Meal Counting and Claiming by Food Service Management Companies in the School Meal Programs
Gao ID: GAO-09-156R January 30, 2009The federal government spends about $10 billion each year to provide meals to over 30 million students through the National School Lunch and Breakfast Programs. However, a 2007 study estimated that of this amount, $860 million (8.6 percent) in school year 2005-2006 was paid improperly because of errors in the number of meals counted and claimed for reimbursement. These programs are administered by the United States Department of Agriculture's (USDA) Food and Nutrition Service (FNS) through state agencies that, in turn, oversee local school food authorities (SFA). SFAs that participate in the lunch and breakfast programs receive federal cash reimbursements through the state agency for each meal served, and in the lunch program they also receive USDA commodity donations based on the number of meals served. In return, SFAs must serve meals that meet federal nutrition requirements and offer meals free or at a reduced price to students whose family's income falls below certain thresholds. While most of the roughly 13,700 SFAs in traditional public school districts in the United States manage their own programs, about 13 percent choose to contract with private companies known as food service management companies (FSMC). FSMC involvement in food service activities varies among SFAs, depending on the duties specified in the contract, but these duties may include meal-counting and -claiming activities. Regardless of the duties specified in the contract, however, FNS guidance states that SFAs remain responsible for the overall operation of the school meal programs, including overall financial responsibility. SFAs are also required to ensure the accuracy of lunch claims through effective internal controls
USDA policies and regulations establish an oversight framework for school meal programs to help ensure accurate meal counting and claiming, and this framework is generally the same for meal services managed by both SFAs and FSMCs except for some additional oversight requirements for FSMCs. USDA regulations require that reviews be conducted at the federal, state, and local levels. FNS must conduct management evaluations of each state agency to review its administration of the school meal programs, including the state's review of SFA contracts with FSMCs. State agencies are required to conduct administrative reviews of each SFA's lunch program at least every 6 years, including a review of the meal-counting and -claiming system. Additionally, state agencies must compare SFA monthly lunch claims to a proxy for attendance to identify potential claim errors. When an SFA contracts with an FSMC, the state agency must also review the contract to ensure compliance with federal regulations, and some state agencies have developed prototype contracts to facilitate this review process. At the local level, SFAs are required to conduct annual on-site reviews of each school in the lunch program to detect problems that would lead to meal-counting and -claiming errors. SFAs are also required to review each school's daily lunch counts to identify potential overcounts. In addition, when an FSMC is present, SFAs must conduct periodic visits to monitor the FSMC's food service operation. Meal-counting and -claiming errors occur at similar or somewhat lower rates when FSMCs manage meal services compared to when SFAs manage meal services. Errors can occur when cashiers improperly determine whether a meal is reimbursable. Error rates at this stage, which tended to be the highest, were generally the same between the two management types. Errors can also occur when meal counts are totaled and reported incorrectly, and are called aggregation errors. They can occur at the point of sale, when meal counts are sent from the school to the SFA, and again from SFA to the state. The differences in error rates between FSMC-managed and SFA-managed meal services were not statistically significant for these aggregation errors, with the exception of errors that occurred when meal counts were sent from the school to the SFA. In this case, error rates for FSMC-managed programs were lower than those of SFA-managed programs. We could not determine if FSMCs directly contributed to this lower error rate because FSMC involvement in meal counting and claiming varied across locations. Finally, FNS and state officials we interviewed said that they do not find additional mealcounting and -claiming problems when FSMCs manage meal services.
GAO-09-156R, Meal Counting and Claiming by Food Service Management Companies in the School Meal Programs
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GAO-09-156R:
United States Government Accountability Office:
Washington, DC 20548:
January 30, 2009:
The Honorable Herb Kohl:
Chairman:
The Honorable Robert Bennett:
Ranking Member:
Subcommittee on Agriculture, Rural Development, Food and Drug
Administration, and Related Agencies:
Committee on Appropriations:
United States Senate:
The Honorable Rosa L. DeLauro:
Chairwoman:
The Honorable Jack Kingston:
Ranking Member:
Subcommittee on Agriculture, Rural Development, Food and Drug
Administration, and Related Agencies:
Committee on Appropriations:
United States House of Representatives:
Subject: Meal Counting and Claiming by Food Service Management
Companies in the School Meal Programs:
The federal government spends about $10 billion each year to provide
meals to over 30 million students through the National School Lunch and
Breakfast Programs. However, a 2007 study estimated that of this
amount, $860 million (8.6 percent) in school year 2005-2006 was paid
improperly because of errors in the number of meals counted and claimed
for reimbursement.[Footnote 1] These programs are administered by the
United States Department of Agriculture's (USDA) Food and Nutrition
Service (FNS) through state agencies that, in turn, oversee local
school food authorities (SFA). SFAs that participate in the lunch and
breakfast programs receive federal cash reimbursements through the
state agency for each meal served, and in the lunch program they also
receive USDA commodity donations based on the number of meals served.
In return, SFAs must serve meals that meet federal nutrition
requirements and offer meals free or at a reduced price to students
whose family's income falls below certain thresholds.
While most of the roughly 13,700 SFAs in traditional public school
districts in the United States manage their own programs, about 13
percent choose to contract with private companies known as food service
management companies (FSMC).[Footnote 2] FSMC involvement in food
service activities varies among SFAs, depending on the duties specified
in the contract, but these duties may include meal-counting and -
claiming activities. Regardless of the duties specified in the
contract, however, FNS guidance states that SFAs remain responsible for
the overall operation of the school meal programs, including overall
financial responsibility. SFAs are also required to ensure the accuracy
of lunch claims through effective internal controls.[Footnote 3]
On the basis of concern about the nature and extent of FSMC involvement
in meal-counting and -claiming activities, we studied the role of FSMCs
in managing data used to support federal meal reimbursement claims.
