New Strategies to Finance Healthy School Meals

1. New Strategies to Finance Healthy School Meals • Arianne Corbett, RD, SNS, Center for Science in the Public Interest • Zoë Neuberger, Center on Budget and Policy Priorities • Rosemary O’Connell and Jessica Saracino, United States Department of Agriculture • Anita Pereira-Sekhon, United States Department of Agriculture • Marla Caplon, RD, LD, Director of Food and Nutrition Services for Montgomery County Schools

2. Webinar: New Strategies to Finance Healthy School Meals Zoë Neuberger June 26, 2011

3. Revenues From Paid Lunches Fall Short Source: U.S. Department of Agriculture, Food and Nutrition Service, School Nutrition Dietary Assessment Study III, November 2007, p. 50.

4. Revenues From Competitive Foods Fall Short Source: Source: U.S. Department of Agriculture, Food and Nutrition Service, School Lunch and Breakfast Cost Study II, April 2008, p. 7-8.

5. Paid Lunch Equity and Nonprogram Food Revenue Presented by: FNS, Child Nutrition Division - Rosemary O’Connell and Jess Saracino

6. Paid Lunch Equity (PLE) Interim Rule: NSLP School Food Service Account Revenue Intent: To ensure that sufficient funds are provided to the food service account for paid lunches

7. Overview School food authorities (SFAs) compare the average price for paid lunches to the difference between the per meal Federal reimbursement for free and paid lunches For SY 2011-2012, if SFA’s average price for paid lunches is $2.46 or more, it is in compliance Other SFAs must determine whether they must take action

8. Increasing Revenue for Paid Lunch • If an SFA’s average price for lunches is less than the difference between free & paid reimbursements, it must increase the revenue by 2% plus inflation by either • Increasing the average price charged for paid meals OR • Adding non-Federal funds to the food service account

9. Increasing Paid Meal Prices • In any year, any new average price increase may be— • Rounded down to the nearest 5 cents • Limited to a maximum required increase of 10 cents • In SY 2011-2012, most SFAs will need to increase their average paid prices by five cents or less

10. Increasing Paid Meal Prices • SFAs have the flexibility to determine how they wish to distribute the average price increase among their schools to reach the new average lunch price • SFAs may increase their average paid meal prices more than the required amount • A “credit” for future required increases will be given to SFAs for any amount increase over the required amount

11. Non-Federal Funding Source • Financial support from non-Federal sources must be cash for direct support for paid lunches, including but not limited to: • per-lunch reimbursements specifically for paid lunches (or the proportion attributable for paid lunches) provided by States, counties, school districts and others • funds provided by organizations for paid lunches • any portion of State revenue matching funds that exceeds the minimum requirement established in 7 CFR 210.17 and is provided for paid lunches

12. Non-Federal Funding Sources • Some examples of unallowable non-Federal support are: • in-kind contributions and a la carte sales • any payments, including additional per-meal reimbursements, provided for support of the School Breakfast Program or other Child Nutrition Program • any payments, including additional per-meal reimbursements, provided specifically to support free and reduced price meals; and • any in-kind contributions converted to direct cash expenditures after July 1, 2011

13. Non-Federal Funding Sources • Exceptions for School Year 2011-2012 only: • SFAs may include any non-Federal cash contribution, except for in-kind contributions and revenues from foods and beverages sold in competition with reimbursable meals • The limitations for non-Federal contributions do not apply

14. Non-Federal Funding Source • Exceptions for School Year 2011-2012 only: • SFAs which raised their prices and met the non-Federal revenue requirement in SY 2011-12, may “roll over” the non-Federal revenue exception into SY 2012-13

15. Paid Lunch Equity Average Price Calculation Example For SY 2011-2012, SFAs that choose to increase paid lunch prices must increase their average paid lunch price by 2% plus 1.14% (or 3.14%) SFAs must use their paid lunch prices from the previous (2010) October to calculate their new average paid lunch price

16. Paid Lunch Equity Average Price Calculation Example

17. Paid Lunch Equity Tool • A PLE tool will be available on the FNS website. The tool will help SFAs calculate: • Average price across the SFA • New required average price across SFA • Distribution of price increases across SFA • Non-Federal source contribution amount

18. Revenue From Nonprogram Food Intent: To ensure that revenues from the sale of nonprogram foods generate at least the same proportion as they contribute to SFA food costs

19. Revenue From Nonprogram Food A nonprogram food is a food sold in a participating school other than a reimbursable meal and is purchased using funds from the school food service account

20. Revenue From Nonprogram Food • To implement this requirement SFAs will need to: • Identify the proportion of total food costs attributable to nonprogram food in order to establish its revenue target • Price nonprogram food items to ensure that revenues will meet the requirement • Track nonprogram food revenues separately from all other revenue items

