[Code of Federal Regulations]
[Title 7, Volume 4]
[Revised as of January 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 7CFR275.23]

[Page 851-861]
 
                          TITLE 7--AGRICULTURE
 
    CHAPTER II--FOOD AND NUTRITION SERVICE, DEPARTMENT OF AGRICULTURE
 
PART 275_PERFORMANCE REPORTING SYSTEM--Table of Contents
 
                      Subpart G_Program Performance
 
Sec.  275.23  Determination of State agency program performance.


    (a) FNS shall determine the efficiency and effectiveness of a 
State's administration of the Food Stamp Program by measuring:
    (1) State compliance with the standards contained in the Food Stamp 
Act, regulations, and the State Plan of Operation; and
    (2) State efforts to improve program operations through corrective 
action.
    (b) This determination shall be made based on:
    (1) Reports submitted to FNS by the State;
    (2) FNS reviews of State agency operations;
    (3) State performance reporting systems and corrective action 
efforts; and
    (4) Other available information such as Federal audits and 
investigations, civil rights reviews, administrative cost data, 
complaints, and any pending litigation.
    (c) State agency error rates. FNS shall estimate each State agency's 
error rates based on the results of quality control review reports 
submitted in accordance with the requirements outlined in Sec.  275.21. 
The State agency's active case error, payment error, underissuance 
error, and negative case error rates shall be estimated as follows:
    (1) Active case error rate. The active case error rate shall include 
the proportion of active sample cases which were reported as ineligible 
or as receiving an incorrect allotment (as described in Sec.  275.12(e)) 
based upon certification policy as set forth in part 273.
    (2) Payment error rate. (i) For fiscal years prior to Fiscal Year 
1986, the payment error rate shall include the value of the allotments 
overissued, including overissuances to ineligible cases, for those cases 
included in the active error rate.
    (ii) For Fiscal Year 1986 and subsequent fiscal years, the payment 
error rate shall include the value of the allotments overissued, 
including those to ineligible cases, and the value of allotments 
underissued for those cases included in the active error rate.
    (3) Underissuance error rate. Prior to Fiscal Year 1986, the 
underissuance error rate shall include the value of the allotments 
reported as underissued for those cases included in the active case 
error rate.
    (4) Negative case error rate. The negative case error rate shall be 
the proportion of negative sample cases which were reported as having 
been eligible at the time of denial, suspension or termination (as 
described in Sec.  275.13(c)) based upon certification policy as set 
forth in part 273.
    (5) Demonstration projects/SSA processing. The reported results of 
reviews of active and negative demonstration project/SSA processed 
cases, as described in Sec.  275.11(g), shall be excluded from the 
estimate of the active case error rate, payment error rate, 
underissuance error rate, and negative case error rate.
    (d) Federal enhanced funding. (1) Before making enhanced funding 
available to a State agency, as described in Sec.  277.4(b), FNS will:
    (i) Validate the State agency's estimated payment error rate, 
underissuance error rate, and negative case error rate, as provided for 
in Sec.  275.3(c);
    (ii) Ensure that the sampling techniques used by the State agency 
are FNS-approved procedures, as established in Sec.  275.11; and
    (iii) Validate the State agency's quality control completion rate to 
ensure that all of the minimum required sample cases, of both active and 
negative quality control samples, have been completed. This completion 
standard is applied separately to the active and negative case samples, 
and the State agency's estimated payment and underissuance error rates 
will be adjusted separately, if necessary, to account for those required 
cases not completed, in accordance with the procedures described in 
paragraph (e)(6)(iii) of this section for adjustment of the payment 
error rate.

[[Page 852]]

