655 15TH ST, NW, SUITE 700 WASHINGTON, DC 20005 TELEPHONE: 202/452-8444 FAX: 202/429-4519

October 12, 1999

Ms. Patricia Daniels, Director
Supplemental Food Programs Division
Food and Nutrition Service
U.S. Department of Agriculture
3101 Park Center Drive
Room 540
Alexandria, Virginia 22302

Re: Comments on Proposed Amendments to WIC Food Delivery Systems Rules

Dear Ms. Daniels,

The Food Marketing Institute (FMI) is pleased to submit the following comments on the U.S. Department of Agriculture's (USDA's) proposed amendments to the "Food Delivery Systems" regulations of the Special Supplemental Nutrition Program for Women, Infants and Children (also known as the WIC Program). 64 Fed. Reg. 32308 (June 16, 1999). Please consider our comments favorably and include them in the formal record of the proceeding. Given the substantial number of significant issues presented by the proposal, we recommend that the Agency hold public hearings on the food delivery systems regulations before promulgating any amendments.

FMI is a non-profit association that conducts programs in research, education, industry relations and public affairs on behalf of its 1,500 members and their subsidiaries. Our membership includes food retailers and wholesalers, as well as their customers, in the United States and around the world. FMI's domestic member companies operate approximately 21,000 retail food stores with a combined annual sales volume of $220 billion, which accounts for more than half of all grocery sales in the United States. FMI's retail membership is composed of large multi-store chains, small regional firms, and independent supermarkets. Our international membership includes 200 members from 60 countries.

FMI and its members have supported the WIC program since its inception in 1972. Our members, who are among the 45,000 retailers who participate in the program, are pleased to be a part of its success, which derives from many sources. The WIC program provides nutritious supplemental foods and nutrition education specifically tailored to the needs of pregnant, breast-feeding and postpartum women; infants; and children to the age of five years, who are at nutritional risk. The result is that a relatively small amount of funds is used to ensure the health of the participants; the economic benefit to society as a whole is the reduction in more costly treatment that would otherwise be needed later on. Thus, WIC is premised on a preventive philosophy.

WIC's success is also attributable to the commercial retail marketing system that is used by most State agencies as the vehicle through which foods are provided to WIC participants. WIC-authorized retail stores provide access and convenience for the WIC consumer who can shop and choose among brands in the same manner as other consumers.

In relevant part, the goals of the proposal are to reduce costs to the WIC Program by eliminating fraudulent vendors and reducing vendor violations. Although we agree that these are legitimate and worthwhile goals, we do not agree that the proposed regulatory modifications are an efficient or effective way to achieve these goals. Indeed, if enacted, we expect that the regulatory amendments will result in higher costs to the WIC Program at the further expense of additional burdens placed on WIC participants.

The proposal is fundamentally flawed. Unlike the nutritional philosophy of the program, which emphasizes the benefits of using early and generally simpler interventions (e.g., good nutrition) to prevent the need to correct more costly medical and social problems in the future, the key proposed amendments to the food delivery systems rules would require expensive new systems for "catching" vendors who have made mistakes, rather than implementing some simple systems to prevent problems, the majority of which are inadvertent.

Although we understand that both intentional fraud and inadvertent vendor errors cost the WIC Program money, the causes are different and, until the remedy is addressed to the cause, full resolution is unlikely to occur. For example, the Agency might have proposed some or all of the following: increasing communication between vendors and State agencies through the adoption of WIC advisory panels; promoting the use of shelf tags to identify WIC-eligible foods more clearly; redesigning food instruments to provide key rules to customers and store personnel more clearly; increasing participant training; and accelerating the development and implementation of an efficient, national electronic benefits transfer system. Each of these options might assist the WIC Program achieve its goals in a less costly and more proactive manner than the changes USDA has proposed.

In fact, many of these very ideas were presented to the Agency in two reports prepared by FMI's WIC Task Force; both are enclosed with our comments and are discussed more fully below. We are disappointed that USDA did not consider either report in the proposed rulemaking, particularly since the studies and data upon which the Agency chose to rely are extremely outdated. The primary reports that USDA cited are the Office of Inspector General's National Vendor Audit, which was published in 1988, and the WIC Vendor Issues Study, which was published in 1991; needless to say, the underlying data are even older than the reports. In the intervening years since these studies were prepared, State agencies have tested and adopted or rejected many of the fundamental program shifts that USDA is today proposing. And yet, the Agency does not reference the states' experiences and apparently has not considered them.

For example, the mandatory adoption of vendor limiting criteria is a key element of USDA's proposal. The Agency theorizes that, if fewer vendors are authorized, the State agency's administrative costs for overseeing those vendors will be reduced. However, this theory fails to account for the increase in administrative costs that will be necessary to implement the new administrative system and the increase in food costs (to the WIC Program and/or to the WIC participant) that will result from the inherently anti-competitive nature of vendor limiting criteria. But, most importantly, the Agency has failed to consider the very real, additional burdens that limiting the number of vendors that can participate in the program will place on WIC participants. Several states, including New York and Massachusetts, have tried vendor limiting criteria and rejected the approach as expensive and inefficient.

Our members are also concerned by the proposal to require the development of secret criteria to identify and target "high risk" vendors. Although we support the removal of fraudulent vendors from the WIC program, we are concerned that a government system that establishes mandatory criteria in secret sets up a system that is ripe for abuse. Unless the process is open to public view, improper criteria may be developed in violation of due process and the civil rights laws.

USDA further proposes to save WIC Program funds by reducing the appellate procedures that are afforded to food retailers. Only a handful of appeals would be entitled to full administrative review; other issues would be adjudicated through an abbreviated process and still others would not be subject to review by the agency at all. No impartial decision maker would be required under the abbreviated review process; the appellant would only be entitled to have the issue considered by "someone other than the person who rendered the initial decision on the action." USDA also proposes to delay the decisions that result from an administrative appeal, while encouraging states to implement the adverse action that is being appealed before the decision is issued.

USDA has invoked the Goodling Act as the reason for the sweeping changes that are being proposed. However, the Goodling Act only provides general mandates for two specific issues. Indeed, the modifications the Agency would implement include the vendor limiting criteria that were roundly criticized by the public and Members of Congress when they were first proposed in 1990. USDA's proposal far exceeds the mandate of the Goodling Act.

The supermarket industry joins with USDA in seeking to reduce fraud and abuse in the WIC Program, and in looking for ways to stretch program dollars as far as possible for the greatest benefit to participants. We are extremely concerned, however, that the majority of changes proposed in the rulemaking at hand will impose additional costs and burdens on State agencies, retailers, and participants without any concommitant benefits. Particularly in the absence of any current data, the emphasis should be on inexpensive methods of preventing problems, rather than on new, costly and heavy-handed measures to limit the number of vendors who can participate in the program or draconian systems of targeting and punishing vendors. The WIC Program is, in many respects, a very successful nutritional program. We want to continue the collaboration between WIC Program personnel and food retailers to develop effective and efficient methods to improve the WIC Program further.

I. Procedural Rulemaking Requirements

The Regulatory Flexibility Act and the Paperwork Reduction Act set forth important procedural requirements for federal agencies engaged in rulemaking. The required procedures help to ensure that the agencies consider the ramifications of their actions, particularly as they affect small businesses. In this case, USDA clearly failed to comply with its obligations under these statutes.

A. Regulatory Flexibility Act

The purpose of the Regulatory Flexibility Act (RFA)¹ is to ensure that federal agencies analyze the impact of regulations on small business and competition.² Under the RFA, agencies are required to consider alternatives to their actions that will allow the agency to achieve its regulatory objectives without burdening small businesses unnecessarily. Toward this end, the RFA requires each federal agency "to prepare and make available for public comment an initial regulatory flexibility analysis" (or IRFA) whenever the agency is required to publish a general notice of proposed rulemaking for a proposed rule. 5 U.S.C. § 603(a). The analysis must describe the impact of the proposed rule on small entities. Id. An IRFA is not necessary if the head of the agency certifies that "the rule will not, if promulgated have a significant economic impact on a substantial number of small entities." 5 U.S.C. § 605(b). The certification must be accompanied by "a statement providing the factual basis for such certification." Id.

Under Section 611 of the RFA, a small entity that is adversely affected or aggrieved by a final agency action is entitled to judicial review of agency compliance with the requirements of the RFA. Thus, failure to follow proper rulemaking procedures may subject an agency to suit.

USDA did not prepare an IRFA in conjunction with the food delivery systems proposal. Instead, the preamble states that Under Secretary, Food, Nutrition and Consumer Services, Shirley R. Watkins certified that the rule would not have a significant impact on a substantial number of small entities. 64 Fed. Reg. at 32308. The Agency states that the effects of the proposed regulatory modifications would fall primarily on State agencies, although the Agency acknowledges that the proposed rule would have some effect on local agencies and vendors, some of which are small entities.

USDA's certification of no significant impact on small entities is deficient for several reasons. First, the proposal will impact small entities substantially, and USDA knows it well. In 1990, the Agency published a proposed rule that was identical to the instant proposal in many respects. Among other things, the 1990 proposal would have required State agencies to use vendor limiting criteria, which are a key component of the 1999 proposal. USDA received over one thousand comments in response to the 1990 proposal, many of which were from small businesses or Members of Congress objecting to the proposal on the grounds that it would have a substantial impact on small grocery stores. Thus, it is, at best, disingenuous for the Agency to claim that it does not expect the proposed regulation to have a substantial impact on small entities.

Second, the factual certification provided by the Agency is itself inadequate. Specifically, USDA did not define a "small entity," nor did the Agency determine the number of small businesses and small governmental jursidictions that are subject to the rule, both of which are necessary elements of a proper certification. We expect that a substantial number of food retailers qualify as "small entities" and, as such, would be impacted by the proposed rule. Moreover, many local agencies and Indian Tribal Organizations (ITO's) that are charged with administering the WIC program are likely to be small entities that may be substantially impacted by the proposed regulatory changes, as well.

An adequate certification also requires a determination of the degree of economic impact, which is absent in this case. The general purpose of this regulatory overhaul is to reduce the administrative costs associated with the Program; the Agency believes that this goal can be accomplished by reducing the number of vendors that are authorized to serve WIC participants, and by reducing the violations committed by the vendors that remain in the Program. Toward this end, the Agency has proposed to implement several provisions that will have a substantial impact on the marketplace as a whole, such as vendor limiting criteria.

Despite the Agency's protestations to the contrary, the impact of the proposed rule will be particularly overwhelming and substantial on small businesses. For example, the State agency must consider price in determining with whom it will contract, and large food retailers are generally able to buy, and thus to offer, foods at lower prices than small retailers. Therefore, if the number of authorized WIC vendors is limited, ABC Supermarket might be more likely to receive WIC authorization than Mom & Pop Grocery Store. As a result, WIC participants would be required to purchase their WIC-authorized foods at ABC Supermarket. In light of the extra time and effort necessary to make a separate trip to a second grocery store, particularly if the WIC participant is pregnant or has a child or children in tow, WIC participants would be likely to shift all of their shopping to ABC Supermarket, even if they had long been customers of Mom & Pop Grocery Store.

