Food Stamp Program: Discretionary Quality Control Provisions of Title IV of Public Law 107-171, 55776-55796 [05-19020]

Agencies

• DEPARTMENT OF AGRICULTURE
• Food and Nutrition Service

[Federal Register Volume 70, Number 184 (Friday, September 23, 2005)]
[Proposed Rules]
[Pages 55776-55796]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-19020]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

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

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Federal Register / Vol. 70, No. 184 / Friday, September 23, 2005 / 
Proposed Rules

[[Page 55776]]



DEPARTMENT OF AGRICULTURE

Food and Nutrition Service

7 CFR Parts 271, 273, 275, and 277

RIN 0584-AD37


Food Stamp Program: Discretionary Quality Control Provisions of 
Title IV of Public Law 107-171

AGENCY: Food and Nutrition Service, USDA.

ACTION: Proposed rule.

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SUMMARY: On May 13, 2002, the President signed the Farm Security and 
Rural Investment Act of 2002. Title IV of that law, the Food Stamp 
Reauthorization Act of 2002, contains provisions substantively revising 
the Quality Control system. This rule proposes to amend the Food Stamp 
Program regulations to implement certain discretionary provisions 
concerning the Quality Control system in Sections 4118 and 4119 of the 
Food Stamp Reauthorization Act of 2002. This rule would establish new 
timeframes for completing individual Quality Control reviews and 
establish procedures for resolving liabilities following appeal 
decisions. This rule proposes to revise the negative case review 
procedures and provides procedures for households that break up while 
subject to the penalty for refusal to cooperate with a Quality Control 
review. This rule also proposes several additional policy changes and 
technical corrections, including deletion of material pertaining to 
enhanced administrative funding for low error rates, which was ended 
beginning in Fiscal Year 2003 by the statute. An interim rule published 
October 16, 2003, addressed certain non-discretionary provisions 
concerning the Quality Control system in Sections 4118 and 4119 of the 
Food Stamp Reauthorization Act. The high performance bonuses that 
replace the administrative enhanced funding are addressed in a separate 
rule published February 7, 2005. This rule would affect State agencies' 
quality control review operations, and it would alter the impact on 
State agencies of assessment and resolution of potential liabilities 
for excessive payment error rates and awarding of bonuses for superior 
performance. Households sampled for quality control review of their 
cases would be minimally affected by this rule.

DATES: Comments on this rulemaking must be received on or before 
December 22, 2005.

ADDRESSES: The Food and Nutrition Service, Department of Agriculture 
invites interested persons to submit comments on this proposed rule. 
Comments may be submitted by any of the following methods:
     E-mail: Send comments to daniel.wilusz@fns.usda.gov.
     Fax: Submit comments by facsimile transmission to: (703) 
305-0928.
     Mail: Send comments to Daniel Wilusz, Quality Control 
Branch, Program Accountability Division, Food and Nutrition Service, 
USDA, 3101 Park Center Drive, Alexandria, Virginia 22302.
     Hand Delivery or Courier: You may also hand-deliver 
comments to us on the 8th floor at the above address.
     Federal eRulemaking Portal: Go to https://
www.regulations.gov. Follow the online instructions for submitting 
comments.

FOR FURTHER INFORMATION CONTACT: Questions regarding this rulemaking 
should be addressed to Margaret Werts Batko at the above address, by 
telephone at (703) 305-2516, or via the Internet at 
margaret.batko@fns.usda.gov.

SUPPLEMENTARY INFORMATION: 

I. Additional Information on Comment Filing/Electronic Access

Electronic Access and Filing Address

    You may view and download an electronic version of this proposed 
rule at https://www.fns.usda.gov/fsp/. You may also comment via the 
Internet at the same address. Please include ``Attention: RIN 0584-
AD37'' and your name and return address in your Internet message. If 
you do not receive a confirmation from the system that we have received 
your message, contact us directly at 703-305-2516.

Written Comments

    Written comments on the proposed rule should be specific, should be 
confined to issues pertinent to the proposed rule, and should explain 
the reason for any change you recommend. Where possible, you should 
reference the specific section or paragraph of the proposed rule you 
are addressing. We may not consider or include in the Administrative 
Record for the final rule comments that we receive after the close of 
the comment period or comments delivered to an address other than those 
listed above.
    We will make all comments, including names, street addresses, and 
other contact information of respondents, available for public 
inspection on the 8th floor, 3101 Park Center Drive, Alexandria, 
Virginia 22302 between 8:30 a.m. and 5 p.m. Eastern time, Monday 
through Friday, excluding Federal holidays.

II. Procedural Matters

Executive Order 12866

    This rule has been determined to be significant under E.O. 12866 
and has, therefore, been reviewed by the Office of Management and 
Budget.

Executive Order 12372

    The Food Stamp Program is listed in the Catalog of Federal Domestic 
Assistance under No. 10.551. For the reasons set forth in the final 
rule in 7 CFR Part 3015, Subpart V and related Notice (48 FR 29115, 
June 24, 1983), this Program is excluded from the scope of Executive 
Order 12372 that requires intergovernmental consultation with State and 
local officials.

Regulatory Flexibility Act

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

Public Law 104-4

    Title II of the Unfunded Mandate Reform Act of 1995 (UMRA) 
establishes requirements for Federal agencies to assess the effects of 
their regulatory

[[Page 55777]]

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) for State, local, and tribal governments or the private 
sector of $100 million or more in any one year. This rule is, 
therefore, not subject to the requirements of sections 202 and 205 of 
the UMRA.

Federalism Summary Impact Statement

    Executive Order 13132 requires Federal agencies to consider the 
impact of their regulatory actions on State and local governments. 
Where such actions have federalism implications, agencies are directed 
to provide a statement for inclusion in the preamble to the regulations 
describing the agency's considerations in terms of the three categories 
called for under section (6)(b)(2)(B) of Executive Order 13132. The 
Food and Nutrition Service has considered this rule's impact on State 
and local agencies and has determined that it does not have Federalism 
implications under E.O. 13132.

