Food Fight:

Small team of state

examiners no match for
schools that divert student
meal funds

This report was prepared for the California Senate

Rules Committee
February 6, 2013

Prepared by Jim Sweeney

John Adkisson
California Senate Office of John Hill
Oversight and Outcomes Saskia Kim
Dorothy Korber
Jim Sweeney
 California Senate Office of
February 6, 2013
Oversight and Outcomes

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Food Fight:
Small team of state
examiners no match for
schools that divert student
meal funds

february 6, 2013

Prepared by Jim Sweeney

California Senate Office of

Oversight and Outcomes
Table of Contents
Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Introduction and Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Oversight Gaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Overview of Cafeteria Fund Misuse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Case Studies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Los Angeles Unified: Despite repeated warnings, district
misappropriated cafeteria funds for years. . . . . . . . . . . . . . . . . . . . . . . 29
Oxnard Union High School District: Inflated meal counts went
undetected for more than three years . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Santa Ana Unified: Troubled food service program ran up a
$16 million surplus as staff vacancy rate exceeded 20 percent . . . 37
Baldwin Park Unified: Long impasse with the state ends with
agreement to increase spending on fresh fruits and
vegetables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
San Diego Unified: State cites faulty accounting and
double-billing for costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

Recommendations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
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Executive Summary
Squeezed by years of unrelenting budget cuts, some California school
districts are illegally dipping into student meal funds, misappropriating
millions of dollars intended to feed California’s poorest children.

In recent years, in cases that

seldom receive any public
Students Shortchanged:
attention, the California
Department of Education Cafeteria fund diversions documented
(CDE) has ordered eight in this report contributed to
districts to repay nearly $170 conditions that discouraged the target
million to student meal population – poor, often hungry
programs. Perhaps more students – from seeking free or
troubling, department officials reduced-price meals.
candidly acknowledge they Cost-saving shortcuts included
have no idea how big the serving processed rather than fresh
problem may be and fear they foods, short lunch periods, rundown
may have uncovered only a cafeterias and insufficient staff
hint of the ongoing abuse, an to properly plan and manage an
investigation by the Senate optimum food service operation.
Office of Oversight and Los Angeles Unified, for example,
Outcomes has found. has 20- and 30-minute lunch periods
at many schools and continues to
The uncertainty reflects a struggle with low participation rates
challenged oversight system among eligible students. A former
designed by the federal Santa Ana Unified food service
government, but carried out by director said “the food was terrible”
a small, overmatched team of and the meal program was woefully
state examiners who are mostly understaffed although the district had
nutritionists and dietitians, amassed an illegal $16 million surplus
not accountants. Nutritional in its cafeteria account.
standards are their top priority The Senate Office of Oversight and
and the system is set up to be Outcomes found that state and federal
collaborative, with prearranged checks fail to catch most violators and
inspections of cafeterias that whistleblowers may be silenced
and food service operations. by realistic fears of retaliation.
Perhaps as a result, most of the

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recent investigations have been triggered by whistleblowers.

In the biggest case, state officials identified more than $158 million in
misappropriations and unallowable charges that Los Angeles Unified
School District drained from its cafeteria fund over a six-year span.

The department also has disallowed cafeteria fund charges at a dozen

other districts, including San Diego, Santa Ana, San Francisco, Baldwin
Park, Centinela Valley and Compton. San Diego and Santa Ana are
challenging the department’s findings, which would force the districts to
repay $4.5 million and $2.7 million, respectively.

In every case, the funds involved were supposed to be spent primarily on

free and reduced-price meals that experts say are frequently the best and
often the only complete meals that many low-income children receive in
a given day.

“From my point of view, they are literally taking food out of the mouths
of kids,” said Richard Zeiger, chief deputy state superintendent of public
instruction. “They say, ‘Well, we can do it cheaper.’ I say you should do it
better.”

State and federal subsidies are paid as reimbursements for meals served.
So, all eligible students who line up for lunch or breakfast at school
are fed. But cafeteria fund diversions contributed to conditions that
discouraged the target population – poor, often hungry students – from
seeking free or reduced-price meals, school officials said.

Cost-saving shortcuts included serving processed rather than fresh foods,

short lunch periods, rundown cafeterias and insufficient staff to properly
plan and manage an optimum food service operation.

“Our core priority was to get kids in eating and to make it a good
experience for them,” said Michael Eugene, a former business manager
over food services at Los Angeles Unified. “But, in order to do that, we
really needed to make sure that the money for the program was spent on
the program.”

Los Angeles Unified, which has 20- and 30-minute lunch periods at many
schools, continues to struggle with low participation rates for its eligible
students.

“They refused to let the secondary students have more than 30 minutes
for lunch and they turned them all loose at once,” said Dennis Barrett,
Los Angeles Unified’s food service director until he retired last June. “I

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said, ‘We have 80 percent of them who are free and we’re only serving a
third of them. The others can’t get in to eat if they wanted to.’”

At Santa Ana Unified, former food service director Jan Monforte said “the
food was terrible” when she was hired to run the program in October
2010. “None of the food met the requirements of what we were supposed
to be serving,” she said. Santa Ana’s food service operation also was
woefully understaffed although the cafeteria account had amassed a
$16 million surplus that was more than double the federal limit for the
program.

At Baldwin Park Unified, where a $6.5 million cafeteria fund surplus also
exceeded the federal limit, the district agreed to spend $2.7 million on
salad bars, fresh fruits and vegetables under a mandatory five-year plan to
trim the surplus.

As part of a national focus on childhood obesity, the federal government

recently ordered schools to improve the nutritional content of student
meals. Obesity increases the risk of heart disease, diabetes, high blood
pressure and other health problems. In California, 38 percent of children
are obese or overweight, according to a 2012 University of California
study.

Numerous studies also have shown a link between proper nutrition and
academic achievement.

Federal regulations require schools to keep student meal funds in a

separate account used only for “the operation or improvement of such
food service.” When federal, state and other cafeteria revenues are held in
the same account, as they are in most districts, all of the funds are subject
to the strict federal guidelines.

But the Senate investigation found an oversight system that offers glaring
opportunities to disregard rules so complex that districts easily can and
often do contest violations as arguable interpretations of the law.

The misappropriations addressed in this report are not examples of funds

skimmed or pocketed for personal profit. Instead, they are in most cases
attempts by school districts to use cafeteria funds to pay for a greater share
of personnel, utility and other costs. Some charges were clearly improper.
Los Angeles Unified used cafeteria funds to buy lawn sprinklers and to
pay salaries of employees at the district’s television station, Eugene and
Barrett said. Auditors also found that L.A. Unified and other districts
charged their cafeteria accounts twice for some expenses.

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Most of the money involved comes from the federal government. The
U.S. Department of Agriculture sends more than $2 billion a year to
California for the National School Lunch Program, breakfast, after-
school and snack programs, as well as commodities used in student meals.
California augments that with another $145 million a year. On average,
the combined funds help pay for 2.4 million free and reduced-price
lunches every day for lower-income students.

The California Department of Education serves as the USDA’s steward

of the subsidized meal programs. In that role, CDE is required to review
school food operations every five years. Other food services, such as those
at adult and child care centers, must be checked more frequently.

The department has fewer than 60 field examiners to monitor nearly

3,000 school districts and other agencies that serve meals. It has not
completed all of the reviews required in any single year since 2001.
Moreover, the field examiners CDE sends in are nutritionists, not
accountants or financial specialists, and they rarely take more than a
cursory look at the books.

The existing rules also provide what amounts to a three-year statute

of limitations. That is how long districts must retain financial records,
leaving two years in every five-year cycle that CDE does not review. Only
when districts have a record of recent violations must they keep records
longer than three years. And CDE does not always go back three years,
even when it has reason to. In two cases, involving the Santa Ana and San
Diego districts, the department inexplicably elected to review and hold
the districts accountable for only one year of disallowed charges. It only
later decided to go back three years in San Diego, even though district
officials had publicly acknowledged the disputed charges went back three
years.

Aside from CDE’s periodic reviews, it’s unclear how much close scrutiny
cafeteria funds receive on a regular basis. Almost all districts are audited
annually by an independent, outside firm. But those audits typically do
not include the cafeteria fund, a CDE official said. When they do, not
all auditors know the complex rules that apply, and the state’s audit guide
provides no help on what may and may not be charged to cafeteria funds,
CDE officials said.

In a reflection of the oversight gaps, nearly all of the cafeteria fund cases
the state has pressed in recent years were instigated by whistleblowers,
not the state’s examiners. In other words, most of the districts that have
been caught were tripped up by inside informants after eluding the state’s
oversight, in some cases for years.

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In the case of Los Angeles Unified, the district had been warned
internally – by its own auditors and a number of top managers – for nearly
a decade that it was misappropriating cafeteria funds, yet continued to do
so until a district employee finally raised the issue with state and federal
officials.

Although the district has agreed to repay the $158 million plus interest to
its cafeteria fund, it is being allowed to pay off that debt with a growing
general fund subsidy of its $300 million cafeteria program. As such,
ongoing general fund payments for food services, which topped $80
million in the last school year, will count as payments toward the $158
million owed to the cafeteria fund. Los Angeles Unified also will not have
to repay millions diverted from its cafeteria fund earlier in the decade,
before the misappropriations began to raise concerns internally.

Deliberate misuse of cafeteria money is a crime, although rarely, if ever,

prosecuted. Federal law provides up to a $25,000 fine and/or five years
in prison, for “willful misapplication” of cafeteria funds. Yet, federal
officials said they were unaware of any school officials ever prosecuted for
intentionally diverting meal funds to cover other district expenses.

In one California case, in which employees at Oxnard Union High

School District were inflating subsidized meal counts, federal
reimbursements jumped 53 percent in a single year, yet set off no alarms
at either the state or federal level. The inflated meal counts began shortly
after the state’s monitors completed a regular review of the district and,
thus, were not scheduled to return for another five years.

The fraudulent counts continued for more than three years, until a district
employee called state and federal authorities in 2008. The informant
disclosed that cafeteria supervisors were gaming the system, claiming
meal counts that were just below a threshold that they knew would trigger
a state review. The district was ordered to repay $5.6 million.

Nearly five years after that case was uncovered, neither the state nor the
federal government has initiated any changes that would flag a similar,
conspicuous spike in meal counts.

The push to divert cafeteria funds for other purposes has created career-
threatening conflicts in some districts, according to leaders of the
California School Nutrition Association, a professional organization that
includes many food service directors.

“Those districts that are doing it illegal are playing hard ball with it,” said
Lynette Rock, food service director at Torrance Unified and president-

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elect of the nutrition association. “They say, ‘You want to contact the state
and let them know we’re cheating? That’s fine. How long do you want
your job?’”

Baldwin Park’s food service director, Geoffrey Monsour, recently sued

that district, alleging the superintendent and others harassed and
retaliated against him after he told state officials that his supervisors
rejected his advice and used cafeteria funds for unallowable purposes.

