Attachment_III_-_Demonstration_Procedures.pdf

ALTERNATIVES

TO

COMMODITY DONATION

IN THE

NATIONAL SCHOOL LUNCH PROGRAM;

DEMONSTRATION PROCEDURES

Prepared for:

Office of Policy, Planning, and Evaluation Food and Nutrition Service u. S. Department of Agriculture

Prepared by:

Virginia Polytechnic Institute & State University

February 12, 1982

TABLE OF CONTENTS

Section

1 .. Introduction

2 ~ Study Summary

3- General Overview of Demonstration Operations

4 - Detailed Description of Operational Procedures •••••••••••••••• 21

Explanatory Notes

Appendices

A- Illustrating How the Commodity Letter of Credit System Will Work

B - Commodity Letter of Credit

C- Commodity Letter of Credit Reporting Form

D - Calendar of Commodity Procurement for the National School Lunch Program, 1980-81 School Year

E - Comparison of Recent Donated Commoditi·es and the Specification for Letter of Credit Commodities

F- Letter of Agreement ••••••••••••••••••• ••• •• •••••• .-~

G - Standard Form 269 •••••••••••••••••••••••••••••••••••••••• 100

H- Food Distribution Program Regulations, 7CFR Part 250 ••••• 101

INTRODUCTION

This manual is intended to provide a comprehensive description of imple-mentation procedures for a·demonstration of alternatives to USDA commodity donations to the National School Lunch Program. As mand~ted by the Agriculture Appropriations Act for Fiscal Year 1981, the demonstration will systematically compare the current commodity donation program to the following alternatives:

a cash-in-lieu of commodities option that will provide selected School Food Authorities with cash equal to the value of their commodity entitlements under the current donation program; and : ietter of credit option that will provide selected School Food Authorities with commodity vouchers that authorize the purchase of designated commodities or food items made from these commodities.

To implement the project, 90 school districts have been chosen to parti-cipate and have been assigned to one of the two demonstration alternatives or a control group that will continue to operate under current donation program pro-cedures. While all selected school systems will be involved in demonstration development and training activities during the 1981-82 school year, only eight of these will actually implement demonstration procedures the first year. Full implementation will begin with th~ 1982-83 school year, and continue through school year 1983-84. School systems will have an opportunity to choose any study option for the 1984-85 school year. During the course of the demonstration, School Food Authorities will be required to keep a variety of operational and cost records and to make these available as requested by designated Food and Nutrition Service representatives.

Information obtained during the first three years of the project will be analyzed to:

• Estimate and systematically compare the costs and effectiveness associated with cash-in-lieu, commodity letter of credit, and existing co~modity donation programs;

• Assess changes in food procurement associated with the two demon-stration alternatives relative to the existing program;

• Estimate the impact each demonstration alternative would have on agricultural commodity markets, farm incomes, the existing food distribution system, and government price support and surplus re-moval programs;

t Assess impact of the demonstration alternatives on meal consumption , nutritional quality of foods purchased, and other related issues; and

• Assess the administrative feasibility of nationally implementing the cash-in-lieu and/or commodity letter of credit alternatives, at the Federal, State and local levels.

Results from the demonstration evaluation will be presented in a report to Congress by December 15, 1984.

Figure 1 depicts the overall organizational structure. During the course of the project, study participants may have occasion to talk with a variety of personnel, either from the Demonstration, Evaluation, or USDA staffs. The personnel are organized by the facet of the study in which they are involved, thus depicting the structure of administrative and organizational study respon-sibilities .

The remainder of this manual is divided into four sections consisting of a study summary, an overview of demonstration plans, a detailed deseription of operational procedures, and a package of project documents and forms. An effort has been made to meet the information needs of a diverse audience that includes school system officials and food program staff; Federal, Regional and State personnel associated with the National School Lunch Program; members of Congress; and special interest groups. While the manual is intended to be comprehensive, additional questions, including requests for technical assistance, may be direct ed to:

Or. Tony Cooke Project Oi rector Commodity Donation Project Department of Education Virginia Tech at Dulles P.O. Box 17432 Washington, DC 20041

Phone: Outside of Virginia - 800-336-3342 Inside Virginia - 703-471-4600

Exlern.ll 1\dvlsory Panel laura Allman, Nat'1 Cattlrn~n's Assoc.

G~! t t r ucfP. App 1 ebaum, Pres Am.Sch.Food Ser.Assoc.

frnes t Berger, Chief, Our. of Oonated Foods, ".Y.State Office of G~!nera l Services

J.W. Ch loupek, Admtn.

Nebraska Food Dts.Prog.

Theodore Cornstock,Hat'1 School Ods. Assoc.

Thomas Cook, Prof., Dept of Psyc. Northwestern llnlv.

Michael Gluffr Ida, .Pres.

r.utf frlda/Calvert AAsso

Palr lck llealy. Pres.Nat1 Milk Producers Fed.

Janet Jenkins, Olr. of Hr.rchandlsfrnJ "Ed. • United rresh Fruit A V•~!Jetab le Assoc.

El~anor Josattls Assoc. Oh •. Focus: IIOPE

Gordon King, Prof. of 1\g •• lcon., Untv of Cal.

Oavts

Ruth Kobel, leg. Asst.

1\mer ican Sch.Food Assoc .

llilt tonal Farmers Unton Hlchacl Licata, Pres., lnternat'l rood Service H~uufacturers ' "ssoc.

