Limitations on the Transfer of Funds

This Management Bulletin (MB) provides local educational agencies (LEAs) with information pertaining to federal and State statutes and regulations that govern school cafeteria accounts. The proposed 2008-09 Budget Bill, as introduced, provides authority for districts to make transfers between categorical funds for operational purposes. This proposed authority is referred to colloquially as the “mega-item transfer.”

Federal law requires the California Department of Education (CDE), Nutrition Services Division (NSD) to ensure that districts/agencies participating in their federal school nutrition programs comply with all applicable federal laws. This means the NSD must alert districts to the following: While the intent of Assembly Bill (AB) 1781 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. AB 1781 does not override the requirements of federal regulations that govern the use of cafeteria funds.

History

The concept of a mega-item transfer is not new. For approximately a decade, language has been added each year to the annual Budget Bills permitting such fund transfers. The percentages allowed to be transferred, as well as the list of categorical programs or operations eligible for this “flexibility,” have varied slightly over the years.

In 2003, the Legislature passed Assembly Bill 1754. This bill authorized a one-time transfer of the June 30, 2003, ending balances of restricted funds, including cafeteria funds, to meet district financial obligations. The CDE provided guidance in November 2004 cautioning districts against relying on the new law, since this legislation did not supersede federal regulations governing the use of cafeteria funds. This guidance is located on the CDE Web site at http://www.cde.ca.gov/ls/nu/sn/caffundguide.asp. Notably, federal regulations are stricter and supersede State law.

Primary and Secondary Issues

The primary issue is that the federal regulations require that a cafeteria fund be established, and State law requires that cafeteria funds be used for specific allowable cafeteria expenditures included, but not limited to, the list of regulations below.

The secondary issue pertains to borrowing from the cafeteria fund as described below.

2008-09 Budget Bill Proposals (Assembly Bill 1781, Statutes of 2008)

We are pleased to share that the June 11, 2008, amendments of the Governor’s Budget, Assembly Bill 1781, Control Section 12.40, allow LEAs to shift up to 10 percent of the State funding from a selected list of categorical programs, which no longer include Child Nutrition (State Meal reimbursement). However, Child Nutrition programs (cafeteria funds) are allowed to be a recipient of additional funds from other [district] categorical programs/funds.

Regulations - Current Federal and State Laws

Please note that regardless of existing/proposed State statute, federal regulations prohibit LEAs from using or transferring money from the cafeteria fund for non-food service expenditures as follows:

Title 7, Code of Federal Regulations

• Title 7, Code of Federal Regulations (7 CFR) Part 210.2 defines revenue, when applied to nonprofit school food service, as, “…all monies received by or accruing to the nonprofit school food service in accordance with the State agency’s established accounting system including, but not limited to, children’s payments, earnings on investments, other local revenues, State revenues, and Federal cash reimbursements.”
• 7 CFR Part 210.14(a) Non-Profit Food Service specifies that all revenues must be deposited into the school cafeteria account and must be used solely for the operation or improvement of a food service program. In addition, LEAs must comply with State and federal limitations on the use of cafeteria funds [7 CFR 210.9(b)(1)].
• 7 CFR Part 210.19(a)(1) Assurance of Compliance for Finances requires each State agency to ensure that school food authorities comply with the requirements to account for all revenues and expenditures of their nonprofit school food service, and requires school food authorities to meet the requirements of nonprofit school food service expenditures.
• 7 CFR Part 210.19(a)(3) Program Compliance requires each State Agency to ensure school food authorities comply with the applicable federal regulations. The State agency shall ensure compliance through audits, administrative reviews, technical assistance, training guidance materials or by other means.
• 7 CFR Part 210.19(a)(4) Investigations requires each State agency to promptly investigate complaints received or irregularities noted in connection with the operation of the food service program, and to take appropriate action to correct any irregularities. State agencies are required to maintain evidence of such investigations and actions. The USDA and the Office of Investigator General (OIG) may make reviews or investigations at the request of the State agency or where the USDA or OIG determines reviews or investigations are appropriate.

In addition, the California Education Code (EC) provides the following definitions and restrictions pertaining to school cafeteria funds/accounts:

• EC Section 38080 defines "cafeteria" as synonymous with the term "food service."
• EC Section 38093 states, “All receipts of the cafeteria, or cafeterias, as the case may be, derived from the sale of food shall be deposited in the account and shall be expended only for the maintenance of the cafeteria, or cafeterias…"
• EC Section 38101(a) states, “The governing board of a school district may authorize expenditures from the cafeteria fund or cafeteria account only for those charges from the fund or account that are defined in the California School Accounting Manual."
• EC Section 38101(d) states, “Charges to, or transfers from, a food service program shall indicate when the charge or transfer was made and shall be accompanied by a written explanation of the purpose of, and basis for, the expenditure."
• EC Section 38101(e) states, “This section does not authorize a school district to charge a food service program any charges prohibited by state or federal law or regulation."

Repayment of Cafeteria Funds and Penalty for Violation

If the CDE and the California 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. These funds must 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. This amount is also to be used solely for improvement of the food service program [EC Section 38101(f)].

Borrowing Money from the Cafeteria Fund

Federal guidance imposes limitations on borrowing money from the cafeteria fund. The USDA does not recommend loaning cafeteria funds to the district funds; however, districts may loan funds from its nonprofit food service account to the district, as long as the loan does not jeopardize the integrity of its food service program to children, and if beforehand, the cafeteria fund transfer meets all of the prerequisite criteria set forth in federal guidance. The USDA states that, “a bona-fide loan agreement complete with interest payment provisions must be executed before, not after, the funds are withdrawn from the account.”

Specifically, a loan 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 be no less than the amount of interest the food service department would have earned by keeping the money deposited in an interest-bearing local account. Additional USDA loan guidance is available on the CDE Web site at http://www.cde.ca.gov/ls/nu/sn/documents/caffundguideusda.doc.

Further Information

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