    (2) After validation and any necessary adjustment of estimated error 
rates:
    (i) A State agency with a combined payment error rate and 
underissuance error rate of less than five percent for an annual review 
period for Fiscal Year 1983 through Fiscal Year 1985, or a payment error 
rate of less than five percent for an annual review period for Fiscal 
Year 1986 through Fiscal Year 1988, shall be eligible for a 60 percent 
Federally funded share of administrative costs, provided that the State 
agency's negative case error rate for that period is less than the 
national weighted mean negative case error rate for the prior fiscal 
year;
    (ii) Beginning with Fiscal Year 1989, a State agency with a payment 
error rate less than or equal to 5.90 percent and with a negative case 
error rate less than the national weighted mean negative case rate for 
the prior fiscal year will have its Federally funded share of 
administrative costs increased by one percentage point to a maximum of 
60 percent for each full one-tenth of a percentage point by which the 
payment error rate is less than six percent.
    (3) State agencies entitled to enhanced funding shall receive the 
additional funding on a retroactive basis only for the review period in 
which their error rates are less than the levels described in paragraph 
(d)(2) of this section.
    (e) State agencies' liabilities for payment error rates. (1) At the 
end of each fiscal year, each State agency's payment error rate over the 
entire fiscal year will be computed, as described in paragraph (e)(6) of 
this section, and evaluated to determine whether the payment error rate 
goals established in the following paragraphs have been met.
    (2) State agencies' liabilities for payment error--Fiscal Year 1992 
through Fiscal Year 2002. Each State agency that fails to achieve its 
payment error rate goal during a fiscal year shall be liable as 
specified in the following paragraphs.
    (i) For Fiscal Year 1992 through Fiscal Year 2002, FNS shall 
announce a national performance measure within 30 days following the 
completion of the case review and the arbitration processes for the 
fiscal year. The national performance measure is the sum of the products 
of each State agency's payment error rate times that State agency's 
proportion of the total value of national allotments issued for the 
fiscal year using the most recent issuance data available at the time 
the State agency is notified of its payment error rate. Once announced, 
the national performance measure for a given fiscal year will not be 
subject to change.
    (ii) For any fiscal year in which a State agency's payment error 
rate exceeds the national performance measure for the fiscal year, the 
State agency shall pay or have its share of administrative funding 
reduced by an amount equal to the product of:
    (A) The value of all allotments issued by the State agency in the 
fiscal year; multiplied by
    (B) The lesser of--
    (1) The ratio of the amount by which the payment error rate of the 
State agency for the fiscal year exceeds the national performance 
measure for the fiscal year, to the national performance measure for the 
fiscal year, or
    (2) One; multiplied by
    (C) The amount by which the payment error rate of the State agency 
for the fiscal year exceeds the national performance measure for the 
fiscal year.
    (3) Establishment of payment error rates and liability. For Fiscal 
Year 2003 and subsequent years, FNS shall announce a national 
performance measure not later than June 30 after the end of the fiscal 
year. The national performance measure is the sum of the products of 
each State agency's error rate times that State agency's proportion of 
the total value of national allotments issued for the fiscal year using 
the most recent issuance data available at the time the State agency is 
notified of its payment error rate. Once announced, the national 
performance measure for a given fiscal year will not be subject to 
change. The national performance measure announced under this paragraph 
(e)(3) is not subject to administrative or judicial review. Liability 
for payment shall be established for Fiscal Year 2004 and beyond 
whenever there is a 95 percent statistical probability that, for the 
second or

[[Page 853]]

subsequent consecutive fiscal year, a State agency's payment error rate 
exceeds 105 percent of the national performance measure. The amount of 
the liability shall be equal to the product of:
    (i) The value of all allotments issued by the State agency in the 
(second or subsequent consecutive) fiscal year; multiplied by
    (ii) The difference between the State agency's payment error rate 
and 6 percent; multiplied by
    (iii) 10 percent.
    (4) Relationship to warning process and negligence. (i) States' 
liability for payment error rates as determined above are not subject to 
the warning process of Sec.  276.4(d).
    (ii) FNS shall not determine negligence (as described in Sec.  
276.3) based on the overall payment error rate for issuances to 
ineligible households and overissuances to eligible households in a 
State or political subdivision thereof. FNS may only establish a claim 
under Sec.  276.3 for dollar losses from failure to comply, due to 
negligence on the part of the State agency (as defined under Sec.  
276.3), with specific certification requirements. Thus, FNS will not use 
the results of States' QC reviews to determine negligence.
    (iii) Whenever a State is assessed for an excessive payment error 
rate, the State shall have the right to request an appeal in accordance 
with procedures set forth in part 283 of this chapter. While FNS may 
determine a State to be liable for dollar loss under the provisions of 
this section and the negligence provisions of Sec.  276.3 of this 
chapter for the same period of time, FNS shall not bill a State for the 
same dollar loss under both provisions. If FNS finds a State liable for 
dollar loss under both the QC liability system and the negligence 
provisions, FNS shall adjust the billings to ensure that two claims are 
not made against the State for the same dollar loss.
    (5) Good cause--(i) Events. When a State agency with otherwise 
effective administration exceeds the tolerance level for payment errors 
as described in this section, the State agency may seek relief from 
liability claims that would otherwise be levied under this section on 
the basis that the State agency had good cause for not achieving the 
payment error rate tolerance. State agencies desiring such relief must 
file an appeal with the Department's Administrative Law Judge (ALJ) in 
accordance with the procedures established under part 283 of this 
chapter. The five unusual events described below are considered to have 
a potential for disputing program operations and increasing error rates 
to an extent that relief from a resulting liability or increased 
liability is appropriate. The occurrence of an event(s) does not 
automatically result in a determination of good cause for an error rate 
in excess of the national performance measure. The State agency must 
demonstrate that the event had an adverse and uncontrollable impact on 
program operations during the relevant period, and the event caused an 
uncontrollable increase in the error rate. Good cause relief will only 
be considered for that portion of the error rate/liability attributable 
to the unusual event. The following are unusual events which State 
agencies may use as a basis for requesting good cause relief and 
specific information that must be submitted to justify such requests for 
relief:
    (A) Natural disasters such as those under the authority of the 
Stafford Act of 1988 (Pub. L. 100-707), which amended the Disaster 
Relief Act of 1974 (Pub. L. 93-288) or civil disorders that adversely 
affect program operations.
    (1) When submitting a request for good cause relief based on this 
example, the State agency shall provide the following information:
    (i) The nature of the disaster(s) (e.g. a tornado, hurricane, 
earthquake, flood, etc.) or civil disorder(s)) and evidence that the 
President has declared a disaster;
    (ii) The date(s) of the occurrence;
    (iii) The date(s) after the occurrence when program operations were 
affected;
    (iv) The geographic extent of the occurrence (i.e. the county or 
counties where the disaster occurred);
    (v) The proportion of the food stamp caseload whose management was 
affected;