Richard lt!Jhl , Prof. Ed.

l'uh.Pol., llar vard Unlv.

J.n. Penn, Prr.s. Econ.

I'Nspcct lves, Inc.

Richard Reed, Bur. Chief nur. of School Food Hgt A Nut.N.Y.St~te Or.pt. fd touts s.,hataS!';O, Pr es.

s., hala.sso Food, Inc.

'll~: uuts. St.cwatt, Reg. Oh r"ud Olst.- l'l oiJ. IJ.s.

1\., .. . t. ""~ A ... r_ ... .A • flt.rf.fml\liV[S T1. . .. 01'• ,.,J ITY IHlii/\TJON W TilE NATIOiffll:-5CJTUO[ lONcll l'lillGT~HUiJIUlTS1TI7iTlOH PROJECT

- I e Puma COR, Evaluation Team,OTJFHS

Evaluation Contractor :

Abt Associate, ln.c

St~ve Fosburg, Area Manager Oob St. Pierre, Project Director Chuck Fairchild, Dr.t'uty P.O.

Janet Wertheimer , Field Ops.

James Riordan, Ag. Economist Oan Sullivan, Econ~nfst Jean l ayzer , Senior Analyst

I flgr lcultural Commo<rlty Market

Impact Panel

Stanley J~1nson, Unlv. of Hlssourl Oaryll Ray, Oklahoma State Untv.

Ronald Ward , Univ. of Florida Abner Womack, Untv. of Hlssourl

Hich;u!IJ. Wargo Olredur, Program [va I uat ton Staff

OI'PE/fNS

--J;lcn fadz fkowskf Chi e f, School

__12..~_!1'-''"'s Or anch

Jerry Ste in , FOO, FHS Frank Gatchell, 00, FN5 Nick Gmlck , 80, FHS len C:oncfon, AHS, USUA Hik e Mcilwain, RO, rNS Jane lk llc i I, OOPA, USOA Tom Stucker, ERS , USO/\ Peg C:ovcl lo, SFCO, FilS J ltn Hcllonal d, SP, FilS Fran Zorn, PO, OPP(, FHS ChIp Dull , 1\SCS, USO/\ J ohn lit ~·fen OPP[ fNS

Ed Sl.ndcwr.ll, Hew Enghnd Sandy ~herhan, Hid-Atlanti c Ed Pendleton, Southeast flr.nr y Ito lcfa, Htrlwe~t Paul Dolan, Southwest Ray V l!tll. 11ounta In Pl.1 Ins ~J!!£l_l __ ~emetman, Western

COR, Demonst.r all on Team OI'I'E/FNS

I Ken Underwood , Prln. Invest.

Tony Cooke, Project Director John Endah1, Sr. Sys. Ana1y~t Jeff Odell. Program Analyst Ann flallawe11, Proj. Analyst Cheri e Root, Op. Analyst tlancy lloyd, School Coor.

Harylynn Richford, Schl.Coor.

Ted Cr omack, Supt. . of Sch I.

Coor.

frank llutchlnson, Res. 1\sst.

Ron HcKeen, Training Spec.

Jfiii!JY Fortune, Internal Cons.

I ,...,.s,.,..urbc""o-,-=-,t-r a.,...c.,.,t""'o-r r or nc s I gn of CLOC System:

Schnlttkcr Associates

John Schnlttker t yon Daft Uon Erickson, Kilnsas St.

Don Rubel, Consultant

SECTION 2

STUDY SUMMARY

Since its inception in the early 1930's, the National School Lunch ?rogram has been guided by two major objectives: to provide nutritionally sound meals to school children and to encourage the cons~mption of domestic agri-cultural products. Federal support for schools participating in the Nationa1 School Lunch Program comes from direct cash subsidies as well as the donation of actual agricultural commodities. Donated commodities are purchased in the market by USDA, although some products (e.g., non-fluid dairy products) are moved di rectly out of government stocks. All commodities are procured and/or distributed under three principal authorities :

Section 32 of Public Law 320 of the 74th Congress (August 24, 1935) authorizes the use of 30 percent of all customs receipts collected by the U.S. each preceding calendar year (plus unused balances from previous years up to $300 million) for encouraging the domestic consumption of agricultural commodities, among other uses. Commodities in a wide range are purchased, although they are commodities principally for which there are no federal price support programs. While attention is given to the relative supply-demand balance in determining commodity types and quantities to be purchased, the guidelines are flexible.

Other factors, including School Food Authorities• (SFA's) food preferences, have become more important determinants in recent years.

Section 416 of the Agricultural Act of 1949 authorizes the Secretary of Agriculture to distribute food commodities acquired by the Commodity Credit Corporation (CCC) under price support programs or directly purchased with CCC funds.

The CCC, which has a borrowing authority of up to $30.5 billion, is reimbursed for net losses through annual appro-priations. Section 416 also authorizes the CCC to pay the cost of processing these commodities into a suitable foMm, as well as packaging, handling, and transportation costs.

In Fiscal Year 1980, commodities of the type previously f unded under Section 416 were made available through appro-priations to Section 6(e) of the National School Lunch Act.

