BILL ANALYSIS �
SENATE COMMITTEE ON EDUCATION
Alan Lowenthal, Chair
2011-2012 Regular Session
BILL NO: AB 1917
AUTHOR: Dickinson
AMENDED: May 25, 2012
FISCAL COMM: No HEARING DATE: June 27, 2012
URGENCY: No CONSULTANT:Kathleen Chavira
SUBJECT : School district food service contracts.
SUMMARY
This bill establishes new requirements to be met if a
school district governing boards enters into a contract for
the acquisition of food services.
BACKGROUND
The School Nutrition Program (SNP) is a federally assisted
meal program operating in public and nonprofit private
schools and residential child care institutions. In
California, the School Nutrition Programs consist of the
National School Lunch, School Breakfast, Special Milk, Meal
Supplements, and Seamless Summer Feeding Option.
California's School Nutrition Program is administered by
the California Department of Education (CDE). School
districts, county superintendents of schools, and charter
schools may receive state and federal funding for this
purpose. (Education Code � 49490-� 49590)
ANALYSIS
This bill :
1) Establishes new requirements to be met if a school
district governing board enters into a contract for
the acquisition of food service. More specifically it:
a) Requires that the governing board
develop and adopt policies and procedures for the
acquisition of food services ensure that a
service contractor fully disclose to the school
district all discounts, rebates, allowances, and
AB 1917
Page 2
incentives received by the service contractor
from its suppliers.
b) Requires a food service contractor
that receives a discount, rebate, allowance, or
other incentive from any supplier, to disclose
and pay to the school district the full amount of
the discount, rebate, or applicable credit that
is received on the basis of purchases made on
behalf of the school district.
c) Requires that language stating
this requirement be included in agreements for
food services entered into by the school
district.
d) Requires that all discount,
rebate, allowance, or incentive received be paid
to the school district during a mutually agreed
upon time frame and be available for review as
part of any legally required audit.
e) Requires that changes to comply
with these provisions be implemented upon the
renewal, extension or amendment of existing
agreements or as part of any new service
agreement.
2) Defines "rebate" for purposes of the bill to include
any return of monetary value, including but not
limited to a volume discount, allowance, or discount
purchase incentive.
STAFF COMMENTS
1) Source of the bill . According to the author, the New
York Attorney General reached an out of court
settlement of $20 million with a third party food
services contractor on behalf of the State University
of New York and local school districts. The Attorney
General found that contractors had adopted a business
model that involved overcharging for food by not
disclosing that part of the food costs paid for
rebates back to them from the suppliers. The author
is concerned that current law allows school districts
to contract for food services but provides no guidance
AB 1917
Page 3
on how to do so.
2) Consistent with federal regulations . The United States
Department of Agriculture (USDA) has adopted
regulations regarding procurement of food and supplies
and the procurement of services offered by a food
service management company (FSMC). These regulations,
among other things, require that allowable costs paid
from the nonprofit school food service account be net
of all discounts, rebates, and applicable credits and
requires State agencies to review and approve school
food authority procurements of FSMC services in
advance of contract execution. The provisions of this
bill are modeled upon the prototype contract language,
provided by the USDA, to assist districts in ensuring
that costs under the National School Lunch Program
(and allowed use of federal dollars) are net of all
discounts, rebates and applicable credits.
3) Food Service Management Company (FSMC) . An FSMC is an
entity that performs one or more activities of the
food service operation on behalf of a school nutrition
program sponsor (typically a school district). These
activities may include any or all of the following
services: bookkeeping, menu development, preparation
of reimbursement claims, organization and maintenance
of program documents (such as daily meal counts,
menus, and menu production records), meal preparation
and service, consulting services, and purchasing
services.
FSMC contracts may be valid for up to one year from
the date that they are signed by all parties and may
be renewed for up to four additional one-year terms.
Federal regulations require that districts annually
submit all new contracts, corresponding bid documents,
and/or annual contract extensions to the California
Department of Education (CDE), Nutrition Services
Division (NSD), for prior approval. Federal
regulations also require that all purchases of goods
and services using food service revenues follow
federal procurement regulations.
As currently drafted the bill refers to a "service
contractor." Staff recommends the bill be amended to
replace "service contractor" with "food service
AB 1917
Page 4
management company" and to make the conforming changes
throughout the bill.
4) Related audit findings . A recent federal audit of the
National School Lunch Program found, among other
things, that the CDE does not have a standard
procedure to review and monitor contracting activity
between school food authorities and FSMCs, as required
under federal regulation. The audit requires that CDE
establish a standard procedure to ensure all pending
contracts between school food authorities and FSMCs
are in compliance with federal regulations. The CDE
has requested, and the Senate and Assembly budget
subcommittees on Education have approved, five
positions in order to create a unit to review and
approve food service management contracts. In
addition, the CDE reports that it is developing
prototype contracts for school districts to use when
contracting with a FSMC.
5) What about other LEAs ? This bill applies its
provisions exclusively to school districts. The CDE
School Nutrition Programs may provide funding to
districts, county offices, and charter schools. It is
unclear why the contracts entered into by other local
educational agencies are excluded from the bill,
particularly if these entities participate in
federally funded food service programs that require
such contract language. Staff recommends the bill be
amended to include county offices of education and
charter schools if they enter into a food service
management contract and use federal or state funds for
this purpose.
6) Beyond federal regulations . As currently drafted, the
bill's provisions apply to all food service management
company contracts. According to the background
provided in the federal rules and regulations, food
service management company contracts can be either an
inclusive fixed price per meal contract, or a cost
reimbursable contracts (no cap on costs), in some
cases with a fixed fee component. It appears that the
majority of FSMC contracts are cost reimbursable with
a fixed fee. The regulations adopted by the USDA
apply specifically to cost reimbursable contracts or
contracts with cost reimbursable terms, the logic
AB 1917
Page 5
being that in a fixed price contract the contractor
has already taken into consideration factors such as
discounts rebates, and other credits when formulating
their prices for their contracts.
If it is the intent to mirror federal regulation,
staff recommends the bill be amended to apply its
provisions to "cost reimbursable contracts or
contracts with cost reimbursable terms."
7) Prior legislation . AB 450 (Wieckowski, 2011) Vetoed
by the Governor whose message read, in pertinent part:
This bill targets a narrow set of contracts
between the California State University campuses
and their food vendors. It aims to correct a
problem that may or may not exist by requiring
those vendors to disclose supplier discounts and
pass them on to the campuses. Since they can
already do this on their own, this measure is not
necessary.
SUPPORT
None received.
OPPOSITION
None received.