State Agencies (SAs) have just received another memo from USDA reiterating the importance of School Food Authorities (SFAs) ensuring Food Service Management Company (FSMC) compliance with the procurement requirements. These requirements are established in regulations affecting the National School Lunch Program (NSLP), School Breakfast Program (SBP), and Special Milk Program (SMP) which became effective on November 30, 2007 and emphasizes that:

• all cost reimbursable contracts (including contracts with cost reimbursable provisions) require provisions which limit the use of the nonprofit school food service account to pay only for allowable costs-those costs net of all discounts, rebates and other applicable credit;
• all cost reimbursable contracts were to be in compliance with the regulatory requirements by School Year 2009-2010;
• the SA may impose a pre-bid requirement on an SFA's proposed procurement; and,
• the SA must annually review each contract (including supporting documentation between each SFA and food service management company (FSMC) before execution of the contract.

This additional guidance is based on information that indicates SFAs have not used due diligence in their review of document submissions from FSMCs prior to payment. While New York State has established a prototype contract and reviews all deviations from the prototype, SFAs must ensure they receive, review and retain all required supporting cost documentation prior to monthly payments to the FSMC.

Specifically:

Provisions Required in Cost Reimbursable Contracts (including contracts with cost reimbursable provisions)

The regulations at 7 CFR 210.21 (f), 215.14a(d), and 220.16(e) require that SFAs must include in all cost reimbursable contracts, in all contracts which include cost reimbursable provisions and in all solicitations for such contracts, provisions which limit the use of nonprofit school food service account funds to costs resulting from proper procurements and contracts. Specifically, the regulations require that SFAs use nonprofit school food service account funds to pay only for allowable costs-those costs net of all discounts, rebates and other applicable credits. This information should be provided to the SFA monthly with the appropriately signed certification (found in the NYS prototype contract) from the FSMC with its invoices.

Implementation Timeline

The regulations apply to all new solicitations issued on or after the regulation's effective date, November 30, 2007. Recognizing that a requirement to re-bid all contracts immediately would have posed a potential hardship on some SFAs, USDAs Food and Nutrition Service (FNS) included an implementation timeline in the regulation's preamble to structure re-bidding of contracts by SFAs in phases. In addition, FNS responded to concerns raised by SAs related to cost reimbursable contracts which at the time of the regulation's effective date, included provisions requiring that all discounts, rebates, and other applicable credits would be credited to the SFA by the vendor, most often a FSMC. FNS advised that if a solicitation and resulting cost reimbursable contract required all discounts, rebates, and other applicable credits to be credited to the SFA by the FSMC, and the FSMC was crediting all such discounts, rebates and other applicable credits to the SFA under those cost reimbursable contracts, then the relevant cost reimbursable contract could have been amended to incorporate the required language of the regulation without constituting a material change. Based on this timeline, FNS required that all cost reimbursable contracts between an SFA and a FSMC or other vendor, regardless of the date entered into, were to be in compliance with the regulatory requirements by School Year 2009-2010. New York State opted to revise all its prototype contracts to ensure SFAs and FSMCs were fully aware of the importance of full and appropriate disclosure of costs allocated to the Child Nutrition Programs.

State Agency (SA) Review of Contracts

The regulations allow for two (2) approaches to SA oversight of SFA contracts. The first approach, pre-bid review requirement, is at the discretion of the SA. The second approach, annual review and approval of each contract between the SFA and FSMC, is required of the SA.

Pre-bid Review Requirement

The regulations allow a SA to impose a pre-bid review of an SFA's proposed procurement. 7CFR 210.21 (c), 215.14a(c) and 220.16(c).

Annual Review and Approval of Each Contract between SFA and FSMC

The program regulations for NSLP and SBP require that each SA annually review and approve each contract and extension between any SFA and FSMC before execution of the contract by either party. 7CFR 210.16(a)(10), 210.19(a)(6) and 220.7(d)(1). Additionally, the program regulations for NSLP require that each SA annually review all supporting documentation to a contract (i.e., solicitation documents, responses submitted by bidders, etc.) between any SFA and FSMC before execution of the contract and extension by either party. 210.19(a)(6). The program regulations for the SMP do not explicitly state that each SA must annually review and approve each contract between any SFA and FSMC before execution of the contract by either party. However, please be aware that it is unlikely for any SFA to contract with an FSMC for solely SMP or SBP without also contracting for the NSLP; therefore, each SA is required to annually review each contract (including all supporting documentation) between any SFA and FSMC before execution of the contract by either party if the resulting contract is for NSLP and either the SMP or SBP. In the rare circumstance where the contract between any SFA and FSMC is for SMP and/or SBP, USDA advises that it is prudent for the SA to annually review each contract (including supporting documentation) before the contract is executed by either party. New York State is required by State law to review all contracts between a public SFA and a FSMC regardless of which, in any federal programs the SFA has opted to administer.

Identification of Allowable and Unallowable Costs on Invoices

As noted in prior guidance, the regulations require FSMCs under cost reimbursable contracts to provide sufficient information/documentation to permit the SFA to identify allowable and unallowable costs, as well as the dollar amount of all such discounts, rebates and other applicable credits on invoices and bills presented for payment to the SFA. (7CFR 210.21 (f), 215.14a(d) and 220.16(e).) Regulations describe in detail the information a contractor must provide to an SFA.

The regulations ensure that SFAs receive the full benefit of any discounts, rebates or other applicable credits arising from purchases made under cost reimbursable contracts on behalf of the school meals programs. As such, it helps ensure that limited school meals program resources are used as efficiently as possible. All cost reimbursable contracts in New York State include the required provisions as described above. However, the responsibility for ensuring contract provisions are monitored and enforced by SFAs is critical. Local, State and national awareness and attention on this issue in the media requires SFAs and SAs to ensure that they are aware of the ramifications if appropriate internal controls are not in place to prevent abuses. SAs should continue to work closely with SFAs to ensure that cost reimbursable contracts, contract provisions and solicitations contain the required provisions and terms and conditions to accomplish the necessary tracking of the discounts, rebates, and other applicable credits.

Questions on this memo should be addressed to Jamie McMillian or Linda St. Pierre at 518-473-8781.