In Santa Ana, Monforte – an experienced food service director who

also warned the district it was violating the expenditure guidelines –
was abruptly fired without explanation two days short of her one-year
anniversary, when she would have cleared probation. Problems that
Monforte identified and attempted to rectify were later cited by the state
in its order to repay $2.7 million in unallowable charges.

Baldwin Park challenged the state’s findings, refusing to pay $1.5 million
in disputed charges for nearly five years, until CDE suspended the
district’s federal meal payments. Santa Ana also is contesting the state’s
order and has cited an “absence of guidance” from the state, although its
former food service director said she understood the rules.

Notably, top administrators at Santa Ana, Baldwin Park and San Diego
said the charges and accounting methods the Department of Education
disallowed in each of their cases are no different than those that could be
found at districts all over the state. Such assertions have raised concerns
that improper uses of cafeteria funds may be widespread.

Los Angeles Unified officials also said it was difficult to get clear guidance
on allowable charges from the state Department of Education. The
district’s own auditors and administrators, however, had for years been
citing the state and federal rules that the district was violating.

As it continued to misappropriate millions of dollars from its cafeteria

fund, Los Angeles Unified depleted a longstanding surplus and began
running ever-increasing deficits in its food service program.

In January, 2009 – a few months before the state would learn the extent
of Los Angeles Unified’s diversions from its cafeteria account – the district
held a press conference to appeal for increased state meal subsidies. The
district’s news release was headlined: “Cafeteria fund cash flow may leave
neediest LAUSD students hungry.”

Two years later, the district requested a $70 million advance on its federal
meal payments to cover cash flow at the start of a new school year. When

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the state balked, the district withdrew the request.

In response to the recent rash of cases, the state Department of Education

moved in June to increase the role and presence of its own Audits and
Investigations Division in the regular, periodic reviews of food service
programs. For the first time, the department’s auditors also will help train
the frontline staff who conduct those reviews.

In addition, new federal regulations will soon tighten the review

cycle from five to three years, although it’s not yet known whether the
Department of Education will receive the additional staffing necessary to
handle what looks to be potentially a 40 percent workload increase.

The Senate Oversight Office recommends that the state Department

of Education assess the workload and staffing needs of its food services
oversight team and request sufficient federal funding to enable the
unit to aggressively carry out its responsibilities. The state also should
require annual school audits to include the cafeteria account, and the
state’s audit guide should be revised to provide clear and comprehensive
guidance on what expenses can be paid with food service revenues. We
also recommend that CDE prepare simplified guidelines on acceptable
charges and publicize enforcement actions, to encourage compliance.

The state’s oversight would benefit from legislation that reinforces new
federal regulations and eliminates conflicts with others. The Senate
Oversight Office also believes the level of ongoing scrutiny would be
improved, perhaps substantially, if food service directors were given access
to all cafeteria-related financial records.

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Introduction and Background

A New York prosecutor who led an investigation of food service contracts
told a congressional committee that it is difficult to overstate the
importance of the subsidized meals that millions of students receive every
day.

“Many American children get only one nutritious meal per day … the
one that they receive at school because of the National School Lunch
Program,” former Assistant Attorney General John Carroll testified in
2011. “We all can theorize about why, in the most fertile country in the
world this is so, but it is a fact.”

Congress passed the Richard B. Russell National School Lunch Act

in 1946 in response to concerns about widespread malnutrition and
to provide an outlet for surplus agricultural commodities. Today, the
$11 billion program feeds more than 31 million children in more than
101,000 schools and day care centers.

The National School Lunch Program (NSLP) subsidizes 80 percent of

the 3 million lunches served on average every day in California’s public
schools. The U.S. Department of Agriculture (USDA), which administers
the lunch program, also pays for school breakfast, snack, afterschool and
summer meal programs.

For the 2012-13 school year, the federal government pays up to $2.94 for
each free lunch and $1.85 for each free breakfast served. In California,
the state also helps, providing 22 cents for each free and reduced-price
lunch or breakfast. The subsidies, however, were never intended to cover
the full cost of providing school meals.

Statewide, the federal lunch and breakfast funding, including

commodities, totals more than $2 billion a year. The state adds another
$145 million a year. For Los Angeles Unified, the nation’s second largest
school district, the federal subsidy alone amounted to nearly $250 million
in fiscal year 2010-11.

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Rules, regulations and the state’s role in an essentially

federal program

To qualify for free meals, students must be from families with incomes at
or below 130 percent of the federal poverty level. For a family of four, that
threshold is $29,965 for the 2012-13 school year (the federal poverty level
is $23,050 for a family of four). For reduced-price meals, the eligibility
line is raised to 185 percent of the federal poverty level, or $42,643 for a
family of four.

All of the federal meal money is funneled through the state, which
oversees compliance with nutritional standards, financial rules and
eligibility verification for the federal government. To carry out those
responsibilities, the federal government pays the California Department
of Education (CDE) more than $30 million a year. That covers 98
percent of the budget for the department’s Nutrition Services Division,
which includes a team of 58 employees who monitor and regularly review
nearly 3,000 school and other meal programs throughout the state.

Federal rules require student meal funds to be maintained in a separate

cafeteria account and used only for “the operation or improvement of
such food service, except that such revenues shall not be used to purchase
land or buildings, unless otherwise approved by (the federal government),
or to construct buildings.” When federal, state and other food service
revenues are comingled in the same account, as they are in most districts,
all of the funds are subject to the strict federal guidelines.

The state Department of Education enforces a far more extensive body of

federal rules and regulations that have been compiled over the long life
of the program. It also follows the 635-page California School Accounting
Manual, which includes 57 pages of rules and directions for assigning
charges to restricted funds, such as cafeteria accounts.

The department weaves into the regulatory mix the applicable sections
of a more permissive California Education Code. But when state and
federal rules conflict, the federal rules prevail. Those conflicts have been
at the root of contentious disagreements between districts and the state
Department of Education.

The collective body of state and federal rules and regulations is unusually
complex. The most recent advisory bulletin issued by the department in
May 2012 was six pages, singled-spaced with 19 electronic links to more
information.

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California schools must feed low-income students

California’s public schools are not required to participate in the National

School Lunch Program. But the state Education Code requires them to
provide at least one “nutritionally adequate free or reduced-price meal”
every day to students who would qualify under the federal criteria. The
Legislature last year passed AB 1595 by former Assemblyman Mike
Eng, D-Monterey Park, which would have extended that requirement to
charter schools. The bill was vetoed by Gov. Jerry Brown.

To participate in the National School Lunch Program, school districts

must sign a lengthy agreement with the state Department of Education
in which the district promises to operate a “nonprofit school food service
and observe the limitations on the use of nonprofit school food service
revenues” as outlined in federal regulations.

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The contract requires districts to agree to limit cash reserves in cafeteria

accounts to no more than three months average expenditures of their
food service program, a key federal rule designed to prevent districts
from hoarding cafeteria revenues or using cafeterias as money-making
operations for other, unrelated purposes.

Districts gather and verify eligibility information from students, keep

records of the number of free and reduced-price meals served and then
bill CDE for reimbursement from the USDA and the state.

Although complex and voluminous, the rules generally limit cafeteria

fund expenditures to employees, supplies, utilities and improvements that
are necessary and directly related to the delivery of student meals. The
rules also permit charging indirect costs for a food service program’s share
of central administration costs, such as human resources, payroll and
other expenses that are not billed directly.

For employees, such as custodians and activity supervisors, who spend

only a portion of their shift on food service-related activities, federal
regulations require that they document hours charged to the cafeteria
fund. The timesheets are known as personal activity reports and can
be compiled daily or monthly, but must be filled out and signed by
the individual employee. Federal regulations permit alternative cost
allocation methods if approved in advance by, not the USDA, but the
U.S. Department of Education. That’s a difficult process, however, and
CDE officials said they were unaware of any district that has received
federal approval of an alternative accounting method.

Utility expenses can be charged fully to a cafeteria account if schools

have separate meters on their kitchens. Most do not. As an alternative,
utilities and similar expenses can be billed under an indirect cost rate set
by the state, or they may be tallied through a process that determines the
portion of a campus’s floor space occupied by its kitchen. That portion,
or percentage, is then multiplied by the total utility bill to determine how
much can be charged to the cafeteria fund.

Federal rules generally prohibit use of cafeteria funds for new

construction or improvements that would extend the life of a facility. But
fine lines have been drawn over the years as the state has taken questions
about the rules to their federal counterparts for clarification.

For example, if a district buys a walk-in freezer, federal rules permit

charging the cafeteria fund for the freezer as well as any expenses – such
as wall and electrical modifications – viewed as necessary to install and
wire the freezer. But rewiring an entire food service area to bring it up to

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code is not an allowable expense, because it would extend the life of the
building.

Similarly, cafeteria funds may be used to replace floor tile in a food

service area, but not in a multi-purpose room where meals are served,
if that room is also used for other activities, such as dances and school
events.

When districts get caught with excess reserves, they have several options
to reduce the surplus over five years. They can spend the money on better
food such as fresh fruits and vegetables, lower meal prices or make other
improvements to the food service program. Absent one of those choices,
federal law requires the state to reduce reimbursements to a district.

Districts that have misappropriated funds or made improper charges

against their cafeteria funds can be ordered to repay the money in
question, plus interest and a financial penalty. The state Education Code
also authorizes the state Superintendent of Public Instruction, who heads
the Department of Education, to punish districts by requiring them
to repay double the amount misappropriated from a cafeteria fund. In
practice, CDE has required only repayment, plus interest.

One federal regulation may actually serve as a disincentive to ferret out

fund misuse. If the state fails to force repayment of misappropriations
or refunds due from food service accounts, the federal government
collects the unpaid amount from CDE. Over the past two decades, the
department has had to pay the USDA more than $3 million that it could
not recoup from food service accounts. Those bad debts often involved
agencies, such as child or adult care centers, which had gone out of
business.

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Oversight Gaps
For much of the past decade, the Los Angeles Unified School
District ignored internal warnings from its food service directors, top
administrators and ultimately its inspector general that the district was
illegally misappropriating millions of dollars in cafeteria funds.

By the time state officials stepped in and ordered the district to stop, more
than $158 million had been improperly charged against the fund over a
six-year period, according to the district’s inspector general and the State
Controller’s Office.

The $158 million, however, did not cover all of the misappropriations. It
represented just six of 11 years of improper or unsupported charges that
dated back to 1999, according to the inspector general and others. During
that span, the district’s cafeteria fund transitioned from a healthy surplus
to deep annual deficits.

How did that happen? And how did similar misappropriations go

unnoticed at other districts, typically until someone complained to state
or federal officials?

Some of the answers can be found in a regulatory scheme decreed by the

federal government, but carried out by a small team of state examiners
who are outnumbered and easily outmaneuvered by school officials who
know when they are coming and what they will be looking for.

