Nonprofit School Food Service Account Nonprogram Food Revenue Requirements

Section 206 of the Healthy, Hunger-Free Kids Act of 2010 (HHFKA) amended section 12 of the Richard B. Russell National School Lunch Act by adding paragraph (q) on nonprogram foods. This amendment established requirements related to the revenue from the sale of nonprogram foods. On June 17, 2011, the Food and Nutrition Service (FNS) issued an interim rule, National School Lunch Program: School Food Service Account Revenue Amendments Related to the Healthy, Hunger-Free Kids Act of 2010 (76 FR 35301), amending the requirements related to revenue from nonprogram foods at 7 CFR 210.14(f). FNS also issued guidance related to implementation of section 206 in policy memorandums SP 13-2014 at http://www.fns.usda.gov/sites/default/files/SP13-2014os.pdf and SP 39-2011 at http://www.fns.usda.gov/sites/default/files/SP39-2011r.pdf.

State agencies and school food authorities (SFAs) continue to pose questions regarding implementation of these requirements and the interaction with the existing revenue requirements found in 7 CFR 210.14(a). This memorandum provides guidance on the revenue requirements including options for assessing compliance to fulfill the requirements in section 206.

Nonprogram Revenue Requirements

Under subsection 12(q) of the Richard B. Russell National School Lunch Act and 7 CFR 210.14(f), SFAs are required to ensure:

• All revenue from the sale of nonprogram foods accrues to the non-profit school food service account; and
• Revenue available to support the production of reimbursable school meals does not subsidize the sale of nonprogram foods.

Nonprogram foods include any nonreimbursable foods and beverages purchased using funds from the nonprofit school food service account. This encompasses all foods sold in schools as well as adult meals, foods sold outside of school hours or any foods used for catering or vending activities. For the majority of SFAs, a la carte foods offered during meal service account for the largest share of nonprogram foods.

SFAs are required to determine if the percent of total revenue that is generated from their nonprogram food sales is equal to or greater than the percent of total food costs that are attributable to the SFA’s purchase of nonprogram foods. For example, if the costs of nonprogram food are 25 percent of the SFA’s total food costs, then the amount of revenue generated from the sale of these nonprogram foods must be at least 25 percent of the total revenue in the school food service account.

To simplify the assessment, the statutory requirement states that only food costs are to be used to measure compliance. Research indicates that the cost of nonprogram foods, as a percent of total food cost, is a reasonable proxy for all costs associated with obtaining foods, (i.e., the cost of food, labor, direct and indirect costs). This means if an SFA is able to show that the percent of nonprogram food costs is less than the percent of nonprogram revenues, the SFA generated enough revenue to cover all reported costs associated with nonprogram foods. Thus, the requirement focuses on nonprogram food costs as a percent of total food costs in an effort to simplify the requirement and eliminate the burden of documenting labor and other costs.

Nonprogram Foods Sale Transactions

When nonprofit school food service account funds are used to provide goods and services (e.g., catering and vending) for outside entities such as the superintendent’s office, school board, or student clubs, there are two separate transactions that occur. The first transaction is between the school food service and the outside entity, which is typically associated with the school district but separate from the school food service, and the second transaction is between the outside entity and its customers. The school food service may provide goods and services to the outside entity only if all costs, including labor and any other costs incurred, are covered by the entity being served by the school food service operations (the first transaction). Any revenue generated through the second transaction between the outside entity and its customers may be kept by the outside entity. For example, an SFA may use nonprofit school food service account funds to purchase and prepare hamburgers for the Parent Teacher Association (PTA) which runs a high school concession stand during football games. If the cost associated with purchasing and preparing the hamburgers is $2 per hamburger, the SFA must recoup at least $2 per hamburger from the PTA; the PTA may then sell each hamburger for $3 and keep the $1 profit per burger.

SFAs providing goods and services to outside entities are strongly encouraged to develop a written agreement with the outside entity that identifies costs and any other responsibilities, as applicable. The agreement must include a stipulation that all risk relating to revenue losses must be covered by the outside entity and not the school food service. For example, if the PTA who is purchasing the hamburgers in the example above is unable to sell them due to the game being cancelled, the PTA is still responsible for reimbursing the food service the costs associated with the purchase and any labor that was involved in the SFA’s preparation of the hamburgers.

Program regulations do not restrict revenues earned from the sale of competitive foods that are purchased with funds outside of the nonprofit school food service account, i.e., the general fund. However, state agencies and SFAs are reminded that to the extent such foods are sold on the school campus during the school day, the “Smart Snack” requirements at 7 CFR 210.11 apply.

Assessing Compliance Options

FNS understands there is wide variation in the capabilities of systems and mechanisms SFAs employ to maintain and monitor their school food service accounts. Separating out the SFA’s costs for nonprogram foods from the costs for program food may be particularly difficult. In recognition of the current variations in system capabilities, FNS is providing a simplified approach for SFAs to assess compliance with this requirement going forward.

The simplified approach, while still requiring SFAs to separate their nonprogram food costs from their program food costs, allows SFAs to select a reference period by which compliance will be assessed. Rather than separating all costs for the entire year, SFAs will separate their nonprogram food costs from their program food costs for a period of at least 5 consecutive operating days (or 4 consecutive days for schools that only operate 4 days).

If the SFA is able to show that the percentage of nonprogram revenue generated is at least as great as the percentage of nonprogram food costs incurred during the reference period, the SFA is in compliance with Federal requirements.

SFAs with the capacity to obtain separate nonprogram and program food cost and revenue data for a period longer than 5 consecutive days (e.g., monthly, annual, biweekly) are strongly encouraged to use data from the longer period to perform the assessment. All revenue and cost data used to assess compliance must reflect the same reference period. For example, if the revenue ratio is calculated using October 2014 data, the cost ratio must be calculated with October 2014 data. Similarly, if revenue information from the full 2014-2015 school year is used to calculate the revenue ratio, food cost information for the full 2014-2015 school year must be used to calculate the food cost ratio.

Detailed guidance on how to perform the cost/revenue assessment is provided in the attached question and answer document.

State agency monitoring

Compliance with the nonprogram revenue requirement is reviewed through the resource management section of the Administrative Review process. While noncompliance with the revenue from nonprogram foods requirements is not subject to fiscal action as defined under 7 CFR 210.18(m), State agencies must ensure that SFAs secure funding to make up any shortfalls in the nonprofit school food service account and/or otherwise take steps to ensure that nonprogram foods are priced sufficiently to meet the nonprogram foods requirement. It is important for state agencies and SFAs to work together to develop practices to ensure the financial viability of the nonprofit school food service account.

State agencies are reminded to distribute this guidance to SFAs immediately. SFAs should contact their state agencies for additional information. State agencies may direct any questions concerning this guidance to the appropriate FNS regional office.

Sarah E. Smith-Holmes
Director
Program Monitoring and Operational Support Division
Child Nutrition Programs

Attachments

• Assessing Compliance with Nonprogram Revenue Requirements