[Footnote 4] In particular, we examined (1) whether policies and
regulations USDA provides states and SFAs on ensuring meal-counting and
-claiming accuracy differ when meal services are managed by FSMCs
compared with when they are managed by SFAs, and (2) whether there are
differences in the accuracy of meal counting and claiming when meal
services are managed by FSMCs compared to when meal services are
managed by SFAs.
To develop our findings, we reviewed relevant federal laws and
regulations on school meal programs, including those with regard to
FSMCs. We interviewed officials from USDA, FNS regional offices, the
School Nutrition Association, and other organizations that have
conducted relevant research. We also conducted structured phone
interviews with 19 state agencies in the three FNS regions--Mid-
Atlantic, Midwest, and Northeast--with the highest levels of food
service management contracting,[Footnote 5] and we conducted site
visits to three SFAs that contract with FSMCs in York, Pennsylvania;
Chicago, Illinois; and Schenectady, New York.[Footnote 6] In addition,
we reviewed the FNS study that provided national estimates of improper
payments in the school meal programs and worked with the contractor for
the study to further analyze data to compare the accuracy of meal
counting and claiming for SFA-managed and FSMC-managed meal programs.
[Footnote 7]
We conducted this performance audit from January 2008 to December 2008
in accordance with generally accepted government auditing standards.
These standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
On November 21, 2008, we briefed appropriate congressional staff on the
results of our analysis using the briefing slides we include in
enclosure I. This report formally conveys information provided during
that briefing. In summary, we reported the following findings:
USDA policies and regulations establish an oversight framework for
school meal programs to help ensure accurate meal counting and
claiming, and this framework is generally the same for meal services
managed by both SFAs and FSMCs except for some additional oversight
requirements for FSMCs. USDA regulations require that reviews be
conducted at the federal, state, and local levels. FNS must conduct
management evaluations of each state agency to review its
administration of the school meal programs, including the state's
review of SFA contracts with FSMCs. State agencies are required to
conduct administrative reviews of each SFA's lunch program at least
every 6 years, including a review of the meal-counting and -claiming
system. Additionally, state agencies must compare SFA monthly lunch
claims to a proxy for attendance to identify potential claim errors.
[Footnote 8] When an SFA contracts with an FSMC, the state agency must
also review the contract to ensure compliance with federal regulations,
[Footnote 9] and some state agencies have developed prototype contracts
to facilitate this review process. At the local level, SFAs are
required to conduct annual on-site reviews of each school in the lunch
program to detect problems that would lead to meal- counting and -
claiming errors. SFAs are also required to review each school's daily
lunch counts to identify potential overcounts. In addition, when an
FSMC is present, SFAs must conduct periodic visits to monitor the
FSMC's food service operation.
Meal-counting and -claiming errors occur at similar or somewhat lower
rates when FSMCs manage meal services compared to when SFAs manage meal
services. Errors can occur when cashiers improperly determine whether a
meal is reimbursable. Error rates at this stage, which tended to be the
highest, were generally the same between the two management types.
Errors can also occur when meal counts are totaled and reported
incorrectly, and are called aggregation errors. They can occur at the
point of sale, when meal counts are sent from the school to the SFA,
and again from SFA to the state. The differences in error rates between
FSMC-managed and SFA-managed meal services were not statistically
significant for these aggregation errors, with the exception of errors
that occurred when meal counts were sent from the school to the SFA. In
this case, error rates for FSMC-managed programs were lower than those
of SFA-managed programs. We could not determine if FSMCs directly
contributed to this lower error rate because FSMC involvement in meal
counting and claiming varied across locations. Finally, FNS and state
officials we interviewed said that they do not find additional meal-
counting and -claiming problems when FSMCs manage meal services.
In conclusion, when SFAs contract with FSMCs to manage their meal
services, SFAs remain responsible for the accuracy of meal claims, and
a robust system of internal controls can help mitigate the risk of
financial losses from FSMC errors in meal counting and claiming.
Although this study focused on circumstances where SFAs contracted with
FSMCs, the similar error rates found between SFA-managed and FSMC-
managed programs, along with the 8.6 percent error rate in the program
overall, suggest that the nature of the problem requires a programwide
approach rather than a focus on FSMC-managed meal services. Additional
analyses are needed to identify potential remedies. In a separate
study, we are currently conducting a programwide review of these
errors.
We provided a draft of this report to USDA for review and comment. In
its comments, USDA's FNS generally agreed with the draft report and
provided technical comments, which we have incorporated where
appropriate.
We are sending copies of this report to relevant congressional
committees and other interested parties and will make copies available
to others upon request. In addition, the report will be available at no
charge on GAO's Web site at [hyperlink, http://www.gao.gov]. If you or
your staff have any questions about this report, please contact me at
(202) 512-7215 or BrownKE@gao.gov. Contact points for our Offices at
Congressional Relations and Public Affairs may be found on the last
page of this report. GAO contact and staff acknowledgments may be found
in enclosure II.
