The U.S. Department of Agriculture’s watchdog arm plans to look closely at whether the food-service-management companies running many school cafeterias are passing along all the discounts and rebates they receive from their suppliers to the districts that hire them.
The audit will begin in August, said Alison Decker, a lawyer in the USDA’s office of inspector general. It was triggered in part by a settlement between the New York state attorney general and Sodexo, one of several large companies in the business of running school cafeterias. Last July, Sodexo, a French company with its U.S. headquarters in Gaithersburg, Md., agreed to pay $20 million to resolve allegations that it had over charged 21 school districts and the State University of New York system for some of the food provided to students.
That settlement prompted U.S. Rep. Rosa L. DeLauro, D-Conn., to write to Secretary of Agriculture Tom Vilsack last September, urging a broader audit.
“I am concerned that these practices are prevalent in many more school districts around the country, potentially resulting in the misuse of tens of millions of dollars of taxpayer funds intended to provide schoolchildren with access to healthy school meals,” Ms. DeLauro wrote."In a time of economic hardship and increased hunger, the National School Lunch and Breakfast Programs are more vital than ever.”
The most recent statistics available show that as of March, schools across the country were serving about 32 million lunches a day through the federal program.
“Given the enormous fiscal pressure facing all levels of government,” Rep. DeLauro went on, “we owe it to American taxpayers to make every dollar invested in these programs count.”
According to USDA statistics from 2007, the most recent data available, more than 13 percent of school districts use a food-service-management company. At the time, the districts most likely to contract with companies to prepare and serve meals were of large or medium size and with low levels of student poverty.
The Agriculture Department’s office of inspector general has notified the USDA of its plans for an audit, but it hasn’t said which companies and districts will be involved, Ms. Decker said. The biggest providers of school food-management services are Sodexo, Philadelphia-based Aramark, and Chartwells, based in Charlotte, N.C.
Sodexo spokesman Greg Yost said the company works in more than 480 school districts large and small across the country.
“Sodexo will cooperate fully with any USDA audit,” he said. “We have systems in place to comply with any USDA regulations.”
Districts may choose to outsource meal programs because they believe they can save money by doing so, both on operations and labor, or because they have a philosophy of outsourcing, said Barry Sackin, a Murrieta, Calif.-based consultant. He has worked as a food-service director and served for seven years as the vice president of public policy for the School Nutrition Association, a national group based in Oxon Hill, Md.
USDA regulations require school districts and states to police contracts with outside food-service managers so districts aren’t short changed.
But that isn’t always the approach of districts, John Carroll, an assistant attorney general in New York who worked on the Sodexo case, said during the School Nutrition Association’s legislative-action conference earlier this year.
His investigation found that Sodexo promised to provide goods at cost but didn’t disclose rebates from suppliers. The company pocketed the rebates and, in essence, overcharged schools, the state found.
“Schools with limited resources and time have a difficult time keeping up as it is, and they view the purpose of hiring the food-service company as a way to increase the school official’s time and resources so they can apply them elsewhere,” Mr. Carroll said.
“As one school official told me, he does not and cannot stand on the loading dock at dawn to observe that the right milk is unloaded and that he is being charged correctly, or review account statements to make sure that any discounts or rebates he’s entitled to he receives,” Mr. Carroll said. “These are tasks he believes he paid the food-service company to perform, and he could only trust they were doing so.”
The undisclosed rebates aren’t limited to New York, however. A report commissioned by a union in New Jersey and published in April of last year found that some food-service-management companies pocketed rebates instead of forwarding them to the school districts in that state.
Mr. Sackin said districts can protect themselves, to an extent, by using contract language provided in federal law, checking with distributors about what prices they are charging other districts nearby, and looking closely at invoices, among other measures.
Easy to Earn
The rebates generally work like this: A food-service provider buys certain products, such as breakfast cereal or chicken. When the provider buys in volume, which large food-service companies working with many districts have the ability to do, they are given a better price than any single customer might be able to negotiate. When the company buys large enough quantities of the product, the company gets a check from the supplier, an “off-invoice” rebate, Mr. Carroll said.
“Earnings from rebates have become an increasingly important source of revenue” for food-service companies, he said. Rebates are easy to earn, he said, but those earnings are “not readily apparent from publicly available financial statements or any other public documents.”
In a twist on the same issue, a previous USDA inspector general audit found that food-service-management companies didn’t always reimburse districts for the value of commodity foods they received at no charge from the USDA.
That 2002 audit found that five of eight companies improperly kept the value of those commodities—worth a total of about $6 million—from 53 districts in seven states. Last year, auditors in the 51,000-student Columbus school district in Ohio found that Sodexo hadn’t provided the district with credit for about $400,000 worth of commodities it had received.
“We felt it was just an honest ... difference of interpretation,” said Joseph Brown, the director of food services for the school district. “They said flat out if they need to pay for this, they would.”
The district sought an opinion from the USDA to settle the matter, and ultimately, the USDA agreed that Columbus should be repaid.
History of Problems
This isn’t the first time the Agriculture Department’s inspector general has looked into whether food-service-management companies are withholding discounts from school districts. The office’s forthcoming audit will also look at whether the USDA’s Food and Nutrition Services division has put into practice recommendations from previous audits involving such companies.
In 2005, the office reviewed 106 contracts from 22 states and found companies did not pass on at least $1.3 million in savings they had received although the agreements with school districts specifically required crediting of those funds. The companies had actually retained more than $6 million in rebates, discounts, and incentives from food manufacturers, but auditors couldn’t figure how much beyond the $1.3 million should have gone to districts because of the way the companies’ accounting systems worked.
“All districts operate on a nonprofit basis; and any rebates or other credit should go back to the food-service-management account,” said Jean Daniel, a spokeswoman for the USDA. “There should be a credit.”
About two months after Rep. DeLauro’s letter, the USDA sent states letters reminding them of their duty to police contracts and collect all rebates and discounts, and noting that doing so is necessary to maximize the federal money allocated to school meal programs.
“Otherwise,” wrote Kevin Concannon, the agency’s undersecretary for food, nutrition, and consumer services, “the financial integrity of the federal child-nutrition programs for children is greatly undermined.”
That message was reaffirmed in a memo to states in April.
However, Mr. Carroll of the New York state attorney general’s office finds fault with the entire idea of rebates for school cafeteria food, no matter how well food-service contracts are overseen.
“There is an inherent conflict of interest between the people who are choosing what foods to buy for children and ... the children they are buying the food for,” he said. “They are likely to make food choices based at least in part on maximizing rebate income rather than more important factors.”
Nirvi Shah, Writer contributed to this article.
A version of this article appeared in the June 15, 2011 edition of Education Week as Audit to Target Food-Service Corporations