Civil Rights Impact Analysis

    FNS has reviewed this proposed 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 has no impact on any of the protected classes. These changes 
primarily affect the quality control (QC) review system and not 
individual recipients' eligibility for or participation in the Food 
Stamp Program. The only provision that has any direct impact on 
recipients is the conforming change made in Sec.  273.2(d)(2). This 
section provides that a recipient who refuses to cooperate with a QC 
review of his or her case will be terminated from further participation 
in the Program; that if the household reapplies during the annual 
review period, it cannot be determined eligible until it cooperates 
with the QC review; and if it reapplies following the end of the 
quality control review period, the household is required to provide 
full verification of its eligibility factors before it can be 
certified. The purpose of the requirement is to encourage household 
cooperation with the QC review of its case. In this rule we are 
proposing a conforming amendment to extend the timeframe of the penalty 
consistent with the revised timeframe for completing the QC review 
process established in Section 4119 of the Food Stamp Reauthorization 
Act of 2002 and addressed in this proposed regulation at Sec.  275.23. 
Significant protection exists within the regulations to ensure that a 
household is terminated solely for refusal, and not inability, to 
cooperate. A household so terminated also has the right to request a 
fair hearing. Further, the household has the ability to reverse its 
termination by cooperating with the QC review during the QC review 
period. There were 56,954 active case households subject to a QC 
review, and 2,101 households who refused to cooperate with a QC review 
during Fiscal Year 2002, the last year information on non-cooperating 
households was collected. Information on protected class is not 
available for these households.
    All data available to FNS indicate that protected individuals have 
the same opportunity to participate in the Food Stamp Program as non-
protected individuals. FNS specifically prohibits the State and local 
government agencies that administer the Program from engaging in 
actions that discriminate against any applicant or participant in any 
aspect of program administration, including, but not limited to, the 
certification of households, the issuance of coupons, the conduct of 
fair hearings, or the conduct of any other program service for reasons 
of age, race, color, sex, handicap, religious creed, national origin, 
or political beliefs (Food Stamp Program nondiscrimination policy can 
be found at Sec.  272.6). Discrimination in any aspect of program 
administration is prohibited by these regulations, the Food Stamp Act, 
the Age Discrimination Act of 1975 (Pub. L. 94-135), the Rehabilitation 
Act of 1973 (Pub. L. 93-112, section 504), and title VI of the Civil 
Rights Act of 1964 (42 U.S.C. 2000d). Enforcement action may be brought 
under any applicable Federal law. Title VI complaints shall be 
processed in accord with 7 CFR part 15.''

Paperwork Reduction Act

    This proposed rule contains reporting or recordkeeping requirements 
that have been approved by the Office of Management and Budget (OMB) 
under several separate information collections under the Paperwork 
Reduction Act of 1995. The collections are:
    0584-0034, Negative Quality Control Review Schedule; Status of 
Sample Selection and Completion, Form FNS-245, and FNS-248: This rule 
does not affect the negative review schedule, Form FNS-245. In the most 
recent approval of OMB Number 0584-0034, the form FNS-247 (Statistical 
Summary of Sample Distribution) was eliminated. FNS has stopped 
requesting that this form be completed and the information be 
submitted. This rule removes the requirement to submit the report from 
the regulations. The elimination does not affect the burden, as the 
burden has already been adjusted for removal of this form. In this rule 
we are proposing to eliminate the Form FNS-248. However, the 
information required to be submitted on that form is still required. 
The regulations currently permit that this information be submitted in 
another format. Accordingly, elimination of this form will not affect 
the approved burden for OMB Number 0584-0034.
    0584-0074 (Form FNS-380, Worksheet for Food Stamp Program Quality 
Control Reviews); 0584-0299 (Form FNS-380-1, Quality Control Review 
Schedule); and 0584-0303 (Sampling Plan, Arbitration, and Good Cause): 
This rule does not affect these information collections. This rule does 
not change the requirements for development and submittal of the 
States' sampling plans. This rule does not change the requirements for 
submitting cases for arbitration nor will it impact the number of cases 
anticipated to be submitted. This rule does include the provisions for 
good cause; however, those provisions are unchanged except for 
redesignation. Therefore, this rule will not impact the burden 
currently approved for good cause either.
    OMB Number 0584-0010, Performance Reporting System, Management 
Evaluation, Data Analysis and Corrective Action: Corrective action 
planning is included under this information collection package. 
Regulations prior to passage of the Food Stamp Reauthorization Act of 
2002 required corrective action planning whenever a State agency failed 
to reach the yearly target, whenever a State agency was not entitled to 
enhanced funding, and when its negative case error rate exceeded one 
percent. In an

[[Page 55778]]

interim rule entitled ``Non-Discretionary Quality Control Provisions of 
Title IV of Public Law 107-171'' published on October 16, 2003 at 68 FR 
59519, the regulations were changed to reflect the provision in Section 
4118 of the Food Stamp Reauthorization Act of 2002 that requires 
corrective action planning whenever a State agency's payment error rate 
equals or exceeds six percent. This requirement replaced the 
requirement for corrective action planning whenever a State agency 
failed to reach the yearly target. In the regulations as modified by 
the interim rule, State agencies continued to be required to do 
corrective action whenever they were not entitled to enhanced funding 
or when the negative case error rate exceeded one percent. A State 
agency was entitled to enhanced funding when its payment error rate was 
less than or equal to 5.90 percent and its negative case error rate was 
less than the national weighted mean negative case error rate for the 
prior fiscal year. This rule proposes to eliminate the requirement that 
State agencies conduct corrective action planning whenever a State 
agency is not entitled to enhanced funding because enhanced funding has 
been eliminated by Section 4118 of the Food Stamp Reauthorization Act 
of 2002. Elimination of this requirement will not have a significant 
impact on States' requirements to do corrective action planning because 
of the requirement in the regulation to do corrective action planning 
whenever the State's error rate exceeds six percent. The change from 
5.9 percent to six is minimal. In Fiscal Year 2002, no State below six 
percent did not get enhanced funding. Further, in this rule we are 
proposing to continue to require that State agencies do corrective 
action planning whenever a State's negative case error rate exceeds one 
percent. Therefore, there is essentially no impact resulting from 
removing the requirement to do corrective action planning whenever a 
State agency is not entitled to enhanced funding.