Sincerely yours,
Signed by:
Kay Brown:
Director, Education, Workforce, and Income Security Issues:
Enclosures - 2:
[End of section]
Enclosure I: Briefing Slides:
Meal Counting and Claiming by Food Service Management Companies in the
School Meal Programs:
Briefing for the Subcommittee on Agriculture, Rural Development, Food
and Drug Administration, and Related Agencies, House Committee on
Appropriations:
November 21, 2008:
Contents:
* Introduction:
* Objectives:
* Scope and Methodology:
* Summary of Findings:
* Background:
* Objective 1: Existing Policies and Regulations when School Food
Authorities Contract with Food Service Management Companies:
* Objective 2: Accuracy of Meal Counts when Food Service Management
Companies Manage Meal Services:
* Concluding Observations:
* Appendix I: Procurement of Point-of-Sale Systems:
* Appendix II: Standard Errors for Estimates:
Introduction:
The National School Lunch and Breakfast Programs (school meal programs)
provide meals to over 30 million students each year.
These programs are administered by the United States Department of
Agriculture‘s (USDA) Food and Nutrition Service (FNS) through state
agencies that then oversee local school food authorities (SFA), which
usually coincide with school districts.
SFAs claim reimbursements from the state agencies based on the number
of meals served. In school year 2005-2006, these reimbursements
amounted to $10 billion in federal funds.
FNS recently estimated that of this 2005-2006 amount, $860 million (8.6
percent) in improper payments resulted from errors in the number of
meals counted and claimed for reimbursement.[Footnote 10] Improper
payments include both overpayments in which the SFA receives more in
reimbursements than it should, as well as underpayments in which it
receives less in reimbursements than it should.
While most of the roughly 13,700 SFAs in traditional public school
districts in the United States manage their own meals services
(including meal-counting and -claiming activities), about 13 percent
contract out their meal services to private companies known as food
service management companies (FSMC).[Footnote 11]
Objectives:
We studied the role of FSMCs in managing meal count data used to
support the federal reimbursement claim and examined:[Footnote 12]
1. whether policies and regulations USDA provides states and SFAs on
ensuring meal-counting and -claiming accuracy differ when meal services
are managed by FSMCs compared with when they are managed by SFAs, and;
2. whether there are differences in the accuracy of meal counting and
claiming when meal services are managed by FSMCs compared to when meal
services are managed by SFAs.
Scope and Methodology:
For objective 1, we:
* reviewed federal laws and regulations relevant to the operation of
federal meal programs, including those with regard to FSMCs;
* conducted in-depth interviews with officials from USDA, USDA‘s
Inspector General, FNS regions, the School Nutrition Association, and
organizations that have conducted relevant research;
* conducted structured phone interviews with the 19 state agencies in
the three FNS regions with the highest levels of contracting–Mid-
Atlantic, Midwest, Northeast;[Footnote 13] and;
* visited three SFAs that contract with FSMCs, to observe their meal-
counting and -claiming procedures–York, Pennsylvania; Chicago,
Illinois; and Schenectady, New York. We chose these SFAs to ensure a
variety of FSMCs and meal-counting and -claiming systems in the regions
with high rates of contracting and their states with high levels of
meal reimbursement.
For objective 2, we:
* reviewed an FNS study that provided the first nationwide estimates on
improper payments in the school meal programs and worked with its
contractor to further analyze data in order to compare the accuracy of
meal counting and claiming for SFAs that contract with FSMCs with SFAs
that managed their own meal programs;[Footnote 14]
* focused our analysis on meal-counting and -claiming errors, known as
noncertification errors;[Footnote 15] and;
* performed a comprehensive literature review of available reports on
improper payments and food service management companies in the school
meal programs, including reviews by USDA‘s Office of Inspector General,
state auditors, and research organizations.
We conducted this performance audit from January 2008 to December 2008
in accordance with generally accepted government auditing standards.
These standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
Summary of Findings:
1. USDA policies and regulations establish an oversight review
framework for meal counting and claiming in which most requirements are
generally the same for meal services managed by SFAs and FSMCs, with
certain additional requirements that are specific to FSMC-managed
programs, such as annual state review of SFA contracts with FSMCs and
periodic visits by SFAs to monitor FSMC operations.
2. Data we obtained show that meal-counting and -claiming errors occur
at similar or somewhat lower rates when FSMCs manage meal services
compared to when SFAs manage meal services. Similarly, FNS and state
officials we interviewed said that FSMC-managed programs are no more
likely to experience meal-counting and -claiming problems than SFA-
managed programs.
Background:
Operation of the Federal School Meal Programs:
SFAs participating in school meal programs receive cash reimbursements
from the federal government through their state agency for each meal
served.[Footnote 16] In the lunch program, they also receive USDA
commodity donations based on the number of reimbursable meals served.
In turn, schools must:
* serve nutritious and well-balanced meals, meaning the meals meet
federal nutrition requirements, and;
* offer meals free or at a reduced price to students whose family‘s
income falls below certain thresholds. Students whose family‘s income
is above the threshold must buy a ’paid meal.“[Footnote 17]
Role of Food Service Management Companies:
Although most SFAs directly manage their meal programs, about 1,800 of
the roughly 13,700 SFAs (13 percent) in traditional public school
districts contract with FSMCs.[Footnote 18]
USDA regulations allow SFAs to contract with FSMCs to manage any aspect
of their school food service. According to FNS guidance, however, SFAs
remain responsible for the overall operation of the school meal
programs, including overall financial responsibility.
FSMC involvement can vary from district to district depending on the
duties specified in the contract. FSMC duties may include food
purchasing and storage, meal service, menu planning, and employee
hiring and training.
Nationwide Study Found High Error Rates in School Meal Programs:
FNS study estimated improper payments for 2006:[Footnote 19]
Table: Improper payments (combination of overpayments and
underpayments), in millions of dollars (percentage of all
reimbursements):
Total federal reimbursements:
Breakfast: $1,938;
Lunch: $8,060;
Total: $9,998.
