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GAO-09-156R: 

United States Government Accountability Office: 
Washington, DC 20548: 

January 30, 2009: 

The Honorable Herb Kohl:
Chairman:
The Honorable Robert Bennett:
Ranking Member:
Subcommittee on Agriculture, Rural Development, Food and Drug 
Administration, and Related Agencies:
Committee on Appropriations:
United States Senate: 

The Honorable Rosa L. DeLauro:
Chairwoman:
The Honorable Jack Kingston:
Ranking Member:
Subcommittee on Agriculture, Rural Development, Food and Drug 
Administration, and Related Agencies:
Committee on Appropriations:
United States House of Representatives: 

Subject: Meal Counting and Claiming by Food Service Management 
Companies in the School Meal Programs: 

The federal government spends about $10 billion each year to provide 
meals to over 30 million students through the National School Lunch and 
Breakfast Programs. However, a 2007 study estimated that of this 
amount, $860 million (8.6 percent) in school year 2005-2006 was paid 
improperly because of errors in the number of meals counted and claimed 
for reimbursement.[Footnote 1] These programs are administered by the 
United States Department of Agriculture's (USDA) Food and Nutrition 
Service (FNS) through state agencies that, in turn, oversee local 
school food authorities (SFA). SFAs that participate in the lunch and 
breakfast programs receive federal cash reimbursements through the 
state agency for each meal served, and in the lunch program they also 
receive USDA commodity donations based on the number of meals served. 
In return, SFAs must serve meals that meet federal nutrition 
requirements and offer meals free or at a reduced price to students 
whose family's income falls below certain thresholds. 

While most of the roughly 13,700 SFAs in traditional public school 
districts in the United States manage their own programs, about 13 
percent choose to contract with private companies known as food service 
management companies (FSMC).[Footnote 2] FSMC involvement in food 
service activities varies among SFAs, depending on the duties specified 
in the contract, but these duties may include meal-counting and - 
claiming activities. Regardless of the duties specified in the 
contract, however, FNS guidance states that SFAs remain responsible for 
the overall operation of the school meal programs, including overall 
financial responsibility. SFAs are also required to ensure the accuracy 
of lunch claims through effective internal controls.[Footnote 3] 

On the basis of concern about the nature and extent of FSMC involvement 
in meal-counting and -claiming activities, we studied the role of FSMCs 
in managing data used to support federal meal reimbursement claims. 
[Footnote 4] In particular, we examined (1) whether policies and 
regulations USDA provides states and SFAs on ensuring meal-counting and 
-claiming accuracy differ when meal services are managed by FSMCs 
compared with when they are managed by SFAs, and (2) whether there are 
differences in the accuracy of meal counting and claiming when meal 
services are managed by FSMCs compared to when meal services are 
managed by SFAs. 

To develop our findings, we reviewed relevant federal laws and 
regulations on school meal programs, including those with regard to 
FSMCs. We interviewed officials from USDA, FNS regional offices, the 
School Nutrition Association, and other organizations that have 
conducted relevant research. We also conducted structured phone 
interviews with 19 state agencies in the three FNS regions--Mid- 
Atlantic, Midwest, and Northeast--with the highest levels of food 
service management contracting,[Footnote 5] and we conducted site 
visits to three SFAs that contract with FSMCs in York, Pennsylvania; 
Chicago, Illinois; and Schenectady, New York.[Footnote 6] In addition, 
we reviewed the FNS study that provided national estimates of improper 
payments in the school meal programs and worked with the contractor for 
the study to further analyze data to compare the accuracy of meal 
counting and claiming for SFA-managed and FSMC-managed meal programs. 
[Footnote 7] 

We conducted this performance audit from January 2008 to December 2008 
in accordance with generally accepted government auditing standards. 
These standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. 

On November 21, 2008, we briefed appropriate congressional staff on the 
results of our analysis using the briefing slides we include in 
enclosure I. This report formally conveys information provided during 
that briefing. In summary, we reported the following findings: 

USDA policies and regulations establish an oversight framework for 
school meal programs to help ensure accurate meal counting and 
claiming, and this framework is generally the same for meal services 
managed by both SFAs and FSMCs except for some additional oversight 
requirements for FSMCs. USDA regulations require that reviews be 
conducted at the federal, state, and local levels. FNS must conduct 
management evaluations of each state agency to review its 
administration of the school meal programs, including the state's 
review of SFA contracts with FSMCs. State agencies are required to 
conduct administrative reviews of each SFA's lunch program at least 
every 6 years, including a review of the meal-counting and -claiming 
system. Additionally, state agencies must compare SFA monthly lunch 
claims to a proxy for attendance to identify potential claim errors. 
[Footnote 8] When an SFA contracts with an FSMC, the state agency must 
also review the contract to ensure compliance with federal regulations, 
[Footnote 9] and some state agencies have developed prototype contracts 
to facilitate this review process. At the local level, SFAs are 
required to conduct annual on-site reviews of each school in the lunch 
program to detect problems that would lead to meal- counting and -
claiming errors. SFAs are also required to review each school's daily 
lunch counts to identify potential overcounts. In addition, when an 
FSMC is present, SFAs must conduct periodic visits to monitor the 
FSMC's food service operation. 