[[Page 854]]

    (vi) The reason(s) why the State agency was unable to control the 
effects of the disaster on program administration and errors;
    (vii) The identification and explanation of the uncontrollable 
nature of errors caused by the event (types of errors, geographic 
location of the errors, time period during which the errors occurred, 
etc.).
    (viii) The percentage of the payment error rate that resulted from 
the occurrence and how this figure was derived; and
    (ix) The degree to which the payment error rate exceeded the 
national performance measure in the subject fiscal year.
    (2) The following criteria and methodology will be used to assess 
and evaluate good cause in conjunction with the appeals process, and to 
determine that portion of the error rate/liability attributable to the 
uncontrollable effects of a disaster or civil disorder: Geographical 
impact of the disaster; State efforts to control impact on program 
operations; the proportion of food stamp caseload affected; and/or the 
duration of the disaster and its impact on program operations. 
Adjustments for these factors may result in a waiver of all, part, or 
none of the error rate liabilities for the applicable period. As 
appropriate, the waiver amount will be adjusted to reflect States' 
otherwise effective administration of the program based upon the degree 
to which the error rate exceeds the national performance measure. For 
example, a reduction in the amount may be made when a State agency's 
recent error rate history indicates that even absent the events 
described, the State agency would have exceeded the national performance 
measure in the review period.
    (3) If a State agency has provided insufficient information to 
determine a waiver amount for the uncontrollable effects of a natural 
disaster or civil disorder using factual analysis, the waiver amount 
shall be evaluated using the following formula and methodology which 
measures both the duration and intensity of the event: Duration will be 
measured by the number of months the event had an adverse impact on 
program operations. Intensity will be a proportional measurement of the 
issuances for the counties affected to the State's total issuance. This 
ratio will be determined using issuance figures for the first full month 
immediately preceding the disaster. This figure will not include 
issuances made to households participating under disaster certification 
authorized by FNS and already excluded from the error rate calculations 
under Sec.  275.12(g)(2)(vi). ``Counties affected'' will include 
counties where the disaster/civil disorder occurred, and any other 
county that the State agency can demonstrate had program operations 
adversely impacted due to the event (such as a county that diverted 
significant numbers of food stamp certification or administrative 
staff). The amount of the waiver of liability will be determined using 
the following linear equation: Ia/Ib x [M/12 or Mp/18] x L, where Ia is 
the issuance for the first full month immediately preceding the unusual 
event for the county affected; Ib is the State's total issuance for the 
first full month immediately preceding the unusual event; M/12 is the 
number of months in the subject fiscal year that the unusual event had 
an adverse impact on program operations; Mp/18 is the number of months 
in the last half (April through September) of the prior fiscal year that 
the unusual event had an adverse impact on program operations; L is the 
total amount of the liability for the fiscal year. Mathematically this 
formula could result in a waiver of more than 100% of the liability, 
however, no more than 100% of a State's liability will be waived for any 
one fiscal year. Under this approach, unless the State agency can 
demonstrate a direct uncontrollable impact on the error rate, the 
effects of disasters or civil disorders that ended prior to the second 
half of the prior fiscal year will not be considered.
    (B) Strikes by State agency staff necessary to determine Food Stamp 
Program eligibility and process case changes.
    (1) When submitting a request for good cause relief based on this 
example, the State agency shall provide the following information:
    (i) Which workers (i.e. eligibility workers, clerks, data input 
staff, etc.)