Section 6 of the National School Lunch Act of 1946 contains t wo separate authorities for the purchase of school lunch c~~mocities. Section 5( a) funds are used to purchase those foods most preferred by the SFAs, irrespective of market conditions. In Fiscal Year 1980, these funds were used almost exclusively to purchase poultry products. Section 6(e) funds are used primaril~ to purchase nonperishable basic agricultural commodities, with priority given to government-owned stocks. Products representing a wide range were purchased with these funds in FY 1980, in-cluding turkey, beef, canned fruits and vegetables, dairy products, grain items, and oilseed products. In Fiscal Year 1982, however, budget reductions have eliminated Section 6 appropriations.

Despite many positive aspects of the commodity donation program, it has been subject to criticism over the years. The timing of deliveries, the need to transport and store the donated commodities, th~ choice of commodities provided, and the commodity form and unit size have been criticized most often. As a result, there is a continuing interest in options to the existing program •

Changes to the commodity donation program have been the topic of several policy studies in recent years. During 1974, the USDA conducted two internal studies of alternatives to the commodity donation program, including the use of cash-outs, vouchers, and price discounts. In 1978, Congress directed the USDA to conduct a study comparing the costs of commodity donati~n versus all-cash support in eight pilot school districts and two control areas. Another study, conducted in 1979 by Don Erickson of Kansas State University, examined the same eight pilot sites.

For a number of reasons, the results of these prior studies are considered inconclusive. For example, the 1978 study sample was both small, and to some degree, self-selected. The period of study was relatively short, and there were a number of disturbances (e.g., a school teacher strike and rapid food price inflation) during that time that could have affected the results. Due to the indefinite nature of prior research results, combined with a lack of policy consensus regarding the desirability of changing the current system, the issue of whether to effect changes to the current commo~ity donation program remains unresolved.

To provide more authoritative evidence about the effacts of adopting either cash or commodity letters of credit in lieu of commodities, the Congrass, through the Agricultural Appropriations Act for Fiscal Year 1981, has authorized a major study to examine the effects of these two alternatives. The Department of Agr iculture announced its intent in the June 9, 1981 issue of the Federal Register to conduct this demonstration. The study is to be impl emented over a three year period with 30 school districts adopti ng an all cash approach and 30 school dis~ricts adopting the commodity letter of credit approach.l Another 30 di stricts will continue to receive donated commoditi es, and will be stud ~ ed for control purposes. During the initial year of the study (1981 - 82) eight school distr icts will pa rticipate in a pilot phase. The remaining 82 school systems will enter the demonstration study the next school year, i.e., 1982-83.

All 90 school systems will then operate in their respective assignments through t he 1983- 84 school year. Du r i ng the 1984-85 school year, each parti-cipating school system may elect to operate under the option of its choice.

1 "Commodity 1 etter of credit" is the term used in th: fi s:a 1 Yecr 1931 Agricult~ra1 ~ppropriations Act and in the June 9, 1981 ~ederal Registe r Notice of Intent to conduct the demonstration project. It is used he re for consistency and described in detail below. The phrase should not be confused with the .. letter of credit .. used to t ransfer regular National School Lunch Program funds to State Distribution Agencies.

The Commodity Letter Of Credit Concept

It has been argued that the goals of the existing commodity donation program might be met in ways more compatible with local SFA operations through the use of commodity letters of credit (CLOC). This is one alternative the demonstration project will be testing. If the CLOC system were adapted nationwide, USDA would simply authorize State Distribution Agencies (SDAs) to issue commodity letters of credit to the SFAs for use in local procurement.2 These CLOCs would permit SFAs to locally purchase and be reimbursed for products containing commodities that qualify for price support or surplus removal as determined by USDA. CLOCs would cover products in the same commodity categories as those now purchased for school donations, but they would provide School Food Authorities greater flexibility in terms of commodity form, delivery time, storage requirements, etc. In short, commodity purchase plans would continue t o be centrally determined, but the authority to make purchases and to specify the terms would be transferred to local School Food Authorities.

The Cash-in-Lieu of Commodities Concept

The principal characteristic of the cash-in-lieu of comm~dity concept is that procurement decisions are transferred to the local level, i.e., School Food Authorities. Approximately 80 per cent of federal support for the National School Lunch Program is currently in the form of cash. The cash alternative would have t ·he effect of extending the use of cash to the remaining 20 per cent.

The same procedures and requirements now in effect for cash assistance would be applicable for cash-in-lieu of commodities.

2 It is recognized that several different State Agencies may play roles in the administration of the commodity don ation component of the National School Lunch Pr ogram, including those that enter into agreements with the USDA for the distribution of donated foods. As used here, the term ''State Distribution Agencies" is all inclusive and refers to all State Agencies that may be involved in the admi nistration of the National School Lunch Program.

The Evaluation Perspective

During the course of the demonstration. School Food Au~ho rities will be required to maintain a variety of operation and cost records and to make these available as requested by designated USDA representatives. Information ob-tained from demonstration and control group SFAs du.ring the first three years of the project will be analyzed to:

• Estimate and systematically compare the costs and effectiveness associated with cash-in-1 ieu, commodity letter of credit, and

·existing commodity. donation programs;

• Assess changes in food procurement associated with the two demonstra-tion alternatives relative to the existing program;

1 Estimate the impact each demonstration alternative would have on agri cul tural commodity markets, far.n incomes, the existing food distribution system, and government price support and price stabilization programs; and

• Assess the administrative feasibility of nationally impl ementing t he cash- in - lieu and commodity letter of credit alternatives.

