Appendix 6 FNS - National School Lunch and School Breakfast Programs (27601-0001-41)

Supporting Statement for OMB Clearance for the Study of Non-Response to the
School Meals Application Verification Process
Appendix 6
FNS – National School Lunch and School Breakfast Programs (OIG-27601-0001-41)

United States Department of Agriculture

OFFICE OF INSPECTOR GENERAl

FNS - National School Lunch and
School Breakfast Programs

27601-0001-41

April 2015
10401-0001-22

FNS – National School Lunch and School
Breakfast Programs
Audit Report 27601-0001-41
What Were OIG’s
Objectives
Our objective was to evaluate
the methods FNS used to
lower the error rates for NSLP
and SBP. We determined if
FNS, State agencies, and
SFAs had adequate controls to
(1) ensure children met the
eligibility requirements, and
(2) meal claims were
supported and accurately
reimbursed.

The Office of Inspector General (OIG)
audited the Food and Nutrition Service
(FNS) to evaluate how the agency has
attempted to lower the error rates for the
National School Lunch and Breakfast
Programs.

What OIG Reviewed

What OIG Found

We conducted fieldwork for
120 schools within 61 SFAs
that participated during fiscal
years 2012 and 2013. We also
reviewed cafeteria fund
account data from July 2011
to June 2012.

The controls the Food and Nutrition Service (FNS) can place on the
National School Lunch Program (NSLP) and School Breakfast
Program (SBP) are limited by law to make the programs accessible to
all children. During school year (SY) 2012-2013, as a result of the
annual verification process, school food authorities (SFAs) reduced or
eliminated benefits for 107,974 of the 199,464 sampled households
because household income was unsupported or excessive. We
estimated that FNS may have spent nearly $12.5 million on lunches
for students who later had benefits reduced or denied after being
selected for verification. Further, at least 97 percent of households
determined to be eligible for benefits based on household applications
are not selected for verification and receive benefits based on
self-reported income.

What OIG Recommends
FNS needs to consult with the
Office of the General Counsel
to determine its regulatory
authority to require
households to submit income
documentation with school
meals applications. Based on
this determination, FNS
should take the appropriate
actions to revise the programs’
documentation requirements;
FNS should also clarify
criteria for identifying
questionable applications and
provide guidance and training
for cafeteria fund
management.

SFAs are required to verify any questionable application. During
SY 2012-2013, 44 of the 56 SFAs we reviewed did not question any
applications, even though we later identified at least 42 potentially
questionable applications based on FNS’ criteria. Further, 20 of our
61 sampled SFAs mismanaged and misused Non-profit School Food
Service Funds intended to be used for operating and improving the
school food service. As a result, SFAs accumulated excess cash,
totaling $4.8 million; expensed nearly $6 million in capital
expenditures in the year of purchase without obtaining prior approval
from State agencies; and charged unallowable costs totaling $166,933
to cafeteria funds. We did not identify any issues related to meal
claims. FNS generally agreed with our recommendations, and we
accepted management decision for all 10 recommendations.

United States Department of Agriculture
Office of Inspector General
Washington, D.C. 20250

DATE:

April 28, 2015

AUDIT
NUMBER:

27601-0001-41

TO:

Audrey Rowe
Administrator
Food and Nutrition Service

ATTN:

Mark Porter
Director
Office of Internal Controls, Audits and Investigations

FROM:

Gil H. Harden
Assistant Inspector General for Audit

SUBJECT:

FNS – National School Lunch and School Breakfast Programs

This report presents the results of the subject review. Your written response to the official draft
is included at the end of the report. Excerpts from the response and the Office of Inspector
General’s (OIG) position are incorporated into the relevant sections of the report. Based on your
written response and subsequent clarifications, we have accepted your management decision on
all 10 recommendations.
In accordance with Departmental Regulation 1720-1, final action is to be taken within 1 year of each
management decision to prevent being listed in the Department’s annual Agency Financial Report.
For agencies other than the Office of the Chief Financial Officer (OCFO), please follow your internal
agency procedures in forwarding final action correspondence to OCFO.

We appreciate the courtesies and cooperation extended to us by members of your staff during our
audit fieldwork and subsequent discussions. This report contains publically available
information and will be posted in its entirety to our website (http://www.usda.gov/oig) in the
near future.

Table of Contents
Background and Objective..................................................................................... 1
Section 1: Eligibility Determinations and Verification ...................................... 4
Finding 1: FNS Should Require Applicants to Provide Proof of Income ......... 4
Recommendation 1 ......................................................................................12
Recommendation 2 ......................................................................................13
Finding 2: SFAs Should Verify Questionable Applications............................. 14
Recommendation 3 ......................................................................................17
Recommendation 4 ......................................................................................17
Section 2: Monitoring .......................................................................................... 19
Finding 3: FNS Needs to Strengthen Controls over SFAs’ Cafeteria Funds .. 19
Recommendation 5 ......................................................................................25
Recommendation 6 ......................................................................................25
Recommendation 7 ......................................................................................26
Recommendation 8 ......................................................................................26
Recommendation 9 ......................................................................................27
Recommendation 10 ....................................................................................27
Scope and Methodology ........................................................................................ 29
Abbreviations ........................................................................................................ 31
Exhibit A: Summary of Monetary Results ........................................................ 32
Exhibit B: Audit Sites Reviewed......................................................................... 33
Exhibit C: Statistical Sampling Methodology and Results .............................. 36
Agency's Response ................................................................................................ 39

Background and Objective
Background
On June 4, 1946, Congress passed the National School Lunch Act, now the Richard B. Russell
National School Lunch Act (NSLA), which established the National School Lunch Program
(NSLP). 1 NSLA has been amended several times, most recently in 2011. The School Breakfast
Program (SBP) began as a pilot project in 1966, and was made permanent in 1975. 2 In fiscal
year (FY) 2012, NSLP and SBP operated in over 100,000 and 89,000 public and nonprofit
private schools and residential child care institutions, respectively. NSLP and SBP provided
nutritionally balanced, low-cost or free meals to more than 31 million children each school day
in 2012. NSLP and SBP cost a total of $14.9 billion in FY 2012.
The Food and Nutrition Service’s (FNS) national office administers the programs and provides
technical assistance to the States through its seven regional offices. FNS enters into a written
agreement with administering State agencies, which operate the programs through agreements
with school food authorities (SFA) for local administration. SFAs are responsible for the
administration of the programs at the school district level. Both SFAs and schools are
responsible for onsite operation, including the implementation of meal accountability systems,
and the review and approval of student applications for free and reduced-price meals.
Children are considered either income eligible (based on the household income provided on the
application) or categorically eligible. Categorically eligible children are those children
automatically eligible for free meal benefits because they, or any household member, receive
benefits under other designated assistance programs (such as Supplemental Nutrition Assistance
Program), or are children who are designated as members of “other source categorically eligible
programs.” Examples of “other source categorically eligible” children include, but are not
limited to, homeless, runaway, migrant, and foster children. Categorically eligible children may
indicate this eligibility on an application or be directly certified. 3 Households that are directly
certified do not need to submit an application and are not subject to verification.
Participating SFAs receive cash reimbursements and donated foods from the Department of
Agriculture (USDA) for each meal served to students. Meals must meet Federal requirements,
and free or reduced-price lunches must be offered to low-income children. Any child at a
participating school may purchase meals through NSLP and SBP. However, children from
families with incomes at or below 130 percent of the poverty level are eligible for free meals.
Those with incomes between 130 percent and 185 percent of the poverty level are eligible for
reduced-price meals. Within the statutory requirements, local schools set prices for full-price
meals, but must operate meal services as non-profit programs. Reimbursement rates for NSLP
during school year (SY) 2012-2013 were $2.86 for each free lunch, $2.46 for each reduced-price
1

42 U.S.C. § 1751 et seq. (November 2011).
Child Nutrition Act of 1966, 42 U.S.C. § 1771 et seq.
3
Direct certification means determining children eligible for free meals benefits based on documentation obtained
directly from the appropriate State or local agency or other authorized individual. In most situations, direct
certification of a child’s eligibility status does not involve the household.
2

AUDIT REPORT 27601-0001-41

1

lunch, and $0.27 for each paid lunch served. 4 Reimbursement rates for SBP during
SY 2012-2013 were $1.55 for each free breakfast, $1.25 for each reduced-price breakfast, and
$0.27 for each paid breakfast served.
To assess the error rates associated with NSLP and SBP reimbursements, FNS funds studies
about every 5 years. FNS published the first of these studies calculating national estimates of
the amounts and rates of erroneous payments in the programs—the Access, Participation,
Eligibility, and Certification (APEC) study—in November 2007. The study included
representative samples of SFAs, schools, and students during SY 2005-2006. After reviewing
87 SFAs, the researchers found that—among other things—slightly more than 1 in 5 applicant
students were erroneously certified or incorrectly denied benefits; household reporting error was
substantially more prevalent than administrative error; and, for both NSLP and SBP,
approximately 9 percent of total reimbursements were erroneous due to certification errors. The
overall estimated error rates calculated by the study for NSLP and SBP, projected by FNS to
FY 2012 levels, are about 16 and 25 percent, respectively. 5 FNS expects a second study,
APEC-II, to be completed in the first half of calendar year 2015.
Related Prior Audits
In 2014, a U.S. Government Accountability Office (GAO) audit reviewed (1) steps taken to help
identify and prevent ineligible beneficiaries from receiving benefits in school-meal programs,
and (2) opportunities that exist to strengthen USDA’s oversight of the school-meals programs. 6
The audit proposed actions to strengthen oversight of the programs while ensuring legitimate
access, such as exploring the feasibility of computer matching external income data with
participant information to identify households whose income exceeds eligibility thresholds and
verifying a sample of categorically eligible applications to help identify ineligible households.
FNS generally agreed with the recommendations.
In 2014, an Office of Inspector General (OIG) audit reviewed USDA’s compliance with the
Improper Payments Information Act and OIG determined NSLP and SBP were not compliant for
a third consecutive year. 7 Of the 16 high-risk programs in USDA, OIG found that FNS’ NSLP
and SBP reported improper payment percentages of 15.69 and 25.26, respectively. 8 USDA’s
Office of the Chief Financial Officer stated that it would issue guidance directing FNS to submit
to Congress the required reauthorization proposals or proposed statutory changes necessary to
bring NSLP and SBP into compliance.

4

School year is the period between July 1 and June 30. While FNS typically reported program data on a fiscal year,
SFAs reported NSLP and SBP data based on school year.
5
USDA FY 2012 Agency Financial Report (November 2012).
6
GAO-14-262, School-Meals Programs, USDA Has Enhanced Controls, but Additional Verification Could Help
Ensure Legitimate Program Access (May 2014).
7
Audit 50024-0005-11, U.S. Department of Agriculture Improper Payments Elimination and Recovery Act of
2010 Review for Fiscal Year 2013 (April 2014).
8
High-risk programs are those that are considered vulnerable to significant improper payments. The Improper
Payments Information Act considers a program susceptible to significant improper payments if improper payments
exceed $10 million and account for 2.5 percent of program outlays, or exceed $100 million regardless of percent of
program outlays.

2

AUDIT REPORT 27601-0001-41

In 2009, a GAO audit reviewed actions taken by States and SFAs to identify and address meal
counting and claiming errors. 9 The audit found that when State reviews identified meal counting
and claiming errors, these problems were not always resolved. Further, GAO stated that States’
infrequent use of certain program sanctions may also affect the priority SFAs give to addressing
errors. Only four States reported terminating an SFA from NSLP and SBP between 2004 and
2009. FNS officials concurred with GAO’s recommendations and issued new policies regarding
annual onsite reviews and State agency administrative reviews of SFAs. 10
In 2004, an OIG audit reviewed NSLP, SBP, and the Child and Adult Care Food Program’s
afterschool supper program in Chicago, Illinois. 11 Over a 4-month period, the SFA claimed
reimbursement for lunches and breakfasts its schools did not serve or that did not meet program
requirements. Additionally, the SFA’s application verification error rate nearly doubled,
increasing from 18 to 35 percent after OIG independently performed the verification decision
process based on the same supporting documents. As a result, students were either incorrectly
categorized as being eligible for free or reduced-price meals when they were not, or were denied
access when, in fact, they were eligible. FNS agreed with the recommendations and the State
agency increased controls over the SFA’s verification process.