[[Page 855]]

and how many (number and percentage of total staff) were on strike or 
refused to cross picket lines;
    (ii) The date(s) and nature of the strike (i.e., the issues 
surrounding the strike);
    (iii) The date(s) after the occurrence when program operations were 
affected;
    (iv) The geographic extent of the strike (i.e. the county or 
counties where the strike occurred);
    (v) The proportion of the food stamp caseload whose management was 
affected;
    (vi) The reason(s) why the State agency was unable to control the 
effects of the strike on program administration and errors;
    (vii) Identification and explanation of the uncontrollable nature of 
errors caused by the event (types of errors, geographic location of the 
errors, time period during which the errors occurred, etc.);
    (viii) The percentage of the payment error rate that resulted from 
the strike and how this figure was derived; and
    (ix) The degree to which the payment error rate exceeded the 
national performance measure in the subject fiscal year.
    (2) The following criteria shall be used to assess, evaluate and 
respond to claims by the State agency for a good cause waiver of 
liability in conjunction with the appeals process, and to determine that 
portion of the error rate/liability attributable to the uncontrollable 
effects of the strike: Geographical impact of the strike; State efforts 
to control impact on program operations; the proportion of food stamp 
caseload affected; and/or the duration of the strike and its impact on 
program operations. Adjustments for these factors may result in a waiver 
of all, part, or none of the error rate liabilities for the applicable 
period. For example, the amount of the waiver might be reduced for a 
strike that was limited to a small area of the State. As appropriate, 
the waiver amount will be adjusted to reflect States' otherwise 
effective administration of the program upon the degree to which the 
error rate exceeded the national performance measure.
    (3) If a State agency has provided insufficient information to 
determine a waiver amount for the uncontrollable effects of a strike 
using factual analysis, a waiver amount shall be evaluated by using the 
formula described in paragraph (e)(5)(i)(A) of this section. Under this 
approach, unless the State agency can demonstrate a direct 
uncontrollable impact on the error rate, the effects of strikes that 
ended prior to the second half of the prior fiscal year will not be 
considered.
    (C) A significant growth in food stamp caseload in a State prior to 
or during a fiscal year, such as a 15 percent growth in caseload. 
Caseload growth which historically increases during certain periods of 
the year will not be considered unusual or beyond the State agency's 
control.
    (1) When submitting a request for good cause relief based on this 
example, the State agency shall provide the following information:
    (i) The amount of growth (both actual and percentage);
    (ii) The time the growth occurred (what month(s)/year);
    (iii) The date(s) after the occurrence when program operations were 
affected;
    (iv) The geographic extent of the caseload growth (i.e. Statewide or 
in which particular counties);
    (v) The impact of caseload growth;
    (vi) The reason(s) why the State agency was unable to control the 
effects of caseload growth on program administration and errors;
    (vii) The percentage of the payment error rate that resulted from 
the caseload growth and how this figure was derived; and
    (viii) The degree to which the error rate exceeded the national 
performance measure in the subject fiscal year.
    (2) The following criteria and methodology shall be used to assess 
and evaluate good cause in conjunction with the appeals process, and to 
determine that portion of the error rate/liability attributable to the 
uncontrollable effects of unusual caseload growth: Geographical impact 
of the caseload growth; State efforts to control impact on program 
operations; the proportion of food stamp caseload affected; and/or the 
duration of the caseload growth and its impact on program

[[Page 856]]

operations. Adjustments for these factors may result in a waiver of all, 
part, or none of the error rate liabilities for the applicable period. 
As appropriate, the waiver amount will be adjusted to reflect States' 
otherwise effective administration of the program based upon the degree 
to which the error rate exceeded the national performance measure. For 
example, a reduction in the amount may be made when a State agency's 
recent error rate history indicates that even absent the events 
described, the State agency would have exceeded the national performance 
measure in the review period. Under this approach, unless the State 
agency can demonstrate a direct uncontrollable impact on the error rate, 
the effects of caseload growth that ended prior to the second half of 
the prior fiscal year will not be considered.
    (3) If the State agency has provided insufficient information to 
determine a waiver amount for the uncontrollable effects of caseload 
growth using factual analysis, the waiver amount shall be evaluated 
using the following five-step calculation:
    (i) Step 1, determine the average number of households certified to 
participate statewide in the Food Stamp Program for the base period 
consisting of the twelve consecutive months ending with March of the 
prior fiscal year;
    (ii) Step 2, determine the percentage of increase in caseload growth 
from the base period (Step 1) using the average number of households 
certified to participate statewide in the Food Stamp Program for any 
twelve consecutive months in the period beginning with April of the 
prior fiscal year and ending with June of the current fiscal year;
    (iii) Step 3, determine the percentage the error rate for the 
subject fiscal year, as calculated under paragraph (e)(2)(i) of this 
section, exceeds the national performance measure determined in 
accordance with paragraph (e)(2)(i) of this section;
    (iv) Step 4, divide the percentage of caseload growth increase 
arrived at in step 2 by the percentage the error rate for the subject 
fiscal year exceeds the national performance measure as determined in 
step 3; and
    (v) Step 5, multiply the quotient arrived at in step 4 by the 
liability amount for the current fiscal year to determine the amount of 
waiver of liability.
    (4) Under this methodology, caseload growth of less than 15% and/or 
occurring in the last three months of the subject fiscal year will not 
be considered. Mathematically this formula could result in a waiver of 
more than 100% of the liability however, no more than 100% of a State's 
liability will be waived for any one fiscal year.
    (D) A change in the Food Stamp Program or other Federal or State 
program that has a substantial adverse impact on the management of the 
Food Stamp Program of a State. Requests for relief from errors caused by 
the uncontrollable effects of unusual program changes other than those 
variances already excluded by Sec.  275.12(d)(2)(vii) will be considered 
to the extent the program change is not common to all States.
    (1) When submitting a request for good cause relief based on unusual 
changes in the Food Stamp or other Federal or State programs, the State 
agency shall provide the following information:
    (i) The type of change(s) that occurred;
    (ii) When the change(s) occurred;
    (iii) The nature of the adverse effect of the changes on program 
operations and the State agency's efforts to mitigate these effects;
    (iv) Reason(s) the State agency was unable to adequately handle the 
change(s);
    (v) Identification and explanation of the uncontrollable errors 
caused by the changes (types of errors, geographic location of the 
errors, time period during which the errors occurred, etc.);
    (vi) The percentage of the payment error rate that resulted from the 
adverse impact of the change(s) and how this figure was derived; and
    (vii) The degree to which the payment error rate exceeded the 
national performance measure in the subject fiscal year.
    (2) The following criteria will be used to assess and evaluate good 
cause in conjunction with the appeals process, and to determine that 
portion of the