SECTION 3

A GENERAL OVERVIEW OF DEMONSTRATION OPERATIONS

COMMODITY LETIER OF CREDIT DEMONSTRATION PROCEDURES

The commodi ty letter of credit (CLOC) system described here has been de-signed expressly for use in the demonstration project. If commodity letters of credit are implemented nationwide, some modifications to the proposed demonstration procedures would be required. The nature and extent of these modifica~i0ns will depend, in part, on the outcome of the demonstration evaluation. Steps involved in implementing the CLOC demonstration are discussed in the remainder of this section, and examples of how the CLOC system will work are provided in Appendix A.

Preoaration of Overall Purchase Plan . The commodity letter of credit component of the demonstration project is dependent on information generated for the annual commodi ty purchase plan for the entire National School Lunch Program.

Development of the yearly purchase plan formally begins in USDA and at the State level around January. At the USDA level, the plann ing process begins with an FNS analysis of program trends and an analysis of the legislation and budget proposal being formulated for the upcoming year. As a result of the trend ana lysis and the legislation, a projected l eve l of funding for commodity purchases is determined. The level of projected funding represents the value of commodities required to be delivered during the upcoming school year (i .e. July 1- June 30). This val ue is calculated by mult ipl ying ~~e antici-pated per lunch commodity assistance level based on legislation and budget proposals for upcoming year by the anticipated number of lunches qualifying for commodity assistance. This computation is adjusted by taking into consid-eration the numbe r of lunches served in the preceding school year and the expected impact of policy changes on program operations •.

At the State level t the planning process begins with the preparation of the State Food Dist~i~~tion Advisory Cou~cil Report on food preferences. The State Advisory Council's report must be submi tted to the State Education

Agency no later than ·January 15 and to FNS Regional Offi ces by February 15.

The State Advi sory Council Food Preference Reports contain in formation on:

a) most desired foods

b) least desired foods

c) recommendations for new products.

Tne reports also may contain information on amounts of food desired, types of packaging and package size, shipping schedules, and recommendations for changes in food specifications.

Once FNS has determined the anticipated funding level for commodity pur-chases and has rece i ved and reviewed the State Advisory Council Food Preference Reports, meetings are scheduled with the USDA food procurement agencies (Agri -cultuia l Stablization Conservation Servi ce and Agricul ture Marketing Servi ce ) to discuss product availability, commodity market concerns, state food prefer-ence and the di vision of the total funding projected among the various com-modities to be purchased for either agricultural economic reasons or State food preference requests.

By March, some preliminary announcements to States have usually been made on the types of commodities that are expected to be purchased . State orders for commodities to be offered during the school year on an open order basis (i .e. Section 416 type commodities-- grains, oils, and peanut products ) may begin to be submitted in April. Orders must be submitted by April 15 for July shipments.

During April, May, and June a more detailed purchase plan takes shape and States are notified of the commodities which may be ordered for shipment during July , August, and September as school opens. Because of their seasonality these early purchases are usually fruits and vegetables •. Meat and poult ry p~oducts shi pments are begun in l at e summer .

Planning di scuss ions and procurements then con~inue on an as needad bas i s .

However, by Oct ober 1, the beg i nning of the fiscal year, a ge nera1 conse~sus is reached between the involved USDA agencies on how the funds that become available in the new fiscal year will be spent. Thus, by October the purchase plan is as concrete as possible barring unforeseen changes in product avail -ability or mar ket conditions. The purchase plan shows the commodities planned to be purchased by food groupings and respective funding authorities as well as the estimated amounts of each commodity to be purchased and the estimated cost .

The purchase plan in its entirety is never publicly released during the school year because of the market implications. Rather, each time a specific purchase is to be made a public announcement concerning .that p~rchase is released. The decision as to when to announce an intended purchase is based on both State commodity requests and agri cultural needs. As noted above, though, prior to the beginning of each school year, USDA does announce the types of the ccmmodities anticipated to be purchased during the year and the anticipated total value of commodity assistance to be received by each State.

The purchase plan for the CLOC sites will be a sub-set of the national purchase plan and the issuance of CLOCs will coincide with USDA ' s acceptance of bids .

Determination and Assignment of CLOC School Commodity Entitlements Demonstration project entitlements will be a pro-rata share of their

State's entitlement, as determined by USDA. This entitlement wi11.determine the size of the CLOC drawing account to be established for each participating school system. The Department of Agriculture will forward quarterly payments to SFAs on July 1, October 1, January 1, and April 1. Payment size will vary over quarters in a way that corresponds to the usual USDA procurement pattern;

that is, larger payments will be made in the first two quarters than in the last two .

Since State Distribution Agencies will not participate directly in the dem-onstration, the Food and Nutrition Service will be responsible for determining the commodity entitlement for each participating school system and disbursing quarterly payments to them. Virginia Tech, in consultation with States and FNS, will have responsibility for monitoring nutrition programs to determine the need for any entitlement adjustments during the school year.

Establishment and Use of Demonstration CLOC Accounts. Each participating SFA will be required to establish a demonstration account that permits the unique crediting and debiting of funds received in lieu of commodities. Funds contained in each demonstra~ion account wi11 be allocated among several CLOC uaccountsu as l etters of credit are issued . These CLOC accounts will be fo~ bookkeeping purposes only. Each CLOC account will be subject to separate terms and conditions, including the time period in which it can be drawn upon.

Over the school year, it is expected that about 35 CLOCs will be issued.