The collaborative approach is designed to assist more than punish,

and places greater emphasis on nutritional standards than financial
compliance. As a result, for those who want to violate strict federal
rules on what cafeteria funds may be used for, the system offers ample
opportunities.

Most food service programs self-supporting,

independent operations

School food services are largely independent operations that depend

on federal and state meal subsidies for most of their income. They are

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required by federal law to be nonprofits and the goal at most districts is

that food services be self-supporting.

As an indication of their unique standing, school cafeterias are regulated

by the U.S. Department of Agriculture, not the U.S. Department of
Education. The federal government pays the California Department of
Education (CDE) to monitor and periodically review the meal programs.
State and federal auditing requirements extend to cafeteria funds, but
with little guidance or information about the unique spending restrictions
that apply, CDE officials and others said. The state Department of
Education has pushed the federal government to include that information
in its audit guide, so far without success.

“A lot of CPAs don’t know everything they need to know about cafeteria
funds,” said Christine Kavooras, a manager and 17-year veteran of CDE’s
Nutrition Services Division. “They focus on the academic world of a
district, not the nutrition side, and they don’t know how restrictive this is.”

Dennis Barrett, a former food service director at L.A. Unified and several
other large school districts over the past 42 years, said the lack of auditing
is the most obvious weakness in the regulation of student meal programs.
Barrett said he has been unable to persuade USDA administrators to
make a simple rule change that might remedy that.

“All you have to do is add one sentence and it will correct everything,”
he said. “It is already federal statute that a school district must be audited
by an external auditing firm every year. All you have to do is require that
the cafeteria fund must be audited, as part as of the external audit, for
compliance with state and federal regulations.”

The USDA conducts little if any direct oversight to spot check the state’s
supervision of meal programs. And efforts by the Legislature to ease the
spending restrictions have created conflicting state and federal rules and
may have encouraged violations of the federal regulations, which prevail
in such conflicts.

Small state oversight team

School meal programs up and down the state are monitored by a

58-person oversight team in CDE’s Nutrition Services Division. The team
has struggled to complete a daunting workload that starts with periodic
reviews of nearly 3,000 school districts and other operations that serve
meals, such as youth and adult day care homes. That workload figures
to increase dramatically, by perhaps as much as 40 percent, when the
Healthy Hunger-Free Kids Act of 2010 is fully implemented.

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That new federal law will attempt, among other things, to tighten and
improve oversight. A five-year review cycle for schools will be shortened
to three years perhaps later this year, but more likely in 2014, according
to CDE officials. That means the federal government will expect the state
to review food service programs once every three years, rather than the
current five-year interval.

The Department of Education, however, has not completed all of the

required reviews in any five-year cycle for more than a decade – since
2001, the department disclosed. The department attributed the chronic
failure to inadequate staffing.

To address the added workload the Healthy Hunger-Free Kids Act will
bring, the department requested and was granted 10 additional positions.
The department believes it ultimately may need twice that many new
positions to meet its responsibilities under the new law.

The ability to secure adequate staffing for the oversight team has been
complicated, if not frustrated, by a bifurcated funding and approval
process for new positions. Although 98 percent of the oversight team’s
funding comes from the federal government, CDE must persuade an
always skeptical state Department of Finance to approve new positions.

Coordinated reviews rather than surprise inspections

Rather than unannounced inspections, like health departments do, the

Department of Education conducts what are known as Coordinated
Review Efforts, or CREs, of food service operations. As the name implies,
the reviews are coordinated with schools, which are told in advance when
the state is coming, what sites it will examine and what documents it
wants to see.

“They give you all the parameters ahead of time. You know the questions
and you know which school sites they are going to,” said Jan Monforte,
a veteran food service director and former president of the California
School Nutrition Association, a professional organization for food service
directors.

Monforte said she has heard others brag about taking steps, such as
transferring strong managers to schools selected for a state review,
to improve their district’s results. Her description of the process was
confirmed by another experienced food service director as well as a CDE
official, who explained that the existing procedure reflects federal policy.

“If they’re going to tell me where they’re going to go, I’m going to make

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sure that site is 100 percent compliant,” said Lynette Rock, food service
director at Torrance Unified School District and incoming president of
the nutrition association.

In contrast, federal guidelines require CDE to conduct unannounced

inspections of adult and child day care centers and to do much more
thorough financial reviews of their food programs every year, said David
Jang, manager of the program integrity unit in CDE’s Nutrition Services
Division.

Incomplete records reviewed largely by nutritionists,

not auditors

While CDE’s oversight arm operates under a five-year review cycle,

federal rules require districts to maintain records going back only three
years, unless they are in the process of correcting previous violations.

The three-year limit on records retention has given districts two years
during every five-year cycle in which they can be fairly certain no one
from the state will ask to see their cafeteria books. That two-year gap will
be closed when the new three-year review cycle takes effect this year, or
in 2014.

As a matter of policy, CDE does not go back more than three years in
investigations involving food service financial records and it does not
always go back that far.

In the case of Santa Ana Unified School District, CDE’s auditors

reviewed three years of records for one finding, but only one year of
records for another that involved the same basic violation – failure to
document the hours of employees who spend only a portion of their shift
on cafeteria-related work. The result was a $1.7 million disallowance
for activity supervisors over three years and a $668,000 disallowance for
custodians and others for a single year. Santa Ana is contesting the state’s
findings.

The state’s field examiners who conduct the coordinated reviews

are instructed to look at only a single year’s records. Only if they see
something that appears irregular or suspicious are the department’s
auditors called in, and that does not always happen. At San Diego
Unified, a coordinated review completed in May flagged $3.3 million in
unsupported custodial costs and $952,000 in unallowable utility charges.
The charges represented steep increases that began three years earlier,
which district officials had publicly acknowledged. But CDE did not
decide to send in auditors to review the two earlier years until the district

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challenged the findings. The district contends that any improper charges
can be written off as partial repayment of an $18 million general fund
loan to the food services operation.

Reflecting a greater emphasis on nutritional standards, most of CDE’s

field examiners are dietitians or nutritionists. Few, if any, have financial
training. The job specifications are set by the State Personnel Board, said
Sandip Kaur, director of the Nutrition Services Division.

Despite the recent increase in cafeteria fund misappropriations, federal

officials said they have no plans to order California and other states to
place more financial expertise on the front lines.

“The state oversees the program, so the state is accountable for the fiscal
activities that happen in the district, period,” said Ronna Bach, regional
director of special nutrition programs for the USDA. “How they oversee
those, how they meet that expectation, that’s up to them.”

The USDA evaluates the state’s oversight through a review of records

and reports compiled every year. But the federal government does not
independently review school districts to measure the effectiveness of the
state’s scrutiny, federal officials said.

One federal regulation may actually discourage state enforcement actions.

The rule requires the state to force repayment of disallowed charges that
it identifies. When it doesn’t, the USDA bills the state for any uncollected
funds. That policy has cost the state more than $3 million that it could
not recover from agencies, such as care homes that had closed. It also
produced warnings from federal officials more than a decade ago that
CDE could lose its federal oversight funding – currently $30 million – if
the state did not improve collections of debts owed by meal providers.

Mixed messages and conflicting rules

Twice in the past decade, the Legislature has enacted measures that
appeared to grant school districts permission to use cafeteria fund
surpluses for other pressing needs. In both cases – AB 1754 in 2003 and
SB 1067 of 2008 – the state Department of Education scrambled to warn
districts that state law could not pre-empt the strict federal rules that limit
what the money may be used for.

“While the intent of SB 1067 is to allow districts to access surplus fund

balances for other district purposes, districts participating in federal
school nutrition programs have minimal flexibility when utilizing
cafeteria funds,” CDE warned with the added emphasis in a July

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2008 bulletin to districts statewide. “SB 1067 does not override the
requirements of federal regulations that govern the use of cafeteria funds.”
At least two other state laws, embedded in the California Education
Code, also conflict with federal guidelines.

Education Code Section 38092 permits cafeteria fund revenue sharing

with associated student bodies. Federal regulations no longer permit such
revenue sharing with student groups.

Education Code Section 38102 authorizes districts to establish cafeteria

equipment funds with reserves from their meal programs. The USDA
does not recognize such accounts and strictly limits cafeteria fund
surpluses to three months average expenditures of the program.

“There is a lot of Education Code that is permissive and districts jump on

that,” CDE’s Kavooras said. “The Legislature wants to provide schools
more flexibility, but they don’t really have it and nobody wants to listen to
that.”

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Overview of Cafeteria Fund Misuse

As financial pressures intensify, some California school districts are
illegally misappropriating millions of dollars from restricted cafeteria
funds intended to feed the state’s poorest children.

In perhaps the biggest such case in the nation, the Los Angeles Unified
School District recently agreed to repay more than $158 million that it
had charged against its food service program over a six-year period. The
district, the nation’s second largest, continued to assess unsubstantiated
and excessive charges to its cafeteria fund for more than a decade, despite
repeated internal warnings that it was violating state and federal law, the
Senate Office of Oversight and Outcomes found.

The California Department of Education, which oversees federal meal

programs in the state, recently notified two more big urban districts – San
Diego Unified, the state’s second largest, and Santa Ana Unified, the sixth
largest – that it has found similar misappropriations and unallowable
charges in their records. The state has ordered San Diego to repay $4.5
million and Santa Ana, $2.7 million. Both districts are challenging the
state’s findings.

The state earlier forced Oxnard Union High School District to repay $5.6
million, Baldwin Park Unified to repay $3.1 million, Compton Unified
to repay more than $1.2 million, Centinela Valley to repay $500,000 and
San Francisco Unified to repay $369,000. A half-dozen smaller districts
were ordered to repay lesser amounts.

Not included on the list of more recent cases is a $2 million settlement

the state reached with Long Beach Unified in 2006 for charges dating
back to 2003. The settlement, which resolved a pending appeal of the
state’s findings, cut in half the amount CDE initially ordered the district
to return to its cafeteria fund.

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Federal government pays for most of the state’s

student meal subsidies

All of the funds in question come largely from $2 billion a year in federal
payments that California receives for the National School Lunch, School
Breakfast, snack and other student meal programs. The state provides
another $145 million a year in subsidies. The combined funds deliver
an average 2.4 million free and reduced price lunches every day to low-
income students.

For many of these poor children, experts say the school meals are often
the only nutritious meals they may receive in a given day.

“From my point of view, they are literally taking food out of the mouths
of kids,” said Richard Zeiger, chief deputy state superintendent of public
instruction. “They say, ‘Well we can do it cheaper.’ I say you should do it
better.”

Federal rules enforced by the state require schools that participate in

subsidized meal programs to maintain nonprofit cafeteria operations
whose revenues are “used only for the operation or improvement of such
food service.” That means school districts can charge utility, custodial,
maintenance, supply and other related costs to cafeteria funds. But those
charges must be documented according to federal guidelines designed to
ensure that only necessary costs associated with food services are billed to
cafeteria accounts.