[[Page 857]]

error rate/liability attributable to the uncontrollable effects of 
unusual changes in the Food Stamp Program or other Federal and State 
programs; State efforts to control impact on program operations; the 
proportion of food stamp caseload affected; and/or the duration of the 
unusual changes in the Food Stamp Program or other Federal and State 
programs and the impact on program operations. Adjustments for these 
factors may result in a waiver of all, part, or none of the error rate 
liabilities for the applicable period. As appropriate, the waiver amount 
will be adjusted to reflect States' otherwise effective administrative 
of the program based upon the degree to which the error rate exceeded 
the national performance measure.
    (E) A significant circumstance beyond the control of the State 
agency. Requests for relief from errors caused by the uncontrollable 
effect of the significant circumstance other than those specifically set 
forth in paragraphs (e)(5)(i)(A) through (e)(5)(i)(D) of this section 
will be considered to the extent that the circumstance is not common to 
all States, such as a fire in a certification office.
    (1) When submitting a request for good cause relief based on 
significant circumstances, the State agency shall provide the following 
information:
    (i) The significant circumstances that the State agency believes 
uncontrollably and adversely affected the payment error rate for the 
fiscal year in question;
    (ii) Why the State agency had no control over the significant 
circumstances;
    (iii) How the significant circumstances had an uncontrollable and 
adverse impact on the State agency's error rate;
    (iv) Where the significant circumstances existed (i.e. Statewide or 
in particular counties);
    (v) When the significant circumstances existed (provide specific 
dates whenever possible);
    (vi) The proportion of the food stamp caseload whose management was 
affected;
    (vii) Identification and explanation of the uncontrollable errors 
caused by the event (types of errors, geographic location of the errors, 
time period during which the errors occurred, etc.);
    (viii) The percentage of the payment error rate that was caused by 
the significant circumstances and how this figure was derived; and
    (ix) The degree to which the payment error rate exceeded the 
national performance measure in the subject fiscal year.
    (2) The following criteria shall be used to assess and evaluate good 
cause in conjunction with the appeals process, and to determine that 
portion of the error rate/liability attributable to the uncontrollable 
effects of a significant circumstance beyond the control of the State 
agency, other than those set forth in paragraph (e)(5)(i)(E) of this 
section: Geographical impact of the significant circumstances; State 
efforts to control impact on program operations; the proportion of food 
stamp caseload affected; and/or the duration of the significant 
circumstances and the impact on program operations. Adjustments for 
these factors may result in a waiver of all, part, or none of the error 
rate liabilities for the applicable period. As appropriate, the waiver 
amount will be adjusted to reflect States' otherwise effective 
administration of the program based upon the degree to which the error 
rate exceeded the national performance measure.
    (ii) Adjustments. When good cause is found under the criteria in 
paragraphs (e)(5)(i)(A) through (e)(5)(i)(E) of this section, the waiver 
amount may be adjusted to reflect States' otherwise effective 
administration of the program based upon the degree to which the error 
rate exceeds the national performance measure.
    (iii) Evidence. When submitting a request to the ALJ for good cause 
relief, the State agency shall include such data and documentation as is 
necessary to support and verify the information submitted in accordance 
with the requirements of paragraph (e)(5) of this section so as to fully 
explain how a particular significant circumstance(s) uncontrollable 
affected its payment error rate.
    (iv) Finality. The initial decision of the ALJ concerning good cause 
shall constitute the final determination for