The CLOCs will authorize an SFA to use demonstration funds to purchase specific commodi ties up to a specified amount. To receive authorization for charging commodities purchased through letters of credit against the demonstration account, invoices or comparable documents must be submitted to Vi rginia Te~h for approval. For each CLOC issued~ account statements will be provided and mailed monthly. These procedures are illustrated in Figure 2.

Use of the Commodity Letter of Credit. The commodity letter of credit syste~ provides a procedure for regulating the choice and timing of commodity purchases by local SFAs when using commodity assistance funds . Documentation will primarily be of two forms: (1) the CLOC itself, which authorizes a local SFA to purchase, up to a stated dollar amount, a part icul ar commodity within a specified time period (See Appendix B) and (2) an invoice, purchase contract, or purchase order form confirming that the commodity bought meets specifications described in the pertinent CLOC. At the time USDA accepts bids to purchase a commodity for don ation to the School L~nch Program, CLOC schools system will

Figure 2

Schematic of Operation of Demonstration/

CLOC Accounts

USDA Commod1ty Procurement Action

(bid acceotancce)

-" v Commod1ty Le ter of Credlt

(CLOC) issued by Virginia Tech

Account Established

Pur chase Order I r-T-I __ _.;_s..:..F.;;.A;;.;lr:r;...;;d..::.e_r _s __ k Invoice Submitted Products ~ to VPI T __ ...;P..;;.u_l.;.,;c...;a;....s_e___

0~ Ven'kor

Ap roved

Account Drawn Down

SFA Notif1ed of New Demonstration & CLOC Account

Balances

Delivers Products

' 1 1 Vendor Paid --

* Depending on the time delay betwen orders and deliveries, SFAs may elect t o submit CLOC usage reports to VPI either at the time of purchase order issuance or at the time an invoice is submitted .

** The hashed arrow indicates the possiblility that some SFAs may wish to pay vendors· only after purchases have been approved by Virginia Tech.

be issued letters of credit for the product, or products, which are targeted by the accepted bids. The calendar of School Year 1980-81 procurement activity shown in Appendix D is illustrative of the schedule that will be followed.

Each letter of credit will specify: the product(s) for which it can be used;

the dollar amount to be provided by the Federal Government; the time period within which the purchase must be made; and informat ion required at the ti me of product delivery.3 For those commodities that USDA procures on a continu ing basis (e.g . , meat, poultry, grain, and oilseed products), letters of credit will be issued in three or four installments corresponding to the quarters of the school year depending on the commodity in question.

Commodities or products specified in each letter of credit will be of the same general type as those purchased by USDA for donation, except that their form and precise specification wi l l be left to local SFA determination. For example, rather than purchasing and distributing "frozen cooked battered/breaded fried cut-up young chickens, cut in nine pieces and packed 30 pounds net in fiberboard containers" (Announcement PY-91, July 1980), the CLOC will simply authorize the. purchase of "chicken." It will be left to the local SFAs to deter-mine whether the chicken should be fresh, frozen, canned, etc •• A comparison of the forms in which donated commodities have been procured in recent years and the more general specifications to be provided in letters of credit are shown in Appendix E. The extent to which SFA purchases deviate from USDA pro-curement specifications will be examined in the evaluation -phase of the demon-stration.

Participating SFAs will be provided a list of eligible commodities or products for each l etter of credit . Al l products contained on this list will qualify for full payment through the letter of credit. It is the intent of the demonstration to include the full range of product forms in which a commodity is co~~erically available. In the case of apples, for example , the list of products for which an "apples" com:noc!ity letter of credit could be redeemed might include:

3As noted, time requirements will relate to the time of commodity purchase rather than to the time of delivery. The extent to which this alters the impact on commodity market prices wil l be studied as part of the evaluation.

fresh appl es dehydrated apples canned apples canned apple juice frozen concentrat ed appl e juice fresh apple juice applesauce frozen apples apple juice powder

Letters of credit may be used toward the purchase of processed products containing more than one ingredient, although the credit applies only toward the cost of the commodity specified in the letter. For example , a product co~ posed only partially of apples, such as baked apple crisp or apple pie would not qualify for total payment from an "appleS 11 CLOC. Instead, only that part of the product comprised of the commodity item (e.g . , canned apples) qualifies fo r CLOC compensation.

More t han one CLOC, however, may be used t oward the purchase of a given product if it contains additional ingredients for which CLOCs are provided .

For example, with a product like apple pie, other constituent commodities might also qualify for CLOC payment. There could be, in addition to apples, CLOCs for flour . There is no limit on the number of processed foods that may ..

be purchased with a single letter of credit . For example, a letter of credit for wheat product s may be used toward the purchase of a number of different products including flour, bread, rolls , pizza shells, etc.

The following constraints will be applied to ·commodity letter of credit use : (1) all commodities purchased with letters of credit must be o~ U. S.

origin; and (2) letters of credi t ~ay not be used for the purchase of commodities recei~ed or ordered ~r1~r tJ t he iss~a~ce Jf e letter of c~edit .

On receipt of a letter of credit, SFAs will follow their customary pro-curement procedures. The invoice or purchase order associated with a CLOC delivered product must include several items of information separately describing each letter of credit commodity contained in the product. This information should include: quantity; quality or official grade; class, Kind, style, or variety (as appropriate); size of product; descriptJon of packaging unit; unit price; and total value of each CLOC commodity. For processed products in which the commodity is used as an ingredient, the vendor will be asked to provide information that includes the proportion of total product value attri-butable to individual CLOC commodities. When this information is unavailable from vendors, a back- up commodity conversion system, now being developed, will be used to estimate the required values.