Meal-counting and -claiming errors occur at similar or somewhat lower 
rates when FSMCs manage meal services compared to when SFAs manage meal 
services. Errors can occur when cashiers improperly determine whether a 
meal is reimbursable. Error rates at this stage, which tended to be the 
highest, were generally the same between the two management types. 
Errors can also occur when meal counts are totaled and reported 
incorrectly, and are called aggregation errors. They can occur at the 
point of sale, when meal counts are sent from the school to the SFA, 
and again from SFA to the state. The differences in error rates between 
FSMC-managed and SFA-managed meal services were not statistically 
significant for these aggregation errors, with the exception of errors 
that occurred when meal counts were sent from the school to the SFA. In 
this case, error rates for FSMC-managed programs were lower than those 
of SFA-managed programs. We could not determine if FSMCs directly 
contributed to this lower error rate because FSMC involvement in meal 
counting and claiming varied across locations. Finally, FNS and state 
officials we interviewed said that they do not find additional meal- 
counting and -claiming problems when FSMCs manage meal services. 

In conclusion, when SFAs contract with FSMCs to manage their meal 
services, SFAs remain responsible for the accuracy of meal claims, and 
a robust system of internal controls can help mitigate the risk of 
financial losses from FSMC errors in meal counting and claiming. 
Although this study focused on circumstances where SFAs contracted with 
FSMCs, the similar error rates found between SFA-managed and FSMC- 
managed programs, along with the 8.6 percent error rate in the program 
overall, suggest that the nature of the problem requires a programwide 
approach rather than a focus on FSMC-managed meal services. Additional 
analyses are needed to identify potential remedies. In a separate 
study, we are currently conducting a programwide review of these 
errors. 

We provided a draft of this report to USDA for review and comment. In 
its comments, USDA's FNS generally agreed with the draft report and 
provided technical comments, which we have incorporated where 
appropriate. 

We are sending copies of this report to relevant congressional 
committees and other interested parties and will make copies available 
to others upon request. In addition, the report will be available at no 
charge on GAO's Web site at [hyperlink, http://www.gao.gov]. If you or 
your staff have any questions about this report, please contact me at 
(202) 512-7215 or BrownKE@gao.gov. Contact points for our Offices at 
Congressional Relations and Public Affairs may be found on the last 
page of this report. GAO contact and staff acknowledgments may be found 
in enclosure II. 

Sincerely yours, 

Signed by: 

Kay Brown:
Director, Education, Workforce, and Income Security Issues: 

Enclosures - 2: 

[End of section] 

Enclosure I: Briefing Slides: 

Meal Counting and Claiming by Food Service Management Companies in the 
School Meal Programs: 

Briefing for the Subcommittee on Agriculture, Rural Development, Food 
and Drug Administration, and Related Agencies, House Committee on 
Appropriations: 

November 21, 2008: 

Contents: 
* Introduction: 
* Objectives: 
* Scope and Methodology: 
* Summary of Findings: 
* Background: 
* Objective 1: Existing Policies and Regulations when School Food 
Authorities Contract with Food Service Management Companies: 
* Objective 2: Accuracy of Meal Counts when Food Service Management 
Companies Manage Meal Services: 
* Concluding Observations: 
* Appendix I: Procurement of Point-of-Sale Systems: 
* Appendix II: Standard Errors for Estimates: 

Introduction: 

The National School Lunch and Breakfast Programs (school meal programs) 
provide meals to over 30 million students each year. 

These programs are administered by the United States Department of 
Agriculture’s (USDA) Food and Nutrition Service (FNS) through state 
agencies that then oversee local school food authorities (SFA), which 
usually coincide with school districts. 

SFAs claim reimbursements from the state agencies based on the number 
of meals served. In school year 2005-2006, these reimbursements 
amounted to $10 billion in federal funds. 

FNS recently estimated that of this 2005-2006 amount, $860 million (8.6 
percent) in improper payments resulted from errors in the number of 
meals counted and claimed for reimbursement.[Footnote 10] Improper 
payments include both overpayments in which the SFA receives more in 
reimbursements than it should, as well as underpayments in which it 
receives less in reimbursements than it should. 

While most of the roughly 13,700 SFAs in traditional public school 
districts in the United States manage their own meals services 
(including meal-counting and -claiming activities), about 13 percent 
contract out their meal services to private companies known as food 
service management companies (FSMC).[Footnote 11] 

Objectives: 

We studied the role of FSMCs in managing meal count data used to 
support the federal reimbursement claim and examined:[Footnote 12] 

1. whether policies and regulations USDA provides states and SFAs on 
ensuring meal-counting and -claiming accuracy differ when meal services 
are managed by FSMCs compared with when they are managed by SFAs, and; 

2. whether there are differences in the accuracy of meal counting and 
claiming when meal services are managed by FSMCs compared to when meal 
services are managed by SFAs. 

Scope and Methodology: 

For objective 1, we: 

* reviewed federal laws and regulations relevant to the operation of 
federal meal programs, including those with regard to FSMCs; 

* conducted in-depth interviews with officials from USDA, USDA’s 
Inspector General, FNS regions, the School Nutrition Association, and 
organizations that have conducted relevant research; 

* conducted structured phone interviews with the 19 state agencies in 
the three FNS regions with the highest levels of contracting–Mid-
Atlantic, Midwest, Northeast;[Footnote 13] and; 

* visited three SFAs that contract with FSMCs, to observe their meal-
counting and -claiming procedures–York, Pennsylvania; Chicago, 
Illinois; and Schenectady, New York. We chose these SFAs to ensure a 
variety of FSMCs and meal-counting and -claiming systems in the regions 
with high rates of contracting and their states with high levels of 
meal reimbursement. 