Objective
Our objective was to evaluate the methods that FNS used to lower the error rates for both NSLP
and SBP. Specifically, we determined if FNS, State agencies, and SFAs had adequate controls to
ensure (1) children approved for free and reduced-price meals met the eligibility requirements,
and (2) meal claims were supported and accurately reimbursed.
We did not identify any issues related to meal claims.

9

GAO-09-814, School Meal Programs: Improved Reviews, Federal Guidance, and Data Collection Needed to
Address Counting and Claiming Errors (September 2009).
10
Policy Memo SP-14-2011 was issued on January 24, 2011. It provides a prototype checklist for SFAs to use
when conducting annual onsite reviews and provides the minimum requirements for assessing counting and
claiming procedures. FNS provided updated guidance on meal counting and claiming procedures to program
administrators in the updated version of the Coordinated Review Effort Manual that was issued in January 2012.
However, this manual was superseded by the school meal programs Administrative Review Manual, last updated on
September 20, 2013.
11
Audit 27010-0017-Ch, Chicago SFA’s Accountability and Oversight of the NSLP, SBP, and CACFP Supper
(September 2004).
AUDIT REPORT 27601-0001-41

3

Section 1: Eligibility Determinations and Verification
Finding 1: FNS Should Require Applicants to Provide Proof of Income
Nationwide, SFAs must annually verify eligibility for a sample of household applications
approved for free and reduced-price meal benefits. 12 During SY 2012-2013, as a result of the
annual verification process, SFAs reduced or eliminated benefits for 107,974 of the
199,464 sampled households nationwide (about 54 percent) because the income claimed on the
applications was unsupported or excessive. 13 This occurred because households are not required
to provide proof of income when they apply for benefits, inhibiting SFAs from confirming that
the income reported on applications is accurate. As a result, we estimated that FNS may have
spent nearly $12.5 million on lunches for students who later had their benefits reduced or denied
after being selected for verification. Further, a large majority of households determined to be
eligible for the National School Lunch Program and the School Breakfast Program based on
household applications—at least 97 percent—are not selected for verification and receive
benefits based on self-reported income.
The NSLA lists conditions for those who receive free or reduced-price meals. An adult member
of the household seeking benefits must execute a household application. 14 No member of a
household can receive a free or reduced-price meal unless “appropriate documentation relating to
the income of such household (as prescribed by the Secretary) has been provided to the [SFA] so
that the [SFA] may calculate the total income of such household.” 15 FNS’ implementing
regulations define documentation as “[t]he completion of a free and reduced-price school meal…
application,” which must include information regarding income earned by each member of the
household. 16 Although the Secretary was given discretion to determine what documentation of
income would be required, the regulations do not require a household to submit anything more
than an application; no actual documentation of income must be submitted to support statements
made in the application.
In 2014, an OIG audit reviewed USDA’s compliance with the Improper Payments Information
Act. 17 Of the 16 high-risk programs in USDA, OIG found that FNS’ NSLP and SBP reported
improper payment percentages of 15.69 and 25.26, respectively. We concluded that FNS was
not in compliance with the Improper Payments Information Act’s requirement to have a gross
improper payment rate of less than 10 percent for each high-risk program. In fiscal year
(FY) 2013, the Office of Management and Budget designated 13 programs within the Federal
12

The standard sample size is the lesser of 3 percent of approved applications selected from error prone applications
or 3,000 error prone applications.
13
The changes made for these households impacted a total of 166,048 students. Of the 25,050,857 students eligible
for free or reduced-price meals in SFAs required to perform verifications nationwide, only 319,221 lived in
households that were subject to verification (1.3 percent). These nationwide verification data include totals from
Washington, D.C., Guam, and Puerto Rico. We did not include verification totals from Oklahoma because the
reported data were inaccurate and FNS could not provide revised amounts.
14
42 U.S.C § 1758(b)(3)(B)(i) (January 2011).
15
42 U.S.C. § 1758(d)(2) (January 2011).
16
7 C.F.R. § 245.2 (June 2012).
17
Audit 50024-0005-11, U.S. Department of Agriculture Improper Payments Elimination and Recovery Act of 2010
Review for Fiscal Year 2013 (April 2014).

4

AUDIT REPORT 27601-0001-41

government as “high-error,” because they each reported about $750 million or more in improper
payments in a given year. Of these 13 programs, NSLP had the second highest improper
payment rate. To evaluate the methods that FNS used to lower the error rates for both NSLP and
SBP and the adequacy of controls that FNS, State agencies, and SFAs used to ensure correct
eligibility determinations, we reviewed the results of the SY 2012-2013 verification process.
For our audit, we reviewed a sample of 60 statistically selected schools from the 15 largest SFAs
in California, Florida, and Texas and 60 statistically selected schools in Delaware, Rhode Island,
and Wyoming. 18 While most of the SFAs involved were public, we did review some private
schools, charter schools, and residential child care institutions. Our sample of SFAs included a
variety of sizes, ranging from very large SFAs (with several hundred schools) to small SFAs
(consisting of only one school).
FNS does not require households to submit income documentation with the applications. Rather,
households are only required to submit a completed application to SFAs; regulations allow
eligibility to be determined based on the self-reported, unsupported information provided on the
application. 19 In contrast, laws for other FNS programs, such as the Supplemental Nutrition
Assistance Program (SNAP) and the Special Supplemental Nutrition Program for Women,
Infants, and Children (WIC), require that (1) the eligibility of each applicant household be
determined based on validation of income, or (2) that an individual seeking certification shall
provide documentation of family income, respectively. 20 While SFAs may not be able to use
household income information to verify household eligibility outside of the legally required
sample (and doing so for all applications would cause undue burden on SFAs), the act of
submitting household income documentation may discourage households from self-reporting
inaccurate household income information.
Verification Process
NSLA requires SFAs to annually verify the eligibility of the children in a sample of
household applications approved for the school year. 21 It sets specific guidelines for the
sample size, the standard being the lesser of 3 percent of approved applications or
3,000 applications, drawn from error-prone applications. 22 NSLA includes two alternate
sample sizes that SFAs can qualify for based on non-response rates.

18

We nonstatisitically selected California, Florida, and Texas because these States received the highest
reimbursement amounts during FY 2011—31.4 percent of total NSLP and SBP reimbursements combined—and
Delaware, Rhode Island, and Wyoming because of the low reimbursement amounts during FY 2011—0.6 percent of
total NSLP and SBP reimbursements combined.
19
7 C.F.R. § 245.6(a)(5) (June 2012).
20
7 U.S.C. § 2020 (January 2012); 42 U.S.C. § 1786 (January 2012). Applications for SNAP and WIC are collected
and approved year round while the majority of school meals applications are collected and approved at the
beginning of each school year.
21
42 U.S.C. § 1758(b)(3)(D) (January 2011).
22

“Error-prone” is defined as an application from a household whose income is within $100 per month of the
applicable Income Eligibility Guideline (the household size and income levels prescribed annually by the Secretary
of Agriculture for determining eligibility for free and reduced price meals), or that otherwise meets criteria
established by the Secretary of Agriculture. 42 U.S.C. § 1758(b)(3)(D).
AUDIT REPORT 27601-0001-41

5

Although each application contains a statement that the adult member of the household
filling out the application must certify that the reported income level is accurate, we
found the annual verifications typically resulted in a high percentage decrease in benefits.
For example, during the SY 2012-2013 verification process, one of our selected SFAs in
California with over 127,000 approved applications, reduced or denied benefits for 886 of
the 1,020 sampled applications (87 percent). Based on these results, we conclude that it
is likely that other students receiving free or reduced-price meals may not be eligible for
them.
Chart 1 shows the changes in eligibility resulting from SY 2012-2013 annual
verifications in our sampled SFAs. Of those households selected for verification,
64 percent were receiving either free or reduced-price meals at the beginning of
SY 2012-2013, but were determined to be ineligible for NSLP and SBP benefits as a
result of the verification process. 23 An additional 11 percent were receiving free meals
when they were only eligible to receive reduced-price meals. These verified applications
represent only 2 percent of approved households and less than 1 percent of participating
students in our sampled SFAs.
Chart 1: Changes Resulting from Annual Verification

1

No Change
23%

Changed to Free2
2%

55%

From Free to
Reduced-Price

11%
9%

Changed to Paid
Did Not Respond3

1

Chart 1 shows the results from the annual verification performed at our sampled SFAs,
not the results of all annual verifications performed nationwide.
2
The eligibility status for these households was changed from reduced-price to free
based on the annual verification process.
3
A non-response to an SFA’s request for verification is not a direct indication that the
household’s income was above the limit for free or reduced-price meals participation
upon application. However, these households are determined to be ineligible as a result
of verification for the remainder of the school year unless they provide household
income documentation.

If participants are selected for verification and want to continue receiving program
benefits, they must provide support for the income claimed on their applications.
Otherwise, if they do not provide proof of income, the participants are no longer eligible
to receive free or reduced-price meals. In total, 55 percent of the applicant households
23

The 64 percent includes the 55 percent of students that were denied benefits based on nonresponse to verification
requests. A non-response to an SFA’s request for verification is not a direct indication that the household’s income
was above the limit for free or reduced-price meals participation upon application. However, these households are
determined to be ineligible as a result of verification for the remainder of the school year unless they provide
household income documentation.

6

AUDIT REPORT 27601-0001-41

selected for verification (5,605 of 10,233) at our sampled SFAs did not respond to the
annual verification request for SY 2012-2013. At one SFA in Texas, 796 of
1,188 sampled households did not respond to the verification request—a non-response
rate of 67 percent. 24
Based on our estimates, during SY 2012-2013, FNS may have spent about $17.3 million
on lunches for students who had their benefits reduced or denied after being selected for
verification. If these students had received benefits based on their post-verification
eligibility status for the period from the beginning of the school year until verification
was complete, we estimated the cost to FNS would have been about $4.8 million.
However, because these households self-certify income and are not required to provide
documentation, FNS may have overpaid nearly $12.5 million for lunches for these
households before their applications were verified. 25 The verified households represent
less than 2 percent of students participating in the programs nationwide.
We also found that SFAs did not always thoroughly review income documentation during
the annual verification process. In Florida, one household submitted income
documentation consisting of a paystub for a State employee that indicated she was
married. However, the application stated that her household consisted only of herself and
her two children. The Florida SFA conducted no followup to determine whether or not
the spouse, and therefore the spouse’s income, should be included as part of the
household. An SFA official told us that, since not all income documentation includes
marital status, it would be unfair to consider this information for those households whose
income documentation included it. 26
During our review of an SFA in Texas, we found 10 household applications that listed
multiple sources of income, but these households did not submit documentation for all
income sources listed on the application when requested during verification. Although
SFAs are required to followup with households if they do not submit adequate
information to complete individual verification activities, the SFA did not followup to
inquire about the other listed sources of income, and recalculated eligibility based only on
the amount of income for which documentation was submitted. 27 If verifications are not
being completed properly, annual verification reports may be inaccurate.

24

One application is completed per household.
In calculating this estimate, we did not account for school breakfasts received since not all schools participate in
SBP. We used the lowest reimbursement rates for each category of meal for SY 2012-2013 for our calculations and
assumed a period of 50 school days from the start of the school year (generally late August or early September) to
the deadline for completed verifications (November 15th). We assumed an 80 percent participation rate for students
that were certified as free eligible prior to annual verification and a 70 percent participation rate for students that
were certified as reduced-price eligible prior to annual verification. This estimate does not take into account that a
household may be certified as eligible to receive free or reduced-price meals, but not participate in the meal service
or may choose to pay the full price for their meals.
26
FNS regulations require that verification include confirmation of income eligibility, they permit—but do not
require—SFAs to confirm any other information required on the application, such as household size.
27
7 C.F.R. § 245.6a(f)(6) (June 2012).
25

AUDIT REPORT 27601-0001-41

7

We found that verifications resulted in a high percentage change in eligibility that could
be prevented by implementing a simple control: requiring income documentation with
each household application. While SFAs can only legally verify a small percentage of
applications, inclusion of income documentation as a component of a complete household
application would streamline the verification process and eliminate non-respondents.
Further, the act of turning in income documentation with applications may discourage
applicants from being dishonest about household income levels.
Cases of Fraud and Improper Payments
FNS’ Eligibility Manual contains guidance specific to “verification for cause” for SFA
employees. This guidance states that SFAs can use “verification for cause” when known
or available information indicates SFA employees may have misrepresented their
incomes to receive free or reduced-price meals for their children. Since SFAs have
access to their employees’ salary information, it can be a good way for SFAs to address
NSLP and SBP integrity concerns as evidenced by the numerous cases of alleged fraud
and theft by deception involving school district employees during calendar years 2012
and 2013. However, it is unlikely that SFA employees are the only people abusing selfcertification and SFAs may be able to identify more instances of fraud if they had access
to documentation of household income.
•

In
, we found that a
at one small SFA in
, who
had previously been employed in the SFA’s office, submitted an application for
school meals.
listed household consisted of
The application showed that
The
household was certified as eligible for free meals, even though—with the
salary—they only qualified for reduced-price meals.