Government Paperwork Elimination Act

    In compliance with the Government Paperwork Elimination Act, the 
Food and Nutrition Service is committed to providing electronic 
submission as an alternative for information collections associated 
with this rule. The Food and Nutrition Service has made every effort to 
streamline and automate these processes. However, we are not able to 
make the entire process electronic at this time.
    Part of the process allows electronic submission. The Quality 
Control review schedule (approved under OMB 0584-0299) serves 
as both the data summary entry form that the reviewer completes during 
each review, and subsequently, as the data input document for direct 
data entry into the automated national Food Stamp Quality Control 
System (FSQCS) at the Kansas City Computer Center. While the data are 
manually collected on a paper form from information extracted from a 
case file, it is electronically submitted to the FSQCS for tabulation 
and analysis. Some States have developed and begun to use computerized 
versions of the worksheet (OMB number 0584-0074), which provides 
information collected on the review schedule. In addition, FNS has 
developed a computerized version of the worksheet. States are being 
given the option to continue to use their own systems, the new 
computerized version provided by FNS or the paper version. When FNS 
computerized versions of the worksheet are used, the information is 
linked to and creates the review schedule.
    Under OMB number 0584-0034, the burden for collecting and reporting 
information related to the review of negative cases and the status of 
sample selection and completion is approved. The FNS-245 serves as both 
the data summary entry form that the reviewer completes during each 
negative case review, and subsequently as the data input document for 
direct data entry into the FSQCS. Therefore, while data is manually 
collected, it is electronically submitted to the FSQCS for tabulation 
and analysis. The FNS-248 (Status of Sample Selection and Completion) 
collects information on the status of State reviews. The FNS-248 
contains necessary information not produced by the automated system. 
However, much of the form contains information that can be obtained in 
other ways. The regulations already provide that the information can be 
submitted in another format than the Form FNS-248. In this rule, we are 
proposing to eliminate the form and to require the States to submit the 
necessary information as requested by the appropriate regional offices. 
States may submit this data electronically.
    The burden under OMB number 0584-0303 encompasses the sampling 
plan, arbitration, and good cause. At this time, these areas are not 
substantively electronic submittals. To the extent possible, States may 
submit documents or portions of documents electronically.

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 that 
conflict with its provisions or that would otherwise impede its full 
implementation. This rule is not intended to have retroactive effect 
unless so specified in the ``Effective Date'' paragraph of the final 
rule. Prior to any judicial challenge to the provisions of this rule or 
the application of its provisions, all applicable administrative 
procedures must be exhausted. In the Food Stamp Program the 
administrative procedures are as follows: (1) For Program benefit 
recipients--State administrative procedures issued pursuant to 7 U.S.C. 
2020(e)(10) and Sec.  273.15; (2) for State agencies--administrative 
procedures issued pursuant to 7 U.S.C. 2023 set out at Sec.  276.7 (for 
rules related to non-quality control (QC) liabilities) or Part 283 (for 
rules related to QC liabilities); (3) for retailers and wholesalers--
administrative procedures issued pursuant to 7 U.S.C. 2023 set out at 7 
CFR Part 279.

Regulatory Impact Analysis

Need for Action

    This action is needed to implement certain provisions of Sections 
4118 and 4119 of Title IV, the Food Stamp Reauthorization Act of 2002, 
Public Law 107-171, which was enacted on May 13, 2002. This rule 
proposes to amend the Food Stamp Program regulations concerning the 
Quality Control (QC) system to eliminate enhanced funding, to address 
the impact of appeals decisions on the resolution of QC liabilities for 
high payment error rates, to revise the timeframes for completing 
individual case reviews and the timeframes for penalties for households 
that refuse to cooperate with a QC review, and to make a number of 
technical policy changes and corrections. This analysis addresses the 
elimination of enhanced funding, the impact of appeals decisions on the 
resolution of QC liabilities for high payment error rates, the revised 
timeframes for completing individual case reviews, the timeframes for 
penalties for households that refuse to cooperate with a QC review, 
validation of the negative case error rate, and corrective action 
planning. An interim rule, published October 16, 2003, at 68 FR 59519, 
addressed the new liability system established by Section 4118 of the 
Food Stamp Reauthorization Act of 2002. The impact of the new liability 
system was addressed in the impact analysis for that rule. For greater 
understanding of the impact of the

[[Page 55779]]

changes to the liability system, the reader is referred to the interim 
rule.
Cost Impact
    This action does not directly impact benefit levels or eligibility, 
so we do not anticipate any impact on food stamp benefit costs. The 
provision extending the timeframes for verification of households 
reapplying for benefits is not expected to have a measurable impact on 
benefit costs. Elimination of enhanced funding will result in a savings 
of administrative matching funds. In 2002, the Agency paid $77.3 
million in enhanced funding incentives to 13 States. Over the five 
years between 1998 and 2002, the Agency paid $250 million in enhanced 
funding, for an annual average of $50 million during this period.
    If State payment error rates remained at their 1998-2002 levels, 
the annual savings to the Food Stamp Program would be $50 million and 
the five-year savings would be $250 million. However, this savings will 
be largely offset by the establishment of the high performance bonuses 
(addressed in the final rule ``High Performance Bonuses'' published 
February 7, 2005, at 70 FR 6313). See Table below.
Benefit Impact
    Elimination of enhanced funding based on payment accuracy would not 
have a benefit impact on State administrating agencies or on program 
operations if considered in isolation. However, when this provision is 
combined with the new performance bonus system in another rulemaking 
that proposes to change performance criteria from a narrow focus on 
payment accuracy to a broader measure that incorporates client service 
criteria in addition to payment accuracy, the new performance bonus 
system is expected to encourage States to assess and improve overall 
performance. Since the new bonus system is capped at $48 million 
annually the impact of the two rules will offset each other.

    Cost Impact of Certain Quality Control Provisions of the Food Stamp Reauthorization Act of 2002 (Federal
                                                    Outlays)
                                            [In millions of dollars]
----------------------------------------------------------------------------------------------------------------
                                                              2005     2006     2007     2008     2009    5-year
----------------------------------------------------------------------------------------------------------------
Elimination of Enhanced Funding...........................      -50      -50      -50      -50      -50     -250
----------------------------------------------------------------------------------------------------------------

    The provisions affecting the timeframes for completing individual 
case reviews, procedures for appeals for the resolution of QC 
liabilities, and the procedures for treating households that refuse to 
cooperate with QC reviews are not expected to have any measurable 
impact on program costs.

III. Background

    On May 13, 2002, the President signed Public Law 107-171, the Farm 
Security and Rural Investment Act of 2002. Title IV of Public Law 107-
171, the Food Stamp Reauthorization Act of 2002 (FSRA), significantly 
revised the sanction, liability, and enhanced funding provisions of the 
Quality Control (QC) system. An interim rule entitled ``Non-
Discretionary Quality Control Provisions of Title IV of Public Law 107-
171'' was published October 16, 2003, at 68 FR 59519 that addressed 
certain provisions of Sections 4118 and 4119. A final rule entitled 
``High Performance Bonuses'' was published February 7, 2005, at 70 FR 
6313 that implemented Section 4120 of the Food Stamp Reauthorization 
Act. This rulemaking addresses the remaining provisions of Sections 
4118 and 4119 of the Food Stamp Reauthorization Act. In addition, it 
includes several discretionary policy changes and numerous technical 
corrections.