For objective 2, we: 

* reviewed an FNS study that provided the first nationwide estimates on 
improper payments in the school meal programs and worked with its 
contractor to further analyze data in order to compare the accuracy of 
meal counting and claiming for SFAs that contract with FSMCs with SFAs 
that managed their own meal programs;[Footnote 14] 

* focused our analysis on meal-counting and -claiming errors, known as 
noncertification errors;[Footnote 15] and; 

* performed a comprehensive literature review of available reports on 
improper payments and food service management companies in the school 
meal programs, including reviews by USDA’s Office of Inspector General, 
state auditors, and research organizations. 

We conducted this performance audit from January 2008 to December 2008 
in accordance with generally accepted government auditing standards. 
These standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. 

Summary of Findings: 

1. USDA policies and regulations establish an oversight review 
framework for meal counting and claiming in which most requirements are 
generally the same for meal services managed by SFAs and FSMCs, with 
certain additional requirements that are specific to FSMC-managed 
programs, such as annual state review of SFA contracts with FSMCs and 
periodic visits by SFAs to monitor FSMC operations. 

2. Data we obtained show that meal-counting and -claiming errors occur 
at similar or somewhat lower rates when FSMCs manage meal services 
compared to when SFAs manage meal services. Similarly, FNS and state 
officials we interviewed said that FSMC-managed programs are no more 
likely to experience meal-counting and -claiming problems than SFA-
managed programs. 

Background: 

Operation of the Federal School Meal Programs: 

SFAs participating in school meal programs receive cash reimbursements 
from the federal government through their state agency for each meal 
served.[Footnote 16] In the lunch program, they also receive USDA 
commodity donations based on the number of reimbursable meals served. 

In turn, schools must: 

* serve nutritious and well-balanced meals, meaning the meals meet 
federal nutrition requirements, and; 

* offer meals free or at a reduced price to students whose family’s 
income falls below certain thresholds. Students whose family’s income 
is above the threshold must buy a “paid meal.”[Footnote 17] 

Role of Food Service Management Companies: 

Although most SFAs directly manage their meal programs, about 1,800 of 
the roughly 13,700 SFAs (13 percent) in traditional public school 
districts contract with FSMCs.[Footnote 18] 

USDA regulations allow SFAs to contract with FSMCs to manage any aspect 
of their school food service. According to FNS guidance, however, SFAs 
remain responsible for the overall operation of the school meal 
programs, including overall financial responsibility. 

FSMC involvement can vary from district to district depending on the 
duties specified in the contract. FSMC duties may include food 
purchasing and storage, meal service, menu planning, and employee 
hiring and training. 

Nationwide Study Found High Error Rates in School Meal Programs: 

FNS study estimated improper payments for 2006:[Footnote 19] 

Table: Improper payments (combination of overpayments and 
underpayments), in millions of dollars (percentage of all 
reimbursements): 

Total federal reimbursements: 
Breakfast: $1,938; 
Lunch: $8,060; 
Total: $9,998. 

Improper payments due to certification error[Footnote 20]: 
Breakfast: $177 (9.1%); 
Lunch: $759 (9.4%); 
Total: $935 (9.4%). 

Improper payments due to meal-counting and -claiming errors[Footnote 
21]: 
Breakfast: $306 (15.8%); 
Lunch: $555 (6.9%); 
Total: $860 (8.6%). 

Source: APEC study. 

Note: Totals may not add up due to rounding. 

[End of table] 

While the breakfast program is smaller in terms of dollars, there were 
higher rates of meal-counting and -claiming error in the breakfast 
program compared to the lunch program. 

Meal-Counting and -Claiming Process: 

According to the FNS study, there are two main types of meal-counting 
and -claiming errors, both of which may contribute to improper 
payments: 

* Cashier error: cashiers improperly determine whether a meal is 
reimbursable. 

* Aggregation error:meal counts are totaled and reported incorrectly at 
any of three stages in the meal counting and claims process: 
- Point-of-sale: Cash register totals of meal counts are inaccurate 
(see app. I for a discussion of point-of-sale system procurement, 
slides 36 and 37).
- School-to-SFA: School totals reported to SFA are inaccurate. 
- SFA-to-state: SFA meal claims to state agency are inaccurate. 

Figure: School Meal Process and Steps Where Errors Can Occur: 

[Refer to PDF for image] 

This figure is an illustration of the school meal process and steps 
where errors can occur, as follows: 

School district/SFA (school food authority: 

Household applies to school district for school meal benefits; 

School district determines whether student qualifies for free or 
reduced-price meals and sends information to school [certification 
error can occur here]; 

School enters eligibility status of student in computer system or other 
tracking system (i.e., cashier roster); 

Student goes to cafeteria and takes a meal; 

Cashier determines whether meal meets requirements and counts it as a 
meal served [cashier error can occur here]; 

Cafeteria manager totals meal counts from each point of sale (i.e., 
cash registers) [point-of-sale error can occur here]; 

School totals meal counts and submits to SFA [School-to-SFA aggregation 
error can occur here]; 

SFA totals meal counts from all schools and submits to state agency 
[SFA-to-state aggregation error can occur here]. 

Source: GAO analysis; FNS Access, Participation, Eligibility, and 
Certification study; Art Explosion (clip art). 