Thus, although USDA may not intend for the WIC program in general or the proposed rule in particular to impact the dynamic of food retail competition, it is an undeniable and unavoidable consequence. Under the RFA, USDA is required to consider the consequences of its actions on small businesses and to determine whether any alternatives might carry out their policy goals as effectively, without impacting small businesses as seriously. Although we agree that reducing the administrative costs of the Program is a worthwhile goal, it may be reached more effectively and efficiently through mechanisms, such as increased communication and education, that will not impact the marketplace negatively, than it can through creating bureaucratic systems that prevent retailers from serving WIC customers. Particularly in the absence of any recent data supporting the proposed regulations, it is incumbent upon the Agency to determine the economic impact of its proposal and address any less drastic alternatives to achieve its objectives.

B. Paperwork Reduction Act of 1995

The purpose of the Paperwork Reduction Act of 1995 (PRA) is to minimize the paperwork burden for individuals, small businesses, and others as a result of the collection of information by or for the Federal Government. 44 U.S.C. §§ 3501, et seq. Agencies must evaluate the impact of their reporting and recordkeeping requirements for consistency with the PRA.

In this case, USDA determined that the burden on some 45,000 vendors would be approximately three hours per year for an average annual cost of $50 per vendor. 64 Fed. Reg. at 32309, 32314. The cost is attributed to two hours of vendor training and fifteen minutes to document receipt of the training. Id. at 32309.

The Agency's estimate is incomplete and inaccurate. First, the analysis does not accurately reflect the costs associated with the training program. Under the proposed rule, a member of management (rather than the head cashier) will be required to undergo the training process, which we would expect to involve more than two hours of time, particularly once transportation time is accounted for. (Transportation time associated with off-site training may be significant, especially for small retailers in rural areas.) One retailer estimated that training sessions will cost $100 in labor expenses alone. A second retailer in a rural area of California reported that the nearest WIC training center is nearly three hours away, thereby necessitating a full day to attend. Hourly wages plus taxes, benefits, and mileage renders the cost of training to the retailer in excess of $200.00 per session. Second, the estimate does not consider the impact of the substantial new recordkeeping requirements, which are set forth in proposed Section 246.12(h)(3)(xv) (see discussion in Section III.F.4, below).

II. References Cited

A. USDA Relied on Outdated References To Prepare the Proposal

USDA lists nine studies as its references for preparing the proposed regulation. The reports the Agency relies upon most heavily are the Office of Inspector General's National Vendor Audit, which was published in June 1988, and the WIC Vendor Issues Study from May 1991. USDA also cites reports from 1996, 1995, 1991, 1990, 1982 and two from 1985. To the extent that these reports rely on data or information gathered from the field, the data themselves are even older than the publication dates of the reports.

Since these reports were issued, significant changes have occurred in many State WIC programs. Some states, like Massachusetts, which was recently commended by the Department for the excellence of its WIC program, have tried and rejected the vendor limiting approach in the period since many of the reports USDA relied upon were published. Indeed, in August 1999, the Government Accounting Office (GAO) concluded that USDA does not have current overall estimates of WIC violations.³ Thus, the reports USDA cites cannot provide credible support for the Agency's proposed overhaul of the food delivery systems regulations.

B. FMI Members Recently Prepared Two Reports on the WIC Program That USDA Did Not Consider

In contrast, within the interim period since the previous proposal, FMI and its members have generated two reports that suggest cost saving improvements that might be made to the WIC program; both reports have been shared with USDA. As neither report was mentioned by the Agency in its proposal, a brief overview of each follows.

In 1996, FMI and its members convened a special task force to study the WIC program and ways in which vendor participation might be improved. In 1997, FMI's WIC Task Force issued a report entitled, "Recommendations to Reform the WIC Program - How to Broaden Its Reach and Reduce Administrative Costs." (A copy is enclosed for the record.) The WIC Task Force is composed of executives from all types of food retailers - large multi-store chains, small regional firms, and independent supermarkets - as well as state grocery association executives. The members represent a cross-section of retail operations, including management, government relations, consumer affairs, electronic payment systems, legal affairs, and communications. One Task Force member served as a WIC Director before joining the retail food industry and a second member is a current participant on USDA's National Advisory Council on WIC.

The Task Force identified issues and made recommendations for change in the areas of retailer authorization, retail operations, reimbursement, penalties, and electronic benefits transfer. Suggestions for improving the efficiency of the program included:

• Creation of WIC retail advisory panels in each state;
• Uniform WIC applications;
• Unlimited vendor participation;
• Increased use of private label food products;
• Increased participant education; and
• Development of a "best practices" manual for food retailers.

As a follow up to the report discussed above, in 1998, the WIC Task Force published a "best practices" manual entitled, "Making WIC Work: A Guide To Successfully Implementing the WIC Program." (A copy is enclosed for the record.) The guide sets forth some of the processes that have proven effective in helping states and retailers work together to improve the implementation of the WIC program. The guide sets forth some of the problems that vendors see in the administration of the WIC program and, more importantly, identifies programs in each of these areas that have led to improvements in the WIC program for both State agencies and vendors.

For example, with respect to increased communication between vendors and State WIC agencies, three different state programs are discussed. In each, the State agencies have made an effort to understand some of the operational issues that retailers face in trying to implement the WIC program; in New Hampshire, for example, the WIC director spent a day in a grocery store. In Ohio, the Ohio Grocers Association publishes communications from the WIC agency in industry trade journals and magazines to help to ensure that retailers are informed of developments within the WIC program. These are examples of relatively simple (and inexpensive) methods of improving the communication between retailers and agency personnel; improved communication leads to smoother (and less costly) Program implementation.

Increased use of private label brands was also identified as a means of stretching WIC program dollars. In Oklahoma, the State agency determined that private label products offer nutritional benefits to consumers and are less costly for the WIC program. Therefore, the State undertook a concerted effort to include private label foods in their program. Virginia and Wisconsin have also found the use of private label foods to be an effective way to stretch the food grant. However, despite the emphasis on cost savings, increased reliance on private label foods is not discussed in USDA's current proposal.

Successful retailer authorization procedures used in three different states were also presented. In Missouri, following substantial problems with the WIC program, the state's WIC office and the Missouri Grocers Association formed a task force, with the encouragement of the Missouri legislature, to work toward resolving issues plaguing the system. North Carolina has employed a corporate contract in its authorization process to eliminate the need for duplicative information submitted on separate forms for stores that are commonly held. Massachusetts tried the limited time frames for applying for WIC authorization that USDA has now proposed; however, following substantial difficulties with the program, Massachusetts changed its policy and now incorporates a rolling application process that allows for ongoing licensing.

Increased participant education was also identified as a cost-savings measure that has been implemented by several States. The Wisconsin WIC agency has developed shelf tags for retailers to help participants identify WIC-eligible foods. In California, the WIC agency provides pamphlets and other literature at point-of-sale displays throughout the store and, in return, grocery stores provide information to the State agency to give to WIC participants. Well-educated WIC participants save the Program money by reducing errors. Retailers are benefited because the responsibility for educating or refusing to sell non-WIC items to WIC customers is not passed on to cashiers who may have difficulty explaining the intricacies of the WIC rules to a WIC participant while a long line of customers waits impatiently for the transaction to end. The explanation itself may engender anger from the WIC participant. Thus, it is important for WIC participants to receive complete information from the State agencies with respect to their responsibilities in the WIC program.

The foregoing examples are just a few of the ideas that were described in the WIC "best practices" manual that should have been considered by the Agency. The failure to consider them, along with the reliance on outdated information, reflects the arbitrary and capricious nature of the Agency's approach to revising the food delivery systems regulations.

III. Discussion of Proposal

A. Background

1. The need for the proposed regulatory modifications is not supported by the studies cited by the Agency.

The intended purpose of the proposed regulations is to modify the WIC Program to reduce the costs associated with its administration. Although cost-saving improvements may be needed, the Agency's proposal, which is not supported by the studies cited, will not save Program dollars and may, in fact, increase overall costs.

The Agency states that proscriptive regulations are necessary because the more generally oriented regulations that have been in place since 1982 "have not brought about an acceptable level of improvement in vendor management." 64 Fed. Reg. at 32310. USDA then notes that the program has expanded significantly in the intervening years and avers that "the potential for loss through misuses of program funds and violation of program regulations," has likewise increased; however, no actual increase in losses is cited. 64 Fed. Reg. at 32310 (emphasis added). To support its contention that "significant levels of vendor violations continue to persist," USDA cites a National Vendor Audit study from 1988 and the WIC Vendor Issues Study from 1991. 64 Fed. Reg. at 32310. In the intervening years since these studies were published, the State agencies have, in some cases, drastically changed their WIC programs. Indeed, some States have adopted and then rejected some of the provisions that USDA now seeks to mandate.

Similarly, USDA relies on a 1991 report that found that 22% of authorized vendors overcharged the Program for WIC-authorized foods. 64 Fed. Reg. at 32314. However, a report issued by GAO in August, 1999 (two months after USDA published its proposal) indicates that vendor violations have fallen substantially in the past eight years. Specifically, the GAO report found that 9% of vendors committed a vendor violation of any type, ranging from overcharging or trafficking to redeeming expired coupons or selling large- instead of medium-sized eggs.⁴ Thus, the regulations that are in place do, in fact, seem to have had an effect on the levels of violations that are occurring. While it may be possible to improve vendor compliance further, the Agency has in no way demonstrated that the proposed federal regulations will be effective in this regard.

2. USDA has not adequately modified the proposal from the 1990 proposal that received overwhelming opposition.

USDA attempted to promulgate similar regulations in 1990. 55 Fed. Reg. 53446 (Dec. 28, 199). During the comment period, the Agency received over one thousand comments, including several from Members of Congress, indicating that "significant modifications to the December 1990 proposed rulemaking were required, and that the extent of such modifications would warrant another opportunity for public input." 64 Fed. Reg. at 32310. And yet, the Agency has issued a proposal that is much the same as the 1990 proposal in many significant respects, such as the vendor limiting criteria that were specifically identified by several Members of Congress as being objectionable.⁵ Although each of the proposed regulatory provisions is discussed more fully below, in the preamble, the Agency states only that it has "made changes to the 1990 proposal based on suggestions of commenters and subsequent State agency vendor experiences," as well as reports from 1990 and 1991. Id. at 32310. USDA has not adequately addressed the concerns expressed regarding the initial proposal, nor has the Agency developed sufficient data in the intervening years to justify the validity of the initial 1990 proposal.

3. The current proposal is as resource-intensive as the 1990 proposal and, therefore, cannot achieve the stated goal of reducing Program administrative costs.

The proposed modifications to the regulations are as resource-intensive as the 1990 proposal. Indeed, the "Department acknowledges that the December 1990 proposal, as well as this one, would require some State agencies to devote additional resources to vendor management, although it is possible that some State agencies could actually experience a decreased burden." 64 Fed. Reg. at 32312. To mitigate the effect, USDA states that the proposed rules would not simply add new requirements, but instead would replace some of the current requirements with "more effective procedures." Id. at 32312. As an example, the Department references the proposed requirement that State agencies replace their representative monitoring programs with high risk vendor monitoring. Id. at 32312. Although State agencies will still be required to monitor 10 percent of the vendor population, the Agencies would be required to develop elaborate and secret "high risk" identification criteria, implement the criteria, and conduct more resource intensive monitoring techniques.⁶ Thus, the very example cited disproves the point that the Agency claims to make.