21. Revenue From Nonprogram Food • Example • SFA has the following characteristics: • Total Costs: $1,000,000 • Total Food Costs: $500,000 • Nonprogram Food Costs: $50,000 • Reimbursable meals Food Costs: $450,000 • Total Revenue: $1,000,000

22. Revenue From Nonprogram Food • Revenue Requirement: • Minimum Proportion of Revenue Required from Nonprogram Food Sales: $50,000/$500,000 = 10% • Minimum Dollar Revenue Required from Nonprogram Food Sales: 10% x 1,000,000 = $100,000 • If this SFA earns $100,000 in revenue from nonprogram food sales, they are in compliance

23. Monitoring Compliance For SY 2011-2012, State agencies need to work with SFAs to provide guidance and technical assistance on how to meet the requirements Assure that all SFAs make a good faith effort to comply FNS will be updating CRE and ME guidance to incorporate review of these requirements

24. Reporting Paid Lunch Prices • SFAs must report the most frequently charged paid meal price for– • Elementary • Middle • High • State agencies submit SFA data to FNS at end of November • FNS is required to publish results • Further guidance on reporting is under development

25. SFA Paid Lunch Price Report

26. SFA Paid Lunch Price Report An Excel version of the report will be made available in the future for State agencies to collect and transmit the data for all of their SFAs to us directly

27. References • Interim Rule: http://www.fns.usda.gov/cnd/Governance/Legislation/SFArevenue_interimrule.pdf • Paid Lunch Equity Q&A: http://www.fns.usda.gov/cnd/Governance/Policy-Memos/2011/SP39-2011_os.pdf • Paid Lunch Equity Tool: http://www.fns.usda.gov/cnd/Governance/Legislation/CNR_2010.htm

28. Indirect Costs Ani Pereira-Sekhon Child Nutrition DivisionFood and Nutrition Services U. S. Department of Agriculture

29. Overview • 307(a): Required FNS to issue guidance to SFAs on program rules pertaining to indirect costs in the NSLP and SBP (collectively referred to as the SMPs in the indirect cost guidance and this presentation) • This section of the presentation will provide an overview on the indirect cost guidance issued by FNS on July 8, 2011 • The information provided in the guidance does not impose any new requirements on the SA or SFA 29

30. Indirect costs in a reimbursement program • Before we discuss direct and indirect costs, it will be helpful to briefly summarize how reimbursement works in the SMPs • In many other programs, program operators bill the Federal awarding agency for program costs for reimbursement • In SMPs, subgrantee SFAs report the number of paid, reduced-price, and free meals served (not program costs) to their SAs 30

31. Indirect costs in a reimbursement program, contd. *Rate of Reimbursement F/RP/P meals = SFA CLAIM: F/RP/P MEALS X • To be reimbursable under the SMPs, each meal served must meet all the requirements set by program regulation 31

32. What does this mean? • SFAs receive certain monies (rate of reimbursement) for each meal served • This is not free money, there are strings attached: • Meals must conform to program regulations • SA and SFA must adhere to Department-wide and program-specific regulations (i.e., Federal cost principles, procurement regulations, etc.)

33. Nonprofit school food service account • One of the major responsibilities that accompany the decision to participate in the SMPs is the management of the nonprofit school food service account, which requires those limited funds to be spent solely on the SMPs • This account must contain all reimbursements and other revenues from all food service operations conducted by the SFA, principally for the benefit of school children, and used only for the operation or improvement of the nonprofit school food service

34. Federal cost principles • They are the government-wide principles for determining allowable costs under contracts, grants, and other agreements with the various entities that operate Federal programs • 2 CFR Part 225 (OMB Circular A-87) applies to State, local, or Indian Tribal governments • 2 CFR Part 230 (OMB Circular A-122) applies to nonprofits

35. Why are they important? • Funds in the nonprofit school food service account can only be used to pay for allowable costs (applies to both direct and indirect cost) • The OMB guidance provides general definitions regarding the applicability and allowability of different types of costs • Federal cost principles provide a uniform method of allocating shared costs to grants from each of its Federal awarding agencies

36. Complementary costs • Total program costs generally include direct and indirect costs Total Program Cost = Direct Cost + Indirect Cost • This is why direct costs must be included when discussing indirect costs

37. Direct costs • Direct costs are incurred specifically for a program or other cost objective, and can be readily identified to a particular objective such as school food service • Examples of direct costs in SMPs include: • Food, • Wages and salaries of the staff working in the school food service, • Supplies specifically used in the school food service

38. Direct costs, contd. 2 CFR Part 225 describes direct costs as, “those that can be identified specifically with a particular final cost objective” Costs that cannot be exclusively attributable to the SMPs should generally be treated as indirect costs A good question to help understand “identified specifically” is -- Who benefitted from the SFA having incurred the cost (i.e., just school food service)?

