributing agency (if a different agency) which 
institutions wish to receive donated foods and must ensure that such 
foods are provided to them. However, if the State administering agency, 
in consultation with the distributing agency, determines that 
distribution of such foods would not be cost-effective, it may, with 
the concurrence of FNS, provide cash payments to the applicable 
institutions instead.
    (d) Use of donated foods in a contract with a food service 
management company. A child care or adult care institution may use 
donated foods in a contract with a food service management company to 
conduct its food service. The contract must meet the requirements in 
Subpart D of this part with respect to donated foods, and must also 
meet requirements in 7 CFR part 226 and 7 CFR parts 3016 or 3019, as 
applicable, with respect to the procurement of such contracts.
    (e) Applicability of other requirements in this subpart to CACFP. 
The requirements in this subpart relating to the ordering, storage and 
inventory management, and use of donated foods in NSLP, also apply to 
CACFP. However, in accordance with 7 CFR part 226, a child care or 
adult care institution that uses donated foods to prepare and provide 
meals to other such institutions is considered a food service 
management company.


Sec.  250.62  Summer Food Service Program (SFSP).

    (a) Distribution of donated foods in SFSP. The Department provides 
donated foods in SFSP to distributing agencies, which provide them to 
eligible service institutions participating in SFSP for use in serving 
nutritious meals to needy children primarily in the summer months, in 
their nonprofit food service programs. Distributing agencies and 
service institutions in SFSP must also adhere to Federal regulations in 
7 CFR part 225, as applicable.
    (b) Types and quantities of donated foods distributed. The 
distributing agency receives donated foods available under Section 6 
and Section 14 of the Richard B. Russell National School Lunch Act (42 
U.S.C. 1755 and 1762), and may also receive donated foods under Section 
32 (7 U.S.C. 612c), Section 416 (7 U.S.C. 1431), or Section 709(7 
U.S.C. 1446a-1), as available, for distribution to eligible service 
institutions participating in SFSP. Section 6 donated foods are 
provided to distributing agencies in accordance with the number of 
meals served in the State in the previous school year that are eligible 
for donated food support, in accordance with 7 CFR part 225.
    (c) Distribution of donated foods to service institutions in SFSP. 
The distributing agency provides donated food assistance to eligible 
service institutions participating in SFSP based on the number of meals 
served that are eligible for donated food support, in accordance with 7 
CFR part 225.
    (d) Use of donated foods in a contract with a food service 
management company. A service institution may use donated foods in a 
contract with a food service management company to conduct the food 
service. The contract must meet the requirements in Subpart D of this 
part with respect to donated foods, and must also meet requirements in 
7 CFR part 225 and 7 CFR parts 3016 or 3019, as applicable, with 
respect to the procurement of such contracts.
    (e) Applicability of other requirements in this subpart to SFSP. 
The requirements in this subpart relating to the ordering, storage and 
inventory management, and use of donated foods in NSLP, also apply to 
SFSP.

    Dated: July 31, 2008.
Nancy Montanez Johner,
Under Secretary, Food, Nutrition, and Consumer Services.
[FR Doc. E8-18230 Filed 8-7-08; 8:45 am]
BILLING CODE 3410-30-P


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