Improper payments due to certification error[Footnote 20]:
Breakfast: $177 (9.1%);
Lunch: $759 (9.4%);
Total: $935 (9.4%).
Improper payments due to meal-counting and -claiming errors[Footnote
21]:
Breakfast: $306 (15.8%);
Lunch: $555 (6.9%);
Total: $860 (8.6%).
Source: APEC study.
Note: Totals may not add up due to rounding.
[End of table]
While the breakfast program is smaller in terms of dollars, there were
higher rates of meal-counting and -claiming error in the breakfast
program compared to the lunch program.
Meal-Counting and -Claiming Process:
According to the FNS study, there are two main types of meal-counting
and -claiming errors, both of which may contribute to improper
payments:
* Cashier error: cashiers improperly determine whether a meal is
reimbursable.
* Aggregation error:meal counts are totaled and reported incorrectly at
any of three stages in the meal counting and claims process:
- Point-of-sale: Cash register totals of meal counts are inaccurate
(see app. I for a discussion of point-of-sale system procurement,
slides 36 and 37).
- School-to-SFA: School totals reported to SFA are inaccurate.
- SFA-to-state: SFA meal claims to state agency are inaccurate.
Figure: School Meal Process and Steps Where Errors Can Occur:
[Refer to PDF for image]
This figure is an illustration of the school meal process and steps
where errors can occur, as follows:
School district/SFA (school food authority:
Household applies to school district for school meal benefits;
School district determines whether student qualifies for free or
reduced-price meals and sends information to school [certification
error can occur here];
School enters eligibility status of student in computer system or other
tracking system (i.e., cashier roster);
Student goes to cafeteria and takes a meal;
Cashier determines whether meal meets requirements and counts it as a
meal served [cashier error can occur here];
Cafeteria manager totals meal counts from each point of sale (i.e.,
cash registers) [point-of-sale error can occur here];
School totals meal counts and submits to SFA [School-to-SFA aggregation
error can occur here];
SFA totals meal counts from all schools and submits to state agency
[SFA-to-state aggregation error can occur here].
Source: GAO analysis; FNS Access, Participation, Eligibility, and
Certification study; Art Explosion (clip art).
[End of figure]
Counting and Claiming Errors Can Result In Overpayments or
Underpayments:
Overpayments can occur when SFAs submit claims for reimbursement for
more meals than they actually served to eligible children. If
overpayments are detected, states may recover the overpayment from the
SFA.[Footnote 22]
Underpayments can occur when SFAs submit claims for reimbursement for
fewer meals than they actually served to eligible children. This
results in a loss of revenue to the SFA.
The cost to the federal government is the net amount of overpayments
minus underpayments.
Meal-Counting and -Claiming Process and Internal Controls:
Ensuring the accuracy of meal claims requires effective internal
controls, including program oversight. USDA regulations establish an
oversight structure that requires FNS to oversee states, states to
oversee SFAs, and SFAs to oversee and monitor its FSMCs, if utilized.
* Internal controls are the methods of ensuring that a program operates
efficiently, with reliable financial reporting, and in compliance with
laws and regulations.[Footnote 23]
* Regardless of the FSMC‘s level of involvement in meal-counting and -
claiming activities, SFAs are required to ensure the accuracy of lunch
claims through effective internal controls. Effective internal controls
could include periodically comparing claims to source data,
periodically observing the counting and claiming activities, and
verifying that cashiers are properly trained.
[End of Background section]
Objective 1: Summary:
USDA‘s Oversight Review Framework Is Generally the Same for Meal
Services Managed by Both SFAs And FSMCs, with the Exception of Some
Added Oversight Requirements:
USDA policies and regulations establish an oversight review framework
for FNS regions, states, and SFAs to help ensure accurate meal counting
and claiming. This framework is generally the same for meal services
managed by both SFAs and FSMCs, with some additional oversight
requirements for FSMC-managed programs:
* FNS issues policies and guidance and conducts management evaluations
of each state agency.
* State agencies are to review monthly meal claims and conduct
administrative reviews of each SFA‘s meal-counting and -claiming system
for the lunch program. They are also required to review any contracts
between SFAs and FSMCs to ensure compliance with federal regulations.
* SFAs are to conduct annual on-site reviews of each school and review
daily meal counts for the lunch program. In addition they are to
conduct periodic visits to oversee FSMC operations.
Table: Federal and State Oversight Framework:
USDA regulatory requirements (Bolded text shows provisions specific to
FSMCs)
FNS:
* must conduct management evaluation of each state agency‘s
administration of programs, including state oversight of meal claims.
State agencies:
* are required to conduct administrative reviews of each SFA at least
once every 6 years, including review of meal-counting and -claiming
systems for the lunch program;
* are to perform monthly reviews of claims, comparing meal counts in
each benefit category to a proxy for attendance; and;
* [begin bolded text] must review FSMC contracts annually to ensure
compliance with federal regulations, including provisions requiring the
FSMC to retain data used to support meal claims [End bolded text].
SFAs:
* must conduct an annual on-site review of each school to review its
meal-counting and -claiming system for the lunch program,
* [begin bolded text] must conduct periodic visits to monitor FSMC
operations [End bolded text], and;
* are to review daily meal counts to identify potential overcounting.
[End of table]
FNS Issues Policies and Guidance Requiring SFAs That Contract with
FSMCs to Be Responsible for the Accuracy of the Claim:
SFAs that employ an FSMC must remain responsible for the accuracy of
meal claims.
* According to USDA regulations, the SFA official signing the lunch
claim shall be responsible for reviewing and analyzing the meal counts
to ensure accuracy.