To minimize the temptation to use cafeteria funds as rainy-day reserves,

federal rules limit surpluses to three months average expenditures.

Misappropriations typically attempt to cover other

school costs

The misappropriations examined in this report are not diversions for

personal gain. Rather, they are typically attempts by administrators to
shift a greater share of a district’s personnel, utility and other costs to flush
cafeteria accounts. Some charges were clearly improper. Los Angeles
Unified used cafeteria funds to buy lawn sprinklers and to pay salaries of
employees at the district’s television station, two former district officials
disclosed. Auditors also found that L.A. Unified and other districts charged
their cafeteria funds twice for some expenses.

Districts are quick to portray the state’s questions about their cafeteria
funds as complex disputes over accounting methodologies for charges,

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such as custodial and utility expenses, that clearly benefit their meal
programs.

But CDE officials, who enforce rules interpreted in consultation with the
federal government, say districts are using unallowable practices, such as
estimating and extrapolating charges, that do not reflect actual, cafeteria-
related costs and enable them to pad allowable expenses.

“Those districts (found in violation) never said that they did not know
what they were supposed to do,” said Sandip Kaur, director of CDE’s
Nutrition Services Division. “They did not say that it was a training or
staff turnover issue. They insisted that what they did should be okay and
we should accept it as being okay.”

Districts feel the federal regulations are too restrictive, and the
requirements too difficult and cumbersome to follow, Kaur added.

“Every one of them has argued that ‘we should be able to do this,’” Zeiger
said. “My answer to that is, ‘Well maybe you should. But the law doesn’t
let you and neither do we.’”

Most of the recent investigations and repayment orders have occurred

in the past two years. The spurt appears to reflect a desperate search for
budgetary relief after years of belt-tightening. But it also may portend a
larger problem that has flourished with little notice under an obliging
oversight system.

Whistleblowers expose most of the improper

expenditures

Most of the recent cases of cafeteria fund misuse have resulted from
complaints or tips, not from the state’s periodic reviews of food service
programs or independent annual audits required of most school districts.
In addition, officials at several districts that have been ordered to repay
millions of dollars in alleged misappropriations insist they have done
nothing that districts all over the state are not doing.

Against that backdrop, CDE officials acknowledged the misappropriations

uncovered so far may be only a small sample of what is going on
statewide.

“We don’t know how big the problem is,” Zeiger said. “I’d like to think
that most people are doing it right. I’m sure that anybody who gets caught,
one of their defenses is going to be, ‘Everybody is doing this,’ and I don’t
know how true that is.”

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In defending their districts, two school business officers acknowledged

witnessing cafeteria fund abuse at other districts.

“I’m very sympathetic,” said Wayne Oetken, former interim chief

financial officer at San Diego Unified. “I’ve seen certain superintendents
over the years try to make a raid on the cafeteria fund.”

“I know that there are abuses of cafeteria funds,” said Ron Hacker,
assistant superintendent for business services at Centinela Valley Union
High School District. “I’ve worked in four school districts and I’ve seen
attempts to use Fund 13 (the cafeteria fund) as a cash cow... In no way,
shape or form was Centinela attempting to do that.”

Centinela disputed the state’s determination, but ultimately agreed to

repay $430,000 that CDE said had been transferred improperly from its
cafeteria fund plus another $72,000 for disallowed personnel costs.

Food service directors fear consequences of

speaking out

Several food service directors, including one who was fired after she began
trying to clean up improper cafeteria fund charges and other problems at
Santa Ana Unified, said illegal diversions of student meal funds are on the
rise as a result of the intense budget pressures of recent years. The trend
has forced some food service directors to weigh whether to remain silent
or risk the peril of speaking out.

“People have strong feelings about districts just taking their money, and
they don’t have any support,” said Margan Holloway, president of the
California School Nutrition Association and director of student nutrition
services at Tamalpais Union High School District. “You’re one person and
you often don’t have anybody else on your side.”

Lynette Rock, president-elect of the nutrition association and the food

service director at Torrance Unified, said districts “are looking for any way
to generate revenues so they don’t have to lay people off. So I understand
why they’re doing it. Is it legal? No. I’m just fortunate to be in a district
that doesn’t do that.”

Rock said some food service directors have been warned not to say
anything about improper charges to cafeteria accounts.

“Those districts that are doing it illegally are playing hard ball with it,”
she said. “They say, ‘You want to contact the state and let them know that
we’re cheating? That’s fine. How long do you want your job?’”

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Another food service director, Geoffrey Monsour of Baldwin Park Unified,

filed a lawsuit against that district in November, alleging that he was
harassed and retaliated against after he told state officials the district was
using cafeteria funds for impermissible purposes.

Baldwin Park’s troubles date back to 2007, when the district transferred
$1.6 million from its cafeteria account to a building fund that financed
construction, including cafeteria improvements, at six schools. Federal
regulations, the state noted, expressly forbid using cafeteria funds for
building construction.

Baldwin Park returned the $1.6 million but later had its meal payments
suspended before it agreed to repay another $1.5 million in disallowed
charges in 2011. The district returned the funds to its cafeteria account
but continues to dispute the state’s findings.

Nutritional standards primary focus of state oversight

Weaknesses in the state’s oversight system stem in part from a greater

emphasis on monitoring nutritional standards than financial integrity.
The system of checks also is a collaborative process designed to help
districts as much or more than it enforces and punishes.

The state’s field examiners, those who conduct periodic reviews of the
food service operations, are dietitians and nutritionists with little, if any,
auditing or financial training. The CDE’s auditors have been called in
only when field examiners see something that raises a concern during
what the department described as an often cursory review of the finances.

That has changed in recent months. In June, CDE moved to expand the
role of its Audits & Investigations Division in the regular reviews. The
department’s auditors also will for the first time help train the field staff
who do the reviews.

Those reviews have been conducted once every five years. But districts
are required to maintain only three years of financial records, leaving
two years in every five-year cycle that state auditors cannot review.
Compounding that regulatory void, CDE has not completed all of the
school and other food programs up for review in any five-year cycle since
2001, according to the department.

New federal regulations will soon cut the review cycle from five to three
years, although it’s unknown whether the department will receive enough
additional staffing to handle what looks to be potentially a 40 percent
workload increase.

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Most districts are audited annually by an independent, outside firm. But

those audits often do not include cafeteria accounts and not all auditors
are knowledgeable of the complex rules that apply, CDE officials said.
State and federal audit guides also provide no guidance on what may and
may not be charged to cafeteria funds, something CDE has attempted to
remedy without success.

The oversight gaps may explain why most of the cases the state has
investigated in recent years have resulted from complaints or informants,
not the state’s scrutiny.

Los Angeles Unified evaded state detection for at least a decade. During
that time, the district was warned repeatedly by its own inspector general
and top administrators that is was misappropriating cafeteria funds. The
district commissioned several reports, which confirmed the inspector
general’s findings, yet continued to assign improper charges to its cafeteria
fund until 2010, when the state stepped in after being alerted by a district
employee.

The district agreed to repay $158 million, plus more than $1 million
in interest. The amount was developed from disallowed charges
identified in audits done by the district’s inspector general and the State
Controller’s Office. Los Angeles Unified did not have to repay years of
earlier improper charges that were noted but not audited by the inspector
general.

Paradoxically, the district’s repayment will not result in any net increase
to its beleaguered cafeteria fund, which has been running a deficit that
ballooned to nearly $79 million in the 2011-12 school year. Because the
district’s general fund must cover the food services deficit, CDE allowed
Los Angeles Unified to apply the ongoing general fund subsidy to the
amount owed – $158 million plus interest. As a result, the district has
been able to write off $120 million of the debt to date.

Intentional misappropriations a federal crime

Under federal law, “willful misapplication” of cafeteria funds is a crime,

punishable by up to a $25,000 fine and five years in prison. Yet, federal
officials said they were unaware of any school officials ever prosecuted for
intentionally diverting cafeteria funds to cover other district expenses.

The Federal Bureau of Investigation and federal prosecutors declined to

file criminal charges when employees were caught padding meal counts
at Oxnard Union High School District from 2005 to 2008. The fraud
resulted in $5.6 million in overcharges.

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“After learning that no one financially profited from inflating the meal
count numbers except the school district, the FBI closed their case file,”
stated an investigative summary compiled by the USDA’s Office of
Inspector General.

In the Oxnard case, federal meal reimbursements shot up 53 percent in a

single year, yet set off no alarms at the state or federal level. The inflated
meal counts began shortly after the state had completed a regular review
and, thus, was not scheduled to return for another five years.

The fraudulent counts continued until a distraught district employee

called a federal whistleblower hotline, according to the USDA inspector
general’s report. The informant disclosed that cafeteria supervisors were
gaming the system, claiming meal counts that were just below a threshold
that they knew would catch the state’s attention.

“The food service director told (the informant) that if the school district
reports meals under the 93 percent national attendance (rate) for each
school site, CDE will not question and investigate the meal counts
reported,” an internal CDE email stated at the time.

The Oxnard food service director was correct. Yet, nearly five years after
the case was uncovered, neither the state nor the federal government has
initiated any oversight changes that would catch a similar, conspicuous
spike in meal counts or make the audit trigger any less predictable, a
CDE official said.

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Case Studies

LOS ANGELES UNIFIED: Despite repeated warnings,

district misappropriated cafeteria funds for years

Not long after Michael Eugene joined the Los Angeles Unified School
District as its new business manager in July 2002, he discovered the
district was rapidly burning through what had once been a healthy, $97
million surplus in its cafeteria fund.

As he pored over the revenues and expenses, Eugene found that the
account was being drained by illegal misappropriations, including double
charges in some cases for the same expenses. Despite strict rules on what
food service funds can be used for, the district’s top administrators were
using the revenue to help balance an ever-strained budget, to cover more
than the program’s share of costs in some areas and unrelated expenses in
others.

Five employees with the district’s television station, a disproportionate

share of financial managers and items such as lawn sprinklers were being
billed to the cafeteria fund, Eugene and others said.

In April 2003, Eugene detailed the situation in an internal memo to

then-Chief Financial Officer Joseph Zeronian. The district, Eugene
wrote, needed to “eliminate inappropriate charges,” “reconcile direct and
allocated charges to ensure no duplicate charges exist” and take several
other steps to bring food service expenditures into compliance with
federal law.

Eugene’s memo failed to accomplish what he had hoped. But it sounded

one of the earliest in a series of internal warnings that the district was
misappropriating millions of dollars from its food service program. The
warnings continued for another six years, until late 2009, when the state
stepped in after it was alerted by a district employee.