•

In 2012, Chicago Board of Education’s Office of Inspector General reported
21 cases of principals and assistant principals who were found culpable of
falsifying information on their applications. 28 For example, the investigation
found that an elementary school principal and his wife, a high school assistant
principal, asked the principal’s mother to submit an application for their children
because their annual income together exceeded $230,000.

•

In 2013, the Office of the State Comptroller in New Jersey issued a report on its
review of applications from school district employees. 29 It found 101 public
employees (or their spouses/domestic partners), including elected school board
members and school district employees, who appeared to have materially
underreported their income on school meal applications.

28

Chicago Board of Education, Office of the Inspector General, Annual Report 2012. Retrieved from
http://cps.edu/About_CPS/Departments/Documents/OIG_FY_2012_AnnualReport.pdf. 26 August 2013.
29
State of New Jersey, Office of the State Comptroller (2013). Investigative Report: Fraudulent School Lunch
Program Applications Filed by Public Employees. Retrieved from
http://www.nj.gov/comptroller/news/docs/report_free_lunch_07172013.pdf. 18 July 2013.

8

AUDIT REPORT 27601-0001-41

•

In 2014, a former school board president in New Jersey was convicted of theft by
deception and tampering with public records for under-reporting her household
income so that her children could receive free or subsidized lunches through
NSLP. 30 She claimed she mistakenly omitted her husband’s income. He worked
for the New York Times and was the owner and head coach of a semi-professional
football team. She was sentenced to 3 years’ probation and ordered to perform
300 hours of community service.

Although an adult household member must certify the application is accurate, there are
almost no consequences when a household misrepresents its income to receive free or
reduced meals. FNS stated that households who misreport income information on the
applications are removed from the programs for that year, but, typically, there are no
penalties imposed unless the local authorities are involved in extreme cases. Applicants
who misreported information on previous applications are able to reapply for the
programs the following school year and are processed like any other applicant.
FNS is aware of its high level of improper payments in NSLP and SBP and is working to
improve Federal and State oversight and technical assistance. However, while the Healthy,
Hunger-Free Kids Act of 2010 31 did include some changes requested by FNS to improve
accountability, it limited the agency’s ability to act in this area because of concerns about
potential barriers to participation. The mandated goal of providing easy access to benefits must
be balanced against FNS’ goal of reducing improper and erroneous payments. Some of the steps
that FNS has recently taken to improve integrity of the programs include:
•

Administrative Reviews: FNS recently revised the monitoring system in place to
review NSLP and SBP. As required by the Healthy, Hunger-Free Kids Act of 2010,
States will be required to conduct these administrative reviews of all SFAs on a 3-year
cycle beginning in SY 2013-2014. 32 (The former cycle was 5 years.)

•

Final and Proposed Rules: FNS has issued a final rule resulting from the Healthy,
Hunger-Free Kids Act of 2010 that should reduce improper payments by requiring an
independent review of initial eligibility determinations in SFAs that demonstrate high
levels of administrative error. 33 Additionally, FNS plans to propose a rule to establish
criteria for imposing fines against State agencies and program operators who jeopardize
the integrity of any Child Nutrition Program and procedures to prohibit the participation
of entities or individuals terminated from any of the Child Nutrition Programs. FNS
expects this proposed rule to be published in the Federal Register in March 2015.

30

Spoto, MaryAnn, “Ex-school Board President Sentenced in Lunch Program Scandal,” The Star-Ledger [Newark,
New Jersey] 31 May 2014, NEWS sec.: 001. FinCEN News, 1 June 2014. This case was going through the legal
process during the timeframe covered by our audit scope.
31
Pub. L. No. 111-296 (December 2010).
32
Pub. L. No. 111-296, 124 Stat. 3183 (December 2010).
33
National School Lunch Program: Independent Review of Applications Required by the Healthy, Hunger-Free
Kids Act of 2010, 79 Fed. Reg. 7049 (Feb. 6, 2014) (amending 7 C.F.R. §§ 210.15, 210.20, 245.6, 245.11).
AUDIT REPORT 27601-0001-41

9

•

Studies: FNS has sponsored a number of studies that also support efforts to reduce
erroneous payments, including “Modeling of High Risk Indicators of Certification Error
in the National School Lunch Program”; 34 “Using American Community Survey Data to
Expand Access to the School Meals Programs,” 35 an evaluation to develop eligibility
estimates for school meals programs, in lieu of individual applications; and “Community
Eligibility Provision Evaluation,” 36 an examination of program integrity and participation
in high poverty areas.

•

Direct Certification: The Healthy, Hunger-Free Kids Act of 2010 set benchmarks for
State direct certification rates using SNAP data. States not meeting the required direct
certification rate benchmarks for a given SY are required to develop and implement
continuous improvement plans to describe the activities they will implement to reach
more eligible children in future years. FNS stated that it approved 16 State plans in
FY 2013, 28 State plans in FY 2014, and has 41 State plans under review in FY 2015.

•

Direct Certification with Medicaid: The Healthy, Hunger-Free Kids Act of 2010
required FNS to conduct a demonstration project in which select SFAs directly certified
students for free school meals based on income eligibility identified through Medicaid
data. FNS is conducting an evaluation study of this project. An interim report was
published January 2015, with a final report due to Congress no later than
October 1, 2015. The project sets specific goals to include areas serving 10 percent of
students certified for free and reduced price meals nationwide by the third year
(SY 2014-2015) and ongoing in each subsequent school year.

•

Community Eligibility Provision: The provision allows SFAs in high-poverty areas to
offer free school breakfast and lunch to all students at no cost. It may be implemented in
individual schools, groups of schools, or in entire school districts. To be eligible, SFAs
and/or schools must: meet a minimum level (40 percent) of identified students for free
meals in the year prior to implementing the provision and agree to cover with
non-Federal funds any costs of providing free meals to all students above amounts
provided in Federal assistance. 37 Federal reimbursement is based on claiming
percentages derived from the identified student percentages.

In addition to the actions cited above, FNS conducted a study about 10 years ago where
researchers found that upfront documentation of household income did not result in fewer
observances of improper payments for the pilot districts. 38 However, because the study selected
34

USDA, FNS, Office of Research and Analysis. “Modeling of High Risk Indicators of Certification Error in the
National School Lunch Program,” 2012.
35
Panel on Estimating Children Eligible for School Nutrition Programs Using the American Community Survey.
National Research Council. “Using American Community Survey Data to Expand Access to the School Meals
Programs,” 2012.
36
“Community Eligibility Provision Evaluation.” Prepared by Abt Associates for USDA, FNS, 2014.
37
Identified students are students certified for free meals through means other than individual household
applications; this primarily includes students who are directly certified.
38
USDA, FNS, Office of Analysis, Nutrition and Evaluation. “Evaluation of the National School Lunch Program
Application/Verification Pilot Projects: Volume I: Impacts on Deterrence, Barriers, and Accuracy.” Special
Nutrition Program Report Series, No. CN-04-AV1, 2004.

10

AUDIT REPORT 27601-0001-41

SFAs to implement upfront documentation on a volunteer basis, the results are not reflective of
NSLP and SBP as a whole. More specifically, very large districts did not implement upfront
documentation during this pilot. The largest pilot district enrolled about 20,000 students and
only one-third of its schools participated in the study. Although less than 2 percent of SFAs
nationally enroll more than 25,000 students, about one-third of all public school students are
enrolled in these very large districts.
Additionally, researchers from the prior FNS study were unable to obtain complete
documentation of household income for 739 of 2,619 students (28 percent). 39 These students
were not dropped from the analysis file, but, instead, the researchers imputed total household
income. Although the researchers performed sensitivity tests and stated that “the findings
presented… would not have been qualitatively different if we had used different imputation
procedures,” failure to obtain household income from 28 percent of sampled students may
indicate a research bias.
Further, only 32 percent of households sampled in the pilot districts (418 students) and
34 percent of households in the comparison districts (463 students) had household incomes
below 185 percent of the Federal poverty level. Therefore, FNS concerns that requiring upfront
documentation increases barriers to participation among some eligible students is based on a
very small sample. The study also states that there is a “need for caution in applying the findings
from the pilots to the national program.”
While FNS’ actions noted above are positive steps towards reducing SFA-caused errors and
reducing the total number of household applications (through increased use of direct
certification), they do not address the problems inherent in relying on program applicants to
self-report income. As long as program benefits are awarded through this application process,
FNS is at risk for improper payments because there is no assurance that household
self-reported income is accurate.
OIG concluded that, since FNS does not require households to submit income documentation
with the applications and the law limits verification activities, FNS does not have reasonable
assurance that students who receive free or reduced-price meals are actually eligible for them.
To reduce improper payments, it is critical that FNS work towards preventing ineligible students
from receiving meal benefits. OIG believes that this can be accomplished by, at a minimum,
requiring families to submit documentation of household income at the time they submit
applications. We note that the Secretary has the authority to determine what constitutes
appropriate “documentation” of household income, 40 which is reflected in the definition set forth
in FNS regulations. 41 However, FNS officials told OIG that FNS cannot require additional
documentation, other than an application, unless Congress amends the NSLA. FNS officials
stated this definition has been used for at least 20 years, and any departure from it would be a
39

Researchers performed telephone surveys with 3,020 households. Researchers did not attempt to obtain income
documentation from the 401 households that reported income above 400 percent of the Federal poverty level. They
considered it unlikely that these households would be misstating income to such a degree that they were actually
eligible for free or reduced-price meals (household income less than or equal to 185 percent of the poverty line).
40
42 U.S.C. § 1758(d)(2)(A) (January 2011).
41
7 C.F.R. § 245.2 (June 2012).
AUDIT REPORT 27601-0001-41

11

significant change requiring legislation. FNS officials acknowledged that, technically, FNS
could propose changes to the regulations, but since it is a contentious issue, they believe that any
change regarding the definition of documentation needs to have support from Congress.
Therefore, FNS should consult with the Office of the General Counsel (OGC) and determine if
FNS has the authority to modify existing regulations so that households are required to submit
income documentation with applications for free or reduced-price meals. Further, since
households that misreport information on program applications are only prosecuted in extreme
circumstances and are only removed from the programs for the remainder of the school year,
FNS, in collaboration with State agencies, should develop a strategy for SFAs to verify for cause
applications of households, which were found to have misreported income information on the
prior year’s applications.

Recommendation 1
In consultation with the Office of the General Counsel, determine if FNS has the authority to
modify existing regulations so that households are required to submit income documentation
with applications for free or reduced-price meals. Based on this determination, take the
appropriate actions to revise the programs’ documentation requirements.

Agency Response
In its March 23, 2015, response FNS stated:
FNS has consulted with OGC on this matter and while the Secretary, as a legal matter,
may have authority to propose a change as recommended, significant other legal, policy,
and operational concerns remain. As this report acknowledges, implementing this
recommendation could create barriers to participation for eligible children, cause
significant administrative and record keeping burden for participating schools, and
constitute a significant reconstruction of the application, certification, and verification
processes.
On March 27, 2015, FNS amended its response to include:
FNS will continue the efforts of increasing direct certification and [the] Community
Eligibility Provision (CEP), both successful strategies in improving Program Integrity
and reducing erroneous payments.
FNS completed this action on February 3, 2015.

OIG Position
We accept FNS’ management decision on this recommendation. We accept FNS’ decision to
pursue improved program integrity and reduced improper payments through means other than
modifying existing regulations to require households to submit income documentation with
applications. However, we do not believe that the collection of income documentation with each

12

AUDIT REPORT 27601-0001-41

household application would cause significant administrative and record keeping burden for
participating schools, and constitute a significant reconstruction of the application, certification,
and verification processes as stated in the agency’s response. For the record, our
recommendation was not to require verification of income documentation for each submitted
application as this would be contrary to statutory requirements, but rather to collect income
documentation for each submitted application. During the verification process, this would
reduce administrative burden on SFAs since they would not need to request income
documentation. It would also eliminate the large percentage verification nonrespondents since
the SFAs would already possess the documentation. Further, upfront collection of income
documentation might deter some households from misreporting income on their applications.