When a binding contract to purchase a product has been signed, (e . g. , issuance of a purchase order) SFAs should submit a copy of the relevant d0:u-ment and a completed copy of the Letter of Credit Reporting Form (see Appendix C) to Virginia Tech for review. Written approval to charge commodity costs purchased through CLOCs against a demonstration acccount will be provided promptly by Virginia Tech staff. Such approval is not necessary, however, before payment can be made to vendors from demonstration funds .

Bonus Commodities Schools currently receiving USDA donated commodities in conjunction with their participation in the National School . Lunch Program are, from time to time, offered "bonus" commodities in addition to their entitlement commodities. These are usually commodities owned by the Federal Government or commodities purchased strictly under surplus removal auspices.

To the extent SFAs can effectively use these items, they may request and receive them on a regular basis. Often, bonus commodities account for a significant share of the total amount of donated commodities received by a school sytem;

30 per cent or more of the total is not unusual.

During the demonstration project, school systems participating as letter of credit sites will receive letters of credit for those bonus commodities made available to their respective State Agencies.4 The value of the letters of credit for bonus commodities will be proportionately equal to the value of bonus commodities received by the control site in a given State. (NOTE 18)

Commoditv Letter of Credit Replacement. In a national program, unused letters of credit (or parts of them) would be reallocated to other School Food Authorities within a State. A demonstration, however , has limited flexibili ty in this regard. To the extent possible, Virginia Tech will repl ace CLOCs that are refused by a School Food Authority. Replacement CLOCs will be for com-modities that one would expect to see traded under national program implemen-tation. If there is no replacement available, a School Food Authority may reconsider its initial decision to refuse or trade its letter of credit with another School Food Authori ty participating in the demonstration.

Reports and Audits. The existing audit system used to review SFA pro-curements shall continue. Special financial record audits may be conducted to prevent possible misuse of demonstration funds. Participating SFAs shall submit copies of their monthly claims reports, food purchase orders and food delivery records on a regular basis to Virginia Tech. Some funds will be available to cover the costs of providing these records.

4 The USDA has already notified SDAs that butter, cheese and nonfat dry milk will be offered as bonus commodities during the 1981-82 school year. SFAs wil1 have access to these and other Section 416 bonus items through out the course of the demonstration.

CASH- IN-LIEU OF COMMODITY DEMONSTRATION PROJECT PROCEDURES

The cash-in-lieu-of-commodities (CASH) system described here has been designed specifically for use in the demonstration . If this approach is imple-mented nationwide, some modification will be required. The following section generally describes the procedures involved.

Determination and Assignment of CASH School Commodity Entitlements. It will be necessary to estimate the total commodity entitlement for each partici-pating school system to determine the appropriate amount of cash payments to be made. Entitlements will be calculated in the same manner as described for letter of credit sites . The USDA will issue quarterly checks to SFAs on July 1, October 1, January 1, and April 1.

Because State Distribut ion Agencies will not participate directly in the demonstration, the Food and Nutrition Service will be responsible for det er-mining the commodi ty entitlement fo r each participating school system and disbursing quarterly payments to them. In coll aboration with the Food and Nutrition Service, Virginia Tech will be responsible for monitoring school nutrition programs to assess the need for entitlement changes during the school year.

Establi shment and Use of the CASH Demonst ration Account . Each participating SFA will be required to establ ish a separate ledger account for use in monitoring the receipt and expenditure of demonstration funds. As with the CLOC sys:em, f unds to establ ish and replenish this account will be provided by the USDA on a quarterly basis. Total funds for the school year will be at least equal in dollar value to a School Food Authority's commodity enti t lement. As with CLOC participants, any interest earned on a demonstration account will be applied toward the SFA's annual commodity entitlement .

CASH demonstration account funds shall be used in the same manner as funds received for meal service reimbursements . In addition, SFAs are bound to use this cash assistance in a:cordance with State and local procurement regulations and policies.

Bonus Commodities. Demonstration CASH school systems shall recei ve a cash allowance for the value of bonus commodities they would otherwise be eligible to receive under the current commodity program. (See Section G.2)

Report and Audits. SFAs shall continue to provide reports as currently required by FNS School Feeding Programs. Special financial record audits may be conducted to prevent possible misuse of demonstration funds. As with CLOC SFAs, CASH SFAs shall submit copies of their cost reimbursement reports, food purchase orders and food delivery orders on a monthly basis to the demonstration contractor. Some funds will be available to cover reporting costs .

CONTROL GROUP DEMONSTRATION PROCEDURES

School systems participating in this demonstration as control sites will continue to receive USDA donated commodities in a manner that is identical to procedur es operating for school systems outside the demonstration. Control sites will continue to be responsible to their respective State Agencies. Control sites will, however, be asked to participate in demonstration data collection activities. These include, but are not limited to, providing Virginia Tech with food product inventories, as well· as copies of monthly claims reports, food purchase orders and delivery records. As with CLOC and CASH SFAs, some funds will be available to cover the costs of providing this information.