Subsequent negotiations between the district and the California

Department of Education (CDE) produced an agreement in March

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2011, in which the district agreed to repay $109.8 million, plus more
than $1 million interest, for illegal or disallowed charges against its
cafeteria fund between 2005 and 2008. The district also agreed to
repay disallowed charges for two later years –2008-09 and 09-10 – that
would be determined by the State Controller’s Office. The controller’s
audit, finalized in August, rejected another $48.3 million in charges to
the cafeteria fund. The state allowed Los Angeles Unified to repay the
combined $158 million by crediting its growing general fund subsidy of
food services to the debt. As a result, the district already has been able to
write off nearly $120 million of the balance due.

Los Angeles Unified is the nation’s second largest school district with
656,000 students. Its food service program serves 109 million meals a year
with an annual budget of more than $325 million. Most of that, nearly
$240 million in the 2011-12 school year, came from federal and state
meal subsidies.

Although the district and state reached a settlement, district officials

continue to dispute some of the disallowed charges, the CDE’s
interpretations of applicable rules and some of the controller’s findings.
However, most of the misappropriations and disallowed charges also were
flagged by Eugene, the district’s inspector general and private consultants
hired by the district.

Eugene’s 2003 memo was followed by:

• A September 2006 audit by LAUSD’s Office of Inspector General

that found the district’s chief financial officer had for six years used
an outdated expense allocation methodology as the basis for assigning
charges to the cafeteria fund.

The audit was requested by Eugene, who said he had difficulty

getting anyone above him to act on the improper charges. “I
believed the district had a compliance issue with federal law that was
not being addressed,” he said.

The OIG found that the district’s food services branch lacked
documentation required to substantiate charges and was not able
to monitor charges for financial managers and supervisory aides.
A survey of 80 administrative positions directly funded by the food
service program found only 20 of those employees spending all of
their time on cafeteria-related work. Some said they were doing
little, if any, cafeteria-related work.

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The OIG also noted that the cafeteria fund was covering half
the salaries of 136 financial managers with none of the required
documentation to show how much of their daily work involved food
services.

• A March 2007 study of the district’s food services operation that

included many of the same warnings issued six months earlier by the
inspector general.

The 154-page report by Evergreen Solutions, a firm hired by the

district, noted that the Business Services office had identified
nearly $9.4 million in salaries paid from the cafeteria account for
employees outside food services.

“State and federal regulations,” the report cautioned, “do not allow
districts to charge to food service funds the costs of any employees
who are not actively engaged in supporting the food service program.
For employees outside the food services operation who are charged
to the food services fund, regulations require time and effort
documentation at least semi-annually.”

• A June 2007 report by B. Sackin & Associates that was ordered by the
district to review the findings of the 2006 OIG audit.

Sackin is a child nutrition and school meals consultant. The firm’s

report focused on employees outside of food services who were being
paid with cafeteria funds. It also included an extensive review of the
relevant federal and state regulations.

The findings were blunt: “In general, the district is out of

compliance with federal and state laws that require accurate
accounting of charges made by a district against the food service
program,” the report declared.

The report cited “clear violations” of federal law and said that, for 21
Personnel Commission positions paid for by food services, the system
for assigning expenses “appears to be based more on identifying
sources of income than allocating costs fairly.”

For 50 finance positions, the report said there was “no ongoing
assessment of time and effort and assignment of positions to be paid
for by food services. This became evident when a programmer stated
that he hadn’t worked on food service tasks for almost two years.”

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• A second OIG audit, issued in August 2009, which found that few
of the violations and problems identified in the 2006 OIG audit had
been remedied.

“Our audit found that the duties, responsibilities and accountability

for the use of cafeteria funds had not been clearly established,” the
inspector general wrote. The district’s top financial officers “did
not have written policies and procedures related to the appropriate
allocation and recording of cafeteria charges.”

The lack of established procedures and accounting methodologies

“increased the potential of double-charging, resulted in unjustified
and unreasonable charges to the cafeteria fund” as well as “charges
to the cafeteria fund for central administrative services that were
disproportionate to the benefit received by the food services
program,” the inspector general stated.

Some district offices were unaware that they received funding from
the cafeteria account and “some of those offices stated that none
of their employees were performing tasks for the food services
program,” the inspector general found.

“Finally, because of the ongoing and unresolved issue of the

cafeteria fund allocations, funding was not consistently available
for necessary improvements and has negatively impacted the
overall quality of the food services program,” the inspector general
concluded.

• A third OIG audit, completed just three months later in November

2009, which stated some maintenance and operations charges to the
Cafeteria Fund “may not be substantiated, resulting in violation of
federal and/or state regulations.”

The audit went on to note that the cafeteria fund also “may have
been overcharged for services due to duplication of claims or
unreasonably high amounts of time claimed for services provided.”

In addition to the improper charges, Los Angeles Unified had earlier

agreed to repay $11 million that had been transferred from its cafeteria
fund to its general fund. The transfer, over four years starting in 2001,
had been questioned by the district’s external auditors and the state
Department of Education, according to an internal department email.

But the far more extensive problems identified by the OIG were not
otherwise detected by CDE. The OIG issues its reports to the school

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board and superintendent. It is not obligated to report findings to the

state, but the audits are public documents available on the district’s
website.

Eugene, who is now the chief operations officer of Orange County

(Florida) Public Schools, said his efforts to persuade Los Angeles Unified
to eliminate improper charges were hampered by frequent turnover
among the district’s top administrators. In seven years at Los Angeles
Unified, Eugene said he worked for five chief financial officers.

“Starting and restarting the discussion about appropriate charges to the

fund was a challenge because of the number of times that position turned
over,” he said. “And this isn’t an easy discussion to have within a district.
In order to really make a systemic fix … you have to cut things out of your
general fund.”

The OIG audits traced the improper charges back as far as the 1999-2000
school year. But the inspector general did not attempt to gather or analyze
any records before the 2005-06 school year, and CDE did not want to do
any independent audits of the period in question. As a result, the district
did not have to review or repay any cafeteria fund charges for the five
school years before 2005-06.

Federal guidelines, enforced by the state, require districts to retain such

records for only three years. Thus, absent the OIG’s audits, Los Angeles
Unified would have had to account for and repay just three years of
improper charges, rather than the six years covered in the 2011 settlement
with the state.

Los Angeles Unified is the only district in the state that has an inspector
general. The district was required to establish an OIG by state legislation
enacted in response to allegations of mismanagement involving the
proposed $200 million Belmont Learning Center, a downtown high
school project the district attempted to build in the late 1990s on a site
that turned out to be contaminated with toxic waste. The OIG mandate
will sunset on Jan. 1, 2015, unless it is extended.

In addition to the impact of the improper charges, Los Angeles Unified’s

food service program has struggled to absorb more than $35 million a
year in added benefit and salary costs the school board approved in 2007,
when it extended health benefits to part-time food service workers. The
cafeteria fund ran up a $27 million deficit the following year, and has
operated in the red ever since, with the annual deficit reaching $78.6
million last year, according to Megan Reilly, the district’s chief financial
officer.

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Eighteen months after the benefit increase, in January 2009, Los Angeles
Unified held a news conference and issued a press release that warned
the district “may run out of money to feed hungry children” because of
a potential shortfall in state meal subsidies. The release, promoting a bill
to increase student meal funding, was headlined “Cafeteria Fund Cash
Flow May Leave Neediest LAUSD Students Hungry.”

In August 2011, four years after approving the benefit package for part-
time cafeteria workers, the district asked CDE for a $70 million advance
to cover food service costs at the start of the new school year. After the
department balked, the district withdrew the request. The state had
denied a similar request two years earlier.

Dennis Barrett, a food services veteran who has run big-city programs in
Texas, Nevada and Colorado, said he recognized the improper cafeteria
fund charges shortly after he became Los Angeles Unified’s food services
director in January 2007. A month into the job, Barrett said he raised the
issue during a meeting with the district’s superintendent and other top
administrators.

“I said if things do not change … someone in this building could go to

the federal penitentiary,” Barrett recalled.

He was alluding to a federal law that provides penalties of up to five

years in prison and a $25,000 fine for the “willful misapplication” of
cafeteria funds. Barrett said his warning prompted the district to order the
Evergreen report, a study that warned millions of dollars in salaries were
being charged improperly to food services.

Both Barrett and Eugene said the financial drain on the cafeteria account
compromised the district’s food services. The district was forced to rely
more on processed rather than fresh foods, Eugene said. They were
able to increase the number of high school students eating a cafeteria
lunch from 17 percent to almost 40 percent, but it stalled there and has
since declined to 34 percent. The district’s participation rate for students
eligible for subsidized lunches ranged from 51 percent to 60.3 percent
over six years ending in 2010-11, well below statewide averages of 71
percent to 74.5 percent during the same span, according to data compiled
by CDE.

“Throughout the seven years that I was there, it just seemed like we were
chasing our tail,” Eugene said. “There was more discussion about how the
district should charge the fund as opposed to really investing that money
back into the program to improve the quality of meals and the physical
environment for kids eating the meals.”

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CFO Reilly, who joined the district in late 2007, acknowledged that
LAUSD should have corrected the problems years ago. But Reilly said
the district found it difficult to get CDE to sign off on an acceptable
accounting methodology for the disputed charges. She also said the
district continues to believe it should have been allowed to charge some
reasonable expense for utility and other costs, which were completely
disallowed.

“The district has worked very hard with CDE to make sure and correct
everything,” Reilly said. “We may have our differences of opinion, but I
think we basically knew we had an outdated methodology that needed to
be updated.”

The 2011 settlement agreement between the district and the state
included detailed definitions of the charges that could be assessed to the
cafeteria fund and the required documentation.

OXNARD UNION HIGH SCHOOL DISTRICT: Inflated meal

counts went undetected for more than three years

Late in the summer of 2008, officials at Oxnard Union High School

District learned that they had a multimillion-dollar case of student meal
fraud on their hands. A district accountant, troubled by several years of
inflated meal counts, disclosed the illegal charges when he filed a stress
claim for worker’s compensation.

The accountant also alerted state and federal authorities, who would
join a district investigation already in progress. An accounting firm hired
by the district estimated the overcharges at $6.6 million. But, because
at least half of the district’s meal count records were missing, the state
later reduced the overcharge to $5.6 million spanning three school years
starting in 2005-06, and a few months of a fourth, 2008-09.

Oxnard Union operates high schools with 16,000 students in three cities,
Oxnard, Camarillo and Port Hueneme. Investigators determined that
each of the district’s six traditional and two alternative high schools was
overstating subsidized meal counts, up to an extra 700 meals a day at
some campuses. More than 4 million extra meals were claimed over the
three-plus years, according to a report prepared for the district by the
accounting firm, Vicenti, Lloyd & Stutzman.

The whistleblower told authorities he first noticed the irregularities after

he had been with the district for about nine months. He said he initially

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reported the situation to the food service director.