[End of figure] 

Counting and Claiming Errors Can Result In Overpayments or 
Underpayments: 

Overpayments can occur when SFAs submit claims for reimbursement for 
more meals than they actually served to eligible children. If 
overpayments are detected, states may recover the overpayment from the 
SFA.[Footnote 22] 

Underpayments can occur when SFAs submit claims for reimbursement for 
fewer meals than they actually served to eligible children. This 
results in a loss of revenue to the SFA. 

The cost to the federal government is the net amount of overpayments 
minus underpayments. 

Meal-Counting and -Claiming Process and Internal Controls: 

Ensuring the accuracy of meal claims requires effective internal 
controls, including program oversight. USDA regulations establish an 
oversight structure that requires FNS to oversee states, states to 
oversee SFAs, and SFAs to oversee and monitor its FSMCs, if utilized. 

* Internal controls are the methods of ensuring that a program operates 
efficiently, with reliable financial reporting, and in compliance with 
laws and regulations.[Footnote 23] 

* Regardless of the FSMC’s level of involvement in meal-counting and -
claiming activities, SFAs are required to ensure the accuracy of lunch 
claims through effective internal controls. Effective internal controls 
could include periodically comparing claims to source data, 
periodically observing the counting and claiming activities, and 
verifying that cashiers are properly trained. 

[End of Background section] 

Objective 1: Summary: 

USDA’s Oversight Review Framework Is Generally the Same for Meal 
Services Managed by Both SFAs And FSMCs, with the Exception of Some 
Added Oversight Requirements: 

USDA policies and regulations establish an oversight review framework 
for FNS regions, states, and SFAs to help ensure accurate meal counting 
and claiming. This framework is generally the same for meal services 
managed by both SFAs and FSMCs, with some additional oversight 
requirements for FSMC-managed programs: 

* FNS issues policies and guidance and conducts management evaluations 
of each state agency. 

* State agencies are to review monthly meal claims and conduct 
administrative reviews of each SFA’s meal-counting and -claiming system 
for the lunch program. They are also required to review any contracts 
between SFAs and FSMCs to ensure compliance with federal regulations. 

* SFAs are to conduct annual on-site reviews of each school and review 
daily meal counts for the lunch program. In addition they are to 
conduct periodic visits to oversee FSMC operations. 

Table: Federal and State Oversight Framework: 

USDA regulatory requirements (Bolded text shows provisions specific to 
FSMCs) 

FNS: 

* must conduct management evaluation of each state agency’s 
administration of programs, including state oversight of meal claims. 

State agencies: 

* are required to conduct administrative reviews of each SFA at least 
once every 6 years, including review of meal-counting and -claiming 
systems for the lunch program; 

* are to perform monthly reviews of claims, comparing meal counts in 
each benefit category to a proxy for attendance; and; 

* [begin bolded text] must review FSMC contracts annually to ensure 
compliance with federal regulations, including provisions requiring the 
FSMC to retain data used to support meal claims [End bolded text]. 

SFAs: 

* must conduct an annual on-site review of each school to review its 
meal-counting and -claiming system for the lunch program, 

* [begin bolded text] must conduct periodic visits to monitor FSMC 
operations [End bolded text], and; 

* are to review daily meal counts to identify potential overcounting. 

[End of table] 

FNS Issues Policies and Guidance Requiring SFAs That Contract with 
FSMCs to Be Responsible for the Accuracy of the Claim: 

SFAs that employ an FSMC must remain responsible for the accuracy of 
meal claims. 

* According to USDA regulations, the SFA official signing the lunch 
claim shall be responsible for reviewing and analyzing the meal counts 
to ensure accuracy. 

* FNS guidance to SFAs further clarifies that this responsibility must 
not be delegated by an SFA to an FSMC. 

Because they are responsible, the SFAs may be at risk for financial 
losses if they do not have adequate procedures in place to ensure 
accuracy.[Footnote 24] 

FNS Conducts Management Evaluations: 

FNS regional offices conduct management evaluations of each state 
agency that examine a variety of issues, including some that are 
specific to FSMCs: 

* reviews of FSMC contracts, 

* the claims payment process, and, 

* state administrative reviews of SFAs. 

FNS guidance on management evaluations states that these evaluations 
should: 

* determine whether the state agency is reviewing each contract to 
ensure compliance with federal requirements, including the requirement 
that SFAs oversee the FSMC’s meal-counting and -claiming activities, 
and; 

* determine whether the state agency is performing its administrative 
reviews and checking for compliance with FSMC specific provisions: 
e.g., SFA oversight of FSMC meal counting and claiming. 

FNS Management Evaluations Identified Some Problems and Required 
Corrective Action: 

FNS management evaluations in regions we visited found some contracts 
that did not include all required provisions, some of which were 
specific to FSMCs. These included the following: 

* In one state, the FNS region’s management evaluation found that the 
state’s administrative review of SFAs did not include a check that FSMC 
contracts included the provision that SFAs remain responsible for the 
accuracy of the meal claim. 

* Two regions similarly reported that in one state in each region, FSMC 
contracts did not contain all required federal provisions such as those 
requiring SFAs to remain responsible for the accuracy of the meal 
claim. 

In each case, we found that the states were required to take corrective 
action in order to improve their administrative and contract review 
procedures. For example, one of the states revised its contract review 
checklist to include a check for the missing required regulatory 
language. 