4. Electronic benefit transfer technology may improve accountability and Program efficiency.

USDA correctly acknowledges that EBT can contribute to improved accountability. 64 Fed. Reg. at 32311. An EBT card or a "smart card" relies on a participant's Personal Identification Number (PIN) to ensure that only the participant or proxy uses the card. In addition, the card may employ a computer chip that lists the authorized supplemental foods, thereby preventing the card from being used to purchase any foods or other items that have not specifically been authorized. Through EBT, vendor accounts may be automatically credited for the amount of the purchase. Thus, EBT has the potential to reduce the opportunity for several vendor violations to occur, including overcharging, food substitutions, and charging for food items not received. Moreover, the use of PIN numbers will limit the extent to which unauthorized persons can obtain WIC funds.

FMI supports the use of EBT in the WIC Program once national standards that will enable the system to be interoperable across state lines are developed. Retailers should not, however, be required to bear the costs of transaction fees or new equipment necessary to implement EBT for WIC. Although replacing paper coupons with EBT cards will have many benefits, it will also mean that the approved foods will no longer be listed on the instrument; increased participant training or shelf tags may be adopted to assist in this regard.

In recognition of the potential benefits EBT offers, proposed Section 246.12(a) "would provide FNS discretion on a case-by-case basis to modify regulatory provisions which FNS determines unnecessarily duplicate the accountability capabilities inherent in the particular EBT system." 64 Fed. Reg. at 32321. Although we agree that EBT has the potential for greatly improving the administration of the WIC system, we are unclear as to the purpose of the proposed regulation.

For example, if promulgated, would the new regulation allow FNS to waive certain regulatory requirements for particular States that have implemented EBT? Eventually, then, it would be necessary to revise the food delivery systems regulations in their entirety. In that case, rather than finalizing essentially the same rules that were proposed and rejected in 1990, we recommend that the Agency wait to modify the food delivery system regulations until EBT can be fully implemented within the WIC program. Given the length of time that has elapsed since the previous proposal, and the lack of data to support either proposal, we expect that it would be more practical and less resource-intensive to overhaul the regulations once, with current data and with full consideration of the best technology.

A. Vendor Limiting Criteria

1. Proposal

USDA proposes to require State agencies to develop and implement criteria to limit the number of vendors that may be authorized and to establish the vendors' distribution. Proposed § 246.12(g)(2). The system must ensure adequate participant access and effective management of authorized vendors. Id. The preamble gives the following guidance to State agencies on establishing the vendor limiting system:

Typically, the State agency would first establish sub-areas within its jurisdiction based on such factors as the distribution of caseload, the location of local agencies and clinics, availability of public transportation and road systems to the WIC population, and the supply of prospective WIC vendors. Each type of sub-area, in turn, would be assigned an appropriate participant to vendor ratio. Theoretically, a State agency with a highly refined methodology might assign a different ratio to each individual sub-area, but State agencies will more likely limit themselves to a small set of ratios capable of addressing the differing needs of particular areas.⁷

The rationale offered is that State agencies must apply "significant resources" to the management of each authorized vendor. Id. at 32318. If more vendors are authorized than are necessary, so the logic goes, the administrative resources may not be sufficient, thereby increasing the possibility of undetected program noncompliance or curtailment of other critical State and local activities. Id. at 32318.

2. FNS has provided no evidence to support the contention that vendor limiting criteria will achieve the desired goals.

USDA has not provided any empirical evidence to support the conclusion that the Agency has identified either the problem or the solution correctly. Specifically, the Department has not shown that the administrative resources are not sufficient to monitor the vendors currently authorized, nor has the Department substantiated the claim that vendor violations are caused by insufficient administrative resources or that reducing the number of vendors will reduce vendor violations.⁸ Moreover, the preamble does not demonstrate that reducing vendors will reduce overall administrative costs or that any reduction in costs would not be offset by increased costs to the system that might result from the increase in effort necessary to manage the vendor limiting program or the increase in food costs (to the Program and/or to participants) as a result of the inherently anti-competitive effect that limiting the number of retailers will have. Indeed, in this section, USDA does not even cite the outdated studies that form the basis for other suggested regulatory modifications.⁹

3. "Many State agencies believe that vendor numbers can be effectively controlled through the application of strong selection criteria. This is true."¹⁰

We agree. State agencies have experimented - first-hand - with vendor limiting and vendor selection criteria for several years, and yet their experiences in this regard are not discussed in the preamble. Although some states have found vendor limiting criteria effective and still use them, others, such as Massachusetts, adopted vendor limiting criteria following USDA's 1990 proposal and have already abandoned the approach as ineffective and expensive. New York, too, found vendor limiting criteria counterproductive. According to the Food Industry Association of New York, the state found that limiting the number of vendors prevented more competitive stores from entering the market. For example, if a relatively expensive grocer holds the only WIC vendor "slot" in a given area, a new, more competitive store would be prevented from obtaining authorization. As a result, New York observed that food costs were increasing because of vendor limiting criteria. Given the practical experience that several states have had with vendor limiting criteria, USDA's proposal to mandate this approach, especially without a discussion of the States' experiences, lacks credibility. If the States that have tried the approach have found that "vendor numbers can be effectively controlled through the application of strong selection criteria," and USDA agrees, then the development of vendor limiting criteria, which would be an additional - and costly - layer of bureaucracy, is unnecessary and fiscally irresponsible.

4. The proposed vendor limiting criteria requirement is virtually identical to the 1990 proposal that was roundly criticized by the public and Members of Congress.

The 1999 proposal on vendor limiting criteria is substantially similar to the 1990 proposal. Entire sections are reproduced verbatim and no additional rationale or empirical evidence is provided to support the validity or advisability of this approach. Given the nearly ten years that USDA has worked on the proposal, the Agency might have pinpointed the issue more precisely or tailored a more fitting recommendation.

The following excerpts from letters that Members of Congress submitted to USDA in response to the 1990 proposal are instructive. For example, Senator Kent Conrad wrote:

I believe that state establishment of limitation criteria . . . will be counterprodutive. Limitation criteria would require the establishment of an arbitrary number of grocers who can participate in the program - before the state has a chance to justify the reasons for its selection of specific grocers. By using selection criteria alone, state officials can identify those grocers who can best serve WIC clients.¹¹

Senator Patrick Leahy, then Chairman of the U.S. Senate Committee on Agriculture, Nutrition, and Forestry, which is USDA's Senate authorizing committee, wrote:

I urge the Department to publish another proposed rule on these matters so that the public has another opportunity to comment before these rules are made final. The rules clearly do not reflect the intent of Congress and indeed will interfere with the proper operation of the WIC program.¹²

The entire Alabama congressional delegation wrote:

We strongly believe that the enactment of such a regulation [vendor limiting criteria] would only be detrimental to both WIC voucher recipients and retailers, especially in our area. We urge you to reconsider this proposal so that WIC benefits continue to be readily available to Alabama's needy.¹³

Regarding the inadvisability of mandating vendor limiting criteria to all states, even if the approach was found to be effective in one state, Congressman Claude Harris wrote:

I doubt that the Delaware pilot program results are applicable to Alabama, as we have single counties larger than that entire state. Transportation problems are not the same in relation to the problems that occur due to the rural make-up of Alabama counties…. Therefore, I definitely remain opposed to the consideration of this proposal [vendor limiting criteria]. The welfare of my constituents is paramount to all other concerns. Again, I am requesting the Department's complete reconsideration of this legislation.¹⁴

Additional letters objecting to the proposed vendor limiting criteria were also submitted by Senator Tom Harkin and Congressman Glen Browder.

5. Based only on the unsupported contention that vendor limiting criteria will reduce vendor oversight costs, USDA has mandated the development and implementation of a bureaucracy that will unquestionably result in the expenditure of substantial additional program resources.

The development and implementation of vendor limiting criteria would require the expenditure of substantial additional program resources to create an unwieldy bureaucracy, particularly in larger states. USDA has provided no evidence to support the assertion that the expenditure of valuable program funds in this manner will be productive in or appropriate for all states.

Large states might need to devise hundreds of sub-areas and determine and apply the appropriate vendor-to-participant ratio in each. The inherent difficulties of this approach would be magnified for the more densely populated urban areas that many large states contain. Managing this process would itself be an extensive and costly undertaking, and yet, USDA has provided nothing to support the claim that vendor limiting criteria will in any way save resources by reducing oversight costs or vendor violations.

6. If vendor limiting criteria are mandated, most States will need to develop new vendor limiting systems.

The majority of State agencies do not currently use vendor limiting criteria as USDA has defined the term. Although the 1999 GAO Report states that 42 out of 51 states use vendor limiting criteria, 26 states relied on vendor pricing to limit the number of vendors in the program;¹⁵ not more than 24 states use vendor limiting criteria of the type that USDA would require states to develop under the proposed rule.¹⁶

Although an attribute of a particular store, such as its pricing structure, may effectively prevent it from participating in the WIC Program, USDA clearly states that selection criteria that incidentally limit the number of vendors are not vendor limiting criteria. 64 Fed. Reg. at 32318. To implement the vendor limiting program that USDA envisions, the State agencies will be required to develop a system to decide how many vendors should be authorized and where, in general terms they should be located. See 64 Fed. Reg. at 32318. Limiting criteria are, in essence, applied before considering the individual aspects of a given vendor. 64 Fed. Reg. 32318. In this regard, the preamble states, "Competitive pricing is already used by most State agencies as a selection criterion in retail food delivery systems." Id. at 32320 (emphasis added). Thus, price limits are not properly considered vendor limiting criteria within the meaning of the Agency's proposal.¹⁷ Consistent with this philosophy, USDA discusses competitive pricing as a vendor selection criterion in a separate section of the preamble. See 64 Fed. Reg. at 32319-20.

Therefore, although the 1999 GAO Report concludes that vendor limiting criteria are widespread and should be used universally, GAO's understanding of vendor limiting criteria includes elements of vendor selection criteria that USDA does not consider vendor limiting criteria. Once the GAO report results are adjusted to reflect USDA's definition, it is clear that mandating vendor limiting criteria would require more than half the States to develop new vendor limiting systems.

7. The imposition of vendor limiting criteria will have a negative impact on small retailers.

As discussed more fully below, Congress has mandated that State agencies consider price when authorizing retailers to participate in the WIC Program.¹⁸ If FNS adds vendor limiting criteria to the regulations, the inevitable result of the combination of vendor limiting criteria and competitive pricing is that small retailers will be forced from the WIC Program, at least in the more desirable locations. See discussion supra at Section I.A.

In an attempt to reassure small retailers, USDA states, "the Department does not foresee dramatic future decreases in the number of authorized smaller WIC vendors." 64 Fed. Reg. at 32319 (emphasis added). In some areas, the loss of WIC authorization may be devastating for a single, family-owned grocer; the fact that the grocer will not be joined by a dramatic number of other small retailers is of no consolation.

The Agency further provides that, "Smaller vendors will always be needed to ensure adequate participant access, particularly in areas where there is a lack of larger chain stores and areas where the number of vendors is small and transportation is difficult." Id. at 32319 (emphasis added). This statement, too, shows a lack of understanding of the nature of small businesses and the impact that the proposed regulations would have on them. The small retailers that are faced with competition from larger chain stores are precisely the stores that are most vulnerable to devastating losses if the vendor limiting criteria are adopted.