SECTION 4

DETAILED DESCRIPTION OF OPERATIONAL PROCEDURES

The purpose of this section is to set forth the detailed operational guidelines and requirements that will govern implementation of the demonstra-tion of alternatives to commodity donation in the tlational School Lunch Program. Virginia Tech has developed this document in consultation with the Office of Policy, Planning and Evaluation/Food and Nutrition Service (FNS) for the purpose of removing as much ambiguity as possible from operation of the demonstration. ·

Some of the material presented here overlaps with the preceding section, "General Overview of Demonstration Operations." However, significant elabor-ation of demonstration procedures is provided to address a number of specific circumstances that will affect at least some School Food Authorities during demonstration activities.

To facilitate use of this detailed operational plan, the right-hand margin indicates the relevance of each subsection for School Food Authorities partici-pating as :ontrol sites, cash-in-lieu of commodity sites, or commodity lett~r of credit sites. The designations "CONTROL", "CASW, and "CLOC" are used respectively, to indicate applicability. Key phrases are also provided in the right-hand margin to indicate the topic addressed by each subsection.

As an additional aid, various appendices and explanatory notes are referenced. Explanatory notes may be found at the end of this section. They are intended to clarify the rationale for certain procedures or requirements.

Finally, it should be recognized that these detailed plans are subject to modification and refinement throughout the course of the demonstration.

Updates will be prepared and distributed as needed. Comments from .School Focd Authorities, State Agencies, and other i nterested parties wi11 be greatly aporeciated on any aspect of this plan at any ti me.

The Operational Procedures

A. Demonstration Administration

B. Conditions of Participation

C. Schedule of Irnp i ementation

D. Demonstration Entitlements

E. Entitlement Utilization- Commodity Letters of Credi t

F. Entitle~ant Utilization - Cash in Lieu of Commodities

G. Bonus Commodities and Processing Contracts

H. Reporting and Audits

I. Waiver of Regulations

J. MonitJring

K. Funding

L. Amendments and Modifications to Demonstration Operating Procedures

M. Information Requests and Information Release

A. DEMONSTRATION ADMI NISTRATION

1. Overall admi nistrative responsibility for the demonstra-ti on shall be assumed by the Program Evaluation staff of the Office of Policy, Planning and Evaluation.

These responsibilities include:

a) management and monitori ng of all ·grants, coop-erative agreements, or contracts awarded pur-suant to the conduct of the demonstration;

b) revi ew and approval of all plans, procedures and documents that describe and direct the operation of the demonstration;

c) coordination of all demonstration activities that i nvolve other agencies within the U.S. De-partment of Agriculture includi ng Regional Offi-ces;

d) prov i si on of information con.cerning the status of demonstration act ivi ties t o the Congress and other organizations, assoc i ations or ind i vidua l s;

and management of al l other acti vities related t o the conduct of t he demonst rat ion as speci f i ed el sewhere in this document.

2. Through a cooperative agreement negotiated with the Food and Nutrition Service, Virginia Polytechnic Insti-tute and State University (Virginia Tech) shall assume major responsibility for designing, implementing , and operating the demonstration project. Specifically, Vi rginia Tech shall:

a) develop and produce al l operational plans and guidelines related to the conduct of t he demon-stration;

b} pl 3n for and conduct any and all t rai ning of State Agency , School Food Aut ho rity, and School

CONiROL . CLOt. CASH

Ro les and resoons i bi li t i es of

FNS

Roles and resoons1bil i t1 of demonstrati cn c~ntrac:or (VPI )

District personnel related to the conduct of the demonstration;

c) develop and impl ement a demonstration technical support system to monitor School Food Authority fo.od pur chases, monitor and adjust commodity letter of credit accounts, and conduct all other data management functions as required by

FNS;

d) develop and implement a system to convert foods purchased by School Food Authorities into farm-level equivalents, or othe~ levels of aggr egation, as required by FNS;

e) implement and monitor all demonstration sample select i on activities; and

f) respor.d to all inquiries fr om school districts or School Food Author i t i es perta i ning to the conduct and operation of the demonstration pr eject.

3. An Advisory Committee composed of U.S. Department of Agr iculture personnel shall be establ i shed to assist the Office of Policy, Planning and Evaluation and Virgnia Tech in the design and implementation of the demonstration.

This Committee sha11 include representatives of the Food Distribution Division, Office of ~o l icy, Planning and Evaluation, School Programs Division, the Budget Divi sion, Office of the Deputy Administrator for Regional Operations, and the State Financial Control Division from FNS, as well as representatives from the Agricultural Marketing Service, the Agricultural Stablization and Conservation Service, the Economic Research Service, and the Office of Budget, Planning, and Analysis.

The func: i ons of this Co~m~tt ee sha11 inc lude:

?.o le of USi)A :.c,•i sc Cc~i~:ee for :~e ciemons:rati on

a) review of all plans and documents related to the operation of the demonstration;

b) coo rdination of i nterdepartmental activities that affect or are affected by the demonstra -t ion ; and

c) provision, as necessary, of technical assis-tance and guidance to the Office of Policy , Planning and Evaluation or its contracted rep-resentative concerning the demonstration and 1ts operations.

4. Each of the seven Regiona l Offices of the Food and Nutrition Service shall appoint one staff member to serve as a study coordinator for the demonstration.