Recommendation 2
Develop a strategy, in collaboration with State agencies, for School Food Authorities to verify
for cause applications of households, which were found to have misreported income information
on their prior year’s applications.

Agency Response
In its March 23, 2015, response FNS stated:
FNS generally agrees with this recommendation. FNS will collaborate with our State
partners to determine opportunities to identify in subsequent school years, those
households that, based on the results of the regular verification process, have been found
to have misreported income. Feasible and reasonable strategies identified will be
incorporated into verification for cause guidance, and will also be incorporated into the
annually updated eligibility guidance.
FNS provided an estimated completion date of April 30, 2016, for this action.

OIG Position
We accept FNS’ management decision on this recommendation.

AUDIT REPORT 27601-0001-41

13

Finding 2: SFAs Should Verify Questionable Applications
SFAs are required to verify any questionable application, a process also referred to as
“verification for cause.” During SY 2012-2013, 44 of the 56 SFAs we reviewed did not question
any applications, even though we later identified at least 42 potentially questionable applications
based on FNS’ criteria. 42 This occurred because there were insufficient criteria for determining
what constituted a questionable application and SFAs were allowed to choose whether to verify
an application for cause on a case-by-case basis. As a result, SFAs interpreted the “verification
for cause” requirement differently, subjecting both NSLP and SBP to potential increased
improper payments.
Regulations state that “[SFAs] must verify any questionable application and should, on a
case-by-case basis, verify any application for cause such as an application on which a household
reports zero income or when the [SFA] is aware of additional income or persons in the
household.” 43 FNS interpreted the phrase “case-by-case basis” to mean that deciding which
applications to verify for cause is solely up to the SFAs’ discretion. Even if an SFA identified an
application that met the criteria listed in the regulations, the SFA was not required to verify it for
cause.
SFAs are required by law to annually verify a sample of approved applications. In the past,
SFAs could verify any data contained in an application. 44 However, the Child Nutrition and
WIC Reauthorization Act of 2004 changed the law so that SFAs could verify no more or less
than their legally prescribed sample size. 45 This sample size varies, but does not exceed
3 percent of approved applications. 46 As an additional control in 2008, FNS began requiring
SFAs to verify for cause any questionable application that was not selected for annual
verification. Applications verified for cause are not considered part of the required annual
verification sample. 47
“Verification for cause” is an important control for reducing improper payments in NSLP and
SBP. For example, after an SFA in Florida verified questionable applications in SY 2012-2013,
72 of 101 students (71 percent) were denied benefits or were recertified from free to reducedprice meals. Verification of questionable applications by a California SFA resulted in benefit
reductions for 228 of 240 students (95 percent). However, for most of our sampled SFAs, this
control was likely underused. During SY 2012-2013, 44 of 56 SFAs (79 percent) did not
identify any applications to be verified for cause. Of the SFAs that did perform verifications for
cause, none performed them on more than 1 percent of approved applications.
•

Twenty SFAs we reviewed had no formal policy regarding “verification for cause” or
chose only to verify the annual sample specified by NSLA. Many officials from these

42

Although 61 SFAs were included in our sample, 5 were residential child care institutions. Residential child care
institutions are exempted from verification activities in the Federal regulations.
43
7 C.F.R. § 245.6a(c)(7) (April 2011).
44
42 U.S.C. §1758(b)(2)(C) (2003).
45
Pub. L. No. 108-265, §§ 104(a)(2), 105(a), 118 Stat. 729, 733-34, 738-44 (June 2004).
46
Pub. L. No. 108-265, § Sec. 105(a), 118 Stat. 729, 738-44 (June 2004).
47
7 C.F.R. § 245.6a(c)(7) (April 2011).

14

AUDIT REPORT 27601-0001-41

SFAs stated that they would call parents if they had questions about an application or if
the application was incomplete, but they did not perform any formal verifications for
cause. In our limited sample of applications, we found at least 1 application with zero
income that was not verified for cause in 7 of these 20 SFAs.
•

Twelve SFAs only performed “verifications for cause” if they received a whistleblower
or hotline complaint about a household. They did not receive any such complaints during
SY 2012-2013. In our limited sample of applications, we found at least 1 application
with zero income that was not verified for cause in 8 of these 12 SFAs.

•

Twelve SFAs had a policy regarding “verification for cause,” but did not consider any
such verification to be necessary during SY 2012-2013. In our limited sample of
applications, we found at least 1 application with zero income that was not verified for
cause in 2 of these 12 SFAs.

We interviewed one employee from each of the 56 SFAs and found that 17 SFA employees
could not tell us what constituted a questionable application. An additional 37 SFA employees
provided inconsistent definitions. 48 The definitions ranged from applications linked to
whistleblower complaints or applications with “extremely low” income. Other criteria the SFA
employees used to identify a questionable application included applications with conflicting
household income information, applicants with multiple applications, or applications for those
households that called the office with questions about income limits.
Based on the various responses from SFA employees, decisions regarding questionable
applications were subjective and inconsistent. The inconsistency in definitions was a result of
49
insufficient FNS criteria. Regulations provide examples of only two types of potentially
questionable applications: when a household reports zero income and when the SFA is aware of
50
additional income or persons in the household. However, we found that even these existing
criteria are not regularly applied. Only 4 of the 56 SFA employees stated that they would verify
applications reporting no income. We reviewed a sample of 3,187 applications from those SFAs
that did not identify any questionable applications and found 42 applications that reported zero
income, but were not verified for cause. While FNS maintains that SFAs may have knowledge
about how these households function with zero income without participating in assistance
programs and, therefore, the SFAs would not need to verify them for cause, the SFAs are not
required to document these justifications. Therefore, there is no way for State agencies to
monitor whether SFAs are adequately assessing which applications to verify for cause.
Overall, there is little to no oversight of SFAs’ application of the “verification for cause”
requirement. Although the administrative review guidance for State agencies that was in use
during our audit scope states that State agencies should become familiar with the SFAs’
procedures for verification, it does not require that State agencies perform any specific review of
48

Of the remaining two SFAs, one did not respond to our requests for verification for cause review information and
one did not perform any verifications for cause during our scope and did not provide a definition.
49
FNS included additional instances of when SFAs may verify applications for cause on p. 97 of the August 2014
edition of the FNS “Eligibility Manual for School Meals.”
50
7 C.F.R. § 245.6a(c)(7) (April 2011).
AUDIT REPORT 27601-0001-41

15

applications verified for cause. FNS’ new administrative review guidance manual directs State
agencies to determine whether SFAs applied “verification for cause” appropriately, if applicable.
However, State agencies are not required to review whether SFAs did not perform “verifications
for cause” on applications that may have warranted it (such as zero income applications).
Likewise, management evaluation guidance requires FNS regional offices to review how the
State agencies ensure that SFAs have implemented the verification process correctly, but
contains no specific requirement to review State agencies’ oversight of the application of the
“verification for cause” requirement.
Reduction in Benefits Due to Annual Verification
According to FNS regulations, a household affected by a reduction or termination of
benefits may re-apply for free or reduced-price meals at any time during the same school
year, but it would be required to submit income documentation or proof of participation
in assistance programs at the time of reapplication. 51 There is no such requirement for
the next school year.
We found that, in 25 of 27 SFAs, 52 963 of 2,138 students (45 percent) who were denied
benefits in the prior school year were approved to receive free or reduced-price meals
without providing proof of household income for SY 2012-2013. 53 Our review of
eligibility status for those students denied benefits during the prior year’s verification
process at our sampled SFAs indicated that some households may continue to
misrepresent income in following years with little to no accountability.
This occurred because SFAs did not choose to verify applications of households that
were denied free or reduced-price meals as a result of the prior year’s annual verification
process. None of the 56 SFA employees we interviewed stated that they would use
“verification for cause” in this circumstance. In addition, the regulations do not
specifically require performing verifications for cause on applications for these
households. These applications would likely only be verified if they were again selected
as part of the annual verification sample. OIG maintains that, to strengthen FNS’ defense
against improper payments, the agency should consider a policy requiring SFAs verify
for cause any application from a household when the household’s application from the
prior year was denied as a result of the prior year’s annual verification process.
In 2014, a GAO audit 54 identified opportunities to strengthen oversight of the programs while
ensuring legitimate access, such as exploring the feasibility of computer matching external
income data with participant information to identify households whose income exceeds
51

FNS “Eligibility Manual for School Meals,” p. 90 (October 2011).
Although there were 56 SFAs in our sample that were required to conduct annual verifications, only 32 were able
to provide us with the change of status data. Of these 32 SFAs, 5 did not have any students denied benefits in
SY 2011-2012 as a result of verification.
53
These students were found to be ineligible for either free or reduced price meals because either their household
income was too high for the level of benefits they were receiving, or the household failed to respond to the request
for proof of income.
54
GAO-14-262, School-Meals Programs, USDA Has Enhanced Controls, but Additional Verification Could Help
Ensure Legitimate Program Access (May 2014).
52

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AUDIT REPORT 27601-0001-41

eligibility thresholds for verification and should be verified for cause. 55 FNS generally agreed
with GAO’s recommendations.
We concluded that SFA employees did not always identify potentially questionable applications
and verify them for cause. In addition, FNS did not provide sufficient guidance to SFAs about
how to identify questionable applications or to State agencies about how to ensure SFAs were
correctly implementing this requirement.

Recommendation 3
Update current regulations and guidance with the criteria explaining what constitutes a
questionable application, including any additional instances of when verifications for cause are
required. Ensure State agencies and SFAs are trained on the new criteria.

Agency Response
In its March 23, 2015, response FNS stated:
FNS agrees that the eligibility guidance can be effectively updated to include additional
information on what constitutes a questionable application. FNS will provide additional
guidance and will provide training via webinar for State agency personnel on the
additional guidance. FNS will make the webinar slides available for States to use for [its]
own training of SFAs on identifying questionable applications.
FNS provided an estimated completion date of August 31, 2015, for this action.

OIG Position
We accept FNS’ management decision on this recommendation.

Recommendation 4
FNS should consider a policy requiring SFAs to verify for cause any application from a
household when the household’s application from the prior year was denied as a result of the
prior year’s annual verification process.

55

Categorically eligible children are those children automatically eligible for free meal benefits because they, or any
household member, receive benefits under other designated assistance programs (such as Supplemental Nutrition
Assistance Program), or are children who are designated as members of “other source categorically eligible
programs.” Examples of “other source categorically eligible” children include, but are not limited to, homeless,
runaway, migrant, and foster children.
AUDIT REPORT 27601-0001-41

17

Agency Response
In its March 23, 2015, response FNS stated:
FNS will consult with OGC to determine if this recommendation is possible under
current legal authorities related to verification. In contrast to recommendation
[number] 2 above, this pool of households is not comprised entirely of households that
have misreported household income information. Some households do not respond to
verification requests but are in-fact income-eligible. Considering all applications from
these households as questionable applications subject to verification for cause may be
considered a violation of the verification sample size established in Section
9(b)(3)(D)(iii) of the Richard B. Russell National School Lunch Act.
FNS provided an estimated completion date of July 31, 2015, for this action.

OIG Position
We accept FNS’ management decision on this recommendation.