A. Enhanced Funding

    The current regulations at Sec.  275.1(b) provide that the 
Department shall pay a State agency enhanced administrative funding if 
its payment error rate is less than or equal to 5.90 percent and the 
negative case error rate is less than the national weighted mean 
negative case error rate for the prior fiscal year. Section 4118 of 
FSRA removed the provision in the Food Stamp Act of 1977 for giving 
enhanced funding to State agencies with low payment and negative case 
error rates, effective fiscal year (FY) 2003, effectively ending 
enhanced payments. As a technical detail, we are proposing to eliminate 
Sec.  275.1(b)(1) and (b)(2) and to revise Sec.  275.1(a) into a 
general introductory paragraph, removing the ``(a)'' paragraph 
designation. Section 4120 of the FSRA replaces these enhanced funding 
provisions with high performance bonuses. Regulations addressing high 
performance bonuses have been published separately (proposed rule 
published December 17, 2003, at 68 FR 70193; final rule published 
February 7, 2005, at 70 FR 6313).
    Section 275.23(d) establishes procedures for providing enhanced 
funding. In accordance with the elimination of enhanced funding, this 
section is no longer necessary. Therefore, we are proposing to remove 
Sec.  275.23(d).
    Section 275.3(c) requires that FNS validate the negative case error 
rate when a State agency's payment error rate for an annual review 
period appears to entitle it to an increased share of Federal 
administrative funding and its reported negative case error rate for 
that period is less than two percentage points above the national 
weighted mean negative case error rate for the prior fiscal year. That 
section also provides that FNS may review any negative case for other 
reasons. Validation of the negative case error rate is no longer 
necessary for purposes of establishing eligibility for enhanced 
funding. However, we are proposing in Sec.  275.3(c) to require that 
all States' negative case error rates be validated by FNS. We are 
proposing to require universal validation of negatives for two reasons. 
First, we believe that fair and equitable treatment in terms of denying 
households needs to be ensured. Second, the negative error rate is one 
of the measurements of high performance. We believe that it is 
necessary to ensure the accuracy of those error rates if awards will be 
driven by these rates.
    In addition, we are proposing to make technical changes throughout 
Part 275 to remove references to enhanced funding. These deletions are 
not discussed in this preamble.
    Part 277, Payments of Certain Administrative Costs of State 
Agencies, establishes the rules for paying State agency administrative 
costs for operating the Food Stamp Program. In Sec.  277.4, paragraphs 
(b)(1), (b)(4), (b)(5), and (b)(6) describe the procedures for 
increasing State administrative funding when State agency quality 
control error rates meet certain standards. Each paragraph provides the 
authority for different fiscal year periods beginning with Fiscal Year 
1980. Sections 277.4(b)(1)(i), (b)(4), (b)(5), and (b)(6) cover fiscal 
year periods beginning October 1, 1980, through September 30, 1988. 
Section 277.4(b)(1)(ii) provides

[[Page 55780]]

the authority for the period beginning October 1988 and forward. The 
authority in the Food Stamp Act for Sec.  277.4(b)(1)(i) was removed by 
the Hunger Prevention Act of 1988 (Public Law 100-435). The authority 
for Sec.  277.4(b)(4), (b)(5), and (b)(6) was removed by the Omnibus 
Budget Reconciliation Act of 1982 (Public Law 97-253). Section 4118 of 
the FSRA eliminated enhanced funding based on quality control error 
rates for fiscal years beginning October 2002 and beyond, thus making 
Sec.  277.4(b)(1)(ii) obsolete for FY2003 and beyond. All enhanced 
funding for Fiscal Years 1980 through 2002 paid under any of these 
authorities has already been made. Therefore, these paragraphs are no 
longer necessary. Accordingly, we are proposing to remove Sec.  
277.4(b)(1), (b)(4), (b)(5), and (b)(6). Sections 277.4(b)(2), (b)(3), 
(b)(7), and (b)(8) are proposed to be redesignated as Sec.  
277.4(b)(1), (b)(2), (b)(3), and (b)(4), respectively. In addition, we 
are proposing to correct the references in redesignated Sec.  
277.4(b)(3) to reflect these changes.

B. Disposition of Cases Where the Household Refuses To Cooperate

    Section 275.12(g) establishes procedures for disposition of active 
quality control cases. Section 275.12(g)(1)(ii) provides procedures for 
handling cases when the household refuses to cooperate in the review. 
Under these procedures, the State agency is required to notify the 
household of the penalties for refusing to cooperate with the review. 
In Sec.  275.12(g)(1)(ii), regulations currently provide that a 
reviewer may attempt to complete the case if this notice has been sent. 
This policy was revised by memorandum on September 1, 1998, in ``Change 
1 to the September 1997 version of FNS Handbook 310,'' to require the 
State agency reviewer to attempt to complete the review. The change was 
effective October 1, 1998. The revised policy has been retained in 
subsequent revisions of FNS Handbook 310. The Department requires such 
completion because incomplete reviews introduce bias into the system. 
Consistent with this change in policy, we are proposing to revise Sec.  
275.12(g)(1)(ii) to say that the reviewer must attempt to complete the 
case. As provided for in the FNS Handbook 310, the reviewer will 
attempt to determine all of the necessary information to the point 
where either ineligibility or the appropriate benefit allotment is 
determined, verified, and documented.