* FNS guidance to SFAs further clarifies that this responsibility must
not be delegated by an SFA to an FSMC.
Because they are responsible, the SFAs may be at risk for financial
losses if they do not have adequate procedures in place to ensure
accuracy.[Footnote 24]
FNS Conducts Management Evaluations:
FNS regional offices conduct management evaluations of each state
agency that examine a variety of issues, including some that are
specific to FSMCs:
* reviews of FSMC contracts,
* the claims payment process, and,
* state administrative reviews of SFAs.
FNS guidance on management evaluations states that these evaluations
should:
* determine whether the state agency is reviewing each contract to
ensure compliance with federal requirements, including the requirement
that SFAs oversee the FSMC‘s meal-counting and -claiming activities,
and;
* determine whether the state agency is performing its administrative
reviews and checking for compliance with FSMC specific provisions:
e.g., SFA oversight of FSMC meal counting and claiming.
FNS Management Evaluations Identified Some Problems and Required
Corrective Action:
FNS management evaluations in regions we visited found some contracts
that did not include all required provisions, some of which were
specific to FSMCs. These included the following:
* In one state, the FNS region‘s management evaluation found that the
state‘s administrative review of SFAs did not include a check that FSMC
contracts included the provision that SFAs remain responsible for the
accuracy of the meal claim.
* Two regions similarly reported that in one state in each region, FSMC
contracts did not contain all required federal provisions such as those
requiring SFAs to remain responsible for the accuracy of the meal
claim.
In each case, we found that the states were required to take corrective
action in order to improve their administrative and contract review
procedures. For example, one of the states revised its contract review
checklist to include a check for the missing required regulatory
language.
States Generally Conduct the Same Administrative Reviews of SFA-and
FSMC-Managed Programs:
USDA regulations require states to conduct administrative reviews at
least once every 6 years for each SFA participating in the lunch
program. The main meal-counting and -claiming procedures established in
USDA regulations and FNS guidance apply to both SFA-and FSMC-managed
meal services. These reviews include basic checks for internal control
procedures such as:
* observing meals served to determine whether they meet federal
reimbursement requirements and;
* checking to ensure that each type of cafeteria line provides accurate
point-of-sale meal counts, and that counts are correctly recorded.
Officials in states we visited said they generally follow the same meal-
counting and -claiming procedures in their administrative reviews for
all SFAs, regardless of whether an FSMC manages the programs.
States Must Review Meal Claims and Require SFA Approval of Each Claim:
States review meals claims by comparing meal counts in each
reimbursement category to a proxy for student attendance.[Footnote 25]
In the three states we visited, state officials told us that they
either prohibited FSMC employees from submitting the meal claim or they
required SFAs to approve claims submitted by their FSMCs.
* Two state agencies do not grant FSMC employees access to their state
systems for submitting meal claims.
* In the third state, the agency allowed FSMCs to submit meal claims
but required SFAs to review and sign off on them.
States Review FSMC Contracts for Compliance with USDA Regulations:
USDA regulations require states to review SFA contracts with
FSMCs.[Footnote 26] These reviews check that the contract includes
required provisions, including the following, that pertain to meal
counting and claiming:
* FSMCs must maintain records needed to support the meal claims, and;
* FSMCs must report claim information each month to the SFA.
According to FNS guidance, state review of these contracts is important
because the contract is the basis for successful oversight of an FSMC
by the SFA. The guidance also specifies that states must carefully
examine the terms of a contract to ensure that:
* the SFA does not delegate those responsibilities assigned to the SFA
by regulations, and;
* the services expected of the FSMC are clearly specified.
Some States Develop a Prototype Contract to Speed Contract Review:
FNS guidance encourages state agencies to develop a prototype contract
to maximize efficiency in their review of SFA contracts with FSMCs. Of
the 19 states whose officials we interviewed, 11 said they developed a
prototype FSMC contract for use by SFAs:
* Five of these states require SFAs to use their prototype contract.
* Six states recommend that SFAs use their prototype contract.
SFAs Are Required by USDA Regulations to Conduct Annual On-site Reviews
of Each School:
USDA regulations require SFAs to conduct annual on-site reviews of each
school‘s meal-counting and -claiming system for the lunch program,
whether managed by FSMCs or not.
According to regulations, these reviews are to ensure that the school‘s
counting system, as implemented, yields the actual number of
reimbursable free, reduced-price, and paid lunches on each day of
operation.
According to FNS officials, an annual on-site review should detect
problems that would lead to meal-counting and -claiming errors. State
agencies are required to check that SFAs conduct on-site reviews and
document any corrective action required to fix identified problems.
State Officials Said SFA Annual On-site Reviews Generally Do Not Find
Problems Related to FSMCs:
When asked whether SFA annual on-site reviews found problems associated
with FSMCs, most state officials we interviewed said that either the
problems found were not related to FSMCs or that on-site reviews rarely
found any problems at all. Of the 19 states we interviewed:[Footnote
27]
* Nine said that no findings seem related to FSMC use;
* Eight said that on-site reviews rarely find problems;
* Two said they did not know/had not analyzed.
State Officials Questioned the Effectiveness of Annual SFA On-site
Reviews, but for Reasons Unrelated to FSMCs:
Some state officials we interviewed questioned the effectiveness of SFA
annual on-site reviews, but for one or more reasons unrelated to FSMCs.