“The food service director told (the whistleblower) that if the school
district reports meals under the 93 percent national attendance (rate) for
each school site, CDE will not question and investigate the meal counts
reported for each site,” an internal CDE email stated. The whistleblower
said each school was reporting meal counts of 85 percent to 90 percent of
enrollment.

The inflated counts began shortly after the state completed a routine
periodic review of the district’s food service program in 2005. Those
reviews are conducted every five years, which meant the state’s examiners
would not be expected back until 2010, at the earliest.

Nonetheless, district, state and federal officials missed a clear sign that
something was awry at Oxnard Union. In a single year – 2005-06 – the
district’s federal payments under the National School Lunch Program
jumped nearly 53 percent, from $2.8 million to $4.3 million. Enrollment
had been flat and, despite the sharp increase in the number of meals
reported served, the district’s food costs declined.

As a result of the padded meal counts, federal and state meal subsidies
provided an unexpected surplus in the district’s cafeteria fund. The
subsidy payments are approved and processed by CDE, which receives
detailed monthly reports that support each request for federal and state
meal reimbursements.

“These variances and high fund balances were significant and unusual
and should have drawn the attention of those responsible for the oversight
and accounting,” the Vicenti report stated.

The report also found that the district failed to follow up on several
earlier disclosures about the inflated counts, including one relayed to
management by the district’s auditors in early 2008.

The state’s five-year review cycle will soon be reduced to three years
under new federal guidelines. But the known audit trigger – the meal
count threshold that district employees knew would prompt a state
review – has not been revised and neither state nor federal officials have
made any changes that would send an automatic alert when a district’s
subsidized meal payments jump by a conspicuous amount, as they
did in Oxnard. Although the federal government provides most of the
meal subsidies, all of the money flows through the state Department of
Education, which administers and monitors meal programs for the U.S.
Department of Agriculture.

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District officials and investigators said most of the padded reimbursements

were spent on the food services program, although some $350,000 was
missing, along with records that might show what happened to the
money.

Jack Parham, the district’s attorney at the time, said district officials
believed there was criminal action involved but could not prove it.
The USDA’s inspector general and the Federal Bureau of Investigation
declined to pursue criminal charges because investigators said they could
find no evidence that anyone benefitted personally from the inflated meal
payments. The prosecutors’ decision was discretionary. The federal statute
that provides up to five years in prison and a $25,000 fine for willful
misappropriation of cafeteria funds does not require evidence that funds
were diverted for personal use.

The district later appealed the $5.6 million balance owed and asked the
state to reduce the amount to $3.4 million. The state, noting that it has no
authority to reduce such debts owed to the federal government, rejected
the appeal. The last installment on the $5.6 million was paid last year.

SANTA ANA UNIFIED: Troubled food service program

ran up a $16 million surplus as staff vacancy rate
exceeded 20 percent

There were unmistakable signs of trouble in Santa Ana Unified’s food

service program long before the state ordered the district in July 2012 to
repay $2.4 million that auditors concluded had been improperly charged
to its cafeteria fund.

Two years earlier, the food service director had been fired for, among
other reasons, allowing what an arbitrator called “a rather astonishing
hostile work environment” to exist in the district’s central kitchen.
Employees there regularly engaged in “sexual horseplay,” including
simulated intercourse or “humping,” grabbing each other’s genitals and
viewing pornography on cell phones, according to the arbitrator’s findings
outlined in a recommendation to uphold the dismissal.

A subsequent assessment by an accounting firm hired by the district

identified multiple problems, including 59 vacancies representing
21 percent of the authorized staff, failure to seek competitive bids for
supplies and lax financial controls that resulted in “a cash shortage that
appears to be caused by more than human error.”

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With some 57,000 students, Santa Ana is the state’s sixth largest school
district. More than 80 percent of the students are eligible for free or
reduced-price meals. As a result, the district’s food services depend heavily
on federal meal subsidies, which provided $24.9 million, or 79 percent,
of the program’s revenues in the 2010-11 school year. State subsidies
accounted for another $2.1 million, or 7 percent of the food service
budget.

The $2.4 million in disallowed charges included more than $1.7 million
for “activity supervisors,” employees who monitor students during meals,
and nearly $670,000 for custodial, security, warehouse, maintenance and
groundskeeper employees. The state has since asked the district to repay
another $300,000 for a roof project that was improperly charged to the
cafeteria account.

In a conspicuous departure, CDE auditors reviewed records for and

disallowed only a single year of charges associated with the custodial,
security, warehouse, maintenance and groundskeeper employees. For
the activity supervisors, the auditors added up charges from three years of
records, the maximum amount districts are required to retain.

The Department of Education also found that Santa Ana Unified had
squirreled away a $16 million surplus in its cafeteria account. The reserve
is more than double what federal law allows for what is supposed to be a
nonprofit operation.

As a result of the bloated surplus, the state recently rejected the district’s
application for a $1.2 million grant, similar to others it has received in
the past, for fresh fruits and vegetables. The department suggested the
district instead use its cafeteria surplus to buy fresh fruits and vegetables
for students.

State auditors also found that the district had failed to collect more than
$100,000 that students owed for meals and was not charging enough for
adult meals, two more violations of state and federal laws.

The Department of Education did not act on allegations that the district
had not solicited competitive bids or secured contracts for any of its major
food service suppliers, as required by law. The district’s own accountants
had raised the same issue in a report issued two years earlier. State law
requires competitive bids and contracts for school cafeteria purchases
that exceed $81,000 a year. The federal threshold is $150,000, but federal
rules require agencies to adhere to the state threshold, if it is lower.

Michael Bishop, a deputy superintendent who supervises Santa Ana’s

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food services, said the district went to bid on “everything” required to

be competitively bid for its food services operation. But, in response to a
Public Records Act request from the Senate Oversight Office, the district
provided only two contracts, both of which had been “piggybacked” or
borrowed from other agencies that solicited the bids, negotiated the terms
and executed the agreements. One contract was for frozen foods. The
other was for distribution of USDA commodities.

The district’s food service operation purchases more than $13 million a
year in food and other supplies. It has exceeded the contracting threshold
for purchases from Driftwood Dairy, US Foodservice, Best Contracting
Services, Loewy Enterprises/Sunrise Produce and A&R Wholesale
Distributors, according to recent, board-approved payments that the
Senate Oversight Office found.

Bishop said one of those payments, $300,978 to Best Contracting

Services, was for a roof replacement project. State investigators had
advised the district that a roof project is an impermissible use of cafeteria
funds. That amount will also have to be repaid.

The district has taken steps to correct some of the problems identified by
the state, but has challenged the $2.4 million in disallowed charges for
salaries and benefits of the activity supervisors, custodians, maintenance
workers and others who work only part of their shifts on cafeteria-related
tasks.

State auditors said the district failed to maintain work logs required to
substantiate workers’ time actually spent on cafeteria-related activities. For
the activity supervisors’ salaries and benefits, which represent $1.7 million
of the disallowed charges, the district based the charges on “estimated
percentages of time worked by only a selected number” of employees, the
auditors found.

As part of a standard, five-year review cycle, CDE had examined Santa

Ana’s food services program in 2006 and 2011. After both visits, the
district was cited for cafeteria surpluses that exceeded the federal limit
– three months average expenses of the program. But neither review
discovered any of the disallowed charges later flagged by CDE auditors.
Those findings resulted from a complaint filed by Jan Monforte, who
succeeded Mary Lou Romero, the food service director who was fired in
2010.

Monforte, a former president of the California School Nutrition

Association, served nearly a year as the district’s food service director
before she was fired without warning or explanation in October 2011,

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two days before her one-year anniversary, when she would have cleared
probation.

After she was dismissed, Monforte told CDE that Bishop and other
Santa Ana administrators viewed the food service department, with its
$16 million surplus, as a “cash cow” that could be used “even when the
expense under discussion was not an allowable charge.”

She told CDE about charges made without proper documentation for the
activity supervisors, and the absence of contracts for the $13 million worth
of food and supplies purchased every year for the district’s cafeterias. She
reported that the food services program had been required to provide
free meals, in violation of federal law, for school board members and
administrators.

Although the cafeteria fund was being charged more than $700,000 a
year for custodians and maintenance workers, Monforte said many of
the cafeteria sites were cited “routinely” by the Orange County health
department for unsanitary conditions.

“In some of the cafeterias, they had to keep old-fashioned mouse traps
around the edges of the kitchen,” Monforte said. “When you get to the
point where you have to do that, things have gone out of control.”

A review of health department records over the past four years showed
many campuses were frequently cited for minor health code violations,
such as deteriorated floors, holes in walls and debris around equipment.
The records also included 22 health code violations for cockroaches and
rodents at 15 campuses and the central kitchen. A rodent infestation
prompted the county to order the closure of a Godinez High snack bar in
the fall of 2011.

Michael Haller, program manager for Orange County’s food protection

program, said the number and types of health code violations at Santa
Ana Unified schools did not stand out from other school systems in the
county.

“We get a smattering of closures throughout all the districts,” Haller said.
“If we did see a district that would tend to trend higher than any of the
others, that would have been brought to my attention.”

As the illegal surplus continued to grow by more than $2 million a year,

Monforte said she had difficulty persuading the district to fill the many
vacancies that hampered the food service operation. Just weeks before
she was dismissed, Monforte also had advised the district’s principals and

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administration that they needed to compile work logs, known as personal

activity reports, for the activity supervisors.

In a Sept. 28, 2011, memo distributed district wide, Monforte warned –

as state auditors later affirmed – that the work logs were required “to be
compliant with federal and state requirements.”

She had warned in an earlier memo that the free meals for board
members and administrators were not permitted and that prices charged
for adult meals could no longer be subsidized by the cafeteria account.

In his criticism of CDE’s findings, Bishop repeatedly cited an “absence

of guidance” from the state. In response to such criticism, which other
districts also expressed, CDE officials point to numerous bulletins that
the department has issued on the rules as well as regular seminars that it
conducts on what is and is not permitted.

Monforte said she understood the rules and was trying to bring the district
into compliance when she was fired.

Bishop refused to discuss any of Monforte’s allegations. He said the

district does need to increase staffing in its food services program. Of
the $16 million surplus, he said: “We run a very profitable program.
We have high utilization … high reimbursement.” One of the federal
government’s basic rules is that food services that accept federal subsidies
operate as nonprofit programs.

Bishop said the reserves also have grown because the district has been
unable to charge all allowable expenses to the program. For example, the
rules permit charging only a fraction of utility costs, unless kitchens have
individual meters, which most do not.

“I think it’s interpretation,” Bishop said. “When you look at the narrowest
interpretation of anything, you can exclude just about anything you want.”

BALDWIN PARK UNIFIED: Long impasse with the state

ends with agreement to increase spending on fresh
fruits and vegetables

In May 2012, Baldwin Park Superintendent Mark Skvarna signed a

settlement agreement committing his district to repay $1.5 million
that the California Department of Education determined had been
misappropriated from the district’s cafeteria fund.