States Generally Conduct the Same Administrative Reviews of SFA-and 
FSMC-Managed Programs: 

USDA regulations require states to conduct administrative reviews at 
least once every 6 years for each SFA participating in the lunch 
program. The main meal-counting and -claiming procedures established in 
USDA regulations and FNS guidance apply to both SFA-and FSMC-managed 
meal services. These reviews include basic checks for internal control 
procedures such as: 

* observing meals served to determine whether they meet federal 
reimbursement requirements and; 

* checking to ensure that each type of cafeteria line provides accurate 
point-of-sale meal counts, and that counts are correctly recorded. 

Officials in states we visited said they generally follow the same meal-
counting and -claiming procedures in their administrative reviews for 
all SFAs, regardless of whether an FSMC manages the programs. 

States Must Review Meal Claims and Require SFA Approval of Each Claim: 

States review meals claims by comparing meal counts in each 
reimbursement category to a proxy for student attendance.[Footnote 25] 

In the three states we visited, state officials told us that they 
either prohibited FSMC employees from submitting the meal claim or they 
required SFAs to approve claims submitted by their FSMCs. 

* Two state agencies do not grant FSMC employees access to their state 
systems for submitting meal claims. 

* In the third state, the agency allowed FSMCs to submit meal claims 
but required SFAs to review and sign off on them. 

States Review FSMC Contracts for Compliance with USDA Regulations: 

USDA regulations require states to review SFA contracts with 
FSMCs.[Footnote 26] These reviews check that the contract includes 
required provisions, including the following, that pertain to meal 
counting and claiming: 

* FSMCs must maintain records needed to support the meal claims, and; 

* FSMCs must report claim information each month to the SFA. 

According to FNS guidance, state review of these contracts is important 
because the contract is the basis for successful oversight of an FSMC 
by the SFA. The guidance also specifies that states must carefully 
examine the terms of a contract to ensure that: 

* the SFA does not delegate those responsibilities assigned to the SFA 
by regulations, and; 

* the services expected of the FSMC are clearly specified. 

Some States Develop a Prototype Contract to Speed Contract Review: 

FNS guidance encourages state agencies to develop a prototype contract 
to maximize efficiency in their review of SFA contracts with FSMCs. Of 
the 19 states whose officials we interviewed, 11 said they developed a 
prototype FSMC contract for use by SFAs: 

* Five of these states require SFAs to use their prototype contract. 

* Six states recommend that SFAs use their prototype contract. 

SFAs Are Required by USDA Regulations to Conduct Annual On-site Reviews 
of Each School: 

USDA regulations require SFAs to conduct annual on-site reviews of each 
school’s meal-counting and -claiming system for the lunch program, 
whether managed by FSMCs or not. 

According to regulations, these reviews are to ensure that the school’s 
counting system, as implemented, yields the actual number of 
reimbursable free, reduced-price, and paid lunches on each day of 
operation. 

According to FNS officials, an annual on-site review should detect 
problems that would lead to meal-counting and -claiming errors. State 
agencies are required to check that SFAs conduct on-site reviews and 
document any corrective action required to fix identified problems. 

State Officials Said SFA Annual On-site Reviews Generally Do Not Find 
Problems Related to FSMCs: 

When asked whether SFA annual on-site reviews found problems associated 
with FSMCs, most state officials we interviewed said that either the 
problems found were not related to FSMCs or that on-site reviews rarely 
found any problems at all. Of the 19 states we interviewed:[Footnote 
27] 

* Nine said that no findings seem related to FSMC use; 

* Eight said that on-site reviews rarely find problems; 

* Two said they did not know/had not analyzed. 

State Officials Questioned the Effectiveness of Annual SFA On-site 
Reviews, but for Reasons Unrelated to FSMCs: 

Some state officials we interviewed questioned the effectiveness of SFA 
annual on-site reviews, but for one or more reasons unrelated to FSMCs. 
For example, some state officials said that the people conducting the 
reviews were not qualified to conduct them effectively. Other officials 
said that SFAs did not view the annual on-site review as an opportunity 
to monitor the food service employees. In addition, according to 
officials in one state, about 20 percent of the required SFA reviews 
had not been conducted at all. When this occurs, according to this 
state’s official, they issue a corrective action plan requiring the SFA 
to conduct the annual on-site review within 20 to 30 days. 

We are currently conducting additional work in this area in a separate 
study. 

SFAs Monitor the FSMC’s Operations through Periodic Visits: 

USDA regulations require SFAs to monitor the FSMC’s food service 
operation through periodic visits. 

USDA guidance states that these visits should determine if the FSMC’s 
food service operation is in conformance with program regulations, as 
outlined in the SFA’s agreement to participate in the program, and 
document their visits. 

USDA guidance further outlines that contract-monitoring 
responsibilities include evaluating data and documentation to support 
the meal claim. 

SFAs we visited varied in the frequency of their visits with FSMC 
officials. 

* Officials in one SFA reported that they met with their FSMC official 
several times daily, and conducted quarterly reviews of FSMC 
operations. 

* Another SFA’s officials reported that they conducted weekly meetings 
with the FSMC. 

* A third SFA’s officials said they regularly visited school cafeterias 
to monitor cashiers. 

SFA Review of Daily Meal Counts and FSMC Level of Involvement Varied in 
the SFAs We Visited: 

SFAs we visited varied in the extent to which they relied on FSMCs for 
meal-counting and -claiming activities and exercised oversight as 
allowed under FNS regulations. 

