1. The Basics of Financial Management Program Monitoring and Operational Support Division Child Nutrition Programs USDA Food and Nutrition Service Presenters: Lynn Rodgers-Kuperman, Maggie Applebaum, and Sean Monahan

2. Session Agenda Overview of Financial Management of the Nonprofit School Food Service Account (NSFSA). Overview of Resource Management Maintenance of Nonprofit School Food Service Account Paid Lunch Equity Revenue from Nonprogram Foods Indirect Costs Questions (Index Cards Provided for Questions)

3. Why is Financial Management Important? Managing the financial resources of Child Nutrition Programs (CNP) is critical to maintaining quality standards and ensuring nutritious meals are served to children. Money that is spent by the Federal government and states represent a significant level of public funding.

4. We Are Stewards of Taxpayer $$$ MONEY $$$ The Federal Government has a fundamental responsibility to be effective stewards of the taxpayers’ money. We must be responsible with money that comes to the government, money that is spent by the government, and money that is used in running the government itself. Decision makers and the public itself must have confidence in financial management efforts. ~ Office of Management Budget Statement

5. Poor Financial Management…

6. What Does This Mean? School Food Authorities receive reimbursements for each meal served. Not free money, there are strings attached:  Meals must conform to program regulations &  State agencies (SAs) and School Food Authorities (SFAs) must adhere to Department-wide and Program-specific regulations (i.e., Federal cost principles, procurement regulations, etc.).

7. Receiving Funds in a Reimbursement Program In many other programs, program operators bill the Federal awarding agency for program costs in order to receive reimbursements. In the Child Nutrition Programs, SFAs do not bill USDA/Food and Nutrition Service (FNS) for the reimbursement of program costs.

8. Federal Regulation 7 CFR Part 210 SFAs must establish a Nonprofit School Food Service Account. CNPs operate on a nonprofit basis. All revenue must be used to support or improve the food service operation for children.

9. There are Limits Placed on Federal Funds The funds provided by Food and Nutrition Service to the SAs and in turn to the SFAs for the Child Nutrition Programs are granted with terms and conditions. These terms and conditions are outlined in the Federal regulations and Office of Management and Budget (OMB) cost circulars (i.e., Federal cost principles)

10. General Criteria for Allowable Costs Necessary; Reasonable; Allocable; Legal under State and local law; Conforms with Federal law, regulation, and grant terms; Consistently treated as direct or indirect; Determined in accordance with Generally Accepted Accounting Principles (GAAP); Not included as a cost or matching contribution of any other grant (except where allowed by Federal regulations); Net of applicable credits; and, Adequately documented

11. In a nutshell… SFAs follow a multi-step process to determine whether funds from the NSFSA may be used for a certain cost: 1 Examine each cost by reviewing the criteria in 2 CFR Part 225; 2 Review program regulations in conjunction with historical FNS policy (which clarifies program regulations); and 3 Apply these collective principles to the specific facts and circumstances regarding each cost.

12. Importance of Resource Management Monitoring Monitoring helps SFAs serve nutritious meals to children by making sure that funds are properly allocated. A balanced review approach is used to monitor an SFA’s resource management practices, this……  Identifies potential problems &  Allows resources to be focused on SFAs most at risk of noncompliance. Monitoring is also required under federal law and regulations.

13. Resource Management Used to Monitor Financial Management Includes Four Areas:  Nonprofit School Food Service Account/ Allowable Cost and Net Cash Resources  Paid Lunch Equity  Revenue from Nonprogram Foods  Indirect Costs

14. Overview of Resource Management The Administrative Review contains a resource management (RM) section that incorporates a systematic approach for monitoring financial requirements. Requires SFAs to submit documentation to SAs prior to an Administrative Review. To balance SAs’ resources, a risk indicator threshold methodology was developed to target SFAs needing a more comprehensive review. If three or more factors identified in the risk indicator tool are triggered, a comprehensive review will take place. SAs should utilize financial management staff, when possible.

15. Resource Management: Review Process Step 1 Resource Management pre-visit questions off- site. Step 2 Risk flags; determine if further review is necessary; corrective action/technical assistance, if needed. Step 3 If necessary, conduct detailed on-site RM review; corrective action/technical assistance.