For example, some state officials said that the people conducting the
reviews were not qualified to conduct them effectively. Other officials
said that SFAs did not view the annual on-site review as an opportunity
to monitor the food service employees. In addition, according to
officials in one state, about 20 percent of the required SFA reviews
had not been conducted at all. When this occurs, according to this
state‘s official, they issue a corrective action plan requiring the SFA
to conduct the annual on-site review within 20 to 30 days.
We are currently conducting additional work in this area in a separate
study.
SFAs Monitor the FSMC‘s Operations through Periodic Visits:
USDA regulations require SFAs to monitor the FSMC‘s food service
operation through periodic visits.
USDA guidance states that these visits should determine if the FSMC‘s
food service operation is in conformance with program regulations, as
outlined in the SFA‘s agreement to participate in the program, and
document their visits.
USDA guidance further outlines that contract-monitoring
responsibilities include evaluating data and documentation to support
the meal claim.
SFAs we visited varied in the frequency of their visits with FSMC
officials.
* Officials in one SFA reported that they met with their FSMC official
several times daily, and conducted quarterly reviews of FSMC
operations.
* Another SFA‘s officials reported that they conducted weekly meetings
with the FSMC.
* A third SFA‘s officials said they regularly visited school cafeterias
to monitor cashiers.
SFA Review of Daily Meal Counts and FSMC Level of Involvement Varied in
the SFAs We Visited:
SFAs we visited varied in the extent to which they relied on FSMCs for
meal-counting and -claiming activities and exercised oversight as
allowed under FNS regulations.
* At one SFA, all meal-counting and -claiming activities were done by
SFA employees. Lunchroom managers submitted daily meal counts to the
SFA office, which submitted regular claims to the state agency.
* At another SFA, the FSMC was responsible for parts of the meal-
counting and -claiming activities, including conducting edit checks of
the data. The FSMC compiled daily meal counts from schools, and
submitted a monthly claim report to the SFA for submission to the state
agency.
* At the third SFA, the FSMC was heavily relied upon for all aspects of
the meal counting and claiming. An FSMC official worked with an SFA
official to review claim data for errors and enter the claims into the
state system, but the SFA official conducted the final verification and
submitted the claim in the state‘s meal claim system.
[End of Objective 1]
Objective 2: Summary:
Meal-Counting and -Claiming Errors Occur at Similar or Somewhat Lower
Rates When FSMCs Manage Meal Services Compared to When SFAs Manage Meal
Services:
SFA-and FSMC-managed meal services had generally similar rates of error
at the following stages of the meal-counting and -claiming
process:[Footnote 28]
* cashier errors (these rates tended to be the highest),
* point-of-sale aggregation errors (these rates were relatively low),
and;
* SFA-to-state aggregation errors (these rates were also relatively
low).
FSMC-managed programs had somewhat lower error levels for school-to-SFA
aggregation than SFA-managed programs, and these differences were
statistically significant.
Table: Counting and Claiming Errors in the Breakfast and Lunch
Programs, by FSMC-and SFA-managed Programs[Footnote 29]; Gross errors
as percentage of all reimbursements (in millions of dollars):
Cashier error:
Breakfast program: FSMC-managed: 6.4% ($16.1);
Breakfast program: SFA-managed: 10.4% ($172.9);
Lunch program: FSMC-managed: 4.6% ($63.3);
Lunch program: SFA-managed: 2.8% ($180.4).
Point-of-sale aggregation error:
Breakfast program: FSMC-managed: 0.8% ($1.4);
Breakfast program: SFA-managed: 0.2% ($3.3);
Lunch program: FSMC-managed: 0.1% ($1.0);
Lunch program: SFA-managed: 0.4% ($25.2).
School-to-SFA aggregation error[Footnote 30]:
Breakfast program: FSMC-managed: 0.2% ($0.4);
Breakfast program: SFA-managed: 4.5% ($76.8);
Lunch program: FSMC-managed: 0.1% ($1.7);
Lunch program: SFA-managed: 2.4% ($160.9).
SFA-to-state aggregation error:
Breakfast program: FSMC-managed: 0.2% ($0.5);
Breakfast program: SFA-managed: 2.1% ($34.1);
Lunch program: FSMC-managed: 1.5% ($22.0);
Lunch program: SFA-managed: 1.5% ($95.8).
Source: GAO and Mathematica Policy Research analysis of APEC data.
[End of table]
FSMC Involvement in Aggregating School-to-SFA Meal Counts Varied
Depending on Location:
The extent to which FSMCs were involved in aggregating meal counts
differed by location, making it difficult to identify why this type of
error was lower in FSMC-managed programs.
* FNS officials stated that FSMCs are likely to be involved in
aggregating meal counts but said the extent to which this occurs can
vary, depending on location.
* In 12 of 19 states, officials we interviewed reported that FSMC
employees are involved to a great or very great extent in point-of-sale
and school-to-SFA aggregation. However, officials in 7 of the 19 states
said FSMC employees were either not involved or involved to a little to
moderate extent.
* On our site visits to SFAs, FSMC involvement in aggregating meal
counts varied from no involvement at one SFA to heavy involvement in
another.
On the basis of this information, we could not determine whether FSMCs
directly contributed to the lower error rate at the school-to-SFA
level.
FNS and State Officials Stated that They Do Not Find Additional Meal-
Counting and -Claiming Problems When FSMCs are Involved:
FNS officials we interviewed said that on the basis of their
experience, the involvement of an FSMC should not affect the accuracy
of meal counting and claiming.
Moreover, officials in 16 of 19 states we interviewed said their
administrative reviews do not find problems any more or less frequently
when FSMCs manage the program.
Some state officials we interviewed questioned the effectiveness of SFA
annual on-site reviews in general but did not think they were any less
effective when FSMCs manage the program.