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The settlement brought to an end almost six years of bitter disagreement

between the district and CDE, although some of the fallout continues
in a lawsuit that Baldwin Park’s food services director filed in November
against Skvarna and the district.

Nearly 60 percent of Baldwin Park Unified’s more than 20,000 students

qualify for free or reduced-price meals. Of more than $8.3 million in
revenue generated by the food service program in 2011-12, nearly 80
percent, or $6.7 million, came from federal reimbursements. The state
provided $568,000, or 7 percent of the revenue.

In the lawsuit, attorneys for food service director Geoffrey Monsour

allege that he was subjected to harassment and retaliation for objecting to
“improper and illegal” uses of the district’s cafeteria funds. Monsour has
been on paid leave since December 2011.

The lawsuit alleges that Skvarna used millions of dollars in cafeteria funds
“that were required by state and/or federal laws and regulations to be
spent for specific childhood nutrition programs ... for other impermissible
purposes, such as making up shortfalls in the general fund.”

Monsour’s attorney, Zachary Shepard, said the food service director

warned Skvarna in 2005 that money the district wanted to use for cafeteria
construction could not be used for that purpose.

Skvarna said Monsour never made such a statement to him. The

superintendent declined to discuss the allegations in the lawsuit, but said
he continues to believe all of the charges against the cafeteria fund were
appropriate and legal. Monsour, he said, “was never mistreated, abused
or anything else. He was just asked questions and I don’t think he liked to
be questioned.”

In 2006, during a periodic review by the state Department of Education,

the district was cited for transferring $1.6 million from its cafeteria fund
to its building fund for remodeling and other construction work done at
six schools, including cafeterias at each campus. State officials said they
received a tip from a district employee about the $1.6 million transfer.

Federal regulations expressly prohibit the use of cafeteria funds for

construction of buildings. The district’s National School Lunch Program
agreement, a contract required to participate in the program, also states
that “program revenues shall not be used for purchasing land, or for
acquiring or constructing buildings.”

The district also was cited for carrying an excess surplus in its cafeteria

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fund. Federal rules limit net cafeteria fund reserves to no more than
three months average expenditures of a food program. Baldwin Park’s
$2 million reserve exceeded that threshold by nearly $500,000, CDE
concluded. The district challenged the state’s findings and Skvarna said
he still believes the state was wrong.

“It was basically a remove and replace operation,” the superintendent

said. “We weren’t expanding any kitchens and, my understanding of
federal standards is that has always been allowable.”

Nonetheless, in November 2006, the district returned the $1.6 million to

its cafeteria fund. Six months later, the district also submitted to the state
a required five-year plan to reduce the surplus.

Less than two years later, during a follow-up review, CDE discovered
that Baldwin Park had transferred another $1.5 million from its cafeteria
fund to its general fund. Most of that money, $982,000, was charged for
custodial services in cafeterias and kitchens dating back to the 2004-05
school year. (District officials said food services had not been charged for
any janitorial or utility costs for at least eight years.) Another $383,000
represented interest overpayments to the cafeteria fund, according to the
district.

The state rejected the charges on a number of grounds. Recouping

unclaimed expenses from previous years is not permitted, the custodial
charges were not properly documented and the combined charges had
not been approved, as required, in the five-year plan to spend down the
surplus. Only CDE “has the specific authority to approve” expenditures to
reduce excess cafeteria fund surpluses, the state said.

Baldwin Park disagreed and refused to repay the funds. Skvarna

threatened to sue the state. The Department of Education offered to
bring in the State Controller’s Office or the Department of Finance to
do an independent audit of Baldwin Park’s cafeteria account. Skvarna
declined because he said the state refused to allow the district to use
cafeteria funds to pay for any audit. No lawsuit was ever filed.

With no movement after nearly three years of impasse, CDE suspended

Baldwin Park’s meal reimbursements, roughly $700,000 a month, in
May 2011. When the district appealed once more, CDE again offered
to submit the dispute to a “neutral third party,” such as the Controller’s
Office. Instead, Baldwin Park agreed to settle.

“They stopped my money,” Skvarna said. “I could have done a lot of

things, but I can’t do anything if I can’t feed kids.”

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By then, after the suspended meal payments were restored, Baldwin

Park’s cafeteria fund surplus had grown to $6.5 million. A new five-year
plan requires the district to spend most of the surplus on equipment and
improvements for the food services program, including $2.7 million for
salad bars, fresh fruits and vegetables.

Skvarna said the surplus-reduction plan will force the district to redo a lot
of work that was recently done and replace equipment that is relatively
new or doesn’t need to be replaced. Federal guidelines offer several
options to reduce an excess cafeteria fund surplus. Schools districts may
improve the food service operation and the meals provided, reduce lunch
prices or accept reduced reimbursements for free and reduced-price
meals.

Skvarna said his district was singled out for accounting practices,
particularly the failure to keep timesheets documenting hours spent on
cafeteria-related work, that are widely used by districts throughout the
state.

“I have great sympathy for (those who complain about) keeping track of
everybody’s hours,” said Richard Zeiger, chief deputy state superintendent
of public instruction. “We have to do that here. We track everybody’s
hours to see if they can write something off to a federal program,
everybody, thousands of people, every single hour.”

SAN DIEGO UNIFIED: State cites faulty accounting and

double-billing for costs

In May 2012, the California Department of Education notified San

Diego Unified, the state’s second largest school district, that it had
improperly charged nearly $4.5 million in custodial and utility charges to
its cafeteria fund.

The department’s findings reflected a review of only one school year,

2010-11, even though a district administrator had publicly stated that the
questionable charges dated back three years. The state has since expanded
its review to include all three years.

District officials are contesting the findings. Pending a more extensive

analysis, they say that any disallowed charges can be deducted from an
outstanding $18 million general fund loan to the food services operation.
The state’s review was expanded in part to determine whether the district
can document that loan.

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More than 65 percent of San Diego Unified’s 131,000 students qualify

for free and reduced-price meals. As a result, federal subsidies provided
$44.2 million, or nearly 79 percent, of the $55.8 million that the district’s
cafeterias generated in the 2011-12 school year. The state provided
another $3.9 million or 7 percent of the revenue.

The origin of the San Diego Unified case distinguishes it from most of the
other cafeteria fund investigations the state has opened in recent years.
Rather than a tip or complaint about budgetary sleight of hand, CDE
disallowed the $4.5 million in charges after a standard state review done
once every five years.

The department said San Diego Unified failed to document a sharp

increase – from $188,000 to $3.3 million a year – in custodial time and
charges assigned to the cafeteria fund. In addition, the department said
the school district failed to substantiate nearly $1.2 million in utility costs
charged to the cafeteria fund. The district also double-charged some of
those utility expenses as both direct and indirect costs to the fund, CDE
said.

District officials acknowledge that, with rapidly shrinking reserves, they

were searching for ways to relieve pressure on the general fund. Assigning
food services its fair share of custodial and utility costs was not only legal,
they said, but something the district should have done long ago.

“It has caused the district to do belt tightening and assign costs out to
provide relief for the general fund, wherever and whenever possible,” said
Wayne Oetken, former interim chief financial officer. “But there was no
attempt on the part of the district to make a claim that was inappropriate
or not allowed.”

To assess its options, the district four years ago commissioned a study
by The Portolan Group, a school consulting firm. Portolan’s 2009
report, “Opportunities for Economic Improvement (in) Food Service
Operations,” identified steps the district could take to improve both its
food services and its precarious finances. One of those recommendations
was to increase custodial charges to the cafeteria fund.

Philip Stover, the district’s deputy superintendent of business, worked for

Portolan at the time and headed the team that did the study. He said the
district had not charged food services for much custodial time because the
program was operating in the red and could not afford it.

But, with increased sales and acceptance of subsidized meals

driven by food service improvements, the district was able to begin

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charging the cafeteria fund for custodial services. Following Portolan’s

recommendation, the charges were based on a detailed time study that
assigned two, four and six hours of custodial time per day to elementary,
middle and high schools, respectively.

The study calculated total annual custodial costs of $2.6 million for food
services. The district already was assigning $188,000 a year in custodial
costs to the cafeteria fund for breakfast cleanup. When the district
executed the consultant’s recommendation, it raised the custodial charge
to the cafeteria fund to $3.3 million in 2009-10 and 2010-11, and $3.6
million in 2011-12.

But the district had a problem. Federal and state guidelines do not
permit the use of time studies, unless approved in advance by the federal
government, to calculate chargeable hours of employees, like custodians,
who spend only a portion of their day on food service duties, CDE stated.

Stover said the recommended accounting methodology was based on the

extensive experience of his Portolan team, which had worked with more
than 150 school districts across the nation. He said his team did not run
the methodology by anyone at CDE.

In a summary of the state’s findings, a CDE examiner reminded the

district of a department PowerPoint presentation entitled, “Cafeteria
Funds, the Do’s and Don’ts. What Districts and Agencies Need to Know
About Managing Their Food Service Funds.” Slides in the PowerPoint,
which the department uses in frequent seminars for school district
employees, identified improper charges like those assessed at San Diego
Unified. The summary also cited a U.S. Department of Agriculture policy
memo and a CDE bulletin to school districts that offered additional
guidance on allowable food service charges.

Nonetheless, Debbie Foster, San Diego Unified’s budget operations

director, said the district’s outside auditor signed off on the disputed
charges. State education officials say there is no cafeteria fund guidance
in the state or federal audit guides and some auditors are unaware of the
strict rules on how the money can be used.

District officials continue to maintain the charges were fully justified, but
have agreed to repay the disallowed charges, if necessary. This district also
is working with CDE to develop a tracking and accounting system that
complies with federal and state law.

In a Sept. 27, 2012, letter to CDE, San Diego Superintendent William

Kowba said the district “clearly understands that the methodology used”

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to substantiate the utility and custodial charges does “not meet program
requirements.” However, he added, since the charges “were incurred
as direct support of the program, it is our hope that some acceptable
validation process can be identified which will enable the district to
charge the food service program for all or a portion thereof.”

Foster said the district has an award-winning food service operation that
has not been hurt by the disallowed charges and continues to attract
increased student participation.

“We have an incredible child nutrition program,” she said. “So we just
want to be appropriate in the way we are recording expenses and move
forward.”

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Recommendations
During research for this report, weaknesses and gaps in the oversight
system for student meal funds were acknowledged by officials at the
California Department of Education, who monitor subsidized meal
programs for the federal government, as well as school administrators
who must comply with the rules. Enforcement appears to be difficult
for all involved and the temptation to use restricted meal funds for other
pressing needs can be great. The following recommendations were
developed by the Senate Office of Oversight and Outcomes and include
worthy proposals suggested by those who participated in the preparation
of this report:

• The California Department of Education should conduct an

assessment of its food services workload and staffing needs and
request sufficient federal funding to hire enough personnel to carry
out the state’s oversight responsibilities.