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AUDIT REPORT 27601-0001-41

Section 2: Monitoring
Finding 3: FNS Needs to Strengthen Controls over SFAs’ Cafeteria Funds
Twenty of our 61 sampled SFAs in 5 States mismanaged and misused Non-profit School Food
Service Funds (or cafeteria funds), which are intended to be used for operating and improving
the school food service. This occurred because the State agencies did not provide SFAs with
specific guidance and adequate oversight for cafeteria funds management. As a result, SFAs
accumulated excess net cash resources, 56 totaling $4.8 million, expensed a total of nearly
$6 million in capital expenditures in the year of purchase without obtaining prior approval from
the State agencies, and charged unallowable costs totaling $166,933 to the cafeteria fund
accounts.
According to FNS regulations, each State agency shall ensure that SFAs comply with the
requirements to account for all revenues and expenditures of their nonprofit school food service.
It shall ensure that SFAs comply with the Departmental regulations when managing cafeteria
fund expenditures and monitor the SFAs’ net cash resources. 57 To ensure each State agency
adequately monitors SFA compliance, the regulations also require FNS to conduct a
comprehensive management evaluation of each State agency, which includes evaluating
implementation of monitoring responsibilities and oversight of SFA procurement activities. 58
Before 2013, State agency reviews of SFAs emphasized oversight of application certification,
meal claims, and nutritional standards, but cafeteria fund accounts were not consistently
monitored. 59 In February 2013, the California Senate published the results of an investigation
that found that, in recent years, the California Department of Education (CDE) has ordered eight
school districts to repay nearly $170 million in inappropriate or unsupported charges to cafeteria
fund accounts. 60 This report prompted us to expand our scope to include a review of the
cafeteria fund accounts for our sampled SFAs.
We reviewed SY 2011-2012 61 financial records at 61 SFAs in 6 States, as well as the oversight
methods employed by the corresponding State agencies. 62 Of these six State agencies, one
lacked an oversight procedure to monitor SFAs’ net cash resources, and four did not specifically
require SFAs to submit prior approval for expensing capital expenditures in the year of
56

Net cash resources means all monies, as determined in accordance with the State agency’s established accounting
system, which are available to or have accrued to an SFA’s nonprofit school food service at any given time, less cash
payable. Such monies may include, but are not limited to, cash on hand, cash receivable, earnings on investments,
cash on deposit, and the value of stocks, bonds, or other negotiable securities.
57
7 C.F.R. § 210.19(a)(1) (January 2013).
58
7 C.F.R. §§ 210.19(a)(1), 210.29(a), (c)(2) (January 2013).
59
Effective for SY 2013-2014, State agencies are required to include financial management as part of the new
administrative review process.
60
California Senate Office of Oversight and Outcomes report: Food Fight: Small team of state examiners no match
for schools that divert student meal funds (February 2013).
61
SY 2011-2012 ran from July 1, 2011 through June 30, 2012.
62
We did not conduct a full financial audit at the 61 SFAs; instead, we reviewed SFAs’ financial statements or
financial reports and requested detailed accounting records when necessary. In addition, two of the three SFAs in
California were trying to resolve cafeteria fund issues identified by CDE during our fieldwork.
AUDIT REPORT 27601-0001-41

19

purchase. 63 We also found that 2 of the 61 SFAs charged unallowable costs to their cafeteria
accounts due to lack of knowledge. These issues are discussed in detail below.
State Agency Lacked Oversight of SFAs’ Net Cash Resources
Of our 61 sampled SFAs, 9 had net cash resources in excess of 3 months of average
expenditures. Of these 9 SFAs, we found that 7—all in Delaware—lacked approved
spending plans to limit the excess amount. This occurred because a State agency, the
Delaware Department of Education (DDE), did not have adequate procedures in place to
monitor SFAs’ net cash resources. As a result, DDE allowed the seven SFAs to decide
when and how to spend the $4.8 million excess without knowing whether it would be
spent timely and appropriately.
FNS regulations require SFAs to limit net cash resources “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 7 C.F.R. § 210.19(a).” 64 If an SFA has
excess net cash resources, the State agency must approve the excess and “may require the
[SFA] to reduce the price children are charged for lunches, improve food quality or take
other action designed to improve the nonprofit school food service.” 65 If the above three
options are not feasible, the State agency is required to adjust the rates of reimbursement
to the SFA. To ensure SFAs’ compliance with this requirement, the regulations direct
State agencies to monitor SFAs’ net cash resources. 66 The regulations also require FNS
to conduct a comprehensive management evaluation of each State agency’s
administration of NSLP. “FNS will evaluate whether the State agency has fulfilled its
State level responsibilities, including, but not limited to the following areas: use of
Federal funds… implementation of the State agency’s monitoring responsibilities…
oversight of school food authority procurement activities…” 67 68
At the end of SY 2011-2012, 9 of the 61 reviewed SFAs had net cash resources in excess
of 3 months of average expenditures. Among these nine SFAs, seven—all in
Delaware—did not have an approved spending plan to limit the excess (see Table 1). We
found these seven SFAs handled excess net cash resources inconsistently and
inappropriately, due to lack of guidance from DDE. Two SFAs notified DDE of the
excess and provided a general description of their spending plans, but DDE performed no
follow up with these two SFAs and did not require them to submit detailed spending
plans. Two other SFAs reduced their excesses by transferring cafeteria funds to a reserve
account called “upgrade/equipment account,” which they erroneously excluded from net
63

Capital expenditures are defined as “expenditures for the acquisition cost of capital assets (equipment, buildings,
land), or expenditures to make improvements to capital assets that materially increase their value or useful life.”
2 C.F.R. pt. 225, app. B, § 15a(1) (January 2012).
64
7 C.F.R. § 210.9(b)(2) (January 2013).
65
7 C.F.R. § 210.19(a)(1) (January 2013).
66
7 C.F.R. § 210.19(a)(1) (January 2013).
67
7 C.F.R. §§ 210.19(a)(1), .210.29(a), (c)(2) (January 2013).
68
FNS uses a risk-based selection method to select State agencies for management evaluation on an annual basis. It
issues final reports after the evaluation activities are completed, and it also requires the State agencies to take
corrective actions when exceptions are noted.

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AUDIT REPORT 27601-0001-41

cash resources calculations. Both SFAs informed DDE about this practice when they
submitted biannual financial reports in January 2012, but DDE did not notify the SFAs to
include the account in the net cash resources calculation until May 2013. An additional
SFA did not notify DDE about its excess, and another SFA stated its excess was due to
indirect costs not being assessed by the school district so sufficient funds could be
maintained for both normal operations and its equipment replacement plan. Lastly, an
SFA did not believe its net cash resources exceeded three-month average expenditures
because it assumed net cash resources were equivalent to cash.
Table 1: Excess Net Cash Resources (as of June 30, 2012)
SFA
Net Cash
3-month Average
Excess Funds
No.
Resources
Expenditures
1
$2,677,275
$863,891
$1,813,384
2

$1,507,750

$658,459

$849,291

3

$1,122,467

$799,755

$322,712

4

$2,844,704

$2,825,356

$19,348

5

$2,088,594

$1,536,436

$552,158

6

$2,679,471

$2,060,533

$618,938

7

$1,957,199

$1,313,325

$643,874

Total

$4,819,705

DDE’s program director stated the State agency provided SFAs with information related
to the net cash resources requirement in 2007, and DDE has also verbally reminded SFAs
to limit net cash resources to 3 months’ average expenditures during quarterly meetings,
but the State agency did not have a formal monitoring process in place. DDE relied on
single audits to monitor SFAs’ financial resources, but these single audits did not include
a review of SFAs’ net cash resources. 69 In February 2014, DDE implemented a
monitoring procedure which requires SFAs to report net cash resources annually. It also
requires SFAs that report an excess to submit corrective action plans for State agency
approval.
Of the six State agencies we reviewed, three monitored net cash resources annually, and
two monitored net cash resources during administrative reviews. 70 DDE was the only
State agency that did not periodically monitor the net cash resources. Although DDE
conducted administrative reviews during SY 2011-2012 for two of the seven SFAs with
an excess, net cash resources management was not included as part of the reviews.
Further, although FNS regional offices are required to conduct periodic management
evaluations of the State agencies, the latest management evaluation report for
DDE—dated August 2011—did not detect DDE’s lack of a monitoring procedure for
69

All non-Federal entities that expend $500,000 or more of Federal awards in a fiscal year are required to obtain an
annual audit in accordance with the Single Audit Act Amendments of 1996, Office of Management and Budget
Circular A-133, the Office of Management and Budget Circular Compliance Supplement, and Government Auditing
Standards. A single audit is intended to provide a cost-effective audit for non-Federal entities in that one audit is
conducted in lieu of multiple audits of individual programs.
70
FNS requires the State agencies to monitor SFAs through an administrative review, which was once every 5 years
until July 2013 and currently is once every 3 years.
AUDIT REPORT 27601-0001-41

21

SFAs’ net cash resources. FNS’ Mid-Atlantic regional officials were unaware of the
issue, but stated that they would conduct follow up and include it in the next management
evaluation for DDE.
SFAs Did Not Obtain Prior Approval for Expensing Capital Expenditures
Of the 61 reviewed SFAs, 22 treated capital expenditures as direct costs during
SY 2011-2012. Of these, 20 SFAs in 5 States expensed nearly $6 million of equipment
purchases or cafeteria improvements in the year of purchase without obtaining prior
approval from the respective State agencies. 71 This occurred primarily because the
program personnel at some State agencies were either unfamiliar with the requirement or
relied on SFAs’ voluntary compliance without providing further guidance.
According to Federal cost principles, capital expenditures for general purpose equipment
and capital expenditures for improvements to buildings or equipment which materially
increase the value or useful life are unallowable as direct charges and require the prior
approval of the awarding agency. 72 FNS delegates the prior approval requirement to
State agencies, but further clarifies that FNS regulations prohibit the use of SFA cafeteria
funds to pay for the cost of purchasing land or buildings, unless otherwise approved by
FNS. 73
Of the 61 SFAs we reviewed, 22 SFAs considered capital expenditures (equipment
purchases or cafeteria improvements) as direct costs in SY 2011-2012, and 20 of them
did not obtain approval from the State agencies before using these funds accordingly (see
Table 2 below). Although the majority of the equipment purchases and cafeteria
improvement were for program purposes, we found that an SFA in Florida spent
$207,763 on 11 vehicles, including 4 sport utility vehicles (SUVs) and 4 transit vans for
the field specialists; 1 SUV for central office staff to conduct school visits; and 2 transit
vans for food service facilities and the maintenance team. 74 FNS requires the SFA to
determine the allowability of the costs when charging cafeteria funds. For a cost to be
allowable, it must be necessary and reasonable. We questioned the necessity and
reasonableness of vehicle purchases by this SFA.

71

Equipment is defined as “nonexpendable, tangible personal property having a useful life of more than 1 year and
an acquisition cost which equals or exceeds the lesser of the capitalization level established by the governmental unit
for financial statement purposes, or $5,000.” 2 C.F.R. pt. 225, app. B, § 15a(2) (January 2012).
72
2 C.F.R. pt. 225, app. B, § 15b(1), (3) (January 2012).
73
SP 41-2011 Child Nutrition Reauthorization 2010: Indirect Cost Guidance, p. 20 (July 2011); 2 C.F.R. pt. 225,
app. B, § 15b(4) (January 2012).
74
Two vehicles were ordered in June 2011 (SY 2010-2011) but were paid for in July 2011 (SY 2011-2012).

22

AUDIT REPORT 27601-0001-41

Table 2: Unauthorized Equipment Purchases or Cafeteria Improvement
SFAs with Capital
SFAs with
Total Unauthorized
State
Expenditures as
Unauthorized Capital
Capital Expenditures
Direct Charges
Expenditures
Florida
7
7
$4,703,800
Texas

3

1

$428,9251

California

2

2

$88,329

Rhode Island

1

1

$51,670

Delaware

9

9

$700,614

Total

22

20

$5,973,338

1

The State agency retroactively approved the cafeteria improvement of $428,925 after we notified it of the
expenditure.