16. Maintenance of the Nonprofit Food Service Account

17. Maintenance of the Nonprofit School Food Service Account: Statement of Revenues Financial statements: Statement of Revenues and Expenses (aka Profit and Loss Statement); Provides the total revenue available to the program by source; Shows total expenditures by category; and Includes net excess/deficit to the program for the period of the statement.

19. Maintenance of the Nonprofit School Food Service Account: Financial Statements Financial statements: Balance sheet (aka Statement of Financial Position); Prepared at the end of each accounting period; and Includes information about the program’s assets, liabilities and fund equity.

20. Maintenance of the Nonprofit School Food Service Account: Financial Statements

21. Net Cash Resources

22. Net Cash Resources: Intent of Monitoring Ensure timely and appropriate use of funds in the nonprofit school food service account to improve program operations and meal quality. Prevent neglect and underfunding of key program functions. Maximize the use and investment of Federal funds in program operations.

23. Net Cash Resources: Administrative Review Conducting a review: Gather the SFA’s Statement of Revenue and Expenses for the most recently completed school year.

25. 3. Deduct expenditures (Step 2) from revenues (Step 1) = (1-2) Revenue shortfallOr Revenue Excess 2. Identify total current expenditures (liabilities) Salaries/wages/benefits Purchased foods/indirect costs/donated commodities 1. Identify total nonprofit food service revenues for the SFA Meal payments & earnings on investments Local and state revenues & Federal cash reimbursements Nonprofit School Food Service Account: Net Cash Resources Calculation, Part 1

26. Nonprofit School Food Service Account: Net Cash Resources Calculation, Part 2 Step 5. Determine the SFA’s compliance with requirements of net cash resources Step 2 is less than Step 3 = the SFA is in compliance Step 2 is greater than Step 3 = SFA is not in compliance Step 4. Calculate 3 months’ average expenditures (Full year expenditures/operating months) x 3 Step 3. Identify Net Cash Resources Annual Financial Statement Total Revenues – Total Expenses

27. Nonprofit School Food Service Account: Net Cash Resources Calculation #2 Determine compliance with net cash resources requirements (7 CFR 210): If the annual net cash resources amount (calculated in net cash resources calculation #1) is less than the 3 months’ average expenses, the SFA is in compliance. If the annual net cash resources amount is greater than 3 months’ average expenses, the SFA is out of compliance unless the SFA received prior approval from the State agency.

28. Allowable Costs

29. 7 CFR Section 210.14(a): Nonprofit School Food Service Revenues received by the nonprofit school food service are to be used only for the operation or improvement of the food service:  Revenues may be used for food, equipment, and personnel used to operate the meal programs.  Revenues cannot be used to purchase land or buildings, unless otherwise approved by FNS, or to construct buildings.

30. Appendix A of 2 CFR 225 Allowable Costs Necessary; Reasonable; Allocable; Legal under State and local law; Conforms with Federal law, regulation, and grant terms; Consistently treated as direct or indirect; Determined in accordance with Generally Accepted Accounting Principles (GAAP); Not included as a cost or matching contribution of any other grant (except where allowed by Federal regulations); Net of applicable credits; and Adequately documented.

31. Appendix B of 2 CFR 225 Provides a list of 43 cost items Classifies certain costs in three categories:  allowable,  allowable with prior SA approval, or  unallowable

32. Allowable Costs: Scope of Monitoring Test actual expenses for compliance with allowable cost requirements; Identify and correct unallowable costs; and Ensure costs are adequately documented and treated consistently.

33. Allowable Costs Step 1 Review the SFA’s most recent full year statement of revenues and expenses Step 2 Determine whether selected expenses are allowable Step 3 Ensure accurate and sufficient support documents are maintained for allowable costs

34. Step 1: Review the SFA’s most recent full year statement of revenues and expenses Verify that the SFA’s Statement of Revenue and Expenses included all costs charged to the school food service account. Ensure costs represented charges for actual expenses, not budgeted or projected amounts.

35. Step 2: Select a Sample of Expenses Select a sample of at least 10% of the SFA’s expenditures to test compliance and allowability.

36. 10% Sample $100,000 Total expenses  $10,000 (10% of 100,000) $40,000 Food  $4,000 $50,000 Labor  $5,000 $10,000 Other  $1,000

37. Step 3: Determine whether selected expenses are allowable Ensure costs are reasonable and necessary for specific program functions. Use Appendices A & B of 2 CFR 225 as guidance to determine whether the cost is allowable. Review actual invoices and receipts as necessary to verify compliance. Identify unallowable costs.