In a third attempt to mollify small retailers, the Agency states, "It is important to stress that smaller vendors are critical to the Program and, where instrumental in ensuring adequate participant access, will have equal opportunity to compete for WIC business." Id. at 32319 (emphasis added). The effect of this statement is to place a much higher burden - instrumentality - on small retailers. The inescapable implication is that, where small retailers are not "instrumental in ensuring adequate participant access," they will not have an equal opportunity to compete for WIC business.

8. Reducing the number of authorized WIC vendors will unquestionably result in fewer choices for, greater confusion among, and increased burdens on WIC participants.

Most importantly, reducing the number of WIC vendors will unquestionably have a negative impact on WIC participants. First, limiting stores limits the WIC participant's shopping options, which will inconvenience some and place additional time and transportation burdens on others. Second, limiting stores may cause confusion. If, for example, only three of an area's five Motley's Food Stores accept WIC vouchers, a WIC participant will assume that the Motley's store on Green Street will accept WIC coupons because the store on Main Street does.

Third, although WIC supplies some important nutritional foods, the Program does not - and should not - provide for all of a family's grocery or sundry needs. Given the time limitations that confront today's families, if a WIC participant is forced to shop at one location for foods prescribed under the WIC program, it is likely that she will purchase all of the things that she needs at that location. Setting aside the effects on the marketplace that are discussed more fully above, the result of this system may be costly for WIC participants, as well.

Consider the following example. Suppose that a given sub-area has two vendors, both of whom are now authorized WIC vendors. To compete for WIC business, the stores might run sales on related ancillary items, such as diapers. However, if, as a result of the imposition of limiting criteria, only one store is WIC authorized, the competitive dynamic will shift. The store that is WIC authorized will not have an incentive to offer a reduced price on diapers, while the store that is not WIC authorized will. The result will be that the WIC participant will either have to travel to two grocery stores - requiring greater time and transportation costs, and perhaps with the added difficulty of children in tow - or pay more for the diapers at the WIC-authorized store.

Or imagine that you have become accustomed to and enjoy shopping at Annie's Grocery Store. You have become familiar with the location of the products in the aisles and you know several of the cashiers by name. One day, the manager tells you that Annie's will no longer be able to serve you because there are enough other retailers in the area that will honor your WIC vouchers. You would likely feel inconvenienced and embarrassed, and, as one retailer put it, you would be forced to "learn" a new store. Food retailers strive to build customer loyalty and satisfaction; refusing service is anathema to our members.

Finally, consider the following scenario. The number of WIC vendors is limited in an area in which a new grocery store will open. Other stores of the chain in the area are WIC authorized, but this one is not because the vendor "slots" in the area have been taken. New stores are generally desirable shopping locations because they are able to offer the latest advancements in convenience and, perhaps, food safety. Food retailers often offer substantial "grand opening" sales to attract new customers. WIC participants who know that the other stores in the chain are authorized for participation in the WIC program will want to shop at the new store. They may even fill a shopping basket and proceed to the checkout line before they are told that the store will not be able to serve them because it does not participate in the WIC Program. Obviously, the WIC participant will be disappointed and will not be able to take advantage of the reduced prices in the same way that other consumers will.

USDA has focused on vendor limiting criteria as a way to reduce administrative costs because, the Agency theorizes, if fewer vendors are authorized, the State agencies' administrative costs for overseeing those vendors will be reduced. However, this theory fails to account for the increase in administrative costs that will be required to implement the system and the increase in food costs (to the WIC Program and/or the WIC participant) that will result from the inherently anti-competitive nature of vendor limiting criteria. But, most importantly, the Agency has failed to consider the additional burdens that the vendor limiting criteria will place on WIC participants.

A. Vendor Selection Criteria

1. Proposal

Proposed Section 246.12(g)(3) would establish the following six specific criteria that State agencies must use to select vendors:

• Competitive price;
• Minimum variety and quantity of authorized supplemental foods;
• No record of business-related criminal convictions or civil judgments;
• No history of serious vendor violations in the WIC program;
• No history of serious Food Stamp Program violations; and
• No current disqualification from the Food Stamp Program or, if subject to a civil monetary penalty on the grounds of participant hardship, the period for disqualification that would otherwise have been imposed has expired.

Each of the criteria is discussed in turn below.

2. Competitive price criterion

In selecting a retail store for participation in the Program, the William F. Goodling Child Nutrition Authorization Act of 1998 requires State agencies to consider "the prices that the store charges for foods under the program as compared to the prices that other stores charge for the foods."¹⁹ State agencies must also establish procedures to ensure that WIC authorized retail stores do not subsequently raise prices to levels that would otherwise render the store ineligible for participation in the Program.²⁰

We understand that a general competitive price criterion has been mandated by Congress. Several of our members have remarked that a competitive price standard is preferable to a fixed price ceiling, as the former is capable of reflecting market fluctuations. However, the State agencies should be permitted to experiment with different methods of implementing the competitive price requirement, such as peer pricing, and to consider the appropriate percentages for market pricing on a state-by-state basis since Congress has only placed the very general requirement on State agencies that they must consider price in selecting vendors. Vendor agreements should include provisions that require the State agencies to consider and accommodate the substantial fluctuations in price that may occur over the period of the agreement due to market forces that are beyond the retailers' control.

3. Minimum variety and quantity of authorized foods

Under this criterion, State agencies would be required to define an adequate quantity and variety of foods that retailers must maintain, as well as package sizes. FMI recently submitted comments to the Food and Nutrition Service (FNS) in support of the minimum quantity and minimum variety requirements of the "retail food store" definition under the Food Stamp Program.²¹ FNS proposes to define a "variety" as no fewer than three for purposes of the Food Stamp Program. We supported the FNS proposal in this regard and would encourage FNS to set a comparable definition for the WIC program to promote consistency.

With respect to the minimum quantity requirement, we urge USDA to incorporate some flexibility. Several members have advised us of situations in which stores were cited because they were one can short of a particular food product. Provided a WIC participant is not actually inconvenienced, some tolerance should be built into enforcement of this requirement, just as states' weights and measures regulations allow for a minimal level of variability. For example, a grace level of perhaps five items should be tolerated.

We should note the Department's express encouragement to State agencies to consider the availability of various package sizes and the shelf space of the whole range of their vendors in establishing the minimum variety and quantity requirements. We agree with and appreciate FNS's guidance to State agencies in this regard.

4. "Integrity" provisions

FNS included four provisions that are ostensibly intended to ensure the integrity of the food retailers that participate in the program. For example, USDA proposes to prohibit the participation of a vendor if the vendor, its current owners, officers, directors, or partners have been the subject of business-related criminal convictions or civil judgments.

The standard given is very general and should not be the basis upon which a vendor is prohibited from participating in the WIC program because there has been no showing that a conviction of this nature will, a priori, result in vendor violations under the WIC program. Under the U.S. system of jurisprudence, once an individual has discharged an obligation to society as a result of a criminal conviction or civil judgment, the person should not continue to be penalized. Although State agencies might consider a prior conviction in the overall analysis of whether a given vendor should be authorized or whether a specific vendor should be subject to monitoring, such conviction should not result in mandatory exclusion from the Program.²²

The same analysis applies to the proposed prohibition of vendors who have a history of serious vendor violations in either the WIC or FSP programs, especially given USDA's statement that, "[S]erious vendor violations and serious FSP violations may include actions that are documented in a monitoring visit or other review or investigation even if a conviction or judgment did not result from the investigation." 64 Fed. Reg. at 32321 (emphasis added). We submit that actions that do not result in convictions or judgments should not be considered "serious vendor violations" sufficient to exclude a vendor from the WIC Program. If they were truly serious, the State agency would have taken the appropriate corrective action at the time.

Since "serious violations" may occur even unintentionally, once the vendor has paid the appropriate penalty for the violation - either disqualification or a fine - the vendor should not be refused admission to the program. However, as with the business-related conviction or civil judgment discussed above, the fact that a vendor has been implicated in a serious WIC or FSP violation might be taken into consideration during authorization and might serve as a basis upon which the vendor would be subject to "high risk" monitoring.

By extending the prohibition to vendors that are in any way associated with persons who have been linked with serious FSP or WIC violations, USDA seems to be trying to address vendors who seek to circumvent a sanction by selling the store for a nominal fee to a relative or associate who then applies for authorization, although the person responsible at the time of the sanction actually maintains control of the store. See 64 Fed. Reg. at 32321. However, the State agencies can look for this type of activity and use it as a basis to refuse to authorize a store without prohibiting the authorization of any store that has associated with it a person who has been the subject of one of the identified "integrity" violations. This approach is more narrowly tailored to the desired goal.

A. Timeframes for Accepting and Processing Vendor Applications

USDA proposes to amend the food delivery systems regulations to provide explicit authorization to State agencies to limit the periods during which vendor applications may be accepted and processed. Proposed § 246.12(g)(6). States will, however, be required to accept vendor applications at least once every three years.

The rationale offered for the proposed modification is that limiting periods for acceptance and processing of vendor applications "allows the State agency to use staff resources during the authorization process most efficiently since training, collection of price data, and evaluation of selection criteria can be clustered for more efficient execution." 64 Fed. Reg. at 32321. The Department concludes that, "[t]hese advantages far outweigh the disadvantages associated with the delay before a vendor may apply." Id. at 32321-22.

We respectfully submit that State agencies are in a better position to know whether the "advantages" - blithely asserted by USDA with no empirical evidence - exist and are, in fact, significant. The fact that only 22 out of 75 WIC agencies surveyed in the NAWD National Vendor Management Roundup Survey use limited time frames might suggest that other states have not determined limited application periods to have any advantages. 64 Fed. Reg. at 32322. Indeed, unless the limited time frame is also intended to reduce the number of overall vendors who apply, it may be more difficult for a State agency to concentrate all of the vendor review and evaluation process into a single period than it would be to spread the same number of reviews over a longer period of time.

USDA's statements also fail to recognize that participant and vendor populations may change significantly over the course of a three-year period. Although a State that adopts this approach must also develop a process for exceptions, that process itself may be unwieldy and resource-intensive. Furthermore, until the process is set in motion each time and new vendors apply and are approved, participants may be without sufficient vendors to serve their needs.

Limiting the periods during which vendors may apply for WIC authorization may well prevent participants from access to the newest retailers and may cause participant confusion. Specifically, although the majority of the public will be able to purchase food at a new store on its opening day, WIC participants might have to wait several years before they would be able to use a store that would otherwise have sought and obtained WIC authorization by its opening day, simply because the State agency decided not to accept vendor applications during the year in which the store opened. Similarly, if all of the Madelyn's Supermarkets in an area are WIC-authorized, and Madelyn's Supermarkets opens a new store during a period in which the State agency is not accepting vendor applications, the vendor will be required to refuse service to WIC customers that had quite reasonably assumed that the new Madelyn's Supermarket would honor their WIC vouchers.

Finally, this approach fails to recognize the most glaring reality of today's retail food industry: namely, consolidation. Stores are rapidly changing ownership. To the extent that changes in ownership result in terminated vendor agreements, the WIC program might quickly be faced with a shortage of authorized retailers if time limits for applying for WIC authorization are imposed. Utilization of the "exception" process for applications is likely to be resource-intensive and may result in inequitable treatment of large and small vendors.