• The state Education Audit Appeals Panel should include in the

state audit guide for K-12 local education agencies clear and
comprehensive guidance on what school districts may and may
not do with funds in cafeteria accounts. The Education Audit
Appeals Panel should require annual audits to review cafeteria fund
expenditures for compliance with state and federal rules.

• The state Department of Education should prepare simplified

guidelines, such as those included in the Los Angeles Unified
School District settlement agreement with the state, that address
most of the common acceptable and unacceptable charges to
cafeteria accounts.

• The state Department of Education should announce and publicize

enforcement actions for misappropriation of cafeteria funds,
to create an ongoing discussion of the rules and to encourage
compliance.

• The Legislature should consider extending the three-year

requirement to maintain financial records to perhaps five or 10

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February 6, 2013
Oversight and Outcomes

years to discourage creative accounting. Many records now are

prepared electronically and can easily and inexpensively be stored
electronically.

• The Legislature should consider adopting legislation that mirrors

federal regulations and guidance to prohibit charges to cafeteria
funds for expenses incurred in prior years, and any recouping
of direct or indirect charges that were never charged during the
appropriate fiscal year.

• The Legislature should consider requiring school districts to give

food service directors access to all financial records involving student
nutrition programs.

• The Legislature should consider repealing sections of the Education

Code that conflict with federal law or regulations. Those sections
include:

EC Section 38102, which authorizes the establishment of

cafeteria equipment accounts which the USDA does not
permit and which some school districts use to hide money.

EC Section 38092, which authorizes cafeteria fund revenue

sharing with associated student bodies. Federal law does not
permit such revenue sharing.

• The Legislature should consider eliminating or extending the Jan.

1, 2015, sunset date in EC Section 35400 for Los Angeles Unified’s
Office of Inspector General. The OIG documented LAUSD’s
decade-long misappropriation of cafeteria funds and has amassed
an impressive body of work since it was established in response to
outrage over the district’s attempt to build a new downtown school
on expensive property that later turned out to be contaminated.

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February 6, 2013
Oversight and Outcomes

References
Bach, Ronna, regional director, Special Nutrition Programs, Western
Regional Office, U.S. Department of Agriculture. Personal interview.
August 2012.

Barrett, Dennis, former food service director, 2007-2012, Los Angeles

Unified School District. Personal interviews. July and October 2012.

Bishop, Michael, deputy superintendent, chief business officer, Santa

Ana Unified School District. Personal interviews. August, September
and October 2012.

B. Sackin & Associates. Report on Charge Allocations to Foodservice.

June 30, 2007.

Burgin, Aaron. “Schools may have to repay cafeteria money.” U-T San
Diego. April 12, 2012.

California Department of Education:

Annual Adjustment to Bid Threshold for Contracts Awarded by

School Districts. Memo to county and district superintendents,
chief business officials and charter school administrators from Scott
Hannan, director, School Fiscal Services Division.

California School Accounting Manual, 2011 edition.

Cafeteria Funds/Accounts – Reminders and Resources. Nutrition

Services Division Management Bulletin. May 2012.

Cafeteria Fund Loan Guidance. Nutrition Services Division.

June 23, 2004.

Files containing documents detailing CDE investigations of

the Alvord, Arcadia, Baldwin Park, Centinela Valley, Compton,
Grossmont, Hesperia, Long Beach, Los Angeles, Merced City,

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February 6, 2013
Oversight and Outcomes

Newark, Oxnard, San Diego, San Francisco, Santa Ana and

Sweetwater school districts.

Frequently Asked Questions about Indirect Costs. Financial

Accountability and Information Services. July 29, 2011.

Information Alert: Annual Bid Threshold. Nutrition Services

Division. March 2010.

Limitations on the Transfer of Funds from School Cafeteria Funds/

Accounts. Nutrition Services Division Management Bulletin.
July 2008.

Memorandum of Understanding between Nutrition Services

Division and Audits and Investigations Division. June 2012.

California Education Code, Sections 35400-35401, 38090-38095, 38100-

38103, 41010-41023 and 49550-49562.

Carlson, Cheri. “Oxnard Union must reimburse millions for school

meals.” Ventura County Star. Sept. 27, 2010.

Carroll, John, former assistant attorney general, New York. Testimony

before the U.S. Senate Committee on Homeland Security and
Government Affairs, Subcommittee on Contracting Oversight.
Oct. 5, 2011.

Code of Federal Regulations, Title 7, Subchapter A, Child Nutrition

Programs, Part 210.

Eugene, Michael, chief operations officer, Orange County (Florida)

Public Schools, former business manager, Business Services Division, Los
Angeles Unified School District. Personal interview. August 2012.

Eugene, Michael. Charges to Cafeteria Fund – Proposed Reductions and

Required Justifications. Inter-Office Correspondence to Joseph Zeronian,
chief financial officer, Los Angeles Unified School District. April 3, 2003.

Eugene, Michael. Status of the Cafeteria Fund and the LAUSD Food
Services Budget. 2003.

Evergreen Solutions. Food Services Review in the Los Angeles Unified

School District. March 28, 2007.

Feeney, Paul, deputy counsel, Office of Inspector General, USDA. Email

interview. June 2012.
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February 6, 2013
Oversight and Outcomes

Foster, Debbie, budget operations director, San Diego Unified School

District. Personal interviews. October and November 2012.

Gordon, Kevin, lobbyist, Capital Advisors Group. Personal interview.

September 2012.

Hacker, Ron, interim assistant superintendent, business services,

Centinela Valley Union High School District. Personal interviews.
August and September 2012.

Haller, Michael, program manager, Food Protection Program,

Environmental Health Division, Orange County Health Care Agency.
Personal interview. October 2012.

Hamilton, Marcene, chief financial officer, Baldwin Park Unified School

District. Personal interview. August 2012.

Hern, Ann; Huntoon, Michele; Wiley, Lewis. Baldwin Park Unified

School District, Nutrition Services Program Review and Analysis. Draft
report. Jan. 24, 2011.

Himes, Thomas. “State: Baldwin Park Schools Misspent Nearly $1.5

million, federal funding suspended.” San Gabriel Valley Tribune.
Oct. 7, 2011.

Holloway, Margan, president, California School Nutrition Association,

student nutrition services director, Tamalpais Union High School District.
Personal interviews. August and October 2012.

Huntoon, Michele, associate vice president, School Services of

California. Personal interview. August 2012.

Ihm, Young, team leader, school programs, Western Regional Office, U.S.
Department of Agriculture. Personal interview. August 2012.

Jang, David, manager, Program Integrity Unit, Nutrition Services

Division, CDE. Personal interviews. June, July, August, September,
October, November 2012.

Kaur, Sandip, director, Nutrition Services Division, CDE. Personal

interviews. September and October 2012.

Kavooras, Christine, manager, School Nutrition Programs, Nutrition

Services Division, CDE. Personal interviews. June, August,
October 2012.

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February 6, 2013
Oversight and Outcomes

Los Angeles Unified School District. “Cafeteria Fund Cash Flow May
Leave Neediest LAUSD Students Hungry.” News release. Jan. 23, 2009.

Monforte, Jan, former president, California School Nutrition Association,

former food service director, Santa Ana Unified School District. Personal
interviews. September, October and November 2012.

Nye, Suzanna, manager of field services, Nutrition Services Division,

CDE. Personal interview. August 2012.

Monsour, Geoffrey vs. Baldwin Park Unified School District, et. al. Case
No. BC495041. Los Angeles County Superior Court. Nov. 2, 2012.

Oetken, Wayne, former interim chief financial officer, San Diego Unified
School District. Personal interviews. September and October 2012.

Office of Management and Budget, OMB Circular A-87.

Office of the Inspector General, Los Angeles Unified School District:

Cafeteria Schools Inventory. Audit Report. June 21, 2006.

Cafeteria Fund Charge Allocation. Final Audit Report.

Sept. 29, 2006.

Cafeteria Fund Charge Allocation. Audit Report. Aug. 24, 2009.

Maintenance and Operations Job Cost Charges to Cafeteria Fund.

Nov. 20, 2009.

Perone, John D. Arbitrator’s opinion and recommendation to uphold the

dismissal of Mary Lou Romero, former food service director, Santa Ana
Unified School District. Aug. 2, 2011.

Portolan Group, The. Opportunities for Economic Improvement, Food

Service Operations. Report prepared for San Diego Unified School
District. January 2009.

Ralls, John, supervising environmental health specialist, Environmental

Health Division, Orange County Health Care Agency. Personal
interviews. October 2012.

Ramos, Monique, legislative representative, CDE. Personal interview.

November 2012.

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Oversight and Outcomes

Reilly, Megan, chief financial officer, Los Angeles Unified School

District. Personal interview. July 2012.

Rock, Lynette, president-elect, California School Nutrition Association,

food service director, Torrance Unified School District. Personal
interviews. August and October 2012.

Rodas, Alfred, interim inspector general, Los Angeles Unified School

District. Personal interviews. July and August 2012.

Shepard, Zachary, attorney, Glickman & Glickman. Personal interviews.

August and October 2012.

Skvarna, Mark, superintendent, Baldwin Park Unified School District.

Personal interviews. August 2012.

State Controller’s Office. Los Angeles Unified School District, Audit

Report, Cafeteria Fund Program, July 1, 2008 through June 30, 2010.
August 2012.

Stover, Philip, deputy superintendent of business, San Diego Unified

School District. Personal interview. November 2012.

United States Department of Agriculture:

Indirect Costs: Guidence for State Agencies & School Food

Authorities. July 7, 2011.

Management Evaluation of the National School Lunch Program as

administered by the California Department of Education. Conducted
May 23-27, 2011.

Report of Investigation, Oxnard Union High School District. Office of

Inspector General-Investigations. Oct. 5, 2010.

Western Wave: Spotlight on California. Western Regional Office.

December 2011 and September 2012.

Vavrinek, Trine, Day & Co. Assessment of the Santa Ana Unified School
District Child Nutrition Department. Letter to Michael Bishop.
July 23, 2010.

Vicenti, Lloyd & Stutzman. Report of Investigation, Food Services Free

and Reduced Meal Count Investigation, Oxnard Union High School.
Sept. 1, 2010.

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Oversight and Outcomes

Walsh, John, director of finance policy, Los Angeles Unified School

District. Personal interview. July 2012.

Womack, Jess, former inspector general, Los Angeles Unified School

District. Personal interview. July 2012.

Zeiger, Richard, chief deputy state superintendent of public instruction.

Personal interviews. May and October 2012.

56
Senate Office of Oversight and Outcomes
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Telephone: (916) 651-1518
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Principal Consultant Saskia Kim • [email protected]
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Principal Consultant Jim Sweeney• [email protected]
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