[[Page 858]]

purposes of judicial review without further proceedings as established 
under the provisions of Sec.  283.17 and Sec.  283.20 of this chapter.
    (6) Determination of payment error rates. As specified in Sec.  
275.3(c), FNS will validate each State agency's estimated payment error 
rate through rereviewing the State agency's active case sample and 
ensuring that its sampling, estimation, and data management procedures 
are correct.
    (i) Once the Federal case reviews have been completed and all 
differences with the State agency have been identified, FNS shall 
calculate regressed error rates using the following linear regression 
equations.
    (A) y1'=y1+b1(X1-
x1), where y1' is the average value of allotments 
overissued to eligible and ineligible households; y1 is the 
average value of allotments overissued to eligible and ineligible 
households in the rereview sample according to the Federal finding, 
b1 is the estimate of the regression coefficient regressing 
the Federal findings of allotments overissued to eligible and ineligible 
households on the corresponding State agency findings, x1 is 
the average value of allotments overissued to eligible and ineligible 
households in the rereview sample according to State agency findings, 
and X1 is the average value of allotments overissued to 
eligible and ineligible households in the full quality control sample 
according to State agency's findings. In stratified sample designs 
Y1, X1, and x1 are weighted averages 
and b1 is a combined regression coefficient in which stratum 
weights sum to 1.0 and are proportional to the estimated stratum 
caseloads subject to review.
    (B) y2'=y2+b2(X2-
x2), where y2' is the average value of allotments 
underissued to households included in the active error rate, 
y2 is the average value of allotments underissued to 
participating households in the rereview sample according to the Federal 
finding, b2 is the estimate of the regression coefficient 
regressing the Federal findings of allotments underissued to 
participating households on the corresponding State agency findings, 
x2 is the average value of allotments underissued to 
participating households in the rereview sample according to State 
agency findings, and X2 is the average value of allotments 
underissued to participating households in the full quality control 
sample according to the State agency's findings. In stratified sample 
designs y2, X2, and x2 are weighted 
averages and b1 is a combined regression coefficient in which 
stratum weights sum to 1.0 and are proportional to the estimated stratum 
caseloads subject to review.
    (C) The regressed error rates are given by 
r1'=y1'/u, yielding the regressed overpayment 
error rate, and r2'=y2'/u, yielding the regressed 
underpayment error rate, where u is the average value of allotments 
issued to participating households in the State agency sample.
    (D) After application of the adjustment provisions of paragraph 
(e)(6)(iii) of this section, the adjusted regressed payment error rate 
shall be calculated to yield the State agency's payment error rate for 
use in the reduced and enhanced funding determinations described in 
paragraphs (d) and (e) of this section. Prior to Fiscal Year 1986, the 
adjusted regressed payment error rate is given by r1''. For 
Fiscal Year 1986 and after, the adjusted regressed payment error rate is 
given by r1''+r2''.
    (ii) If FNS determines that a State agency has sampled incorrectly, 
estimated improperly, or has deficiencies in its QC data management 
system, FNS will correct the State agency's payment error rate based 
upon a correction to that aspect of the State agency's QC system which 
is deficient. If FNS cannot accurately correct the State agency's 
deficiency, FNS will assign the State agency a payment error rate based 
upon the best information available. After consultation with the State 
agency, this assigned payment error rate will then be used in the above 
described liability determination and in determinations for enhanced 
funding under paragraph (d) of this section. State agencies shall have 
the right to appeal assignment of an error rate in this situation in 
accordance with the procedures of part 283.
    (iii) Should a State agency fail to complete 98 percent of its 
required sample size, FNS shall adjust the State

[[Page 859]]