* At one SFA, all meal-counting and -claiming activities were done by 
SFA employees. Lunchroom managers submitted daily meal counts to the 
SFA office, which submitted regular claims to the state agency. 

* At another SFA, the FSMC was responsible for parts of the meal-
counting and -claiming activities, including conducting edit checks of 
the data. The FSMC compiled daily meal counts from schools, and 
submitted a monthly claim report to the SFA for submission to the state 
agency. 

* At the third SFA, the FSMC was heavily relied upon for all aspects of 
the meal counting and claiming. An FSMC official worked with an SFA 
official to review claim data for errors and enter the claims into the 
state system, but the SFA official conducted the final verification and 
submitted the claim in the state’s meal claim system. 

[End of Objective 1] 

Objective 2: Summary: 

Meal-Counting and -Claiming Errors Occur at Similar or Somewhat Lower 
Rates When FSMCs Manage Meal Services Compared to When SFAs Manage Meal 
Services: 

SFA-and FSMC-managed meal services had generally similar rates of error 
at the following stages of the meal-counting and -claiming 
process:[Footnote 28] 

* cashier errors (these rates tended to be the highest), 

* point-of-sale aggregation errors (these rates were relatively low), 
and; 

* SFA-to-state aggregation errors (these rates were also relatively 
low). 

FSMC-managed programs had somewhat lower error levels for school-to-SFA 
aggregation than SFA-managed programs, and these differences were 
statistically significant. 

Table: Counting and Claiming Errors in the Breakfast and Lunch 
Programs, by FSMC-and SFA-managed Programs[Footnote 29]; Gross errors 
as percentage of all reimbursements (in millions of dollars): 

Cashier error: 
Breakfast program: FSMC-managed: 6.4% ($16.1); 
Breakfast program: SFA-managed: 10.4% ($172.9); 
Lunch program: FSMC-managed: 4.6% ($63.3); 
Lunch program: SFA-managed: 2.8% ($180.4). 

Point-of-sale aggregation error: 
Breakfast program: FSMC-managed: 0.8% ($1.4); 
Breakfast program: SFA-managed: 0.2% ($3.3); 
Lunch program: FSMC-managed: 0.1% ($1.0); 
Lunch program: SFA-managed: 0.4% ($25.2). 

School-to-SFA aggregation error[Footnote 30]: 
Breakfast program: FSMC-managed: 0.2% ($0.4); 
Breakfast program: SFA-managed: 4.5% ($76.8); 
Lunch program: FSMC-managed: 0.1% ($1.7); 
Lunch program: SFA-managed: 2.4% ($160.9). 

SFA-to-state aggregation error: 
Breakfast program: FSMC-managed: 0.2% ($0.5); 
Breakfast program: SFA-managed: 2.1% ($34.1); 
Lunch program: FSMC-managed: 1.5% ($22.0); 
Lunch program: SFA-managed: 1.5% ($95.8). 

Source: GAO and Mathematica Policy Research analysis of APEC data. 

[End of table] 

FSMC Involvement in Aggregating School-to-SFA Meal Counts Varied 
Depending on Location: 

The extent to which FSMCs were involved in aggregating meal counts 
differed by location, making it difficult to identify why this type of 
error was lower in FSMC-managed programs. 

* FNS officials stated that FSMCs are likely to be involved in 
aggregating meal counts but said the extent to which this occurs can 
vary, depending on location. 

* In 12 of 19 states, officials we interviewed reported that FSMC 
employees are involved to a great or very great extent in point-of-sale 
and school-to-SFA aggregation. However, officials in 7 of the 19 states 
said FSMC employees were either not involved or involved to a little to 
moderate extent. 

* On our site visits to SFAs, FSMC involvement in aggregating meal 
counts varied from no involvement at one SFA to heavy involvement in 
another. 

On the basis of this information, we could not determine whether FSMCs 
directly contributed to the lower error rate at the school-to-SFA 
level. 

FNS and State Officials Stated that They Do Not Find Additional Meal-
Counting and -Claiming Problems When FSMCs are Involved: 

FNS officials we interviewed said that on the basis of their 
experience, the involvement of an FSMC should not affect the accuracy 
of meal counting and claiming. 

Moreover, officials in 16 of 19 states we interviewed said their 
administrative reviews do not find problems any more or less frequently 
when FSMCs manage the program. 

Some state officials we interviewed questioned the effectiveness of SFA 
annual on-site reviews in general but did not think they were any less 
effective when FSMCs manage the program. 

[End Objective 2] 

Concluding Observations: 

When SFAs contract with FSMCs to operate their school meal programs, a 
robust system of internal controls can help mitigate the risk that they 
will incur financial losses from FSMC counting and claiming 
errors—either because they are held responsible for overpayments or 
because they do not receive the total amount of federal funds to which 
they are entitled. 

Although this study focused on circumstances where SFAs contracted with 
FSMCs, the similar error rates among SFA-managed and FSMC-managed 
programs, combined with the relatively high overall error rate, suggest 
that the nature of the problem requires a more systematic, program-wide 
approach rather than a focus specifically on FSMC-managed programs. 

Because we did not assess the effectiveness of the various oversight 
elements we identified, it is not clear whether the framework itself is 
not adequate or the elements of the framework are not well implemented, 
or both. Additional analyses are necessary to identify potential 
remedies. In a separate study, we are currently conducting a program-
wide review of these errors. 