B. Time Limited Vendor Agreements

Under the current food delivery systems regulations, State agencies are required to review vendor qualifications at least once every two years. 7 C.F.R. § 246.12(g). The Agency has proposed to replace this requirement with vendor agreements that extend for no more than three years. Proposed § 246.12(h)(1). As a related matter, to promote uniformity, USDA has proposed to require that all vendor agreements be executed between vendors and State agencies, instead of allowing contracts to be made with local agencies. Proposed § 246.12(h)(1).

To justify and support the proposal, FNS cites a 1990 Vendor Management Study that found that 78 percent of the geographic State agencies already authorize vendors for three years or less, making fixed-period agreements the norm. 64 Fed. Reg. at 32322. The data USDA cites are outdated and do not reflect the current situation. Indeed, the 1998 National State Agency Program Integrity Profile (the Profile), prepared by USDA but not cited in this proposal, indicates that almost all of the geographic states has vendor agreements that are a specific length, i.e., for one, two or three years.²³ However, some of these states also employ a system of automatic renewal. That is, if no violations occurred during the agreement period, the agreement would be automatically renewed. The automatic renewal system is more resource-efficient, since it takes less time to carry out than preparing new agreements. The Profile does not include information on automatic renewals.

As many States have adopted the practice under the current regulations, often with modifications such as the automatic renewal provision, mandating time-limited vendor agreements is unnecessary and potentially counter-productive for those State agencies that have determined that time limiting vendor agreements results in an inefficient use of resources. To the extent that State WIC programs evolve and develop more efficient methods over time, they should not be restricted by the Agency.

Moreover, the combined effect of time limited vendor agreements and vendor limiting criteria is that vendors who have long been authorized to serve WIC participants and who may be highly valued by the WIC participant community may not be able to renew their agreements at the end of the term, simply because the State has already decided that a sufficient number of vendors have been authorized in the area. This result would be a substantial disservice to both the vendors who should be respected as important contributors to the success of the WIC program and to the participants that we all serve. Thus, USDA should not require State agencies to adopt time-limited vendor agreements, but should leave the issue to the discretion of the State agencies, at least until definitive data are developed.

C. Vendor Agreement Specifications

USDA's proposal would require State agencies to include several provisions in the vendor agreements. The provisions of interest to FMI are discussed in turn below, followed by our comments.

1. General

Proposed Section 246.12(h)(1) will continue to allow vendor agreements to encompass more than one store. FMI supports this provision.

Proposed Section 246.12(h)(3)(iv) requires vendors to ensure that the actual purchase price is entered on the food instrument before the instrument is signed by either the participant or the proxy. No justification or rationale for the importance or significance of the requirement is offered, however, we expect that vendors will certainly be penalized if the price is entered after the instrument is signed during a compliance buy. Unsubstantiated rules that will result in fines should not be included in the regulations.

FMI supports the requirements that the vendor agreements contain copies of the sanction schedule, the actions subject to administrative review, and the State agency's administrative review procedures. See proposed Section 246.12(h)(4), (5).

2. Vendor claims

Proposed Section 246.12(h)(3)(ix) would allow State agencies to withhold or collect the entire redemption value of a food instrument that contained an overcharge or other error. This provision is unnecessarily punitive and is discussed more fully below in Section III.I.

3. Training

Proposed Section 246.12(h)(3)(xi) would add provisions to the vendor agreements reflecting the proposed vendor training requirements.²⁴ These are discussed below in Section III.G.

4. Recordkeeping

Section 246.12(f)(2)(xiii) currently requires vendors to "provide access to shelf price records, if available" to inspection personnel. Proposed Section 246.12(h)(3)(xv) would substantially increase the recordkeeping burden placed on vendors without providing any justification for its necessity. Specifically, under the proposal, vendors would be required to retain inventory records that are used for State or Federal tax reporting purposes, and other records as the State agency may require. State agencies are given the authority to determine the length of time for which the records must be retained. Vendors must make these records available at any reasonable time and place to representatives of the State agency, the Department, and the Comptroller of the United States for inspection and audit. 64 Fed. Reg. at 32323.

The proposed requirement imposes a substantial, unnecessary, and unjustified burden on retailers. As defined in the proposed regulations, "vendor" refers to each individual store location. See proposed 7 CFR § 246.2. Thus, the individual locations of multi-store operations would each be required to maintain - for an unspecified amount of time - potentially voluminous and extensive records that are often centrally held by the corporate offices. Rather than requiring on-site record retention, USDA should permit retailers to store the records according to their corporate policies, but make the records available to Federal and State officials within a time period that accommodates the potential shipment of the records, when the need arises.

5. Notification

Proposed Section 246.12(h)(3)(xvii) would require vendors to give State WIC agencies 45 days' written notice prior to a change in vendor ownership, store location, or cessation of operations. These events will terminate the vendor agreement, except that the State agency may permit vendors to move short distances without voiding the agreement; changes in business structure without any change in ownership will not constitute a change of ownership.

We agree that changes in business structure and local moves should not constitute grounds for terminating vendor agreements and appreciate USDA's intention to clarify the food delivery systems regulations in this regard. However, our members have expressed great concern regarding the 45-day notice requirement. Given the rapid consolidation that is now occurring in the retail food industry, advising the State agency 45 days prior to the change in ownership will not, in most cases, be possible. Likewise, the decision to cease operations is one that is often held highly confidentially so that employees and customers are retained for as long as possible. Therefore, we recommend replacing the 45-day notice requirement with a "promptly" or "as soon as practicable" standard.

A. Vendor Training

Proposed Section 246.12(i) would require annual training for all vendors. 64 Fed. Reg. at 32324. Face-to-face training must occur at least once during the vendor agreement period. In the first agreement period, on-site training²⁵ must be performed prior to or at the time of initial authorization of a new vendor; on-site training fulfills the face-to-face training requirement for the period. In subsequent vendor agreement periods, the State agency has the "sole discretion to determine the date, time and place of all training, except that the vendor would have to be given at least one opportunity to reschedule." Id. at 32324. In other years of the agreement period, the annual training could, for example, consist of a training video, written material, such as a handbook update, or verbal instructions relayed by audiotape. Id. at 32324. State agencies would be allowed to permit training to be conducted by a local agency, contractor, or "vendor representative."

Many of our members have expressed appreciation for the training program and FMI generally supports training as an important means of communicating information regarding WIC program requirements. However, we have the following suggestions regarding the specifics of the proposal.

With respect to the off-site, face-to-face training requirement, members have noted that this requirement may place a substantial burden on retailers, particularly those with small staffs or in rural locations. One member suggested that State agencies be required to hold off-site training within a 100 mile radius of the store's location. To facilitate planning, it might be helpful to have the training scheduled at least twice per year or vendors should be given at least 60 days' notice of the training session.

Several members remarked that they have found the video and other non-in-person forms of training helpful, however, members have also experienced problems obtaining copies of materials from State agencies that do not have sufficient supplies in stock. State agencies should be required to maintain an adequate supply of all training materials on hand.

We agree that State agencies should be permitted to delegate the training function to vendor representatives. Indeed, several states currently utilize self-training or "train-the-trainer" programs with great success. FMI agrees that this practice should be allowed to continue. Vendors should also be allowed to open new stores with employees who have been previously trained, rather than being required to wait until State personnel are available to train them.

Two of the proposed training requirements, however, seem designed to ensure vendor liability rather than to enhance the value of vendor training. Specifically, the stated purpose for requiring vendors to sign a receipt following training is so that "the State agency retains evidence of awareness of program rules and procedures by vendors. Thus, violative vendors cannot successfully argue during administrative reviews that they were not appropriately trained on their responsibilities." Id. at 32324. Similarly, the purpose for requiring that a manger of the vendor, rather than a "head cashier" undergo the training is to ensure that a person who possesses "the necessary authority to accept training responsibilities for the vendor" participates in the training process. Id. at 32323; see proposed § 246.12(h)(3)(xi).

As the recently promulgated vendor disqualification regulations and accompanying preamble make abundantly clear, FNS will hold retailers responsible for all manner of violations, regardless of whether they are intentional or inadvertent. 64 Fed. Reg. 13323 (March 18, 1999). Accordingly, the training receipt is irrelevant. Since the store will be responsible for violations regardless of who attends the training or who commits the violation, stores should be allowed to choose the person who is best situated to attend the training and who might best provide information to the store, rather than to require a manager to attend.

B. Vendor Monitoring

USDA has proposed a substantial overhaul of the vendor monitoring provisions of the food delivery systems regulations. Federal and state agencies will develop secret identifying criteria, which will be used to target "high risk" vendors for compliance buys and inventory audits.

FMI members are interested in ensuring that fraudulent retailers are not authorized for participation in the WIC program. Indeed, it is the presence of a handful of unethical retailers that has precipitated the proposed wholesale revision of the regulations. However, the proposal would substantially increase the amount of Program funds necessary for vendor monitoring. Moreover, the proposed system would require the development of secret criteria to target businesses; the notion of secret criteria violates the fundamental principles of transparency of government and government accountability. Lastly, USDA does not have sufficient information about the nature and type of violations being committed. USDA argues that all violations - whether inadvertent or intentional - cost the program money. While that may be true, inadvertent and intentional violations have different causes and likely result in different levels of cost to the program. To design an effective remedy, the government first needs a solid understanding of the scope and cause of the problem.

1. Current regulations

Under the current regulations, State agencies must design and implement a system to identify high risk vendors and to ensure on-site monitoring, investigation and sanctioning, as appropriate. 7 C.F.R. § 246.12(i). Criteria for identifying high risk vendors are identified in the regulation and include previous overcharges or errors in redeemed food instruments or participant complaints. 7 C.F.R. § 246.12(i)(1). State agencies are required to conduct on-site monitoring visits of at least 10 percent of authorized food vendors selected on a "representative basis" each year. 7 C.F.R. § 246.12(i)(2). Compliance buys, review of cashier check-out procedures, review of inventory records, and review of availability and prices of Program supplemental foods are acceptable methods of monitoring. 7 C.F.R. § 246.12(i)(4).

2. Proposed amendments

The Goodling Act requires State agencies to "identify vendors that have a high probability of program abuse and conduct compliance investigations of the vendors." Section 203(f) of Goodling Act; 42 U.S.C. § 1786(f). In addition, USDA is required to propose regulations to carry out this provision by March 1, 1999 and to finalize these regulations by March 1, 2000. Toward this end, proposed Section 246.12(j) maintains the requirement that the State agency design and implement a system for monitoring vendors, but additionally requires the State agency to identify high-risk vendors using criteria developed by FNS. In this regard, FNS states that it will develop criteria that will change no more often than once every two years and FNS will provide at least one years' notice prior to implementation of the new criteria. Proposed § 246.12(j)(2). The high risk criteria, however, will not be included in the regulations published regulations because, "Public disclosure of the high-risk criteria would undermine their usefulness in identifying high-risk vendors and would interfere with timely changes to the criteria as knowledge about the effectiveness of various criteria increases." 64 Fed. Reg. at 32325.