agency's regressed error rates using the following equations:
    (A) r1''=r1'+2(1-C)S1, where 
r1'' is the adjusted regressed overpayment error rate, 
r1' is the regressed overpayment error rate computed from the 
formula in paragraph (e)(6)(i)(C) of this section, C is the State 
agency's rate of completion of its required sample size expressed as a 
decimal value, and S1 is the standard error of the State 
agency sample overpayment error rate. If a State agency completes all of 
its required sample size, then r1''=r1'.
    (B) r2''=r2'+2(1-C)S2, where 
r2'' is the adjusted regressed underpayment error rate, 
r2' is the regressed underpayment error rate computed from 
the formula in paragraph (e)(6)(i)(C) of this section, C is the State 
agency's rate of completion of its required sample size expressed as a 
decimal value, and S2 is the standard error of the State 
agency sample underpayment error rate. If a State agency completes all 
of its required sample size, then r2''=r2'.
    (7) FNS Timeframes. The case review process and the arbitration of 
all difference cases shall be completed by May 31 following the end of 
the fiscal year. FANS shall determine and announce the national average 
payment error rate for the fiscal year by June 30 following the end of 
the fiscal year. At the same time FNS shall notify all State agencies of 
their individual payment error rates and payment error rate liabilities, 
if any. FNS shall provide a copy of each State agency's notice to its 
respective chief executive officer and legislature. FNS shall initiate 
collection action on each claim for such liabilities before the end of 
the fiscal year following the reporting period in which the claim arose 
unless an administrative appeal relating to the claim is pending. Such 
appeals include requests for good cause waivers and administrative and 
judicial appeals pursuant to Section 14 of the Food Stamp Act. While the 
amount of a State's liability may be recovered through offsets to their 
letter of credit as identified in Sec.  277.16(c) of this chapter, FNS 
shall also have the option of billing a State directly or using other 
claims collection mechanisms authorized under the Federal Claims 
Collection Act, depending upon the amount of the State's liability. FNS 
is not bound by the timeframes referenced in this subparagraph in cases 
where a State fails to submit QC data expeditiously to FNS and FNS 
determines that, as a result, it is unable to calculate a State's 
payment error rate and payment error rate liability within the 
prescribed timeframe.
    (8) Interest charges. (i) To the extent that a State agency does not 
pay a claim established under paragraphs (e)(2) and (e)(3) of this 
section within 30 days from the date on which the bill for collection 
(after a determination on any request for a waiver for good cause) is 
received by the State agency, the State agency shall be liable for 
interest on any unpaid portion of such claim accruing from the date on 
which the bill for collection was received by the State agency. This 
situation applies unless the State agency appeals the claim under part 
283 of the regulations. If the State agency agrees to pay the claim 
through reduction in Federal financial participation for administrative 
costs, this agreement shall be considered to be paying the claim. If the 
State agency appeals such claim (in whole or in part), the interest on 
any unpaid portion of the claim shall accrue from the date of the 
decision on the administrative appeal, or from a date that is one year 
after the date the bill is received, whichever is earlier, until the 
date the unpaid portion of the payment is received.
    (ii) If the State agency pays such claim (in whole or in part) and 
the claim is subsequently overturned through administrative or judicial 
appeal, any amounts paid by the State agency above what is actually due 
shall be promptly returned with interest, accruing from the date the 
payment was received until the date the payment is returned.
    (iii) Any interest assessed under this paragraph shall be computed 
at a rate determined by the Secretary based on the average of the bond 
equivalent of the weekly 90-day Treasury bill auction rates during the 
period such interest accrues. The bond equivalent is the discount rate 
(i.e., the price the bond is actually sold for as opposed to its face 
value) determined by the weekly auction (i.e., the difference between 
the

[[Page 860]]

discount rate and face value) converted to an annualized figure. The 
Secretary shall use the investment rate (i.e., the rate for 365 days) 
compounded in simple interest for the period for which the claim is not 
paid. Interest billings shall be made quarterly with the initial billing 
accruing from the date the interest is first due. Because the discount 
rate for Treasury bills is issued weekly, the interest rate for State 
agency claims shall be averaged for the appropriate weeks.
    (9) Suspension and waiver of liabilities for investments in program 
management activities. In connection with the settlement of all or a 
portion of a QC liability for FY 1986 through Fiscal Year 2002 QC review 
periods, the Department may suspend and subsequently waive all or part 
of a State agency's payment error rate liability claim based on the 
State agency's offsetting investment in program management activities 
intended to reduce errors measured by the QC system. A State agency may 
submit a request to the Department for review of planned investments in 
program management activities intended to reduce error rates as part of 
a proposed settlement of all or a portion of a QC liability at any time 
during the QC liability claim process.
    (i) The State agency's investment plan activity or activities must 
meet the following conditions to be accepted by the Department:
    (A) The activity or activities must be directly related to error 
reduction in the ongoing program, with specific objectives regarding the 
amount of error reduction, and type of errors that will be reduced. The 
costs of demonstration, research, or evaluation projects under sections 
17 (a) through (c) of the Act will not be accepted. The State agency may 
direct the investment plan to a specific project area or implement the 
plan on a statewide basis. In addition, the Department will allow an 
investment plan to be tested in a limited area, as a pilot project, if 
the Department determines it to be appropriate. A request by the State 
agency for a waiver of existing rules will not be acceptable as a 
component of the investment plan. The State agency must submit any 
waiver request through the normal channels for approval and receive 
approval of the request prior to including the waiver in the investment 
plan. Waivers that have been approved for the State agency's use in the 
ongoing operation of the program may continue to be used.
    (B) The program management activity must represent a new or 
increased expenditure. The proposed activity must also represent an 
addition to the minimum program administration required by law for State 
agency administration including corrective action. Therefore, basic 
training of eligibility workers or a continuing corrective action from a 
Corrective Action Plan shall not be acceptable. The State agency may 
include a previous initiative in its plan; however, the State agency 
would have to demonstrate that the initiative is entirely funded by 
State money, represents an increase in spending and there are no 
remaining Federal funds earmarked for the activity.
    (C) Investment activities must be funded in full by the State 
agency, without any matching Federal funds until the entire investment 
amount agreed to is spent. Amounts spent in excess of the settlement 
amount included in the plan may be subject to Federal matching funds.
    (ii) The request shall include:
    (A) A statement of the amount of money that is a quality control 
liability claim that is to be offset by investment in program 
improvements;
    (B) A detailed description of the planned program management 
activity;
    (C) Planned expenditures, including time schedule and anticipated 
cost breakdown;
    (D) Anticipated impact of the activity, identifying the types of 
errors expected to be affected;
    (E) Documentation that the funds would not replace expenditures 
already earmarked for an ongoing effort; and
    (F) A statement that the expenditures are not simply a reallocation 
of resources.
    (iii) The State's and the Department's agreement to settle all, 
part, or none of the QC liability claim under this paragraph is final 
and not subject to further appeal within the Department. An agreement to 
settle all or