[End Objective 2]
Concluding Observations:
When SFAs contract with FSMCs to operate their school meal programs, a
robust system of internal controls can help mitigate the risk that they
will incur financial losses from FSMC counting and claiming
errors”either because they are held responsible for overpayments or
because they do not receive the total amount of federal funds to which
they are entitled.
Although this study focused on circumstances where SFAs contracted with
FSMCs, the similar error rates among SFA-managed and FSMC-managed
programs, combined with the relatively high overall error rate, suggest
that the nature of the problem requires a more systematic, program-wide
approach rather than a focus specifically on FSMC-managed programs.
Because we did not assess the effectiveness of the various oversight
elements we identified, it is not clear whether the framework itself is
not adequate or the elements of the framework are not well implemented,
or both. Additional analyses are necessary to identify potential
remedies. In a separate study, we are currently conducting a program-
wide review of these errors.
[End of section]
Appendix I: Procurement of Point-of-Sale Systems:
Point-of-sale software systems are one of the tools that SFAs and FSMCs
can use to count meals.
USDA requires all procurement transactions conducted by SFAs or FSMCs,
acting on behalf of SFAs, to be conducted in a manner providing full
and open competition, consistent with the standards set forth in its
regulations.
FNS officials told us that these standards are satisfied when, for
example, an SFA's original request for proposals (RFP) includes a
request for the FSMC to provide a point-of-sale system, or to act on
the SFA‘s behalf in obtaining a point-of-sale system.
However, FNS officials also noted that if an SFA has an existing
contract with an FSMC that does not provide for the FSMC to provide a
point-of-sale system, and the FSMC later purchases a point-of-sale
system without the SFA having issued a new competitive RFP, such a
procurement would be in violation of USDA's procurement standards.
FNS recently issued new regulations that, among other things, require
states to review contracts prior to their execution and to ensure that
the relevant procurement standards, including those related to full and
open competition,are satisfied. These regulations are being phased in
by states.
FNS is developing Web-based procurement training for state agency
officials that address issues related to full and open competition. On
December 10, 2008, FNS released an initial phase of the training on
general procurement requirements and responsibilities. FNS plans to
release training to SFAs at a later date.
[End of section]
Appendix II: Standard Errors for Estimates:
Table: Standard errors for dollar estimates of certification and meal-
counting and -claiming errors for the breakfast and lunch programs,
reported in slides 4 and 12 (in millions of dollars)[Footnote 31]:
Improper payments due to certification error
Breakfast: $18;
Lunch: $54;
Total: $57 maximum.
Improper payments due to meal-counting and -claiming errors:
Breakfast: $111 maximum;
Lunch: $171 maximum;
Total: $210 maximum.
Source: APEC study; GAO analysis.
[End of table]
Table: Standard errors for counting and claiming errors when FSMCs
manage meal services compared to when SFAs manage meal services,
reported in slide 32, as a percentage of all reimbursements (standard
errors for dollars):
Cashier error:
Breakfast program: FSMC-managed: 3.4% ($9.2);
Breakfast program: SFA-managed: 2.8% ($52.7);
Lunch program: FSMC-managed: 1.8% ($29.5);
Lunch program: SFA-managed: 0.5% ($33.0).
Point-of-sale aggregation error:
Breakfast program: FSMC-managed: 0.5% ($0.9);
Breakfast program: SFA-managed: 0.2% ($2.5);
Lunch program: FSMC-managed: 0.1% ($0.8);
Lunch program: SFA-managed: 0.2% ($13.3).
School-to-SFA aggregation error:
Breakfast program: FSMC-managed: 0.1% ($0.3);
Breakfast program: SFA-managed: 2.0% ($35.3);
Lunch program: FSMC-managed: 0.1% ($1.7);
Lunch program: SFA-managed: 0.9% ($62.7).
SFA-to-state aggregation error:
Breakfast program: FSMC-managed: 0.2% ($0.5);
Breakfast program: SFA-managed: 1.2% ($20.2);
Lunch program: FSMC-managed: 1.0% ($15.2);
Lunch program: SFA-managed: 0.8% ($52.6).
Source: GAO and Mathematica Policy Research analysis of APEC data.
[End of table]
[End of section]
Enclosure II: GAO Contact and Staff Acknowledgments:
GAO Contact:
Kay E. Brown (202) 512-7215 or BrownKE@gao.gov:
Acknowledgments:
Jeremy Cox, Assistant Director, and Paul Schearf, Analyst-in-Charge,
managed this assignment. Marcia Carlsen, Anar Ladhani, Joanie Lofgren,
Kara Patton, and Lisa Reynolds made significant contributions to this
report in all aspects of the work. Carolyn Boyce and Wilfred Holloway
provided methodological assistance; Sheila McCoy provided legal
support; and Susan Bernstein helped develop the report's message.
[End of section]
Footnotes:
[1] USDA, FNS, Office of Research, Nutrition, and Analysis, Erroneous
Payments in the National School Lunch Program and School Breakfast
Program: Summary of Findings, Alexandria, VA, November 2007.
[2] Michael D. LaFaive, A School Privatization Primer for Michigan
School Officials, Media and Residents, Mackinac Center for Public
Policy, Midland, Michigan, 2007 (Mackniac study).
[3] Internal control is "an integral component of an organization's
management that provides reasonable assurance that the following
objectives are being achieved: effectiveness and efficiency of
operations, reliability of financial reporting, and compliance with
applicable laws and regulations." Source: GAO, Standards for Internal
Control in the Federal Government, [hyperlink,
http://www.gao.gov/products/GAO/AIMD-00-21.3]. (Washington, D.C.:
November 1999).