[End of section] 

Appendix I: Procurement of Point-of-Sale Systems: 

Point-of-sale software systems are one of the tools that SFAs and FSMCs 
can use to count meals. 

USDA requires all procurement transactions conducted by SFAs or FSMCs, 
acting on behalf of SFAs, to be conducted in a manner providing full 
and open competition, consistent with the standards set forth in its 
regulations. 

FNS officials told us that these standards are satisfied when, for 
example, an SFA's original request for proposals (RFP) includes a 
request for the FSMC to provide a point-of-sale system, or to act on 
the SFA’s behalf in obtaining a point-of-sale system. 

However, FNS officials also noted that if an SFA has an existing 
contract with an FSMC that does not provide for the FSMC to provide a 
point-of-sale system, and the FSMC later purchases a point-of-sale 
system without the SFA having issued a new competitive RFP, such a 
procurement would be in violation of USDA's procurement standards. 

FNS recently issued new regulations that, among other things, require 
states to review contracts prior to their execution and to ensure that 
the relevant procurement standards, including those related to full and 
open competition,are satisfied. These regulations are being phased in 
by states. 

FNS is developing Web-based procurement training for state agency 
officials that address issues related to full and open competition. On 
December 10, 2008, FNS released an initial phase of the training on 
general procurement requirements and responsibilities. FNS plans to 
release training to SFAs at a later date. 

[End of section] 

Appendix II: Standard Errors for Estimates: 

Table: Standard errors for dollar estimates of certification and meal-
counting and -claiming errors for the breakfast and lunch programs, 
reported in slides 4 and 12 (in millions of dollars)[Footnote 31]: 

Improper payments due to certification error 
Breakfast: $18; 
Lunch: $54; 
Total: $57 maximum. 

Improper payments due to meal-counting and -claiming errors: 
Breakfast: $111 maximum; 
Lunch: $171 maximum; 
Total: $210 maximum. 

Source: APEC study; GAO analysis. 

[End of table] 

Table: Standard errors for counting and claiming errors when FSMCs 
manage meal services compared to when SFAs manage meal services, 
reported in slide 32, as a percentage of all reimbursements (standard 
errors for dollars): 

Cashier error: 
Breakfast program: FSMC-managed: 3.4% ($9.2); 
Breakfast program: SFA-managed: 2.8% ($52.7); 
Lunch program: FSMC-managed: 1.8% ($29.5); 
Lunch program: SFA-managed: 0.5% ($33.0). 

Point-of-sale aggregation error: 
Breakfast program: FSMC-managed: 0.5% ($0.9); 
Breakfast program: SFA-managed: 0.2% ($2.5); 
Lunch program: FSMC-managed: 0.1% ($0.8); 
Lunch program: SFA-managed: 0.2% ($13.3). 

School-to-SFA aggregation error: 
Breakfast program: FSMC-managed: 0.1% ($0.3); 
Breakfast program: SFA-managed: 2.0% ($35.3); 
Lunch program: FSMC-managed: 0.1% ($1.7); 
Lunch program: SFA-managed: 0.9% ($62.7). 

SFA-to-state aggregation error: 
Breakfast program: FSMC-managed: 0.2% ($0.5); 
Breakfast program: SFA-managed: 1.2% ($20.2); 
Lunch program: FSMC-managed: 1.0% ($15.2); 
Lunch program: SFA-managed: 0.8% ($52.6). 

Source: GAO and Mathematica Policy Research analysis of APEC data. 

[End of table] 

[End of section] 

Enclosure II: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Kay E. Brown (202) 512-7215 or BrownKE@gao.gov: 

Acknowledgments: 

Jeremy Cox, Assistant Director, and Paul Schearf, Analyst-in-Charge, 
managed this assignment. Marcia Carlsen, Anar Ladhani, Joanie Lofgren, 
Kara Patton, and Lisa Reynolds made significant contributions to this 
report in all aspects of the work. Carolyn Boyce and Wilfred Holloway 
provided methodological assistance; Sheila McCoy provided legal 
support; and Susan Bernstein helped develop the report's message. 

[End of section] 

Footnotes: 

[1] USDA, FNS, Office of Research, Nutrition, and Analysis, Erroneous 
Payments in the National School Lunch Program and School Breakfast 
Program: Summary of Findings, Alexandria, VA, November 2007. 

[2] Michael D. LaFaive, A School Privatization Primer for Michigan 
School Officials, Media and Residents, Mackinac Center for Public 
Policy, Midland, Michigan, 2007 (Mackniac study). 

[3] Internal control is "an integral component of an organization's 
management that provides reasonable assurance that the following 
objectives are being achieved: effectiveness and efficiency of 
operations, reliability of financial reporting, and compliance with 
applicable laws and regulations." Source: GAO, Standards for Internal 
Control in the Federal Government, [hyperlink, 
http://www.gao.gov/products/GAO/AIMD-00-21.3]. (Washington, D.C.: 
November 1999). 

[4] This study is in response to House Report 110-258, which 
accompanied the appropriations bill for Agriculture, Rural Development, 
Food and Drug Administration, and Related Agencies for fiscal year 
2008. 

[5] Mackinac study. 

[6] These sites were selected to ensure a variety of FSMCs, contract 
types, and counting and claiming systems in the regions with high rates 
of contracting and their states with high levels of meal reimbursement. 