Of the six States we visited, only the Texas Department of Agriculture (TDA) had
established a formal approval process for capital expenditures. The director of TDA told
us that agency staff continuously educated SFAs on requirement compliance, but a few
SFAs might still occasionally make mistakes. These mistakes would be identified and
corrected through TDA’s administrative review process. In California, CDE took a step
to amend the problem by issuing an updated Management Bulletin “Cafeteria
Fund—Allowable Uses” in May 2013. The updated guidance reminds SFAs to request
prior approval for capital expenditures. 75
The program operations director at the Florida Department of Agriculture and Consumer
Services stated the agreement between the State agency and SFAs included relevant
Federal regulations, which specify the prior approval requirement for expensing capital
expenditures, but five of the seven SFAs we visited in Florida seemed to be unaware of
this requirement. The other two SFAs’ purchases were handled by the school district’s
purchasing department. In those cases, the purchasing department followed the district’s
internal procurement policy, which did not include requesting prior approval from the
State agency. The responsible personnel at Delaware and Rhode Island’s State agencies
were not aware of this requirement; and they issued relevant guidance to the SFAs during
our review. 76
We discussed the prior approval requirement of expensing capital expenditures with FNS
regional office officials. The officials at two FNS regional offices stated the prior
approval requirement is included in NSLP and SBP regulations because the programs are
subject to applicable Departmental regulations, but our review found that the program
personnel at both the State and local levels either did not have this knowledge or did not
comply with prior approval requirements when managing the cafeteria fund. According
to FNS officials, obtaining the prior written approval before incurring the cost of a capital
expenditure has been a longstanding requirement under Cost Principles for State, Local,
and Indian Tribal Government. 77 FNS later issued a policy in March 2014, which
emphasized the State agencies’ prior approval process for equipment purchases and
75

California now has one SFA that is utilizing an allowed pre-approved equipment list whereby items compiled on
that list may be purchased by SFAs without prior approval.
76
The SFAs we reviewed in Wyoming did not treat capital expenditures as direct charges.
77
2 C.F.R. pt. 225, app. B, § 15b(1), (3) (January 2012).
AUDIT REPORT 27601-0001-41

23

extended the flexibility to the State agencies to implement an option that would alleviate
some administrative burden without departing from Federal cost principles. 78
Unallowable Costs Were Charged by SFAs
Of the 61 SFAs we reviewed, 2 charged a total of $166,933 in unallowable costs to
cafeteria fund accounts due to a lack of knowledge of the applicable Federal cost
principle.
According to Federal cost principles, bad debt expenses are considered unallowable
costs. 79 One SFA in Florida charged $10,453 of uncollectible check (i.e., bad debt)
expenses to its cafeteria fund account. Although a list of unallowable costs—including
bad debt expense—was included in the agreement between the State agency and the SFA,
the SFA’s senior accounting manager stated that she was unaware of this cost principle.
A Delaware SFA charged $156,480 of indirect costs accumulated from previous years
(SY 2009-2010 and SY 2010-2011) to the cafeteria fund at the beginning of
SY 2012-2013. 80 However, FNS’ Indirect Cost Guidance states that it is unallowable to
bill the cafeteria fund account for indirect costs that were paid from the general fund in
prior years unless an agreement exists to show that the SFA has been “loaning” the
cafeteria funds to cover the indirect costs in one or more prior years. 81 No accounting
records showed that such a loan existed. The SFA supervisor stated that she used the
cash basis accounting method to record and pay the bills, and she did not know the
indirect cost entry for prior years was unallowable without corresponding accrual
entries. 82 Although she had access to the FNS guidance, she was not familiar with the
requirements therein.
During the course of our audit, we noted that FNS had already taken some initial steps to
strengthen oversight of SFA cafeteria funds. For example, it issued its Indirect Cost Guidance in
2011 in accordance with requirements of the Healthy, Hunger-Free Kids Act of 2010. FNS also
updated and streamlined its administrative review procedures at the beginning of 2012. The
updated Administrative Review Guidance Manual was issued in March 2013 and included a
resource management component for monitoring SFA cafeteria funds. In addition, FNS
provided trainings to the State agencies on the updated administrative review process through
conferences and webinars. However, we noted that the program personnel at some State
agencies and SFAs were still unfamiliar with the details of the Indirect Cost Guidance.

78

SP-31-2014 State agency Prior Approval Process for SFA Equipment Purchases (March 2014).
2 C.F.R. pt. 225, app. B, § 5 (January 2012).
80
The SFA accumulated 3 years’ indirect costs (SY 2009-2010, 2010-2011, and 2011-2012) and paid them on July
30 2012. Although July 2012 was the beginning of SY 2012-2013, because the SFA used the cash basis accounting
method, we did not take an exception for the indirect cost incurred in SY 2011-2012.
81
FNS SP41-2011 Child Nutrition Reauthorization 2010: Indirect Costs Guidance for State Agencies and School
Food Authorities, p. 33 (July 2011).
82
For cash basis accounting, revenue is recorded when cash is received and expenses are recorded when cash is
paid. For accrual basis accounting, revenue is recorded when earned and expenses are recorded when goods or
services are received.
79

24

AUDIT REPORT 27601-0001-41

Therefore, we concluded that FNS must periodically assess State agencies’ oversight controls
and provide them with sufficient training.

Recommendation 5
Provide specific guidance to State agencies to ensure they adequately monitor the SFAs’ net cash
resources as required by FNS regulations.

Agency Response
In its March 23, 2015, response FNS stated:
FNS agrees with the goal of ensuring program integrity by providing guidance to State
agencies to ensure they adequately monitor [the] SFAs’ net cash resources as required by
regulation. In SY 2013-2014, we implemented the new Administrative Review process
to include a new section entitled, “Resource Management.” This section was specifically
designed to provide a systematic approach to ensuring the overall financial health of an
SFA’s nonprofit school food service. The section consists of a review of four areas
integral to the financial health of the SFA’s food service: Paid Lunch Equity,
Nonprogram Revenue, Indirect Costs, and Net Cash Resources. Additionally, on
July 7, 2011, FNS issued memo SP 41-2011 Child Nutrition Reauthorization 2010:
Indirect Cost Guidance.
FNS plans to issue additional clarification to State agencies to ensure they adequately
monitor the SFAs’ net cash resources through further updates to the Administrative
Review Manual.
FNS provided an estimated completion date of October 31, 2015, for this action.

OIG Position
We accept FNS’ management decision on this recommendation.

Recommendation 6
Instruct the Delaware Department of Education to review all SFAs’ net cash resources and
appropriately address the $4.8 million in excess net cash resources.

Agency Response
In its March 23, 2015, response FNS stated:
FNS supports this recommendation. FNS received OIG’s documentation to support the
amount stated in this recommendation on March 18, 2015. Upon review of the
documentation, FNS will determine the appropriate course of action. If FNS determines
AUDIT REPORT 27601-0001-41

25

that the questioned costs are valid and requires recovery, we will advise the State agency
to proceed with the necessary collection efforts.
FNS provided an estimated completion date of March 31, 2016, for this action.

OIG Position
We accept FNS’ management decision on this recommendation.

Recommendation 7
Issue a reminder to State agencies that prior approval authority for treating capital expenditures
as direct costs has been delegated to them and require them to establish a process to fulfill this
requirement.

Agency Response
In its March 23, 2015, response FNS stated:
FNS concurs with this recommendation and will issue a policy memorandum to remind
State agencies that prior approval authority for treating capital expenditures as direct
costs has been delegated to them and require them to establish a process to fulfill this
requirement.
FNS provided an estimated completion date of August 31, 2015, for this action.

OIG Position
We accept FNS’ management decision on this recommendation.

Recommendation 8
Instruct the State agencies to work with the 20 SFAs to review nearly $6 million of capital
expenditures incurred in SY 2011-2012 and determine if those costs are truly allowable; if
unallowable costs are determined, the State agencies need to recover the costs.

Agency Response
In its March 23, 2015, response FNS stated:
FNS received OIG’s documentation to support the amount stated in this recommendation
on March 18, 2015. Upon review of the documentation, FNS will determine the
appropriate course of action. If FNS determines that the questioned costs are valid and
requires recovery, we will advise the State agency to proceed with the necessary
collection efforts.

26

AUDIT REPORT 27601-0001-41

FNS provided an estimated completion date of March 31, 2016, for this action.

OIG Position
We accept FNS’ management decision on this recommendation.

Recommendation 9
Instruct the State agencies to recover $166,933 in unallowable costs from two SFAs.

Agency Response
In its March 23, 2015, response FNS stated:
FNS received OIG’s documentation to support the amount stated in this recommendation
on March 18, 2015. Upon review of the documentation, FNS will determine the
appropriate course of action. If FNS determines that the questioned costs are valid and
requires recovery, we will advise the State agency to proceed with the necessary
collection efforts.
FNS provided an estimated completion date of March 31, 2016, for this action.

OIG Position
We accept FNS’ management decision on this recommendation.

Recommendation 10
Require the personnel with oversight responsibilities of the cafeteria fund at the State agencies
and SFAs to be trained periodically on cafeteria fund management.

Agency Response
In its March 23, 2015, response FNS stated:
On March 2, 2015, [FNS] published a final rule entitled Professional Standards for
School Nutrition Programs Personnel. This regulation established professional standards
for school nutrition professionals. Under the final rule, which is effective July 1, 2015,
annual training hours are required for school food service directors, managers, staff, and
State agency directors. The regulation requires that each individual employee at the SFA
level receive and complete training on the topics or areas applicable to his/her job.
Furthermore, State Directors of school nutrition programs must provide SFAs at least
18 hours annually in topics such as administrative practices; the accuracy of approvals for
AUDIT REPORT 27601-0001-41

27

free and reduced priced meals; the identification of reimbursable meals at the point of
service; nutrition; health and safety standards and the efficient and effective use of USDA
donated foods; and any other appropriate topics as determined by FNS to ensure program
compliance and integrity or to address other critical issues.
In conjunction with the new rule, FNS has developed a database of currently available
training resources (including on-line modules, in-person classes, and self-directed
training) that State and local directors, managers and staff may use to meet the annual
training requirements. This database includes financial management modules such as a
module developed in conjunction with the National Food Service Management Institute
titled: Financial Management: A Course for School Nutrition Directors. To emphasize
the importance of cafeteria fund management as a topic and highlight the specific
modules on this topic available to fulfill the requirement, FNS will include this topic as
an example of training which directors, managers, and certain staff may take relevant to
their job responsibilities.
FNS provided an estimated completion date of July 1, 2015, for this action.

OIG Position
We accept FNS’ management decision on this recommendation.

28

AUDIT REPORT 27601-0001-41

Scope and Methodology
We conducted a nationwide audit of FNS’ National School Lunch and School Breakfast
Programs and its enforcement of laws, regulations, and policies during FYs 2012 and 2013. We
performed fieldwork at the FNS national office in Alexandria, Virginia; six regional offices
(San Francisco, California; Denver, Colorado; Atlanta, Georgia; Boston, Massachusetts;
Robbinsville, New Jersey; and Dallas, Texas); and seven State agencies. 83 We also performed
fieldwork at 61 SFAs and 120 schools in 6 States (see Exhibit B for a list of audit sites). We
performed audit fieldwork from September 2012 to August 2014.
We statistically selected 120 of 4,526 schools for review. We used a stratified sample with two
strata. For stratum one, we nonstatisitically selected California, Florida, and Texas because they
received the highest reimbursement amounts—31.4 percent of total NSLP and SBP
reimbursements combined—during FY 2011. 84 Within these 3 States, we selected the 15 SFAs
that had both the highest level of meal reimbursement and the most associated schools. From
these 15 SFAs, we randomly selected 60 schools for review.
For stratum two, we nonstatisitically selected Delaware, Rhode Island, and Wyoming because of
their low reimbursement amounts–0.6 percent of total NSLP and SBP reimbursements
combined. Within these three States, we randomly selected 60 schools, and the related SFAs, for
review. (See Exhibit C for additional information on our statistical methodology and results.)
To accomplish our audit, we:
•

Reviewed Criteria: We reviewed the pertinent laws and regulations governing the
NSLP and SBP and the current policies and procedures FNS established as guidance for
State agencies, SFAs, and schools.

•

Interviewed FNS, State agency, and SFA Personnel: We interviewed FNS national
and regional officials, State agency officials, and SFA personnel to gain an understanding
about their roles in monitoring the programs and to determine what controls are used to
ensure (1) children approved for free and reduced-price meals meet the eligibility
requirements, and (2) meal claims are supported and accurately reimbursed.

•

Conducted Site Visits: We conducted visits at 38 schools and 20 SFAs to determine
whether there are adequate controls to ensure that only actual meals served are claimed
for reimbursement and that children approved for free and reduced-price meals met the
eligibility requirements.

83

California Department of Education, Delaware Department of Education, Florida Department of Agriculture and
Consumer Services, New York State Education Department, Rhode Island Department of Education, Texas
Department of Agriculture, and Wyoming Department of Education. New York was originally selected as part of
our nonstatisitical sample, but was later removed in consideration of hardships caused by Hurricane Sandy.
84
New York was originally selected as part of our nonstatisitical sample, but was later removed in consideration of
hardships caused by Hurricane Sandy. In its place, we added additional schools from California, Florida, and Texas,
and created the second stratum that consisted of schools from Delaware, Rhode Island, and Wyoming.
AUDIT REPORT 27601-0001-41

29

•

Sampled and Reviewed Applications for Free and Reduced Price Meals: For the
120 selected schools, we sampled and reviewed student applications to determine
whether students’ initial eligibility determinations were correct.

•

Verified Accuracy of SFA Claims: We selected and verified one month’s
reimbursement claims from the selected schools and traced the number of meals served
by category to the SFAs’ meal claims.

•

Reviewed SFAs’ Verification Processes: We reviewed the SFAs’ files for annual
verification to determine whether verification was conducted accurately for the selected
households and whether corrective actions were taken against households that provided
inaccurate information or did not respond to the verification request. We also reviewed
SFAs’ questionable application processes to determine the basis for a questionable
application and whether verification for questionable applications was done.

•

Reviewed State Agencies’ Information Systems: We obtained read-only access to the
States’ Information Systems to verify the systems’ controls and availability of data. We
reviewed enrollment information, verification data, and meal claims.