C. Negative Case Reviews

    In order to understand the parameters of the changes being proposed 
in this rulemaking for the review of negative cases, the readers need 
to understand the basic framework of the negative case review process. 
A negative case is a case where a household's application for food 
stamp benefits was denied or where a household's food stamp benefits 
were suspended or terminated. The negative universe includes all 
negative actions that occur during the review period. Under current 
rules, State agencies may randomly select negative cases for review by 
either ``action'' or by ``effective date.'' ``Action'' is a specific 
decision to deny, suspend, or terminate a case. Each action results in 
a notice to the household advising the household of the action. 
``Effective date'' measures the result of a negative action, that is, 
that following the negative action, the household does not receive 
benefits. It measures the non-receipt of benefits against the prior 
receipt of benefits. In order for a case to be subject to review as a 
negative case under the current rules, there has to be a break in 
participation, that is, a household cannot receive uninterrupted 
benefits for two full consecutive months. Between the negative action 
and the next date of participation, there must be at least one day for 
which no benefits are received. A negative case review consists of a 
case file review. An expanded review of items addressed in the case is 
permitted if the case file does not support the negative action under 
review. Contact with the household and/or collateral contacts should 
occur only to clarify information in the case record if the case record 
does not support the negative action under review. Contact with the 
household and/or collateral contacts should occur only to clarify 
information in the case record if the case record does not support the 
negative action under review. This proposal would significantly modify 
the process described above in order to make the process uniform among 
the States and to eliminate inappropriate, excessive, and unnecessary 
household contacts.
    Although not currently required, the Department has validated all 
State agencies' negative case error rates for the past several years. 
As discussed elsewhere in this rule, we are proposing that the 
Department will validate all State agencies' negative case error rates 
annually. In the process of performing these validations, it has become 
apparent that various State agencies have interpreted the regulatory 
provisions and Handbook review provisions differently. Further, it has 
become apparent that allowing the use of two different measuring 
points, by ``action'' or by ``effective'' date, has contributed to the 
differences among State agencies. Secondarily, use of ``effective 
date'' has resulted in confusion when multiple negative actions have 
occurred within the sample month. This is particularly important in 
determining the awarding of the high performance bonus awards for low 
negative case error rates. Finally, the Department has become concerned 
that some State QC workers, when they find that the basis of a negative 
case action is invalid, in an effort to find any reason that the 
negative action might have been valid, continue to review a household's 
case until any reason can be found to support the negative action 
result. This can result in multiple household and/or collateral 
contacts. The Department considers such contacts potentially 
intimidating and believes it is necessary to curtail their use. The 
Department believes that it is important that all States conduct 
negative reviews interpreting the regulatory and Handbook provisions 
the same way to ensure that review results are comparable.
    First, the Department is proposing that the negative universe be 
based on ``action,'' eliminating the option to use ``effective date.'' 
Use of the two different selection criteria, ``action'' and ``effective 
date,'' has resulted in differences in the sampling universes among the 
States and inconsistent reviews. These sampling differences are of 
statistical concern in calculating a national negative case error rate. 
Further, because multiple actions can occur within a sampling period, 
but only resulting in one denial, suspension, or termination, States 
using ``effective date'' have to decide which of the several actions to 
review. This selection process can introduce bias into the system. 
Focusing on ``action'' means that each negative action would have an 
equal opportunity to be sampled and reviewed. Finally, negative reviews 
are not measuring program losses, but service to clients. Using 
``action'' means the review is based on the reason given the household 
for the negative action. We are proposing to revise Sec.  
275.11(e)(2)(i) and (e)(2)(ii) accordingly.
    Further, we are proposing to delete the requirement that there be a 
break in participation in order for a case to be subject to review. 
Section 275.11(f)(2)(vi) provides that a negative action would not be 
subject to review if there were no break in participation.

[[Page 55781]]

Changing the focus to the action eliminates a need for measuring 
whether there was a break in participation. The break in participation 
measures the effectiveness of the negative action, the denial or end of 
a households receipt of benefits. Elimination of ``break in 
participation'' is consistent with the change in focus to ``action'' 
only reviews. A conforming change is also being made to the definition 
``Negative case'' in Sec.  271.2.
    Finally, the Department is proposing to eliminate the expanded 
review in Sec.  275.13(b). As described above, the expanded review 
allows the QC reviewer to look beyond the reason given for action taken 
by the EW to deny, terminate, or suspend a household. The QC reviewer 
may examine the case file for additional reasons to support the denial, 
suspension, or termination. It also permits contacting the household or 
a collateral contact to clarify a reason for the denial, suspension, or 
termination. During the validation process, it has become apparent that 
the expanded review has become an opportunity to search for information 
to eliminate an invalid negative decision, making the decision correct, 
rather than determining the validity of the action the EW took. The 
Department considers this an inappropriate use of the review process 
that needs to be curtailed. Elimination of the expanded review is also 
consistent with a review of ``action.'' The QC review would be focused 
solely on the action taken, not on other possible negative actions that 
could have been taken. Under this proposal, an action could only be 
determined ``valid'' if the case record supported the negative action, 
as it was presented to the household. If documentation is missing in 
the case file to support and verify the reason for the specific denial 
action, the Department is proposing to continue to allow the QC 
reviewer to contact the household or a collateral contact to verify the 
validity of the specific negative action. The Department believes that 
this is necessary to curtail reviews that are focused on eliminating 
the error, rather than on determining the validity of the action, and 
result in excessive collateral contacts, negatively impacting customer 
service. A conforming change is also being made to Sec.  275.13(c)(1).
    We recognize that by evolving State interpretations of the 
regulatory and Handbook provisions to be the same, these proposed 
revisions may change the proportion of valid determinations. However, 
the Department believes that the consistent interpretations among the 
States will yield information that more accurately reflects actual 
negative actions, and represents a better balance between accuracy and 
customer service.

D. Corrective Action Planning

    Section 4118 of the FSRA requires a State agency to do corrective 
action planning whenever its payment error rate is six percent or 
greater. In the interim rule published October 16, 2003 at 68 FR 59519, 
Sec.  275.16(b)(1) was revised to require corrective action planning 
whenever a State agencys error rate equals or exceeds six percent. 
Current regulations provide that corrective action planning shall also 
be done by a State agency when the State agency is not entitled to 
enhanced funding (Sec.  275.16(b)(2)) or when the State agencys 
negative case error rate exceeds one percent (Sec.  275.16(b)(3)). We 
are proposing to remove Sec.  275.16(b)(2) as no longer necessary 
because enhanced funding has been eliminated. In practical terms, this 
change will have little impact on the number of State agencies required 
to do corrective action planning. In FY 2002, the last year of enhanced 
funding, no State that had a payment error rate of less than six 
percent failed to qualify for enhanced funding. We are proposing to 
continue to require State agencies to conduct corrective action 
planning whenever the negative case error rate exceeds one percent 
(Sec.  275.16(b)(3)), but are proposing to redesignate Sec.  
275.16(b)(3) as Sec.  275.16(b)(2) to reflect the deletion of Sec.  
275.16(b)(2). We believe that retaining the requirement to do 
corrective action planning when the negative error rate exceeds one 
percent is necessary to ensure that households are not being 
inappropriately denied or terminated in an effort to reduce payment 
error rates. Also, this is consistent with the High Performance Bonuses 
final rule that provides criteria for rewarding States with very low 
negative case error rates. Finally, we are proposing to redesignate 
Sec.  275.16(b)(4), (b)(5), and (b)(6) as Sec.  275.16(b)(3), (b)(4), 
and (b)(5), respectively, to reflect the deletion of Sec.  275.16(b)(2) 
and redesignation of Sec.  275.16(b)(3) as Sec.  275.16(b)(2).
    Section 275.13 requires State agencies to review suspended cases as 
part of the negative case sample. Suspended cases were added to the 
negative universe in a rule published July 16, 1999, at 64 FR 38287. 
That rule did not add suspended cases to those deficiencies requiring 
corrective action at Sec.  275.16(b)(6) (redesignated in this rule as 
Sec.  275.16(b)(5)). To correct this oversight, we are proposing to 
revise redesignated Sec.  275.16(b)(5) to include deficiencies which 
result in improper suspensions.