39. Indirect costs • Indirect costs are incurred for the benefit of multiple programs, functions, or other cost objectives and therefore cannot be identified readily and specifically with a particular program or other cost objective • They typically support administrative overhead functions: • Fringe benefits, • Accounting, • Payroll, • Purchasing, • Facilities management, • Utilities, etc.

40. Indirect Costs, contd. 2 CFR Part 225 describes indirect costs as those: “(a) incurred for a common or joint purpose benefiting more than one cost objective, and (b) not readily assignable to the cost objectives specifically benefitted, without effort disproportionate to the results achieved” Costs that can be allocated to multiple programs or other cost objectives are always an indirect cost

41. How are indirect costs assigned? Allocation -- mathematical exercise used to assign indirect costs to particular programs and other cost objectives, such that each program or other cost objective bears a portion of the indirect costs that is commensurate with the benefit received from such costs What does this mean?

42. How are indirect costs assigned, contd. Allocation is a method to assign to school food service their fair share of indirect costs (i.e., portion of utility bills in kitchen and cafeteria) This methodology normally entails applying a calculated indirect cost rate to a direct cost base

43. Indirect cost rate • U.S. Department of Education (ED) requires each SEA to negotiate an indirect cost methodology for any LEA under its jurisdiction that requests one • SEA generally distributes an “indirect cost rate proposal (ICRP)” form to its LEAs and uses the data collected to develop each LEA’s indirect cost rate • Once the SEA approves the ICRP, the end result is an indirect cost rate agreement between the SEA and the LEA • Key information from indirect cost rate: • Current and approved indirect cost rate (established for a specific fiscal year); and • Corresponding direct cost base

44. Classifying cost as direct or indirect? • Many times, cost can be treated either way – direct or indirect • The treatment of a cost as direct or indirect is almost always driven by its treatment in the program operator’s accounting system  • The indirect cost methodology the SEA prescribes for a school district may call for direct-indirect distinctions • The SFA must defer to such instructions from the SEA, since their authority to issue them is based on Federal regulations issued by the U.S. Department of Education

45. Consistent treatment The SFA is required to treat each item of cost in a consistent manner as a direct or indirect cost in accordance with the Federal cost principles A cost may be assigned to the nonprofit school food service as a direct cost only if that cost item under the same circumstances has not been charged to other programs or cost objectives as an indirect cost

46. How does the school district recover indirect costs? • A school district generally has two options to recover the indirect costs benefiting the school food service, yet paid from the general fund: • Directing the general fund to rely on its own allotments, or • Billing the school food service • School food service is not allowed to pay any amount in excess of the properly billed indirect costs (the portion of costs that do not support the operation or improvement of the food service) with funds from the nonprofit school food serviced account

47. How to avoid incorrect indirect costs? • Errors can occur for a variety of reasons: • Mathematical error • User assessment • SFA needs the necessary tools – both the indirect cost rate and direct cost base because each is useless without the other • Indirect cost rate can only be applied to items in the direct cost base

48. Retroactive billing • Many school districts have never billed indirect costs to the nonprofit school food service account, because the general fund contained enough funds to cover such costs and they wanted to support school food service • There is no Federal requirement that prohibits an SFA from changing its internal fiscal policy regarding the recovery of indirect costs (i.e., originally chose to absorb all indirect costs and then later felt it couldn’t keep paying for indirect costs out of general fund) • This can only be done prospectively

49. Retroactive billing, contd. • It is unallowable to bill the nonprofit school food service account for indirect costs that were paid from the general fund in prior years unless an agreement exists to show that the district had been “loaning” the nonprofit school food service account funds to cover the indirect costs in one or more prior years • Proper documentation needed -- an official “inter-fund” transaction had been posted to the accounting records of the general fund and the school food service each year that such a “loan” had been made

50. Error found? • Steps an SFA should take if indirect costs charged to the nonprofit school food service account result from mathematical error or user assessment: • The appropriate officials should be notified and the ICRP and indirect cost methodology corrected as soon as possible; • If there is a disagreement between the SFA and the appropriate officials, the SA or SEA should be contacted to discuss the issue; and • The SFA should not pay for any costs resulting from the mathematical error or user assessment until the issue has been appropriately remedied Note: The SA or SEA should seek FNS’ guidance, if needed, by contacting the appropriate FNS Regional Office