38. Step 4: Ensure accurate and sufficient support documents are maintained for allowable costs SFAs must meet documentation and recordkeeping requirements established by State agemcies. Verify accuracy of cost documents for the samples chosen and ensure records are adequate to support expense transactions. Ensure expense records for the samples chosen are supported with source documents such as cancelled checks, paid bills.

39. Allowable Costs: Corrective Action/Technical Assistance Examples of when corrective action is needed:  Inappropriate expenditures on unallowable costs;  Insufficient documentation to support expenditures; Example of corrective action:  Required transfer of funds from the SFA’s general fund to the nonprofit school food service account. Example of technical assistance:  Providing information to the SFA about the allowability of future expenses it may be planning.

40. Maintenance of the Nonprofit School Food Service Account: Financial Statements SP 56-2013 encourages State child nutrition program staff to work with State school business officials. Details documentation necessary to conduct a comprehensive Resource Management review.

41. Paid Lunch Equity

42. What is Paid Lunch Equity ? The PLE ensures that SFAs charge paid lunch prices sufficient to cover the costs of paid meals or otherwise provide enough funds to support paid meal costs.

43. What do We Mean by Equity? Equity is the difference in dollar amount between the Free and Paid reimbursement rates. (Free Reimbursement – Paid Reimbursement)

44. How is it Important? To ensure that the costs of paid lunches are covered by students receiving paid lunches the average price that the SFA charges for a paid lunch must be greater than the equity; i.e. the difference between Free and Paid Reimbursement rates.

45. How is PLE Compliance Achieved? If out of compliance, an SFA must increase the revenue by 2% plus inflation by either:  Increasing average price charged for paid meals OR  Adding non-Federal funds to Nonprofit School Food Service Account.

46. Paid Lunch Equity Tool A PLE tool is available on the FNS website. The tool helps SFAs calculate:  Weighted Average price across the SFA  New required average price across SFA  Non-Federal source contribution amount The PLE tool can be found at: www.fns.usda.gov/cnd/Governance/Legislation/CNR_2010. htm

47. Information needed: Copy of completed PLE tool or alternative mechanism used to assess lunch prices; Paid lunch prices for October of previous SY; Number of paid lunches served in previous SY. Step one: Gather documents from SFA Paid Lunch Equity: Comprehensive Review

48. Input SFA’s information into PLE Tool. The purpose of this step is to ensure that the SFA correctly determined its need to raise its paid lunch prices. Step two: Input SFA’s PLE calculation

49. Paid Lunch Equity: Comprehensive Review Goal is to ensure that the SFA correctly determined its need to raise its paid lunch price(s). Step three: Verify SFA’s PLE calculation

50. Paid Lunch Equity: Comprehensive Review Do board minutes or other documentation indicate that a price increase was implemented? Ensure that non-Federal sources are allowable and were added to the nonprofit school food service account. Step four: Determine if the SFA raised its price, if necessary, & review non- federal sources, if applicable

51. Paid Lunch Equity: Comprehensive Review SFAs must report their most frequently charged price at each of these categories--elementary, middle/junior high and high school levels--to their State agency. Step five: Verify that the SFA submitted its most frequently charged paid lunch price to the State Agency

52. Paid Lunch Equity: Comprehensive Review Allowable non-Federal sources: Per-meal reimbursements for paid breakfast and lunches from states, counties, school districts and others*; Funds provided by organizations for paid meals; and Any portion of State revenue matching funds that exceed the minimum requirement & that’s provided for paid meals.* * SY 2013-2014 only

53. Paid Lunch Equity: Technical Assistance and Corrective Action Corrective action examples:  Incorrect PLE tool calculations;  Utilizing unallowable non-Federal sources of revenue;  SFA didn’t increase its paid lunch price(s), if required;  Technical assistance; and  Identifying allowable non-Federal sources of revenue.

54. Paid Lunch Equity: No Fiscal Action Required Withholding program payments, in whole or in part, to any SFA for repeated or egregious violations should be considered.