E. Timeframes for Announcing the National Performance Measure and for 
Completing Quality Control Reviews and Resolving State/Federal 
Differences

    The interim rule published October 16, 2003, at 68 FR 59519 revised 
the regulations at Sec.  275.23(e)(7) to establish the following 
timeframes for completing quality control reviews and resolving State/
Federal differences and for announcing the national performance 
measure. The deadline for completing quality control reviews and 
resolving State/Federal differences is May 31 of the following year. 
The deadline for announcing the national performance measure is June 30 
following the end of the fiscal year review period. These new 
timeframes provide approximately two additional months to complete the 
case review and arbitration process and to develop and announce the 
national performance measure. In this rule, we are proposing to use 
this additional time in the following way.
    Currently, as provided for in Sec.  275.21(b)(2), State agencies 
are required to complete and transmit to FNS 90 percent of all cases 
selected for a sample month within 75 days of the end of that sample 
month. State agencies are required to complete and transmit to FNS 100 
percent of all cases selected for a sample month within 95 days of the 
end of the month. Section 273.21(d) requires that all cases sampled for 
the annual review period be completed or otherwise accounted for and 
reported to FNS no later than 105 days from the end of the review 
period.
    In order to fully understand this proposal, it is helpful to 
understand the background of the current timeframes. Section 13951 of 
the Mickey Leland Childhood Hunger Relief Act of 1993, Public Law 103-
66, required that all case reviews and arbitration be completed within 
180 days of the end of the review period. On June 23, 1995, the 
Department proposed changes to the regulations to implement the 180-day 
requirement to complete all case reviews and arbitration (60 FR 32615). 
In that rule, we proposed to reduce the amount of time to complete each 
monthly sample by requiring that 100 percent of the cases selected for 
review be completed within 90 days of the end of the sample month. 
However, in the final rule published June 2, 1997 (62 FR 29652), we 
left the timeframes as they were originally, i.e., that 90 percent of 
all cases be completed within 75 days and all cases be disposed of 
within 95 days of the end of the sample month. In that final rule, we 
reduced the amount

[[Page 55782]]

of time FNS regional offices had to complete validation from 95 days to 
43 days and modified the arbitration system in order to reduce the 
amount of time necessary to complete the case review and arbitration 
process within the allotted 180 days. Thus FNS absorbed all the 
reduction in time for completing the annual QC review process.
    We believe that the best uses of the additional two months of time 
between the end of March and May 30 are to provide States with more 
time to complete the individual case review process, to provide the FNS 
regional offices with more time to complete their reviews of the 
subsample cases, and to provide some additional time at the end of the 
review process for the Department to ensure the accuracy of the error 
rates, liabilities, and any adjustments to the liabilities.
    Accordingly, in Sec.  275.21(b)(2), we are proposing to provide 
State agencies at least 100 days from the end of the sample month to 
complete and transmit to FNS 90 percent of all cases and that State 
agencies shall have at least 113 days from the end of the sample month 
to complete and transmit to FNS 100 percent of all cases selected for 
the sample month. We are proposing that State agencies have at least 
123 days from the end of the annual review period to complete or 
otherwise account for all cases selected for review during the annual 
review period and to report to FNS the results of all the reviews. This 
gives the State agency an additional 25 days to act on 90 percent of 
the cases selected each sample month and an additional 18 days to 
complete all the cases selected each sample month. We are proposing 
that State agencies have at least until January 21 after the end of the 
review year to complete and dispose of all cases. We are also proposing 
that FNS may grant additional time as warranted upon request by a State 
agency for cause shown beyond these dates to complete and dispose of 
all cases. We are also proposing to revise Sec.  275.21(b)(4) by 
replacing ``95'' with ``113''; to revise Sec.  275.21(c) by replacing 
``105'' with ``123''; and to add a sentence to each of these paragraphs 
stating that if FNS extends the timeframes in Sec.  275.21(b)(2), that 
the timeframes in these paragraphs will be extended accordingly.
    On January 22, 2003, we waived the deadlines for State agencies to 
complete processing cases in Sec.  273.21(b) for FY 2003 and provided 
States with 113 days to complete each sample month's cases. This waiver 
was extended on March 4, 2004. In providing comments on this proposal, 
we would be interested in hearing whether this amount of additional 
time was useful and/or sufficient. In addition to the extended 
timeframes for completion of individual cases, that waiver provides 
State agencies an additional 10 days at the end of the review period, 
i.e., January 22 through January 31, to perform checks on the 
individual data transmitted by State agencies (c-trails). That 
additional 10 days is an expansion of current policy allowing 
additional time to check the c-trails during the review period. In this 
rulemaking, we are not proposing to allow this additional 10 days at 
the end of the review year for checking the c-trails. We are not 
proposing to allow the additional 10 days in this rulemaking because we 
feel that States have already received a significant additional amount 
of time to perform and complete all work related to the individual case 
reviews. Delaying completion of the State work until January 31 delays 
the completion of the Federal rereview process which in turn impacts 
FNS?s ability to timely and accurately prepare the payment error rates. 
However, we are interested in receiving comments on this issue.
    Under the timeframes as provided in the January 23, 2003, 
memorandum, FNS regional offices were given until March 31 to complete 
their subsample review process in order for all arbitration to be 
completed timely and to provide some additional time to ensure the 
accuracy of the error rates, liabilities, and adjustments to the 
liabilities. If FNS opts to extend the State agencies? timeframes, FNS 
will adjust the amount of time provided to the regions for validation 
and/or adjust the time provided to the Department to ensure the 
accuracy of the error rates, liabilities, and adjustments to the 
liabilities.
    Section 275.21(c) provides that State agencies report the monthly 
progress of sample selection and completion on the Form FNS-248, Status 
of Sample Selection and Completion or other format specified by FNS. In 
response to a notice published at 68 FR 10437 on March 5, 2003, the 
Department received two comments suggesting elimination of the form. 
Federal statisticians use the information on the FNS-248 to track the 
status of case completions and identify when timely generation of an 
error rate is jeopardized. Most of the information on the FNS-248 is 
available elsewhere. Further, the form itself is not necessary for 
State agencies to provide the necessary information, and the regulation 
currently provides that States may submit this information other than 
on the form. Therefore, we are proposing to revise Sec.  275.21(c) to 
eliminate the form. State agencies will still be required to submit the 
information on a monthly basis as directed by the appropriate regional 
office.
    Section 275.21(d) requires State agencies to submit an FNS-247, 
Statistical Summary of Sample Distribution, annually. Although the 
requirement is still in the regulations, FNS no longer requires State 
agencies to submit this form. Accordingly, we are proposing to remove 
Sec.  275.21(d).
    Currently, there is one level of arbitration. Quality control 
arbitration is the resolution of disagreements between the FNS regional 
office and the State agency concerning individual QC case findings and 
the appropriateness of actions taken to dispose of an individual case. 
The timeframes for conducting arbitration are in Sec.  275.3(c)(4). 
Under these rules, a State agency is required to submit its request for 
arbitration within 20 calendar days of the date of receipt by the State 
agency of the regional office case findings. The FNS arbitrator has 20 
calendar days from receipt of the State agency request to review and 
make a decision on the case. The arbitration timeframes as currently 
established appear to be adequate from our perspective. We believe that 
20 days is an adequate amount of time for a State agency to prepare its 
case for arbitration. This time period is intended primarily for the 
State agency to prepare its letter addressing what issue or issues it 
is appealing, assemble the case file, and transmit the request. This 
time period is not intended for State agencies to conduct additional 
review activities. Our recent experience with the arbitration process 
indicates that, except for a small number of cases where the State 
submitted an incomplete case, 20 days has been sufficient to review and 
reach a decision. Accordingly, we are not proposing to make any changes 
in the timeframes for requesting and conducting arbitration. We are 
seeking comments, however, about whether affected parties and the 
public agree that the timeframes are adequate. If additional time is 
required for arbitration, the amount of time given to State agencies 
for completing individual case reviews may need to be reduced from that 
proposed in this rule.