[7] These study data were collected to estimate improper payments 
nationally and not to compare differences between SFA-managed and FSMC- 
managed programs. However, we determined that the data are reliable 
enough for the purposes of our review. USDA, FNS, Office of Research, 
Nutrition and Analysis, NSLP/SBP Access, Participation, Eligibility, 
and Certification Study--Erroneous Payments in the NSLP and SBP, Vol. 
I: Study Findings, November 2007 (APEC). 

[8] The proxy for student attendance is determined by first adjusting 
for the difference between enrollment and attendance (attendance 
factor) and then multiplying this attendance factor by the number of 
students eligible for meals under each category. 

[9] In October 2007, USDA issued procurement regulations that require 
states to review FSMC contracts prior to execution. 72 Fed. Reg. 61, 
479. 

[10] This estimate should be considered the maximum because the method 
FNS’s contractor used to calculate it did not eliminate offsetting 
errors that might occur. The standard error for this estimate should be 
no larger than about $210 million. For more details about standard 
errors, see appendix II. USDA FNS, Office of Research, Nutrition, and 
Analysis, Erroneous Payments in the National School Lunch Program and 
School Breakfast Program: Summary of Findings, Alexandria, VA, November 
2007. 

[11] LaFaive, M. D., A School Privatization Primer for Michigan School 
Officials, Media and Residents, Mackinac Center for Public Policy, 
Midland, Michigan, 2007 (Mackinac study). 

[12] This study is in response to House Report 110-258, which 
accompanied the appropriations bill for Agriculture, Rural Development, 
Food and Drug Administration, and Related Agencies for fiscal year 
2008. 

[13] According to data from the Mackinac study, 75 percent of all SFAs 
that contract with FSMCs are in these three regions. 

[14] These data were collected to estimate improper payments nationally 
and not to compare differences between SFA-managed and FSMC-managed 
programs. However, we reviewed the study’s methodology and determined 
that the data are reliable enough for the purposes of our review. USDA, 
FNS, Office of Research, Nutrition and Analysis, NSLP/SBP Access, 
Participation, Eligibility, and Certification Study–Erroneous Payments 
in the NSLP and SBP, Vol. I: Study Findings, November 2007 (APEC). 

[15] Another source of improper payments is certification errors: 
errors resulting from mistakes in certifying the eligibility status of 
students. 

[16] In 2008-2009, FNS basic cash reimbursement rates for meals are as 
follows: $2.57 for each free lunch, $2.17 for each reduced-price lunch, 
and $0.24 for each paid lunch and $1.40 for each free breakfast, $1.10 
for each reduced-price breakfast, and $0.25 for each paid breakfast. 
FNS has higher reimbursement rates for Alaska and Hawaii, and for 
schools with high percentages of low-income students. 

[17] Children from families whose income is at or below 130 percent of 
the poverty level are eligible for free meals. Those whose income is 
between 130 and 185 percent of the poverty level are eligible for 
reduced-price meals. 

[18] Mackinac study. 

[19] USDA FNS, Office of Research, Nutrition, and Analysis, Erroneous 
Payments in the National School Lunch Program and School Breakfast 
Program: Summary of Findings, November 2007. 

[20] Certification errors result from mistakes in certifying the 
eligibility status of students. The standard errors for these estimates 
are provided in appendix II. 

[21] These estimates should be considered the maximum because the 
method FNS’s contractor used to calculate them did not eliminate 
offsetting errors that might occur. The standard errors for these 
estimates are provided in appendix II. 

[22] If the state fails to recover the overpayment from an SFA in the 
lunch program, FNS may assess a claim against the state agency. 

[23] Internal control is “an integral component of an organization’s 
management that provides reasonable assurance that the following 
objectives are being achieved: effectiveness and efficiency of 
operations, reliability of financial reporting, and compliance with 
applicable laws and regulations.” Source: GAO, Standards for Internal 
Control in the Federal Government, [hyperlink, 
http://www.gao.gov/products/GAO/AIMD-00-21.3]. (Washington, D.C.: 
November 1999). 

[24] To guard against this potential loss, FNS guidance encourages SFAs 
to add a provision in the contract that requires the FSMCs to pay the 
SFA for any overclaims due to FSMC negligence or noncompliance with 
regulations. 

[25] The proxy for student attendance is determined by first adjusting 
for the difference between enrollment and attendance (attendance 
factor) and then multiplying this attendance factor by the number of 
students eligible for meals under each category. 

[26] USDA issued new procurement regulations in October 2007 that 
require states to review FSMC contracts prior to execution. 72 Fed. 
Reg. 61, 479. 

[27] This question did not apply to one state since it has no FSMCs in 
public SFAs that have more than one school; only SFAs with more than 
one school need to conduct on-site reviews of each school in the SFA. 
Another state said both that there were no findings that seem related 
to FSMC use and that on-site reviews rarely find problems. 

[28] Differences in error rates were not statistically significant. 

[29] See appendix II for standard error estimates. 

[30] Differences are statistically significant. 

[31] Standard error is a statistic used to calculate the range of 
values that express the possible difference between the sample estimate 
and the actual population value. We calculated maximum standard errors 
for some estimates because we did not have information on how error at 
one level (e.g., cashier) influences error at another level (e.g., 
point-of-sale aggregation). To calculate these maximum standard errors, 
we assumed there was no influence from one level to another 
(covariance). 

[End of section] 

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