Food Stamp Program, Regulatory Review: Electronic Benefit

From: GPO_OnLine_USDA
Date: 2000/10/04

[Federal Register: October 4, 2000 (Volume 65, Number 193)]
[Rules and Regulations]
[Page 59105-59111]
From the Federal Register Online via GPO Access []


[[Page 59105]]


Food and Nutrition Service

7 CFR Parts 272 and 274

[Amendment No. 390]
RIN 0584-AC44

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

AGENCY: Food and Nutrition Service, USDA.

ACTION: Final rule.


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

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

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


Executive Order 12866

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

Executive Order 12372

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

Executive Order 13132, Federalism

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

Regulatory Flexibility Act

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

Paperwork Reduction Act

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

Executive Order 12988

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

[[Page 59106]]

Public Law 104-4

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


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

Mandate EBT

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

 Off-Line Technology

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

[[Page 59107]]

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

Cost Neutrality

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

[[Page 59108]]

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

Differentiate Food Stamp Eligible Items

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

Replacement Card Fee

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

Photograph on EBT Card

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

[[Page 59109]]

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

Anti-tying Restrictions

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

System Compatibility

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

Regulation E

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


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

List of Subjects

7 CFR Part 272

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

7 CFR Part 274

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

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

    Authority: 7 U.S.C. 2011-2036.


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

Sec. 272.1 General terms and conditions.

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

[[Page 59110]]

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


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

Sec. 274.3 Issuance systems.

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

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

Sec. 274.12 Electronic Benefit Transfer issuance system approval

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

[[Page 59111]]

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

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

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