[[Page 861]]

part of a State agency's QC liability claim will result in suspension of 
the claim for the specified amount, pending the State's satisfactory 
completion of the initiative or action taken by the Department under the 
provisions of paragraph (e)(9)(vi) of this section.
    (iv) The State agency shall submit modifications to the plan to the 
Department for approval, prior to implementation. Expenditures made 
prior to approval by the Department may not be used in offsetting the 
liability.
    (v) Each State agency which has all or part of a claim suspended 
under this provision shall submit periodic documented reports according 
to a schedule in its approved investment plan. At a minimum, these 
reports shall contain:
    (A) A detailed description of the expenditure of funds, including 
the source of funds and the actual goods and services purchased or 
rented with the funds;
    (B) A detailed description of the actual activity; and
    (C) An explanation of the activity's effect on errors, including an 
explanation of any discrepancy between the planned effect and the actual 
effect.
    (vi) Any funds that the State agency's reports do not document as 
spent as specified in the investment plan may be withdrawn by the 
Department from the reduction in QC liability. Before the reduction is 
withdrawn, the State agency will be provided an opportunity to provide 
the missing documentation.
    (vii) If the reduction in QC liability is withdrawn, the Department 
shall charge interest on the funds not spent according to the plan, in 
accordance with section 602 of the Hunger Prevention Act of 1988, which 
amended section 13(a)(1) of the Food Stamp Act of 1977.
    (viii) The Department's determination to withdraw a reduction in QC 
liability is not appealable within the Department.
    (10) Resolution of liabilities for FY 2003 and beyond. FNS may: 
waive all or a portion of the liability; require the State agency to 
reinvest up to 50 percent of the liability in activities to improve 
program administration, which new investment money shall not be matched 
by Federal funds; designate up to 50 percent of the liability as ``at-
risk'' for repayment if a liability is established based on the State 
agency's payment error rate for the subsequent fiscal year; or assert 
any combination of these options. Once FNS establishes its proposed 
liability resolution plan, the amount assigned as at-risk is not subject 
to settlement negotiation between FNS and the State agency and may not 
be reduced unless an appeal decision revises the total dollar liability. 
FNS and the State shall settle any waiver amount or reinvestment amount 
before the end of the fiscal year in which the liability amount is 
determined unless an administrative appeal relating to the claim is 
pending. If a State agency appeals its liability determination, if the 
State agency began required reinvestment activities prior to an appeal 
determination, and if the liability amount is reduced to $0 through the 
appeal, FNS shall pay to the State agency an amount equal to 50 percent 
of the new investment amount that was included in the liability amount 
subject to the appeal. If FNS wholly prevails on a State agency's 
appeal, FNS will require the State agency to invest all or a portion of 
the amount designated for reinvestment during the appeal to be 
reinvested or to be repaid to the Federal government.

[Amdt. 160, 45 FR 15912, Mar. 11, 1980, as amended by Amdt. 260, 49 FR 
6311, Feb. 17, 1984; Amdt. 262, 49 FR 50598, Dec. 31, 1984. Redesignated 
and amended at 52 FR 3410, Feb. 4, 1987; Amdt. 295, 52 FR 29659, Aug. 
11, 1987; Amdt. 328, 56 FR 60052, Nov. 27, 1991; Amdt. 325, 57 FR 2828, 
Jan. 24, 1992; Amdt. 327, 57 FR 44486, Sept. 28, 1992; 57 FR 47163, Oct. 
14, 1992; Amdt. 348, 59 FR 34561, July 6, 1994; ; Amdt. 366, 62 FR 
29659, June 2, 1997; Amdt. 373, 64 FR 38297, July 16, 1999; 68 FR 59524, 
Oct. 16, 2003]