[4] This study is in response to House Report 110-258, which
accompanied the appropriations bill for Agriculture, Rural Development,
Food and Drug Administration, and Related Agencies for fiscal year
2008.
[5] Mackinac study.
[6] These sites were selected to ensure a variety of FSMCs, contract
types, and counting and claiming systems in the regions with high rates
of contracting and their states with high levels of meal reimbursement.
[7] These study data were collected to estimate improper payments
nationally and not to compare differences between SFA-managed and FSMC-
managed programs. However, we determined that the data are reliable
enough for the purposes of our review. USDA, FNS, Office of Research,
Nutrition and Analysis, NSLP/SBP Access, Participation, Eligibility,
and Certification Study--Erroneous Payments in the NSLP and SBP, Vol.
I: Study Findings, November 2007 (APEC).
[8] The proxy for student attendance is determined by first adjusting
for the difference between enrollment and attendance (attendance
factor) and then multiplying this attendance factor by the number of
students eligible for meals under each category.
[9] In October 2007, USDA issued procurement regulations that require
states to review FSMC contracts prior to execution. 72 Fed. Reg. 61,
479.
[10] This estimate should be considered the maximum because the method
FNS‘s contractor used to calculate it did not eliminate offsetting
errors that might occur. The standard error for this estimate should be
no larger than about $210 million. For more details about standard
errors, see appendix II. USDA FNS, Office of Research, Nutrition, and
Analysis, Erroneous Payments in the National School Lunch Program and
School Breakfast Program: Summary of Findings, Alexandria, VA, November
2007.
[11] LaFaive, M. D., A School Privatization Primer for Michigan School
Officials, Media and Residents, Mackinac Center for Public Policy,
Midland, Michigan, 2007 (Mackinac study).
[12] This study is in response to House Report 110-258, which
accompanied the appropriations bill for Agriculture, Rural Development,
Food and Drug Administration, and Related Agencies for fiscal year
2008.
[13] According to data from the Mackinac study, 75 percent of all SFAs
that contract with FSMCs are in these three regions.
[14] These data were collected to estimate improper payments nationally
and not to compare differences between SFA-managed and FSMC-managed
programs. However, we reviewed the study‘s methodology and determined
that the data are reliable enough for the purposes of our review. USDA,
FNS, Office of Research, Nutrition and Analysis, NSLP/SBP Access,
Participation, Eligibility, and Certification Study–Erroneous Payments
in the NSLP and SBP, Vol. I: Study Findings, November 2007 (APEC).
[15] Another source of improper payments is certification errors:
errors resulting from mistakes in certifying the eligibility status of
students.
[16] In 2008-2009, FNS basic cash reimbursement rates for meals are as
follows: $2.57 for each free lunch, $2.17 for each reduced-price lunch,
and $0.24 for each paid lunch and $1.40 for each free breakfast, $1.10
for each reduced-price breakfast, and $0.25 for each paid breakfast.
FNS has higher reimbursement rates for Alaska and Hawaii, and for
schools with high percentages of low-income students.
[17] Children from families whose income is at or below 130 percent of
the poverty level are eligible for free meals. Those whose income is
between 130 and 185 percent of the poverty level are eligible for
reduced-price meals.
[18] Mackinac study.
[19] USDA FNS, Office of Research, Nutrition, and Analysis, Erroneous
Payments in the National School Lunch Program and School Breakfast
Program: Summary of Findings, November 2007.
[20] Certification errors result from mistakes in certifying the
eligibility status of students. The standard errors for these estimates
are provided in appendix II.
[21] These estimates should be considered the maximum because the
method FNS‘s contractor used to calculate them did not eliminate
offsetting errors that might occur. The standard errors for these
estimates are provided in appendix II.
[22] If the state fails to recover the overpayment from an SFA in the
lunch program, FNS may assess a claim against the state agency.
[23] Internal control is ’an integral component of an organization‘s
management that provides reasonable assurance that the following
objectives are being achieved: effectiveness and efficiency of
operations, reliability of financial reporting, and compliance with
applicable laws and regulations.“ Source: GAO, Standards for Internal
Control in the Federal Government, [hyperlink,
http://www.gao.gov/products/GAO/AIMD-00-21.3]. (Washington, D.C.:
November 1999).
[24] To guard against this potential loss, FNS guidance encourages SFAs
to add a provision in the contract that requires the FSMCs to pay the
SFA for any overclaims due to FSMC negligence or noncompliance with
regulations.
[25] The proxy for student attendance is determined by first adjusting
for the difference between enrollment and attendance (attendance
factor) and then multiplying this attendance factor by the number of
students eligible for meals under each category.
[26] USDA issued new procurement regulations in October 2007 that
require states to review FSMC contracts prior to execution. 72 Fed.
Reg. 61, 479.
[27] This question did not apply to one state since it has no FSMCs in
public SFAs that have more than one school; only SFAs with more than
one school need to conduct on-site reviews of each school in the SFA.
Another state said both that there were no findings that seem related
to FSMC use and that on-site reviews rarely find problems.
[28] Differences in error rates were not statistically significant.
[29] See appendix II for standard error estimates.
[30] Differences are statistically significant.
[31] Standard error is a statistic used to calculate the range of
values that express the possible difference between the sample estimate
and the actual population value. We calculated maximum standard errors
for some estimates because we did not have information on how error at
one level (e.g., cashier) influences error at another level (e.g.,
point-of-sale aggregation). To calculate these maximum standard errors,
we assumed there was no influence from one level to another
(covariance).
[End of section]
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