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Hard to Swallow: Do Private Food Service Contractors Shortchange New Jersey Schools?

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Though public schools traditionally managed their own cafeterias, in recent years there has been a marked rise in the use of private food service management companies (FSMCs). This industry, dominated by corporations like Sodexo, Inc., Compass Group, and Aramark Corp., promise to increase the efficiency of food service and delivery, thereby saving money for cash-strapped schools.

While the switch from school-run food programs to FSMCs has been a growing national trend, New Jersey has been well ahead of the curve. According to a recent study, 64 percent of New Jersey school districts outsource food service to private contractors, the second highest rate in the nation.1 A survey of New Jersey school superintendents in 1997 found that 83 percent of respondents identified saving money as a “very important” consideration when they switched to FSMCs.2

In light of the economic recession, ensuring that school dollars are used effectively has never been more critical. But are there hidden costs when New Jersey Public School Districts outsource their food services? To answer this question, SEIU Local 32BJ commissioned Clarion Group, a consulting firm that researches food service issues, to analyze contracts and financial data provided by ten school districts that outsource their food services to either Sodexo or Chartwells (a division of Compass). Of the ten districts, five contract with Sodexo and five with Chartwells.3

Our study’s findings—of overcharges for insurance, the withholding of rebates, and questionable bidding practices—are explained in further detail below.

1. Charges for Workers Compensation and Liability Insurance May Represent Hidden Profits for Sodexo and Chartwells

Sodexo and Chartwells charge school districts for their workers compensation and liability insurance costs; however, it appears that these charges exceed the actual cost of obtaining insurance. For three school districts where we were able to obtain current information, Chartwells overcharged the school districts a total of $51,979 for workers compensation insurance. We don’t know the precise cost of liability insurance– and Sodexo combines the two types of insurance in its financial statements – so we can only estimate the total of the overcharge amount. For the ten school districts, the estimate of total insurance overcharges comes to nearly $320,000 – money that could have been used to purchase more than 4,600 new elementary school math textbooks.4 It bears repeating that this substantial savings comes solely from the ten districts analyzed. If the approximately 378 New Jersey school districts using FSMCs are also being overcharged at the same rate, the total amount of taxpayer money being misappropriated would come to $12 million, or enough to pay the annual salaries of 186 New Jersey teachers.5

2. Despite Federal Law, Sodexo Withholding Rebate Money Due Districts

Because of their high-volume purchasing, large FSMCs receive rebates, discounts, and other benefits from food suppliers. Beginning with the 2009-2010 school year, the US Department of Agriculture’s Food and Nutrition Service required FSMCs to pass these savings along to the districts when participating in the free and reduced lunch program. In two districts contracted with Sodexo—Piscataway and Long Branch—the FSMC is permitted to retain a portion of these savings that Sodexo says is attributable to “prompt payment discounts,” although federal regulations clearly state “all costs to the [school food service] program be net of applicable discounts, rebates, and applicable credits.”6 This clause in the contract creates a loophole that Sodexo can exploit and strips much-needed money from districts.

3. School Districts Discourage Competitive Bidding
In the ten New Jersey districts, all competitive RFP processes resulted in the incumbent retaining its contract, raising immediate questions about whether the bidding process is truly competitive. Additionally, in some cases the terms of the renewed contract were more favorable to the incumbent FSMC than the terms of the request for proposal (RFP). Some examples include:

  • West Orange issued an undated 45-page RFP for the 2009-2010 school year that required bidders to attend a tour of the district’s food service facilities on Thursday, June 25 and submit proposals three business days later, on Tuesday, June 30—for a contract that began the following day.
  • When Bergenfield renewed its contract with Chartwells for the 2008-09 school year after receiving proposals from two other companies, it allowed Chartwells to more than double its fee from ten cents per meal in its proposal (the low bid) to 21 cents per meal (higher than the other two bids).
  • Edison’s RFP for the 2008-09 school year received only one response, from Chartwells. The $250,000 performance bond required in the RFP was not included in the contract with Chartwells, and the requirements for a guaranteed profit to the district and insurance coverage were reduced from that of the RFP.
  • Piscataway, Marlboro, and Edison failed to follow guidelines issued by the New Jersey Department of Agriculture, which states that districts should “allow a minimum of 45 days for the FSMC to submit a proposal [beginning] when the FSMC receives the request, not when the RFP is advertised or sent out.” 7

The Road to Reform

Serving meals to students in school has become a big business. Even medium-sized districts like Edison serve nearly two million meals a year and have food service budgets of three to four million dollars. Companies like Sodexo and Chartwells are attracted by the lure of fees that can exceed $300,000 a year, along with opportunities to generate even more profits in ways that are not always apparent to the districts they serve.

In a time of tightened budgets, New Jersey School Districts need every dollar owed to them. Below are five measures that should be immediately taken towards that end.

1. Districts should require the FSMC to provide specific proof (such as invoices) that the charge to the district for liability insurance is only for actual cost.

2. The amount chargeable for workers compensation insurance should be reported separately from other types of insurance on the FSMC’s financial statements and be limited to the actual cost to the FSMC. This cost can be found on the New Jersey Compensation Rating and Inspection Bureau website, http://www.njcrib.com.

3. The State should enforce the federal requirement that school districts cannot adopt FSMC-prepared contracts and should ensure that FSMCs are not permitted to increase the fees quoted in their proposals or change essential RFP requirements, such as bonds and insurance limits. The State also should adopt and enforce the federal recommendation that FSMCs should not be permitted to “assist in finalizing the contract provisions after the successful offeror has been identified.”

4. Among the documents reviewed were several FSMC self-administered operational performance and food safety audits. Unsurprisingly, these found no deficiencies and required no remedial actions. The State should require that operational, food safety and financial audits should be administered by an independent professional firm, contracted and paid by, and reporting only to, the State to ensure there is no influence on the auditor by the FSMC.

5. The State should enforce its own standards regarding the RFP process. In particular, the State should ensure that each school district allows enough time for non-incumbents to submit bids.