State agencies will be required to conduct compliance buys or inventory audits on at least 10 percent of the number of authorized vendors. Proposed Section 246.12(j) "High risk" vendors must be monitored first. If more than 10 percent of the vendors are "high risk," the State must prioritize and monitor the ten percent that is most likely to be non-compliant; if less than 10 percent are identified as "high risk," the State agency must fill in the difference by randomly selecting additional vendors upon which to conduct compliance buys and inventory audits. Proposed § 246.12(j)(3). Under the proposal, routine monitoring would no longer be required. 64 Fed. Reg. at 32326.

3. Development of "high risk" vendor criteria in secret is contrary to principles of government transparency and accountability.

The proposed scheme in which the federal government will develop secret criteria to identify vendors that will be targeted for monitoring establishes the potential for government abuse. Although the preamble states that FNS's review of any State-developed criteria would include "a review of the civil rights implications of the criteria," no such assurance is given for the federally developed criteria. 64 Fed. Reg. at 32325. Moreover, if the criteria are developed in secret, there is no way for the public to monitor the Agency. Our federal government depends on a system of checks and balances; if one branch holds the development of its policies in secret, it cannot be "checked" by the other branches of government. The Goodling Act mandates only the development of "high risk" criteria; it does not require the criteria to be developed in secret.

USDA predicates the need to develop the criteria in secret in part on the need to prevent interference "with timely changes to the criteria as knowledge about the effectiveness of various criteria increases." Id. at 32325. However, since FNS is committing not to change the criteria more frequently than once every two years and to allow one year's notice prior to implementation, we do not understand how public notice would hinder the timeliness of the criteria's development.

By their very nature, "high risk" identifiers are suspect. The Agency itself states: "[H]igh risk identifiers can be manipulated." Id. at 32326 (emphasis added).²⁶ Given the outcry associated with racial profiling, we recommend that USDA abandon the proposal requiring the government to develop secret criteria to be used to identify and target individual companies.²⁷

4. USDA's proposed "high risk" vendor monitoring program is more resource-intensive than the current program, and the Agency has not shown that the extra resources will improve WIC Program integrity or reduce WIC Program violations.

Under the proposal, although State agencies will no longer be required to conduct routine monitoring of ten percent of the vendor population, State agencies will be required to conduct compliance²⁸ buys or inventory audits on the ten percent of the vendor population that meets the "high risk" vendor criteria. As USDA acknowledges, this "may not be an even exchange since both compliance buys (given the probable need for more than one at each vendor) and inventory audits are almost always more expensive than routine monitoring visits." 64 Fed. Reg. at 32327. Indeed, to establish program compliance for a high risk vendor, the Agency has proposed to require at least three compliance buys in which no violations are observed. Several store visits may also be required to establish the necessary "pattern" element of some violations. See 7 C.F.R. § 246.12(l).

As justification for the high risk vendor monitoring program the Agency proposed, USDA cites the 1988 National Vendor audit, which the Agency describes as "not nationally representative." Id. at 32324. The WIC Vendor Issues study from 1991, the Applied Research on Vendor Abuse from 1985, and the "WIC State Agency Guide to Vendor Monitoring," (which is not listed in the reference list so its publication date cannot be determined) are also cited.²⁹ These studies are extremely outdated. In the intervening years, State agencies have tried and rejected or adopted a variety of different approaches. In the absence of any current studies or data, USDA should at least consider and evaluate the States' experience before publishing proposed regulations.

The Agency further notes that, according to the 1996 VAMP report, 33 percent of State agencies conduct annual routine monitoring of all of their vendors and that an unspecified number of State agencies exceed the proposed 10 percent requirement. 64 Fed. Reg. at 32327. However, no comparison is given of the efficacy of the approaches or of the levels of vendor violations observed in the 33 percent of states that rely heavily on routine monitoring. Since this has been tried in the states, it would be appropriate to offer some empirical evidence to support USDA's proposal before requiring such a substantial expenditure of Program funds. Indeed, the proposal pre-supposes that if no difference in the total number of violations is observed as a result of switching from routine monitoring to monitoring high risk vendors, then the State agency must have developed the high risk detection system incorrectly.³⁰ Of course the other obvious possibility is that the "high risk" monitoring system is simply not an effective means for identifying vendor violations.

1. Routine monitoring, which the Agency acknowledges as a valuable tool, may be discontinued in many states because the resources will be channeled into "high risk" monitoring

According to the preamble, routine monitoring, in which WIC staff identify themselves to vendor personnel, is most often used by State agencies. 64 Fed. Reg. at 32324. Routine monitoring serves many important and valuable functions. Id. USDA states that routine monitoring provides "an overview of vendors statewide," "has program noncompliance-deterrent and educational functions, and can adequately address inventory, sanitation, and processing of food instruments available on the premises for inspections." Id. at 32324-25. However, despite the acknowledged value of this tool, routine monitoring is no longer required. Id. at 32326. Given the substantial increase in resources that will be needed to complete the high risk vendor monitoring program, State agencies are unlikely to have sufficient resources available to conduct routine monitoring at all.

2. USDA should prohibit State agencies from adding inspector travel costs to penalties imposed on retailers

In some areas, an inspector's food, hotel and other travel costs are added to the penalty imposed on retailers. This approach encourages inspectors to use all means possible to justify their expenses and essentially gives the inspector a financial incentive to target retailers. FMI encourages USDA to prohibit states from adopting this approach.

7. Better feedback to stores on the results of monitoring will improve vendor compliance

FMI's members report that one of the most effective systems that a State agency can implement to improve vendor compliance is a system to provide timely and meaningful feedback to stores from monitoring visits. For example, information on the date and time of the inspection, store personnel that were interviewed, and the inspector's observations are very helpful in ensuring that any necessary education and training are targeted to the appropriate people and that corrections are made where necessary. Timely feedback on monitoring visits in which no infractions are observed is likewise beneficial.

A. Vendor Claims

Under the current regulations, State agencies are required to "design and implement a system of review of food instrument[s] to detect suspected overcharges and to identify food vendors with high levels of suspected overcharges." 7 C.F.R. § 246.12(r). State agencies must grant vendors an opportunity to correct or justify an error giving rise to an overcharge claim. Id. FNS proposes to amend the regulations to include an explicit authorization to State agencies to withhold or collect from vendors the entire redemption value of food instruments that include an overcharge. Proposed § 246.12(k)(2). In fact, the preamble specifically "encourages" State agencies to exercise their authority in this regard. 64 Fed. Reg. at 32328.

To justify this modification to the regulations, FNS cites studies from 1988 and 1991, which the Agency vaguely claims "demonstrate that the general regulatory requirements have been ineffective in detecting overcharges in some State agencies." Id. at 32327. After discussing the two basic types of overcharge detection systems currently in use and concluding that the accounting systems are too complex and variable "to govern them . . . through the regulatory process," the Agency instead proposes to require States to report overcharges and errors on a quarterly basis and to include a federal regulation confirming the authority of State agencies to withhold or collect from vendors the entire redemption value of food instruments that include an overcharge. Id. at 32327.

There are several problems with the proposal and the rationale the Agency has offered. First, the reports are so outdated that they cannot reliably establish that a vendor overcharge problem exists today that needs to be addressed by such a draconian measure. Second, as the Agency intimates, the real issue is with the accounting system. However, as USDA was unable to determine how to regulate the accounting system, the Agency proposes to require quarterly reporting, which will require more paperwork and greater administrative costs.

With respect to the encouraged practice of withholding entire payments, the Department has presented no evidence to support the conclusion that this will reduce overcharges. Presumably, the purpose is to deter intentional non-compliance. However, if the cause is actually inadvertent error, deterrence will have no effect.

More importantly, the practice is simply unfair. In no other commercial setting would it be appropriate to refuse to reimburse clear and uncontested obligations because one obligation was the subject of dispute. For example, one cannot refuse to pay an entire credit card bill simply because the charge for one item is disputed.

As part of the rationale for permitting States to withhold or collect the entire redemption value of a food instrument containing an overcharge or other error, USDA states that, "the 1991 Vendor Issues study found a close correlation between overcharging and other program violations."³¹ First, the study cited is outdated. Second, if the allegation is true, than perhaps a pattern of overcharges might be a criterion that would suggest that high risk monitoring is necessary; such an alleged correlation cannot, however, form the basis for punitive action. If a State agency believes that a specific vendor that overcharged the agency for an item on a food instrument has committed other program violations, the State agency should determine what those other violations are and initiate the appropriate action for those particular violations against the specific vendor. The agency cannot simply assume on the basis of an overcharge that other violations "must have" occurred and therefore punish all vendors for those other unproven violations by refusing to honor the States' obligations for the rest of the food properly charged to the State agency. The proposed approach is patently unfair.

B. Vendor Sanctions

Both vendor and participant sanctions are currently addressed in Section 246.12(k) of the food delivery systems regulations. The Agency proposes to separate the requirements for vendors and participants into different sections for clarity but does not propose any substantive changes to the rules themselves. As USDA notes, the vendor sanction regulations were recently amended. The Department published a final rule on March 18, 1999, following the notice of proposed rulemaking, which was issued on April 20, 1998. Since the regulations were recently amended, the Department states that it will not consider any comments at this time on the vendor sanction rules.

1. USDA should consider comments on the vendor sanction rules now because the Goodling Act, which was passed three months after the comment period for the vendor sanctions proposal closed, substantially impacted the final rules

As explained more fully below, USDA should re-open the vendor sanction rules for comment because the rules changed significantly following the enactment of the Goodling Act, which occurred several months after the comment period closed. The currently proposed overhaul of the food delivery systems regulations presents the appropriate opportunity for this undertaking. The following chronology may be helpful.

On April 20, 1998, USDA proposed to amend the vendor sanction rules to accomplish two primary goals: (1) to implement the reciprocal disqualification provision of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA) and (2) to establish mandatory and, thus, uniform sanctions for vendors who violated the WIC program rules. The second goal was developed in response to a September 1995 report issued by the Office of Inspector General entitled, "Disqualification of Vendors from Food and Nutrition Service," but was not statutorily mandated. 63 Fed. Reg. at 19416. The proposal specifically recommended amending the rules to require the mandatory disqualification of vendors for periods ranging from one year for certain relatively minor infractions to permanent disqualification for an administrative finding of trafficking in food instruments. 63 Fed. Reg. at 19418. The only proposed exception to disqualification would occur if disqualification would result in inadequate participant access, in which case, the vendor would be subject to a civil money penalty. The comment period for the proposal closed on July 20, 1998.

Three months later, Congress passed the William F. Goodling Child Nutrition Reauthorization Act of 1998 (the Goodling Act). Pub. Law 105-336 (enacted October 31, 1998). With the exceptions discussed further below, the Goodling Act required a vendor to be permanently disqualified from the WIC program if the vendor had been convicted of either (1) trafficking in food instruments or (2) selling firearms, ammunition, explosives or controlled substances in exchange for food instruments (hereinafter collectively referred to as "trafficking or illegal sales violations").

The Goodling Act provided for two possible exceptions to the permanent disqualification sanction imposed in the case of a conviction for either trafficking or illegal sales violations. First, a vendor might be permitted to pay a civil money penalty (CMP) in lieu of disqualification, if disqualification of the vendor would cause hardship to the participants in the WIC program. Second, a CMP would also be permitted in lieu of disqualification if the vendor could make the following "good faith showing:"

1. the vendor had, at the time of the violation, an effective policy and program in effect to prevent the violation; and
2. the ownership of the vendor was not aware of, did not approve of, and was not involved in the conduct of the violation.

