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 permeal 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
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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 onsite 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 onsite 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 onsite 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 onsite review of such recipient agencies.

We received thirteen comments in response to this proposal. Twelve of the commenters indicated that requiring State agency onsite 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 onsite 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 onsite 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 onsite 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 A133, 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 programspecific 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 onsite 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 costeffective. 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 costeffectively distributed to them.

The proposed rule included a restructuring of some sections of 7 CFR part 250, including:

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 DDonated 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
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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 contractsfixedprice and costreimbursable 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 fixedprice and costreimbursable 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
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periode.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 fixedprice contracts. In precrediting, the food service management company deducts the value of donated foods the recipient agency is expected to receive from the fixedprice 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 permeal 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 (276010027CH) referenced in the proposed rule, food service management companies that utilize ``precrediting'' 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 fixedprice 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 permeal 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 ``fixedprice'' 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 onetime 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 costreimbursable 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 valueswhich, 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 ``cashout'' 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]]
ofcondition 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 ruleif 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 costreimbursable 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 onsite review of the food service management
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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 costbenefit 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 onetime 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 costeffective 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 onsite 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 ENational 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
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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 webbased 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 workintensive. 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 ``requestdriven'' 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 costeffectively 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 shipmentsi.e., donated food shipments with more than one stopoff 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 costeffective 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 costeffectiveness 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 costeffectiveness 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 costeffectively distributed to them, and may not prohibit the use of split shipments in determining such costeffectiveness. 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 costeffective 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
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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

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 223021594, or telephone (703) 3052662. 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 email to Robert.Delorenzo@fns.usda.gov.