F. Consequences To Households Who Refuse To Cooperate With Quality 
Control Reviews

    Section 273.2(d)(2) provides procedures for handling the cases of 
food stamp participants who refuse to cooperate with a quality control 
review of their case. Currently, a household is determined ineligible 
if it refuses to

[[Page 55783]]

cooperate with a QC review. Questions have arisen about what happens 
when one or more household members leave a household subject to this 
penalty. Because the regulations do not provide an answer to the 
question, it has been left to State agencies to determine which 
household members continue to be subject to the penalty. We are 
proposing to amend this provision to provide that the ineligibility 
penalty will follow the household member(s) who refused to cooperate.
    In this rule, we are also proposing to make a conforming change to 
Sec.  273.2(d)(2). Current procedures in Sec.  273.2(d)(2) require that 
a household be terminated for refusal to cooperate with a State or 
Federal quality control reviewer. If a household terminated for refusal 
to cooperate with a State QC reviewer reapplies within 95 days of the 
end of the annual review period, the household cannot be determined 
eligible until it cooperates with the State QC reviewer. If the 
household terminated for refusal to cooperate with a State QC reviewer 
reapplies more than 95 days after the end of the review period, the 
household is required to provide verification of all eligibility 
factors before it can be certified. If a household terminated for 
refusal to cooperate with a Federal QC reviewer reapplies within 7 
months of the end of the annual review period, the household cannot be 
determined eligible until it cooperates with the Federal QC reviewer. 
If the household terminated for refusal to cooperate with a Federal 
reviewer reapplies more than seven months after the end of the review 
period, the household is required to provide verification of all 
eligibility factors before it can be certified. We are proposing to 
change the dates in Sec.  273.2(d)(2) to 123 days and nine months to 
conform the dates in Sec.  273.2(d)(2) to the proposed changes in the 
dates for completion of the State review process in Sec.  275.21(b) and 
the end of the Federal QC review process in Sec.  275.23(e)(7) 
(renumbered in this proposed rule as Sec.  275.23(c)).
    We are also proposing additional conforming changes to other 
sections of the regulations that identify these timeframes. These 
conforming amendments are not discussed in this preamble.

G. Section 275.23--Determination of State Agency Program Performance

    Section 275.23 establishes the procedures to be used to evaluate a 
State agency's performance through the quality control review system. 
This section includes the error rates to be established, the 
methodology used to establish those error rates (including regression), 
the thresholds for establishing potential liabilities for excessive 
error rates, the relationship of the sanction system to the warning 
process and negligence, the timeframes for announcing error rates, the 
procedures for resolving liabilities, the procedures for reducing 
liabilities based on good cause on appeal, the policy on charging 
interest on liabilities, and the procedures for new investment 
activities to reduce liabilities.
    Over time, as the authority for determining the error rates and the 
sanction system has been changed by legislation, changes have been made 
throughout Sec.  275.23. Those changes were made within the existing 
structure of the section. The changes to the sanction system made by 
the FSRA impact much of Sec.  275.23. Because several sections require 
substantive revision and many paragraphs require minor changes or 
reference changes, we have decided to take the opportunity to 
reorganize the section at the same time as making the necessary changes 
resulting from the legislation. Accordingly, we are proposing to revise 
and reorganize Sec.  275.23 in its entirety.
    Under this proposed reorganization, Sec.  275.23(a) will address 
the basic components of FNS determination of a State agency's 
efficiency and effectiveness (currently Sec.  275.23(a) and (b)). A new 
Sec.  275.23(b) will address error rates. The existing methodology for 
regression in Sec.  275.23(e)(6) is proposed to be incorporated into 
the new Sec.  275.23(b). Section 273.23(c) will address the timeframes 
for completing case reviews, conducting arbitration, and issuing error 
rates. Section 273.23(d) will address State agency liability. Included 
in this paragraph will be the procedure for establishing the national 
performance measure, the liability methodology, appeal rights, and the 
relationship to the warning process and negligence. Section 275.23(e) 
will address liability resolution plans; Sec.  275.23(f) will address 
good cause; Sec.  275.23(g) will address results of appeals on 
liability resolution; Sec.  275.23(h) will address new investment (the 
rules currently refer to such investment as ``reinvestment''; in this 
rule, we are proposing to change the term to ``new investment,'' 
consistent with the language used in the FSRA); Sec.  275.23(i) will 
address payment of the at-risk money; and Sec.  275.23(j) will address 
interest charges.
    Current Sec.  275.23(e)(4) (Relationship to warning process and 
negligence), Sec.  275.23(e)(5) (Good cause), and Sec.  275.23(e)(6) 
(Determination of payment error rates) are unchanged except for minor 
editing, renumbering, or reference changes. Sections 275.23(e)(4), 
(e)(5), and (e)(6) are proposed to be redesignated as Sec.  
275.23(d)(4), (f), and (b)(2), respectively. These changes are part of 
the restructuring for purposes of clarity. Necessary reference changes 
and language changes resulting from the elimination of enhanced funding 
have also been made. Such changes are technical in nature and do not 
impact the procedures themselves. These sections include the regression 
methodology and the criteria for good cause. Although these sections 
have been included in their entirety, their substantive content has not 
been changed, and comments are not being sought on these procedures. 
Because comments are not being sought on the substantive content of 
these sections, any comments received on the substantive content will 
not be taken into consideration in developing the final rule.

