Cafeteria Fund Loan Letter

Date: November 15, 2004

Dear County and District Superintendents, Business Officials, and School Food Service Directors:

SCHOOL CAFETERIA FUNDS/ACCOUNT REGULATIONS; CLARIFICATION OF AB 1754

Reference(s): Assembly Bill 1754 Section 39; Title 7, Code of Federal Regulations, Part 210.14, et seq.; California Education Code Section 38100, et seq.

This guidance provides districts with information and instructions pertaining to federal and State statutes and regulations that govern school cafeteria accounts, and clarifies section 39(a) of Assembly Bill (AB) 1754, (Chapter 227, Budget Committee, Statutes of 2003).

Federal Regulations

The Title 7, Code of Federal Regulations (7 CFR) governs nonprofit school food service cafeteria accounts. School food authorities participating in the National School Lunch, School Breakfast, and Special Milk Programs must establish a nonprofit school food service (cafeteria fund/account) [7 CFR 210.9(b)(1)]. All federal, State, and local revenues, payments, and program reimbursement must be deposited into the cafeteria account and are to be used solely for the operation and improvement of this service [7 CFR 210.14]. In addition, school nutrition program sponsors must comply with State and federal limitations on the use of cafeteria funds [7 CFR 210.9(b)(1)].

Assembly Bill 1754

With the passage of AB 1754 in 2003, California's legislature authorized a one-time transfer of the June 30, 2003, ending balances of restricted funds, including cafeteria funds, to meet district financial obligations.

However, while the intent of AB 1754 was to allow districts to access surplus fund balances for other district purposes, districts participating in federal school nutrition programs (listed above) have minimal flexibility when utilizing cafeteria funds. AB 1754 did not override the requirements of federal regulations that govern the use of cafeteria funds.

In November 2003, the California Department of Education (CDE) issued guidance regarding AB 1754, which stated:

It is the intent of the Legislature to allow LEAs to access surplus balances in the Cafeteria Fund. However, for districts participating in federal food programs, flexibility may be limited. Federal law requires school food authorities to establish a nonprofit school food service, and further requires that federal, state and local revenues received by the school food service be used only for the operation or improvement of such service. Therefore, you should exercise caution if your district receives federal funds and has established a school food service in accordance with federal guidelines, so as to ensure program compliance and avoid a federal audit exception.

In addition, AB 1754 contained an exception to the transfer of restricted accounts. Specifically, AB 1754 Section 39(c) stated, "A governing board may not use the ending balance in any restricted account if that use would violate a federal maintenance of effort requirement."

Restricted accounts are those designated by law or donor for specific purposes; the cafeteria fund is a restricted account.

Cafeteria Fund Audits and Reviews

7 CFR 210.14(a) restricts the use of nonprofit food service revenues to the operation or improvement of the nonprofit food service for children. Also, 7 CFR 210.18 requires that all schools participating in federal meal programs be audited. The Nutrition Services Division (NSD) administers this through a Coordinated Review Effort or "CRE." NSD staff must report non-compliance findings to the CDE and the U.S. Department of Agriculture (USDA) and require subsequent corrective action procedures from districts.

Repayment of Cafeteria Funds

1. If your district determined it could comply with federal law and transferred cafeteria funds pursuant to AB 1754 during the 2003-2004 school year, your district must have written documentation (board approval of transfer, accounting procedures), including specification that the transfer originated pursuant to the provisions in AB 1754 [ Education Code (EC) Section 38101(d)].
2. If the CDE and the Department of Finance concur that a district has improperly expended or transferred cafeteria funds, the district will be directed to transfer double the amount improperly transferred to the general fund to the cafeteria fund for the subsequent year to be used for the improvement of the district's food service program. If the district fails to transfer the funds back into the cafeteria account, the Superintendent of Public Instruction shall reduce the school district's regular apportionment and increase the district's child nutrition allowance by double the amount improperly transferred to the district's general fund, and that amount is to be used for improvement of the food service program [EC Section 38101(f)].

In addition, districts may not forego repayment of improper cafeteria fund transfers/expenditures. However, some cafeteria expenditures paid out of the general fund that could have been paid from cafeteria funds may be recouped by the general fund. For example, if school district (not cafeteria) funds are expended for the lease or purchase of additional cafeteria equipment for a central food processing plant, or for the lease, purchase, installation, or housing of vending machines, the governing board may, at any time within five years after the expenditure, reimburse school district funds from cafeteria funds. Also, if district funds are expended for the cost of the alteration (modernization, not construction) or improvement of a central food processing plant and the installation of additional cafeteria equipment, the governing board may, at any time within five years after the expenditure reimburse district funds from cafeteria funds [7 CFR 210.14(a) and EC Section 38100]. Expenditures for food service employees' salaries and benefits, including retirement benefits paid out of the general fund, may be reimbursed from the cafeteria fund at any time (EC Section 38103). However, all other expenditures from the general fund that could have been paid from the cafeteria fund, including indirect charges/costs, are only reimbursable during the current year. Such repayments may be applied against cafeteria funds that were improperly transferred, including transfers documented pursuant to AB 1754.

Repayment options must be implemented immediately, and State and federal regulations prohibit further transfers of cafeteria funds for other district financial obligations.

Loans

If your cafeteria fund transfers meet all the prerequisite criteria set forth by USDA, your district may consider transfers and expenditures from the cafeteria account as "a loan."  USDA has provided formal guidance stating, "A bona-fide loan agreement complete with interest payment provisions must be executed before, not after, the funds are withdrawn from the account."

Loans from the cafeteria fund must be treated as a commercial loan, and before the district can transfer the funds, there must be a bona-fide (written, formal) loan agreement between district and food service officials and specific repayment terms (dates and amounts) and interest payments are required. The rate of interest charged must be equal to the rate that would be paid if the loan was obtained from a commercial source, and no less than the amount of interest the food service department would have earned by keeping the money deposited in an interest-bearing account (see attached USDA guidance).

Please share this information with your district/agency management and business personnel. If you have questions regarding cafeteria fund policy or regulations, please contact the Resource Management Unit at 800-952-5609 or you can submit your questions to SNPCafeFundQuestions@cde.ca.gov.

Letter signed jointly by Phyllis Bramson-Paul, Director, Nutrition Services Division, and Scott Hannan, Director, School Fiscal Services Division.

Attachment

United States Department of Agriculture - Cafeteria Fund Loan Guidance at http://www.cde.ca.gov/ls/nu/sn/documents/caffundguideusda.doc