On March 18, 1999, FNS issued a final rule amending the WIC regulations to reflect both the comments received in response to the April 1998 proposal and the requirements of the Goodling Act. 64 Fed. Reg. 13323 (March 18, 1999). The final rule sets forth mandatory vendor sanctions in Section 246.12(k)(1), which range from a permanent disqualification from the WIC program for one year as a result of a pattern of exchanging food instruments for unauthorized food items to permanent disqualification for conviction of trafficking or illegal sales violations. An administrative finding of a trafficking or illegal sales violation would result in a six-year disqualification.

In each of these cases, the State may impose a CMP in lieu of disqualification if the State determines that disqualification of the vendor would result in inadequate participant access. 7 C.F.R. § 246.12(k)(i)(A), (ix). However, in addition, and only in the case of a vendor who has been convicted of trafficking in food instruments or selling firearms, ammunition, explosives, or controlled substances in exchange for food instruments, a CMP may be assessed in lieu of disqualification (which would have been permanent in the case of a conviction for this violation) if the vendor can make the good faith showing described in the Goodling Act and reiterated in new Section 246.12(k)(1)(i)(B). Thus, the regulations now provide for a good faith showing to be the basis of a CMP imposed in lieu of a permanent disqualification in the case of a conviction for the most serious WIC violations, but do not provide the same opportunity for a good faith showing for an administrative finding of the same or lesser violations.

The conference report to the Goodling Act provides little discussion of either the vendor disqualification or the good faith showing provisions. H.R. Report 105-786 at 63-64 (October 6, 1998). The only clarification provided with respect to the latter is the Committee's intent that the good faith showing is not to be permitted for use by a vendor who has "repeated convictions for WIC offenses . . . simply because the ownership of the vendor was not aware of, did not approve of, or was not involved in the offenses." Id. at 64. The Committee notes that the "strongest possible action" should be taken against vendors who have repeatedly been convicted of trafficking or illegal sales of WIC food instruments. Id. at 64.

2. Vendor sanction rules are internally inconsistent because they provide the statutorily mandated opportunity for a "good faith" showing upon conviction of the most serious offense, but do not afford the same opportunity if only an administrative finding is made of the same or lesser offenses.

Based on the foregoing discussion, it is clear that the current regulations provide for an anomalous result: as required by statute, a vendor who has been convicted of the most serious offense has the opportunity to make a good faith showing and, if successful, to pay CMP's in lieu of disqualification, but a vendor against whom an administrative finding of the same violation or any lesser violation has been made is not afforded the same opportunity. USDA should render the regulations internally consistent and permit vendors to make the "good faith" showing described above and permitted under the Goodling Act in all cases.

A. Conflict of Interest

Proposed Section 246.12(t) of the food delivery systems regulations would prohibit a conflict of interest between vendors and State agencies as well as vendors and local agencies. We agree with the Department's statement that this is an area that is based more appropriately on State laws or regulations governing conflict of interest. We also agree that prohibiting conflicts of interest is important to the integrity of the Program.

B. Vendor Appeals

Solely as a cost-savings measure, USDA is proposing to curtail the current vendor appeals process. As discussed more fully below, USDA proposes to limit the types of State agency actions subject to administrative reviews, establish abbreviated administrative review procedures for certain adverse actions, and relax review procedure timeframes. We strongly object to the proposed changes on the grounds that they will adversely affect vendors' due process rights to a fair hearing in contravention of the United States Constitution and the Administrative Procedures Act.

1. Appeals allowed

The current regulations require State agencies to provide a hearing procedure whereby a food vendor or local agency adversely affected by a State or local agency action may appeal the action. 7 C.F.R. § 246.18(a). The right of appeal must currently be granted when a local agency's or a food vendor's application to participate is denied, when a local agency or vendor is disqualified during the course of the contract or agreement, or as a result of "any other adverse action which affects participation." 7 C.F.R. § 246.18(a)(1).

Under the proposed regulations, only the following actions would be the subject of a full administrative review: (1) denial of authorization based on selection criteria or the State agency's determination in accordance with proposed Section 246.12(g)(4) that the vendor is attempting to circumvent a sanction; (2) termination of an agreement for cause; (3) disqualification; and (4) the imposition of a fine or a civil money penalty in lieu of disqualification.

In addition, USDA proposes to create an abbreviated appeals procedure for the following actions, which are alleged to present only very narrow appellate issues: (1) a denial of authorization based on some of the "integrity" provisions in the selection criteria; (2) denial of authorization due to limiting criteria or because the application was submitted outside the specified application timeframe; (3) termination of an agreement based on a change of ownership or location, or cessation of operations; and (4) disqualification from the WIC program based on the imposition of an FSP civil money penalty for hardship. Proposed Section 246.18(a)(1)(ii). In the Agency's opinion, abbreviated procedures are deemed sufficient in these cases because the "decision is largely systematic." 64 Fed. Reg. at 32331.

The proposed regulations make no provision for any other possible basis for appeal. Disputes regarding food instrument payments and vendor claims are specifically prohibited from administrative review. Proposed Section 246.18.(a)(1)(iii).

The proposal to curtail appellate rights is largely unsupported with factual studies or empirical evidence. The Agency relies solely on the 1988 National Vendor Audit. Likewise, the Agency did not provide any justification for its decision to treat local agency appeals, which will continue to be entitled to full administrative review, differently from vendor appeals. Proposed Section 246.18(a)(2). If appeal procedures are so costly to the system that draconian rearrangement of the regulations is required for vendors, we would expect the same to hold true for local agency appeals.

2. Proposed modifications to full appeal procedures

a. Timeframes for full administrative review

Paragraphs (b)(1) and (b)(9) of Section 246.12 set forth timeframes for the advance notice of adverse action (15 days) and the notification of the appeal decision (within 60 days of the date of receipt of the vendor's request for administrative review). USDA proposes to extend the time limit for providing decisions on vendor appeals to 90 days; the time frame for providing an appellate decision to local agencies will remain unchanged at 60 days.³²

Appellate decisions should not be delayed any longer than they already are. Under the proposal, appellate procedures are being severely curtailed. The reduction in appeals, alone, should be sufficient to ensure that the remaining decisions are issued in a timely manner. Since, as the Department notes, some State agencies have been clearly able to meet the current timeframe, USDA should encourage all State agencies to improve the efficiency of their appellate systems, rather than encourage them to become less efficient.

b. Effective dates of adverse actions

Under the current regulations, State agencies are given the option of taking adverse action against a vendor 15 days after the vendor has been notified. The proposed regulations would render denials of vendor authorizations and disqualifications effective on the date the notice of administrative action was received. Proposed Section 246.18(a)(3). All other adverse actions subject to administrative review would be made effective 15 days after the date of notice of the action. The State agency would only be allowed to postpone the effective date of an adverse action "if the State agency determines that the delay is necessary to ensure either adequate participant access or the effective and efficient operation of the Program." Proposed Section 246.18(a)(3).

The combined effect of the proposed extended decision timeframes discussed above, and the proposed effective dates of the adverse action is that vendors that have been accused of committing a violation will be prohibited from serving their WIC customers during the entire pendancy of the proceeding, which is likely to be 90 days, even though the vendor may ultimately be exonerated. (Interestingly, adverse actions against local agencies are not effective until after the decision is issued; as noted above, decisions for local vendors must still be issued within 60 days.)

c. "In camera" review

The current regulations provide the opportunity to confront and cross-examine adverse witnesses. 7 CFR § 246.18(b)(5). Proposed Section 246.18(b)(5) would restrict this provision to the opportunity to cross-examine adverse witnesses and further states that such examination may be conducted "in camera," if "necessary to protect the identity of WIC Program investigators." The preamble interprets the regulation as allowing examinations to be conducted "behind a protective screen or other device, to protect the identity of WIC Program investigators." 64 Fed. Reg. at 32332. Theoretically, the identity of the investigator is protected to prevent future investigations from being compromised. Id. at 32332.

Black's Law Dictionary defines in camera as follows:

In chambers; in private. A cause is said to be heard in camera either when the hearing is had before the judge in his private chambers or when all spectators are excluded from the courtroom.

Black's Law Dictionary at 684 (5th ed. 1989).

The meaning of the proposed regulation is unclear to us. USDA certainly should not be allowed to authorize questioning of a program witness out of hearing of the vendor. The accused vendor should have the opportunity to hear the testimony presented against it and the opportunity to cross-examine any and all of the government's witnesses. If the Agency decides that preventing the vendor from knowing the identity of the investigator is of sufficient importance - a decision with which we would not agree - the regulation should specifically authorize the use of a device to screen the investigator's identity.

d. Disclosure of information

Under the current regulations, appellant vendors or local agencies are given "the opportunity to review the case record prior to the hearing." 7 CFR § 246.18(b)(7). Proposed Section 246.18(b)(7) would limit the information that the appellant is allowed to examine to "the evidence upon which the State agency's action is based." The reason given is that the case record may contain investigative information that, if released "would jeopardize efforts to combat program noncompliance." 64 Fed. Reg. at 32332. The investigative information at issue is specifically identified as "information regarding how the State agency established the vendor's high risk status." 64 Fed. Reg. at 32332.

Although we disagree with the underlying premise that information regarding the manner in which the State established the vendor's high risk status should be considered confidential (see discussion above), assuming arguendo that it is correct, the proper amendment to the current regulation would be as follows:

(b) The procedures should provide the local agency or vendor with the following:
. . .
(7) The opportunity to review the case record prior to the hearing, except for investigative information regarding how the State agency established the vendor's high risk status.

7 C.F.R. § 246.18(b)(7) (proposed amendment to the current regulation in italics). The suggested amendment would preserve the appellant's right to review the case file with the specific exception of the information about which USDA is particularly concerned. All other information regarding the State agency's investigation should most certainly be made available to the vendor to allow the vendor adequate due process in preparing an appeal. We submit that the investigative information should also be made available.

e. Determination by impartial decision maker

The current regulations require an impartial decision maker to determine "the validity of the State or local agency's action" solely on the evidence presented at the hearing and the statutory and regulatory provisions governing the Program. 7 CFR § 246.18(b)(8). Although the proposed regulation would still require an impartial decision maker, the proposal would significantly change the nature of the determination. Specifically, the decision maker's determination would be limited to "whether the State agency has correctly applied its policies and procedures." Proposed Section 246.18(b)(8).

The proposal represents an important shift in the focus of the decision maker, and yet, no discussion of the change or the basis upon which the modification was proposed is included in the preamble. We oppose the proposed change. If the Agency intends to recommend a modification, the requirement should be that the decision maker ensure that the State agency has acted in accordance with the statutes and regulations governing the WIC program and not simply with its "policies and procedures."

f. Notification requirements

The current regulations require State agencies to notify appellants of the availability of any higher review procedures that are available. 7 C.F.R. § 246.18(d). The Agency objects to this requirement because it might "be viewed as encouraging State agencies to provide an additional level of administrative review." 64 Fed. Reg. at 32332. On these grounds, USDA proposes to revise the regulations to "make clear that the decisions rendered under both the full and abbreviated administrative review procedures are the final State agency action." Id. at 32332. The proposed regulatory amendment is unnecessary and intended to mislead appellants with respect to their rights.

