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Revenue Sharing in School Nutrition Programs

The California Department of Education (CDE) Nutrition Services Division (NSD) is issuing this Management Bulletin (MB) to (1) inform School Food Authorities (SFA) (local educational agencies [LEA] participating in School Nutrition Programs [SNP]) that revenue sharing Memorandums of Understanding (MOU) are not allowable; and (2) provide resources to SFAs pertaining to the laws and regulations that govern financial management of the nonprofit food service cafeteria account (cafeteria fund). This MB highlights some improper practices related to revenue sharing MOU agreements that the CDE has encountered, which have led to SNP cafeteria fund reviews that have resulted in audit findings for SFAs.

Background

In February 2012, the CDE released Administrative Review (AR) summation report addendums for SFAs that the CDE found to be out of compliance for improper practices involving their cafeteria fund. During school fiscal year 2010–11, these districts had entered into revenue sharing MOUs between their SNP and their Associated Student Body (ASB) organizations. The MOUs were established without the express authorization of their district’s governing boards and allowed cafeteria fund transfers to their ASB accounts for purposes other than the necessary operation and/or maintenance of the school food service. The CDE has directed those districts that were subject to the findings to immediately discontinue all revenue sharing activities.

The California Department of Education’s Authority over School Nutrition Programs 

Since the state agency (in this case, the CDE) is responsible for administering federal SNPs in California, the CDE is required to ensure that SFAs participating in federal SNPs comply with all applicable state and federal laws and regulations.

Public Law 111-296, the Healthy, Hunger-Free Kids Act of 2010 (HHFKA), Section 12(q) of the National School Lunch Act, [42 U.S. Code 1760 (q)] requires that all revenues from the sale of nonprogram foods accrue to the nonprofit food service account, and is codified in Title 7, Code of Federal Regulations (CFR) Section 210.14(f) as follows:

(f) Revenue from nonprogram foods. Beginning July 1, 2011, school food authorities shall ensure that the revenue generated from the sale of nonprogram foods complies with the requirements in this paragraph.

(1) Definition of nonprogram foods. For the purposes of this paragraph, nonprogram foods are those foods and beverages:

(i) Sold in a participating school other than reimbursable meals and meal supplements; and

(ii)  Purchased using funds from the nonprofit school food service account.

(2) Revenue from nonprogram foods. The proportion of total revenue from the sale of nonprogram foods to total revenue of the school food service account shall be equal to or greater than:

(i)   The proportion of total food costs associated with obtaining nonprogram foods to

(ii)  The total costs associated with obtaining program and nonprogram foods from the account.

(3) All revenue from the sale of nonprogram foods shall accrue to the nonprofit school food service account of a participating school food authority.

Other U.S. Department of Agriculture program regulations have been amended to reflect the HHFKA’s statutory changes. Some of the pertinent federal regulations concerning cafeteria fund management include:

• Title 7 CFR Section 210.11(b) Competitive Food Service requires the following:

State agencies and school food authorities shall establish such rules or regulations as are necessary to control the sale of foods in competition with lunches served under the Program. Such rules or regulations shall prohibit the sale of foods of minimal nutritional value, as listed in the Appendix B of this part, in the food service areas during lunch periods. The sale of other competitive foods may, at the discretion of the state agency and school food authority, be allowed in the food service area during the lunch period only if all income from the sale of such foods accrues to the benefit of the nonprofit school food service or the school or student organizations approved by the school.* State agencies and school food authorities may impose additional restrictions on the sale of and income from all foods sold at any time throughout schools participating in the program.

* NOTE: Revenues generated from the sale of competitive foods that are also “nonprogram foods,” per Title 7 CFR Section 210.14(f), shall not accrue to the benefit of student organizations.

• Title 7 CFR Section 210.14(a) Non-Profit Food Service requires the following:

School food authorities shall maintain a nonprofit school food service. Revenues [emphasis added] received by the nonprofit school food service are to be used only for the operation or improvement of such food service, except that, such revenues shall not be used to purchase land or buildings, unless otherwise approved by FNS [USDA’s Food and Nutrition Service], or to construct buildings. Expenditures of nonprofit school food service revenues shall be in accordance with the financial management system established by the state agency under Section 210.19(a) of this part. (For California, this means the California School Accounting Manual [CSAM]).

“Revenue” is defined in Title 7 CFR Section 210.2 below.

Additional pertinent federal regulations include:

• Title 7 CFR Section 210.2 defines Revenue, when applied to nonprofit school food service, as:

All monies received by or accruing to the nonprofit school food service in accordance with the state agency’s established accounting system including, but not limited to, children’s payments, earnings on investments, other local revenues, state revenues, and federal cash reimbursements.