H. Elimination of Pre-Fiscal Year 2003 Liability Establishment 
Procedures

    The interim rule, published October 16, 2003, at 68 FR 59515, 
revised Sec.  275.23(e) to eliminate procedures for establishing 
liabilities for Fiscal Years 1983 through 1991. Section 275.23(e)(2) 
now provides procedures for establishing liability for excessive 
payment error rates for FY 2002. Section 275.23(e)(3) provides 
procedures for establishing liability amounts for FY 2003 and beyond, 
putting in place the provisions of Section 4118 of the FSRA. The 
provisions of Section 4118 give the Department the authority to waive 
any portion of the established liability amount, to require a State 
agency to invest up to 50 percent of any established liability amount 
in program administration activities, to establish up to 50 percent of 
the established liability amount as being ``at-risk'' for repayment if 
a liability amount is established for the subsequent fiscal year, or 
any combination of the three. Readers should refer to the interim rule 
for more information concerning the new liability system. Comments 
received in response to the interim rule and to this proposed rule will 
be considered in developing the final rule on liability resolution. The 
final rule will merge the interim rule and this proposed rule.
    We are proposing to remove Sec.  275.23(e)(2) (as part of the 
overall revision of Sec.  275.23) as it no longer necessary. All 
liabilities for FY 2002 have already been determined.

[[Page 55784]]

I. Appeals of Liability Determinations

    Section 16(c)(7) of the Food Stamp Act, as amended, provides that a 
State agency is entitled to appeal the amount of a liability only for a 
fiscal year in which a liability amount is established. That means that 
excessive payment error rates in the first year of the new 2-year 
liability system are not subject to appeal. Nor is the national 
performance measure subject to appeal, in accordance with Section 
16(c)(6)(D) of the Food Stamp Act, as amended. Thus, only a State 
agency's second year error rate and related liability determination are 
appealable. The Department recognizes that good cause may exist for an 
excessive error rate in year 2 that could be the result of events in 
year 1. The Department has proposed at Sec.  275.23(d)(3) to limit 
appeals to the determination of a State's payment error rate, or a 
determination of whether the payment error rate exceeds 105 percent of 
the national performance measure and the liability amount for any year 
for which a liability is established. To address the limitations on the 
appealability of year 1 and the possibility of causes extending back 
into that year, we are also proposing to allow a State agency to 
address areas of good cause in the prior fiscal year that may have 
impacted the fiscal year 2 for which a liability amount has been 
established.
    The recent significant drop in the national performance measure and 
individual State error rates has raised questions about the effect on 
this new liability system if the error rates continue to fall lower. 
Specifically questions have arisen about what happens if a State 
agency's error rate is below six percent but there is a 95 percent 
statistical probability that the State's payment error rate exceeds 105 
percent of the national performance measure. There are two significant 
points to be addressed. First, since six percent is the potential 
liability threshold provided in the FSRA no liability amount would be 
established. However, the year would be a year of poor performance 
under the new liability system and would be considered a year 1 in 
determining whether a State agency had two consecutive years of error 
rates exceeding 105 percent of the national performance measure. The 
law mandates that a year be considered a year of poor performance 
whenever there is a 95 percent statistical probability that a State 
agency's payment error rate exceeds 105 percent of the national 
performance measure. The six percent threshold for a liability amount 
determination is not relevant to the determination of poor performance. 
Second, questions have also arisen about whether the determination of 
whether a year for which no liability was established because the 
State's error rate was above the national performance measure but was 
below six percent was a year 1 is appealable. Under FSRA, this 
determination is not appealable. However, in the event a State agency 
incurs a potential liability in a subsequent year, a State agency would 
be able to address areas of good cause in prior fiscal year 1 that may 
have impacted the fiscal year 2 for which a liability amount has been 
established.
    Section 4118 of the FSRA provides that when a State agency appeals 
its liability amount determination, if the State agency began required 
new investment activities prior to an appeal determination, and if the 
liability amount is reduced to $0 through the appeal, the Secretary 
shall pay to the State agency an amount equal to 50 percent of the new 
investment amount that was included in the liability amount subject to 
appeal. If the Secretary wholly prevails on a State agency's appeal, 
Section 4118 provides that the Secretary will require the State agency 
to invest all or a portion of the amount designated for new investment 
to be invested or paid to the Federal government. Section 4118 further 
specifies that the Department will issue regulations addressing how the 
remaining new investment amount will be treated if neither party wholly 
prevails. The interim rule published October 16, 2003 at 68 FR 59519 
established in Sec.  275.23(e)(10) the provisions concerning either the 
Secretary or the State agency wholly prevailing. In accordance with 
Section 4118 of the FSRA, we are proposing procedures in this rule for 
use when neither party wholly prevails on appeal.
    Under the FSRA, liability is established based on two consecutive 
fiscal years of poor performance. Whenever there is a 95 percent 
statistical probability that a State's payment error rate exceeds 105 
percent of the national performance measure in each of two consecutive 
review years, the Department will issue, for the second consecutive 
fiscal year, a statement of potential liability amount to the State 
agency at the same time that the Department issues the State agency's 
official regressed payment error rate. The Department will also advise 
the State agency of the Department's determination of the portions of 
the liability amount (expressed as percentages) designated as waived, 
for new investment, and at-risk. If the State agency wishes to appeal 
the liability amount through the process in Part 283 of the 
regulations, the State agency may do so.
    As specified in the interim rule, if the State agency appeals the 
liability amou