First, the State agency is entitled to provide - either on state constitutional grounds or for other reasons - further appellate procedures. Second, simply because the decision constitutes the final action of the administrative agency does not mean that it is not subject to further judicial review. USDA would prohibit State agencies from providing a minimal amount of information at a negligible cost to prevent vendors from exercising their rights to appeal the decision to outside bodies, simply to cut down on lawsuits; the proposal is not a proper exercise of the federal government's power.

3. Procedures for abbreviated administrative reviews

The procedures for full and abbreviated administrative reviews would differ in several important respects. First, appellants subject to the abbreviated review requirements would not be afforded an opportunity to present their case, except through a written response. Accordingly, the appellant would not have an opportunity to cross-examine witnesses.

Second, the State agency would not be required to provide an impartial decision maker. To decide an abbreviated appeal, the State is only required to provide "someone other than the person who rendered the initial decision on the action." Proposed Section 246.18(c). The preamble states that the decision maker need not be independent from the State agency. Thus, a co-worker of the person who initiated the adverse action against a vendor might well be the person assigned to decide the appeal. The potential for an unfair hearing is obvious. If nothing else, the proposal creates the appearance of a conflict of interest, which is damaging to the integrity of the overall program.

M. Confidentiality of Vendor Information

Under the proposal, State agencies would be required to restrict the disclosure of information obtained from vendors or generated by the State agency on vendors to persons directly connected with the administration and enforcement of any federal or state law, including the WIC Program and the Food Stamp Program, as well as to the Comptroller General of the United States. Proposed Section 246.26(e).

FMI supports restricting the disclosure of information obtained from vendors or generated by the Federal and State agencies on vendors to the extent permitted by the federal Freedom of Information Act and its state counterparts. Individual vendors should, of course, be permitted to receive information compiled about them by the Agency, especially for purposes of appealing an adverse action, but also so that they may improve their programs. Vendors should not, however, have access to specific information about other, unrelated vendors. Agencies should be subject to penalties for wrongful release of confidential information.

* * *

In conclusion, we believe that the proposed regulations are fundamentally flawed. We urge you to consider our comments seriously and to hold hearings and reconsider your proposal in its entirety before any regulations are issued.

Sincerely,

Tim Hammonds
President and CEO

cc: Senator Richard Lugar, Chair, Committee on Agriculture, Nutrition and Forestry
Senator Tom Harkin, Committee on Agriculture, Nutrition and Forestry
Subcommittee on Research, Nutrition, and General Legislation
Rep. William Goodling, Chair, Committee on Education and the Workforce
Rep. William Clay, Committee on Education and the Workforce
Subcommittee on Early Childhood, Youth and Families

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¹ 5 U.S.C. §§ 601, et seq., as amended by the Small Business Regulatory Enforcement and Fairness Act, Pub. L. No. 104-121, 110 Stat. 866 (1996).
² U.S. Small Business Administration, "Annual Report of the Chief Counsel for Advocacy on Implementation of the Regulatory Flexibility Act, Calendar Year 1998" at 5.
³ GAO, "Food Assistance: Efforts to Control Fraud and Abuse in the WIC Program Can Be Strengthened" at 6 (August 1999) (hereinafter 1999 GAO Report). The same report does, however, note that the Agency will be issuing updated information regarding vendors late in 2000. Id.
⁴ 1999 GAO Report at 5, 17, 27.
⁵ See full discussion of comments received from Members of Congress in Section III.B.4., below.
⁶ In fact, USDA later states that, replacing routine monitoring with high risk monitoring "may not be an even exchange since both compliance buys . . . and inventory audits are almost always more expensive than routine monitoring visits." 64 Fed. Reg. at 32327.
⁷To see the extent to which the Agency modified the 1999 proposal from the controversial 1990 proposal, it is instructive to compare the two. The following paragraph appeared in the 1990 proposal:

Typically, the State would first establish sub-areas within its jurisdiction based on such factors as the distribution of caseload, the location of local agencies and clinics, availability of public transportation and road systems to the WIC population, and the supply of prospective WIC vendors. Each area should have some degree of homogeneity if possible. For example, it might be best to separate an agricultural community from an adjoining large urban area. Each type of sub-area, in turn, would be assigned an appropriate ratio. Theoretically, a State agency with a highly refined methodology might assign a different ratio to each individual sub-area, but States will more likely limit themselves to a small set of ratio capable of addressing, for example, the differing needs of rural and urban areas.
55 Fed. Reg. at 53451.

⁸ Of course, in an absolute sense, reducing the number of vendors participating in the program will reduce the number of vendors who are available to err, just as reducing the absolute number of program participants will reduce the number of participants who commit infractions; however, both approaches to reducing violations are patently ridiculous.
⁹ Comparing the results of the 1988 Office of Inspector General report, which concluded that 22% of vendors committed overcharges, with the results of the 1999 GAO Report, which found that 9% of vendors committed any type of violation - from overcharges to selling the wrong sized egg, the available data suggest that vendor violations are decreasing. 1999 GAO Report at 5, 17, 27. We agree that further improvements can be made; we disagree with the means proposed.
¹⁰ 64 Fed. Reg. at 32318 (emphasis added)
¹¹ Letter from Senator Kent Conrad to Mr. Ronald Vogel (April 29, 1991).
¹² Letter from Senator Patrick Leahy to Mr. Ronald Vogel (April 26, 1991).
¹³ Letter from Senators H. Heflin and R. Shelby, and Congressmen T. Bevill, W. Dickinson, B. Erdreich, S. Callahan, C. Harris, G. Browder, and R. Cramer (April 29, 1991).
¹⁴ Letter from Congressman Claude Harris to Mr. R. Washington, Deputy Administrator, Special Nutrition Programs (June 11, 1991).
¹⁵1999 GAO report at 37.
¹⁶ Specifically, twelve states reported using a ratio of the number of participants to vendors; five states use competitive bidding for vendor slots; four states use an absolute number of vendors; and three states rely on "other vendor ratios." 1999 GAO Report at 37. Assuming that each of these methods is an acceptable vendor limiting criterion and further assuming that no state has reported using more than one of these criteria, the total number of states using vendor limiting criteria would be twenty-four.
GAO notes that 19 states use "other methods" to limit vendors. These are (1) meeting minimum stock requirements; (2) keeping prices charged the program within 10 percent of the lowest priced store in the community; (3) not selling gas or alcohol; (4) convenient location; and (5) maintaining their stores in good condition. 1999 GAO report at 37. These are all properly considered vendor selection criteria and several are discussed by USDA in the "vendor selection criteria" section of the preamble. See 64 Fed. Reg. at 32319-21.
¹⁷ We find it curious that, although USDA reviewed the report and clarified other points, this issue was not amended to ensure that it was consistent with USDA's definition.
¹⁸ William F. Goodling Child Nutrition Authorization Act of 1998, Pub. Law 105-336, 112 Stat. 3143, 3162 (October 31, 1998), codified at 42 U.S.C. § 1786(h)(11)(A).
¹⁹William F. Goodling Child Nutrition Authorization Act of 1998, Pub. Law 105-336, 112 Stat. 3143, 3162 (October 31, 1998), codified at 42 U.S.C. § 1786(h)(11)(A).
²⁰ Id. at § 1786(h)(11)(B).
²¹ Under the FSP proposal, a retail food store must stock and offer for sale a variety of foods on a continuous basis in each of the four defined staple food categories, with perishable foods in at least two of those categories. 64 Fed. Reg. 35082, 35086 (June 30, 1999).
²² In an apparent nod to concerns raised following the 1990 proposal that "integrity" criteria would require State agencies to conduct background investigations of vendors, which, themselves, would be costly and time-consuming, USDA here states that the agencies are not required to conduct background checks; instead agency personnel are supposed to rely upon the applicant vendors' responses to questions regarding their records. 64 Fed. Reg. at 32321. This approach is internally inconsistent. If a "history of serious violations" or a criminal conviction or business-related civil judgment indicates a lack of veracity that suggests that the vendors will cheat the WIC program, then the same logic dictates that the person is also likely to lie on the application regarding his or her history; conversely, a retailer who honestly admits a past mistake would be refused admission into the program, despite the fact that the honest admission might suggest that the retailer would not behave dishonestly with respect to the WIC program. Thus, if past actions are truly a worthy basis upon which to refuse WIC authorizations, the State agencies should be required to conduct background investigations.
²³ USDA, National State Agency Program Integrity Profile (September 1998).
²⁴ The preamble states that the vendor agreements must include a provision notifying vendors of "the mandatory selection criterion in Section 246.12(g)(3)(iv) making a history of failing to participate in the annual training a condition of authorization in the next authorization cycle." Id. at 32323. We believe USDA intends the opposite, in fact, to be true.
²⁵ "On-site" should be interpreted broadly. Some food retailers have training centers specifically designed for educating employees. On-site training should be permitted to occur at these facilities so that the store can be WIC-authorized by the time that it is ready to open.
²⁶ The phrase appears in the following context: "The Department chose not to propose that compliance buys or inventory audits be performed on all high-risk vendors. Since high-risk identifiers can be manipulated, the high-risk identification process could be driven by the objective of minimizing compliance buy and audit activity rather than the need to identify vendors with a high probability of program non-compliance." 64 Fed. Reg. at 32326. Needless to say, since high risk criteria can be manipulated, the high risk identification process could also be driven by objectives that violate the civil rights laws or the U.S. Constitution.
²⁷ The Agency's own statements underscore the risks involved. In the context of explaining why additional vendors should be randomly selected if less than 10 percent of the vendors are identified as "high risk," the Agency states, "[R]andom selection should result in a cross-section of all vendors being reviewed, thereby precluding a disparate over-selection of small and minority-owned vendors." Id. at 32325-26 (emphasis added). The statement implies that, in the absence of random selection, most of the vendors targeted would be small and/or minority-owned.
²⁸ USDA favors compliance buys because, "the fact that the program noncompliance is identified on-site and witnessed by the compliance monitor provides a strong case which can withstand the challenges of vendor appeal." Id. at 32326. We submit that building a case against vendors should not be the reason that the Agency favors a particular investigative tool; the Agency should be employing tools that reliably identify problems within the system. We further submit that compliance buys are more likely to uncover inadvertent errors by clerks rather than the outright fraud and abuse that might justify the use of more costly monitoring techniques; inadvertent errors can be better remedied through routine monitoring and improved training.
²⁹ The "WIC State Agency Guide to Vendor Monitoring" may refer to the "WIC Compliance Buy Handbook," which is described in the reference list as a handbook that provides guidance for State agencies in conducting WIC compliance investigations. This document was published in June, 1985.
³⁰ See 64 Fed. Reg. at 32326 "[I]f the random sample and the high-risk population yield similar percentages of violative vendors and the State agency has used a large enough random sample to be statistically valid, the State agency should reassess its high-risk detection system."
³¹ The statement is listed as a "Reason for Change" in the "Summary of WIC Program Food Delivery System Proposal."
³² Since the adverse action affecting a participating local agency must be postponed until a hearing decision is reached, the consequences of a delay in the decision would not have been felt by the local agency during the appeals process, although they are by the vendor in most cases. Section 246.18(a)(2).

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