55. Revenue from Nonprogram Foods

56. What is the Requirement for Revenue from Nonprogram Foods? The mechanism required by Section 206 that ensures that SFAs charge prices for nonprogram food sufficient to cover the costs of nonprogram food.

57. What is Nonprogram Food? Nonprogram food is food other than reimbursable meals or snacks:  Vending machines  A la Carte food  Adult meals  Etc.

58. How is Revenue from Nonprogram Food Compliance Determined? If an SFA’s ratio of nonprogram revenue to total revenue is less than the ratio of nonprogram food cost to total food cost then the SFA is out of compliance. Nonprogram Revenue Total Revenue Nonprogram Food Cost Total Food Cost OUT OF COMPLIANCE <

59. Why is Food Cost Used Instead of Total Cost?  Labor and other costs are difficult to accurately track and allocate to nonprogram food sales.  The ratio of nonprogram food cost to total food cost was found to be a suitable proxy for the reported cost ratio.

60. Revenue from Nonprogram Foods: Review Many SFAs do not separate their nonprogram food costs from their program food costs Possible relief: Hiring contracted support to separate information and/or develop tracking system; Sharing “best practices”; Upcoming FNS guidance.

61. Revenue from Nonprogram Foods: Pricing All nonprogram foods do not have to be marked up the same amount; Less healthy food should be marked up by a greater amount than healthier choices; Items sold a la carte from a reimbursable meal should always cost more than the price of the reimbursable meal itself; Regularly review costs of nonprogram items.

62. Revenue from Nonprogram Foods: Comprehensive Review AR manual details comprehensive review steps for SFAs that separate their program and nonprogram food costs; Manual advises that SA’s should secure approval for compliance assessments that do not involve the separation of program and nonprogram food costs; Further FNS guidance is in development.

63. Revenue from Nonprogram Foods: Comprehensive Review For SFAs that do not separate nonprogram and program food costs, reviewers should: Identify all nonprogram food items sold; Determine guidelines SFAs use to price these items; and Compare a la carte food items with same items sold via a reimbursable meal – how are a la carte items/meals priced?

64. Revenue from Nonprogram Foods: Comprehensive Review FNS Instruction 782-5 REV. 1 Adult meal prices should include the value of any USDA entitlement and bonus USDA Foods used to prepare the meal. Review adult meal prices

65. Revenue from Nonprogram Foods: Technical Assistance and Corrective Action Corrective action examples:  SFA’s process for calculating its nonprogram food costs/revenues insufficient;  Nonprogram food revenue isn’t added to the nonprofit school food service account;  Charges for adult meals are insufficient.

66. Revenue from Nonprogram Foods: No Fiscal Action Required Withholding program payments, in whole or in part, to any SFA for repeated or egregious violations should be considered.

67. Indirect Costs

68. Indirect Costs: Comprehensive Review Information needed for review: Approved Indirect Cost Rate Agreement; Financial statements; Chart of accounts; and Accounting records.

69. Step 1: Review Indirect Cost Rate Agreement Ensure that the SFA received approved indirect cost rates from the State Education Agency.

70. Step 2: Is the Correct Rate/Base being Used? Ensure that the SFA is using the approved indirect cost rate to the correct direct cost base.

71. Step 3: Determine if costs are consistently treated Allowable costs, both direct and indirect, must be identified in a consistent manner. An LEA must identify indirect costs by using the same methodology to allocate certain shared costs across the entire spectrum of its Federal programs.

72. Step 4: Ensure the SFA is not charging indirect costs previously paid by the general fund. The reviewer should look at the prior year’s retroactive billing and accounting records to assess this area.

73. Step 5: Ensure that direct and indirect costs are properly classified Are the same costs treated consistently as direct? As indirect? Ensure no “double dipping” is occurring.

74. Step 6: Verify Indirect Cost Billing Confirm that documentation supports actual indirect costs charged to the nonprofit school food service account.  Compare: VS. Check for mathematical errors and ensure that indirect costs were calculated based on the correct rate and base. Indirect cost amount chargeable to the school food service Indirect cost amount actually billed to the school food service

75. Indirect Costs: Corrective Action Examples of when corrective action is needed:  SFA uses an outdated indirect cost rate;  The SFA charges indirect costs that were previously paid from the general fund;  The SFA lacks sufficient documentation of actual indirect costs charged.

76. Questions?? Please submit your index cards!