•

Reviewed State Agencies’ Administrative Review Processes: We reviewed the State
agencies’ administrative review processes to identify any deficiencies found, what the
proposed corrective actions were, and whether they performed followup reviews to
determine if deficiencies were corrected.

•

Reviewed SFAs’ cafeteria funds: We reviewed the SFAs’ relevant accounting records
related to NSLP and SBP to determine if SFAs used program funds for the intended
purpose.

We conducted this performance audit in accordance with generally accepted government
auditing standards. Those 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.

30

AUDIT REPORT 27601-0001-41

Abbreviations
APEC .........................Access, Participation, Eligibility, and Certification
CDE............................California Department of Education
C.F.R. .........................Code of Federal Regulations
DDE ...........................Delaware Department of Education
FNS ............................Food and Nutrition Service
FTBPTBU ..................Funds to Be Put to Better Use
FY ..............................Fiscal Year
GAO ...........................U.S. Government Accountability Office
NSLA .........................Richard B. Russell National School Lunch Act
NSLP ..........................National School Lunch Program
OGC ...........................Office of the General Counsel
OIG ............................Office of Inspector General
SBP ............................School Breakfast Program
SFA ............................School Food Authority
SNAP .........................Supplemental Nutrition Assistance Program
SUV............................Sport utility vehicle
SY ..............................School Year
TDA ...........................Texas Department of Agriculture
U.S.C. .........................United States Code
USDA.........................U.S. Department of Agriculture
WIC ............................Special Supplemental Nutrition Program for Women, Infants, and
Children

AUDIT REPORT 27601-0001-41

31

Exhibit A: Summary of Monetary Results
Exhibit A summarizes the monetary results for our audit report by finding and recommendation
number.
Finding

Recommendation

Description

Amount

Category

1

1

Money spent on lunches for
students later found to be
ineligible as a result of
annual verifications.

$12,481,136

FTBPTBU1 –
Management or Operating
Improvements / Savings

3

6

SFAs had excess net cash
resources without approved
spending plans.

$4,819,705

FTBPTBU – Management
or Operating
Improvements / Savings

3

8

SFAs made unauthorized
equipment purchases and
cafeteria improvements.

$5,973,338

Questioned Costs/Loans,
No Recovery

3

9

SFAs charged unallowable
costs to the cafeteria fund
account.

$166,933

Questioned Costs/Loans,
Recovery Recommended

TOTAL MONETARY RESULTS
1

Funds to be put to better use.

32

AUDIT REPORT 27601-0001-41

$23,441,112

Exhibit B: Audit Sites Reviewed
Exhibit B shows the organization and location of all sites reviewed.

Organization

Location

FNS National Office

Alexandria, VA

FNS Mid-Atlantic Regional Office
Delaware Department of Education
School Food Authorities:
1
2
3
4
5
6
7
8
9
10
11
12
13

Robbinsville, NJ
Dover, DE

FNS Mountain Plains Regional Office
Wyoming Department of Education
School Food Authorities:
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16

Denver, CO
Cheyenne, WY

, DE (2 schools)
DE (2 schools)
DE (2 schools)
DE (2 schools)
DE (1 school)
DE (2 schools)
DE (3 schools)
DE (1 school)
DE (1 school)
DE (1 school)
DE (2 schools)
DE (1 school)
DE (1 school)

WY (1 school)
WY (1 school)
WY (1 school)
WY (1 school)
WY (1 school)
WY (4 schools)
WY (1 school)
WY (1 school)
WY (1 school)
WY (1 school)
WY (1 school)
WY (1 school)
WY (1 school)
WY (1 school)
WY (1 school)
WY (1 school)

AUDIT REPORT 27601-0001-41

33

Organization

Location

FNS Northeast Regional Office
New York State Education Department*
Rhode Island Department of Education
School Food Authorities:
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17

Boston, MA
Albany, NY
Providence, RI

FNS Southeast Regional Office
Florida Department of Agriculture and Consumer
Services
School Food Authorities:
1
2
3
4
5
6
7

Atlanta, GA
Tallahassee, FL

FNS Southwest Regional Office
Texas Department of Agriculture
School Food Authorities:
1
2
3
4
5

Dallas, TX
Austin, TX

RI (1 school)
RI (1 school)
RI (1 school)
RI (1 school)
RI (1 school)
RI (1 school)
RI (1 school)
RI (1 school)
RI (1 school)
RI (2 schools)
RI (1 school)
RI (3 schools)
RI (1 school)
RI (1 school)
RI (1 school)
RI (1 school)
RI (1 school)

FL (4 schools)
FL (7 schools)
FL (4 schools)
FL (3 schools)
FL (3 schools)
FL (4 schools)
FL (1 school)

TX (5 schools)
TX (5 schools)
TX (4 schools)
TX (2 schools)
TX (1 school)

*New York was selected as part of our original nonstatisitical sample, but was later removed from our sample in consideration of hardships
caused by Hurricane Sandy. This occurred after we had performed some audit work for the New York State Education Department, but
before we had performed any audit work for any of the selected schools or related school food authorities.

34

AUDIT REPORT 27601-0001-41

Organization
FNS Western Regional Office
California Department of Education
School Food Authorities:
1
2
3

Location
San Francisco, CA
Sacramento, CA
CA (4 schools)
CA (11 schools)
CA (2 schools)

AUDIT REPORT 27601-0001-41

35

Exhibit C: Statistical Sampling Methodology and Results
Exhibit C details the OIG statistician’s description of the audit sampling methodology and
results.
Objective
This sample is designed to support OIG audit 27601-0001-41. To help achieve the objective of
the audit, we developed a representative random statistical sample for review. The audit team
reviewed the sample and collected data to support the audit findings. The information gathered
were used to determine whether statistical projections were feasible.
Audit Universe
The universe list was provided to the OIG statistician by the audit team. Due to travel and
resource considerations, we initially made a decision to limit our universe to four
States–California, Florida, New York, and Texas. Those were selected on the basis of highest
dollar reimbursement amounts for NSLP and SBP combined. Due to the large territorial spread
of schools in the 4 States included in our review, we further limited the universe in California,
Florida, New York, and Texas to the top 16 school food authorities (SFAs) in those States based
on the number of schools and dollar amount of reimbursements. We dropped New York from
our sample because it was struck by Hurricane Sandy and needed time to recover from storm
damage.
Since New York represented a large part of our initial universe and sample, dropping it from
review meant that we had resources for additional work. We added another group of States to
our review—Delaware, Rhode Island, and Wyoming. We selected these States to represent
States with comparatively small NSLP and SBP reimbursement dollar amounts. Delaware,
Rhode Island, and Wyoming were grouped in their own stratum.
Hence, our final universe consisted of schools within six States, which were grouped into two
strata. Descriptive universe statistics are shown in Table 1 below.
Table 1: Descriptive Universe Statistics per Stratum
Universe Stratum I
State
CA
FL
TX
Total

36

Frequency
1,155
schools
1,520
schools
874
schools
3,549
schools

Universe Stratum II

Percent

Cumulative
Percent

State

32.50%

32.50%

DE

42.80%

75.40%

RI

24.60%

100%

WI

100%

AUDIT REPORT 27601-0001-41

Total

Frequency
244
schools
395
schools
338
schools
977
schools

Percent

Cumulative
Percent

25.00%

25.00%

40.40%

65.40%

34.60%

100%

100%

Sample Design
Given the data structure diversity in the audit programs (data factors) and audit resource
requirements (resource factors), we developed several designs to help us make informed
decisions about which design(s) would be feasible for the objective of this audit. We considered
various sample designs: simple random, stratified, multi-stage selections, etc. To keep our
sample size as low as possible, while still achieving statistical representation of the universe, we
decided to use a multi-stage stratified sample. We randomly selected 60 schools within each
stratum for review. The sample size of 60 schools per stratum was calculated based on the
following factors:
•

Audit Universe: Stratum I consisted of 3,549 schools and stratum II consisted of
977 schools.

•

Expected Error Rate: We did not know what error rate to expect. Additionally, we did
not have any information about whether variation would be greater within the States or
between them.

•

Precision: We wanted to be able to report our estimates with a +/-10% precision in an
attribute testing scenario.

•

Confidence Level: We are using a 95% confidence level when reporting our estimates.

Table 2 presents summaries of counts for each stratum at stage one of sample selection.
Table 2: Descriptive Sample Statistics per Stratum - Stage 1 Sample Selection
Sample Stratum I

Sample Stratum II

State

Frequency

Percent

Cumulative
Percent

State

Frequency

Percent

Cumulative
Percent

CA

17 schools

28.30%

28.30%

DE

20 schools

33.30%

33.30%

FL

26 schools

43.30%

71.70%

RI

21 schools

35.00%

68.30%

TX

17 schools

28.30%

100%

WY

19 schools

31.70%

100%

Total

60 schools

100.00%

Total

60 schools

100%

Each school in our sample contained numerous applications for NSLP and SBP participation. To
review a sample of applications at each school selected, we applied a second stage of sampling.
We selected a simple random sample of 20 percent or 150 applications, whichever was less.
Results
Based on the evidence collected in support of the findings for this audit, we decided not to
project any values across the universe.

AUDIT REPORT 27601-0001-41

37

For our first finding, the audit team did not have direct access to income documentation from
families, so our evidence was based on FNS’ own verification of applications. Because three
different sampling methodologies are used for FNS verification, we could not use this data to
develop a statistical projection.
No projections were developed for the audit’s second finding because we did not have a clear
idea of the total number of applications for all SFAs. While we knew the total number of
applications for our selected SFAs, we did not have this data for all SFAs.
The audit’s third finding was added to the scope of work after the statistical sample was
determined. Our sampling methodology did not support the data needed as evidence for this
finding. Hence, projections were not used.

38

AUDIT REPORT 27601-0001-41

Agency's Response

USDA’S
FOOD AND NUTRITION SERVICE
RESPONSE TO AUDIT REPORT

AUDIT REPORT 27601-0001-41

39

United States
Department of
Agriculture
Food and
Nutrition
Service

DATE:

March 23, 2015

AUDIT
NUMBER:

27601-0001-41

TO:

Gil H. Harden
Assistant Inspector General for Audit
Office of Inspector General

FROM:

/s/ (for): Audrey Rowe
Administrator

SUBJECT:

FNS – National School Lunch and School Breakfast Programs

3101 Park
Center Drive
Room 712
Alexandria, VA
22302-1500

This letter responds to the Office of Inspector General (OIG) official draft report for audit
report number 27601-0001-41, FNS – National School Lunch and School Breakfast
Programs. OIG audited the Food and Nutrition Service (FNS) to evaluate how the Agency
has attempted to lower the error rates for the National School Lunch and Breakfast
Programs. FNS is responding to the content, recommendations and Exhibit A in the audit
report.
The Department of Agriculture’s Food and Nutrition Service (FNS) is committed to
reducing the rate of improper payments in the school meals programs. The Agency
recognizes the critical importance of minimizing error in order to maintain public trust in
the programs, and to ensure that the full value of program resources are used to serve
healthy meals to eligible children.
FNS, along with its State and local partners, has invested in system improvements and
process reforms over the last several years that are beginning to pay dividends and
promise long term reduction in program error. A number of these reforms were mandated
by the Healthy, Hunger-Free Kids Act (HHFKA) of 2010. A few highlights include:


The establishment of a new Office of Program Integrity for Child Nutrition
Programs in 2014. The new office draws on the expertise of FNS research and policy
staff in the Agency’s capitol area and regional offices. The office is guided by a data
and evidence driven approach to error reduction, and a commitment to the
development and testing of scalable initiatives.



Taking aim at certification error with several projects focused on the applicants’
perspective. These include the 2015 release of a new model household application
that incorporates elements of human-centered design to improve clarity and reduce the
incidence of household reporting error; the planned development of a model electronic
application; and a study to identify and better understand the underlying causes of
household misreporting.

P age |2



The reduction of certification error through improved administrative processes.
These projects include research trials to test the effectiveness of alternate
communication protocols with households during the verification process, and a study
to explore the potential for additional data matching against Federal and State data
systems in both the certification and verification processes.



Working with States to achieve direct certification performance targets and
reduce their reliance on traditional applications – the single biggest source of improper
program payments. The great majority of children from SNAP participating
households are now certified for free school meals without application. As more
States meet the direct certification performance targets mandated by HHFKA the
number of children certified through the traditional application process will decrease
further. Since direct certification is the key to CEP eligibility, high direct certification
rates will allow more schools and school districts to eliminate their application
processes altogether.