• Title 7 CFR Section 210.9(b)(1) Agreement with State Agency requires SFAs to:

(1) Maintain a nonprofit school food service and observe the limitations on the use of nonprofit school food service revenues

(2) Limit its net cash resources [emphasis added] to an amount that does not exceed 3 months average expenditures for its nonprofit school food service or such other amount as may be approved in accordance with Section 210.19(a)

(3) Maintain a financial management system as prescribed under Section 210.14(c)

(4) Comply with the requirements of the Department’s regulations regarding financial management (Title 7 CFR Part 3015 and Part 3016, or Part 3019, as applicable)

In addition, the California Education Code (EC) provides definitions and restrictions concerning an SFA’s proper use of school cafeteria funds or accounts, which include, but are not limited to, the following:

• EC Section 38080 defines "cafeteria" as synonymous with the term "food service.”

• EC Section 38091 requires that the cafeteria fund shall be used only for those expenditures authorized by the governing board as necessary for the operation of school cafeterias. The remainder of EC Section 38091 conflicts with Title 7 CFR 210.14(a) and Title 2, CFR, Part 225, Appendix A.

• EC Section 38092 currently requires that the governing board of any school district with an average daily attendance of over 100,000 may allow as an expenditure from the cafeteria fund or account a share of money agreed upon pursuant to a contract, which is generated from the joint sale of items between the cafeteria and an associated student body student store. The expenditure must result from an agreement entered into by the cafeteria and the associated student body in which pupils will participate in the operation of the store.*

*NOTE:  Revenues generated from an SFA’s sale of “nonprogram food” items, per Title 7 CFR 210.14(f) and from an SFA’s sale of program foods (reimbursable meals) per Title 7 CFR 210.2, shall not accrue to the benefit of student organizations. SFAs should also be aware of the state labor laws requiring the use of classified employees for food services (see EC Section 38103 at http://www.leginfo.ca.gov/ ).

• EC Section 38093 states, “All receipts of the cafeteria, or cafeterias, as the case may be, derived from the sale of food shall be deposited in the account and shall be expended only for the maintenance of the cafeteria, or cafeterias. . .”

• EC Section 38101(a) states, “The governing board of a school district may authorize expenditures from the cafeteria fund or cafeteria account only for those charges from the fund or account that are defined in the California School Accounting Manual.”

• EC Section 38101(d) states, “Charges to, or transfers from, a food service program shall indicate when the charge or transfer was made and shall be accompanied by a written explanation of the purpose of, and basis for, the expenditure.”

• EC Section 38101(e) states, “This section does not authorize a school district to charge a food service program any charges prohibited by state or federal law or regulation.”

• EC Section 41010 states, “The accounting system used to record the financial affairs of any school district shall be in accordance with the definitions, instructions, and procedures published in the California School Accounting Manual as approved by the State Board of Education and furnished by the Superintendent of Public Instruction.”

School Food Authority Responsibilities Related to Cafeteria Funds

SFAs are responsible for the financial management of their school food service by adhering to the state and federal regulations that govern cafeteria funds. The cafeteria fund consists of revenues from state and federal reimbursements, child and adult payments, grants, interest, etc. When there is a conflict between state and federal regulations, the most restrictive regulations prevail.

Regardless of existing or proposed State of California statute(s), federal regulations clearly prohibit SFAs from using or transferring money from the cafeteria fund for non-food service expenditures.

Action Required

As stated in the above regulations, payments from the cafeteria fund to other funds for purposes other than of school food service operations and improvements, e.g., made to school clubs, associated student organizations, athletic programs, or parent organizations, or payments for school staff meetings or social occasions, or for school remodeling or construction, etc., are not allowable.

Effective immediately, the CDE advises SFAs that revenue sharing MOUs with school food services are not allowable and requires that all SFAs that have MOUs with their ASBs discontinue revenue sharing activities.

Charging Costs to the Cafeteria Fund

The CSAM outlines California’s official school accounting system and assists SFAs in managing their funding. EC Section 41010 requires school districts to use systems to record their financial affairs that comply with the CSAM’s definitions, instructions, and procedures. Pursuant to EC Section 41010, SFAs must follow CSAM instructions with regard to charging costs to their cafeteria fund.

To order, view, or download the CSAM please refer to the CDE Definitions, Instructions, and Procedures Web page at http://www.cde.ca.gov/fg/ac/sa/index.asp.

Applicability of this Information

While this MB is directed to all SNP sponsors, the information regarding the EC and the CSAM applies only to public school districts and county offices of education. Unless specifically stated as such within applicable EC sections, the EC does not currently apply to charter schools, residential child care institutions, juvenile detention facilities, probation camps, or private schools. However, federal regulations apply to all participating SNP sponsors and/or SFAs.

Contact Information

If you have questions regarding this MB or cafeteria fund policy or regulations, contact Tracey Smith, SNP Specialist, by phone at 916-322-3934 or by e-mail at trsmith@cde.ca.gov.

If you have questions about the CSAM or how to account for particular charges to the cafeteria fund, please contact the School Fiscal Services Division, Financial Accountability and Information Services Unit, by phone at 916-322-1770 or by e-mail at sacsinfo@cde.ca.gov.