Nationwide implementation of the Community Eligibility Provision (CEP). A
2014 USDA study provides strong support for the CEP as an error reduction strategy.
Almost 14,000 schools in more than 2,000 school districts serving 6.4 million children
embraced the CEP in School Year 2014-2015, its first year of nationwide availability.
FNS is now engaged in an effort to extend the CEP’s benefits to remaining schools
and districts that meet eligibility requirements.



Improved oversight, data collection, and performance reporting. Almost all
States have now adopted the Agency’s redesigned administrative review process. The
more rigorous risk-based review of school districts, conducted on a shorter 3-year
cycle, is generating high value information that will support improved management
analysis and performance tracking. FNS is now engaged in the development of
reporting requirements to capture and summarize the right information to realize the
full potential of this new data resource.



Targeted review of applications to address administrative error. School districts
with high rates of application processing error must now conduct a second review of
all their certification decisions. This risk-based approach to error reduction imposes
new accountability on States and local districts, and targets their efforts for maximum
return.



Publication of a final Professional Standards rule in March 2015 that implements
new continuing education and training requirements on school nutrition program
directors, managers, and staff to address persistent sources of program error and
improper payments. The Agency anticipates near-term publication of a proposed
Child Nutrition Program Integrity rule that provides States the authority to implement
assessments for egregious or ongoing program compliance issues.

AN EQUAL OPPORTUNITY EMPLOYER

P age |3

Additional note on measuring program error:
FNS is concerned with the analysis and presentation of the results of the OIG’s audit. A critical
step in addressing program error is measuring it accurately. FNS conducted a carefully designed
nationally representative study to measure improper payments in the school meal programs in
School Year 2005-2006. The Access, Participation, Eligibility, and Certification (APEC) Study,
released in 2007, found that about 1 in 5 certified students was improperly certified for free or
reduced-price meals, a figure cited in the OIG report.
The OIG’s audit examines outcomes from the verification process. The audit report’s inadequate
explanation of the verification process contributes to persistent confusion about the relationship
between program error and verification outcomes. The two are not comparable. OIG presents
the result of its verification findings in a way that appears to challenge APEC error estimates; the
report may suggest to some that program error is as high as 50 percent or more.
To clarify, only a narrow subset of households approved for free or reduced price meals are
included in the pool of applicants subject to verification sampling. The verification pool
excludes all children certified by direct certification – well over half of all children certified for
free meal benefits. Directly certified children are primarily SNAP recipients whose benefits
depend on a rigorous income verification process. In addition, most school districts choose an
even narrower “error prone” subset of applicants from the verification pool whose incomes fall
within $100 of the monthly eligibility thresholds – that is, applicants more likely to have made
errors.
Finally, more than half of the applicants selected for verification who lose their benefits do so
because they fail to respond to the school district’s request for income documentation, not
because their incomes were found to exceed the eligibility threshold. A 2004 USDA case study
of large urban school districts found that just over half of nonrespondents were, in fact, incomeeligible for at least the level of benefits they were originally certified to receive. Although dated
and not nationally representative, that study suggests that a significant subset of nonrespondents
remain income-eligible for program benefits, even though they are ineligible for failure to
respond.
The audit report offers brief reference, in footnotes, to the error prone nature of the verification
sample and the uncertain income levels of non-respondents. FNS suggests that a more thorough
discussion of these points would provide a more accurate description of the verification process
for the school meal programs.
FNS responses to the report’s recommendations:
Recommendation 1:
In consultation with the Office of the General Counsel (OGC), determine if FNS has the
authority to modify existing regulations so that households are required to submit income
documentation with applications for free or reduced-price meals. Based on this determination,
take the appropriate actions to revise the programs’ documentation requirements.

AN EQUAL OPPORTUNITY EMPLOYER

P age |4

FNS Response:
FNS has consulted with OGC on this matter and while the Secretary, as a legal matter, may have
authority to propose a change as recommended, significant other legal, policy, and operational
concerns remain. As this report acknowledges, implementing this recommendation could create
barriers to participation for eligible children, cause significant administrative and record keeping
burden for participating schools, and constitute a significant reconstruction of the application,
certification, and verification processes.
Completion Date: February 3, 2015
Recommendation 2:
Develop a strategy, in collaboration with State agencies, for School Food Authorities (SFAs) to
verify for cause applications of households, which were found to have misreported income
information on their prior year’s applications.
FNS Response:
FNS generally agrees with this recommendation. FNS will collaborate with our State partners to
determine opportunities to identify in subsequent school years, those households that, based on
the results of the regular verification process, have been found to have misreported income.
Feasible and reasonable strategies identified will be incorporated into verification for cause
guidance, and will also be incorporated into the annually updated eligibility guidance.
Estimated Completion Date: April 30, 2016
Recommendation 3:
Update current regulations and guidance with the criteria explaining what constitutes a
questionable application, including any additional instances of when verifications for cause are
required. Ensure State agencies and SFAs are trained on the new criteria.
FNS Response:
FNS agrees that the eligibility guidance can be effectively updated to include additional
information on what constitutes a questionable application. FNS will provide additional guidance
and will provide training via webinar for State agency personnel on the additional guidance.
FNS will make the webinar slides available for States to use for their own training of SFAs on
identifying questionable applications.
Estimated Completion Date: August 31, 2015

AN EQUAL OPPORTUNITY EMPLOYER

P age |5

Recommendation 4:
FNS should consider a policy requiring SFAs to verify for cause any application from a
household when the household’s application from the prior year was denied as a result of the
prior year’s annual verification process.
FNS Response:
FNS will consult with OGC to determine if this recommendation is possible under current legal
authorities related to verification. In contrast to recommendation #2 above, this pool of
households is not comprised entirely of households that have misreported household income
information. Some households do not respond to verification requests but are in-fact incomeeligible. Considering all applications from these households as questionable applications subject
to verification for cause may be considered a violation of the verification sample size established
in Section 9(b)(3)(D)(iii) of the Richard B. Russell National School Lunch Act.
Estimated Completion Date: July 31, 2015
Recommendation 5:
Provide specific guidance to State agencies to ensure they adequately monitor the SFAs’ net cash
resources as required by FNS regulations.
FNS Response:
FNS agrees with the goal of ensuring program integrity by providing guidance to State agencies
to ensure they adequately monitor their SFAs’ net cash resources as required by regulation. In
SY 2013-2014, we implemented the new Administrative Review process to include a new
section entitled, “Resource Management.” This section was specifically designed to provide a
systematic approach to ensuring the overall financial health of an SFA’s nonprofit school food
service. The section consists of a review of four areas integral to the financial health of the
SFA’s food service: Paid Lunch Equity, Nonprogram Revenue, Indirect Costs, and Net Cash
Resources. Additionally, on July 7, 2011, FNS issued memo SP 41-2011 Child Nutrition
Reauthorization 2010: Indirect Cost Guidance.
FNS plans to issue additional clarification to State agencies to ensure they adequately monitor
the SFAs’ net cash resources through further updates to the Administrative Review Manual.
Estimated Completion Date: October 31, 2015
Recommendation 6:
Instruct the Delaware Department of Education to review all SFAs’ net cash resources and
appropriately address the $4.8 million in excess net cash resources.

AN EQUAL OPPORTUNITY EMPLOYER

P age |6

FNS Response:
FNS supports this recommendation. FNS received OIG’s documentation to support the amount
stated in this recommendation on March 18, 2015. Upon review of the documentation, FNS will
determine the appropriate course of action. If FNS determines that the questioned costs are valid
and requires recovery, we will advise the State agency to proceed with the necessary collection
efforts.
Estimated Completion Date: March 31, 2016
Recommendation 7:
Issue a reminder to State agencies that prior approval authority for treating capital expenditures
as direct costs has been delegated to them and require them to establish a process to fulfill this
requirement.
FNS Response:
FNS concurs with this recommendation and will issue a policy memorandum to remind State
agencies that prior approval authority for treating capital expenditures as direct costs has been
delegated to them and require them to establish a process to fulfill this requirement.
Estimated Completion Date: August 31, 2015
Recommendation 8:
Instruct the State agencies to work with the 20 SFAs to review nearly $6 million of capital
expenditures incurred in SY 2011-2012 and determine if those costs are truly allowable; if
unallowable costs are determined, the State agencies need to recover the costs.
FNS Response:
FNS received OIG’s documentation to support the amount stated in this recommendation on
March 18, 2015. Upon review of the documentation, FNS will determine the appropriate course
of action. If FNS determines that the questioned costs are valid and requires recovery, we will
advise the State agency to proceed with the necessary collection efforts.
Estimated Completion Date: March 31, 2016
Recommendation 9:
Instruct the State agencies to recover $166, 933 in unallowable costs from two SFAs.
FNS Response:
FNS received OIG’s documentation to support the amount stated in this recommendation on
March 18, 2015. Upon review of the documentation, FNS will determine the appropriate course

AN EQUAL OPPORTUNITY EMPLOYER

P age |7

of action. If FNS determines that the questioned costs are valid and requires recovery, we will
advise the State agency to proceed with the necessary collection efforts.
Estimated Completion Date: March 31, 2016
Recommendation 10:
Require the personnel with oversight responsibilities of the cafeteria fund at the State agencies
and SFAs to be trained periodically on cafeteria fund management.
FNS Response:
On March 2, 2015, the Food and Nutrition Service published a Final rule entitled Professional
Standards for School Nutrition Programs Personnel. This regulation established professional
standards for school nutrition professionals. Under the final rule, which is effective July 1, 2015,
annual training hours are required for school food service directors, managers, staff, and State
agency directors. The regulation requires that each individual employee at the SFA level receive
and complete training on the topics or areas applicable to his/her job.
Furthermore, State Directors of school nutrition programs must provide SFAs at least 18 hours
annually in topics such as administrative practices; the accuracy of approvals for free and
reduced priced meals; the identification of reimbursable meals at the point of service; nutrition;
health and safety standards and the efficient and effective use of USDA donated foods; and any
other appropriate topics as determined by FNS to ensure program compliance and integrity or to
address other critical issues.
In conjunction with the new rule, FNS has developed a database of currently available training
resources (including on-line modules, in-person classes, and self-directed training) that State and
local directors, managers and staff may use to meet the annual training requirements. This
database includes financial management modules such as a module developed in conjunction
with the National Food Service Management Institute titled: Financial Management: A Course
for School Nutrition Directors. To emphasize the importance of cafeteria fund management as a
topic and highlight the specific modules on this topic available to fulfill the requirement, FNS
will include this topic as an example of training which directors, managers, and certain staff may
take relevant to their job responsibilities.

Estimated Completion Date: July 1, 2015

AN EQUAL OPPORTUNITY EMPLOYER

P age |8

FNS has provided responses to the chart from the audit report, Exhibit A.

Exhibit A: Summary of Monetary Results
Exhibit A lists findings and recommendations that had a monetary result, and includes the type and
amount of the monetary result.

Finding

Recommendations

Description

1

1

Money spent on
lunches later
found to be
ineligible as a
result of annual
verification

$12,481,136

FTBPTBU1Management or
Operating
Improvement/Savings

3

6

SFAs had excess
net cash
resources without
approved
spending plans.

$4,819,705

FTBPTBUManagement or
Operating
Improvement/Savings

3

8

SFAs made
unauthorized
equipment
purchases and
cafeteria
improvements.

$5,973,338

Questions Costs/Loans,
No Recovery

3

9

SFAs charge
unallowable
costs to the
cafeteria fund
account.

$166,933

Questions Costs/Loans,
Recovery
Recommended.

TOTAL MONETARY RESULTS
1Funds

Amount

Category

$23,441,112

to be put to better use.

AN EQUAL OPPORTUNITY EMPLOYER

FNS
Response
FNS disputes
this amount.
We disagree
with the
method OIG
used to make
this estimate.
FNS is unable
to concur with
this figure
until we
review the
supporting
documentation
provided by
OIG.
FNS is unable
to concur with
this figure
until we
review the
supporting
documentation
provided by
OIG.
FNS is unable
to concur with
this figure
until we
review the
supporting
documentation
provided by
OIG.

To learn more about OIG, visit our website at
www.usda.gov/oig/index.htm
How To Report Suspected Wrongdoing in USDA Programs
Fraud, Waste, and Abuse
File complaint online: http://www.usda.gov/oig/hotline.htm
Click on Submit a Complaint
Telephone: 800-424-9121
Fax: 202-690-2474
Bribes or Gratuities
202-720-7257 (24 hours a day)

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