Duties and responsibilities of Regional Study Coordin-ators include:

a) coordination of Regional Office review of all pla ns and documents related to the operation of the demonstration;

b) coordination of all communica:ions between the Office of Policy , Planning and Evaluation or its cont racted representat ives and Sta:e Age~ cies;

c) conduct of any activities related to the ad-ministration, implementation and monitoring ~f the demonstration as mutually agreed upon by the Office of Policy, Planning and Evaluation, the Deputy Administrator for Regional Opera-tions, and each Regional Office Administrator.

5. State Agenci es responsible for commodity distribution shail have a limited role in the administration, im?lementation a~d monitoring of the demonstration . ( ~OT~ 1) State Agencies sha ll :

CONTROL. CLCC, CASH

Role of rNS Regional Office Study Cooroinatl

S ~;; :! ;..~,;enc::' ~es~:~s i ~ i~ :: ;e~

a) review and approve school districts selected from their respective States to participate in the demonstration;

b) review and approve estimated entitlements for cash-in-lieu and commmmod ity letter of credit st i es;

c) review and certify donated commodity inventori es for each participating school district at the beginning and concl usion of the demonstration;

d) conduct any other monitoring activities that are specifically agreed to with the Office of Pol icy, Planning, and Evaluation; and

e) participate in all demonstration evaluation activities that attempt to assess the cost-effectiveness and administrative feasibility of alternatives to the ex i sting commod ity donation program.

6. The evaluation of the demonstration will be conducted by Abt Associates, Incorporated, under contract to

OPPE/FNS.

B. CONDITIONS OF PARTICIPATION

1. All School Food Authorities selected to participate in the demonstration shall, through their respective school districts, sign a Letter of Agreement wh ich sets forth the terms and conditions of study involvement (Appen-dix F). A Copy of this Agreement will be filed with the appropriate State -Agency.

CONTROL, C~CC. CASn

Demonstra ti ~n ~va lua~~ by Abt Associates, Inc

2. Participating School Food Authorities shall retain existing inventories of USDA donated cor.modities for use at their discretion . School Food Authorities shall, however, provide to VA Tech an inventory of food pro-ducts on hand as of July 1, 1982 and June 30, 1934.

Both inventories shall clearly different{ate food pro-ducts physically donated to the School Food Authority by USDA from other food products. Commodity inventory reports will be forwarded to the appropriate State Agency for review (NOTE 2)

a) All products listed in these inventories will be valued at their replacement cost (e . g., current market cos t) by the demonstration contractor .

C. SCHC:OUL:: OF IMPLEt1D:TAT ION

1. The demonstration shall begin during the 1981 -82 school year and shall continue through the 1984- 85 school year.

Ninety School Food Authcri~ies shall participate in the demonstration -- 30 shall operate under a cash- in- lieu of commodities option ; 30 shall participate unde~ a commodity l etter of credit option; and 30 shal l serve as a control group operating under the current commQdity donation program.

a) Of the 90 School Food Authorities selected to participate in the demonstration , eight shall serve as pilot projects during the 1981-82 school year. Of these eight , two shall operate under a cash- in- lieu of commodities option ; three shall participate under a letter of credit option, and

COS~Ol , CLC:. ~~r.

E: is:in~ inv~~t:r ~ !S Oi Cona :!~ ==~~~:: : e~ c:;:rii\CL. c:.oc. c:.s:, Sc :~ e::iule for deT.ons~rat ~ cn s~r~-·JO

:::::IT~Ol . CL~C , CAS:;

?ilot sites for t~e lg81-3Z sc~ool y~~r three shall serve as control s ites (NOTE 3).

b) All 90 School Food Authorities shall participate in demonstration training and preparation acti-vities during the 1981 -82 school year.

c) Those 82 School Food Authorities not assigned to piiot project status during the 1981 -82 school year shall begin operation of their respective demonstration assignments July 1, 1982, and shall continue in this assignment until June 30, 1Q84.

d) For the 1984-85 school year, all 90 School Food Authorities may elect to participate in the demonstration option of their choice (NOTE 4).

2. In addition to the 90 School Food Authorities selected to participate in the demonstration, School Food Authori - ~ies that participated in the 1978- 79 study of cash-in-lieu of commodities shall have the option to return to a cash system be9inning with the 1981 -82 school year and continuing through the 1984-85 school year . These Schoo l Food Authorities sha ll not be incl uded in th~ demonstration evaluation but they shall be subject to the same reporting requirements for demonstration monitoring as the o:her demonstr.ation si:es (NOTE 5).

D. DEMONSTRATION ENTITLEMENTS

1. Each demonstration site shall receive a commodity en-titlement in an amount consistent with existing legis-lation and U.S. Department of AgricultuPe entitlement calcu1a~ion procedures .

a) For School Food Authorities participating under cash or comnodity letter of credit systems, the initial value of co~modity entitlements for each

CO~OL, CLX, CASH

Trainino for ael'!:onnr;

ac:ivities

CO!fiROL, C~OC, CASH

Oura t "iCf'! of :!er.~onstrat ion activi t~ es

C~~TROL, CLOC. CASH

Optional year o7 demons!ration participat~on

CASH

1978-1579 Study Sit!S

CL0C, CASH

::s:i ~!ti::~:1 of co~oaity en:~t~ e~e~:

for d~onstr!:icr pur;:ose school year shall be estimated by multiplying the total number of free, reduced price and paid reimbursed lunches served by the School Food Authority during the immed i ately preceding school year by the prevailing per meal commodity subsidy.

This subsidy is currently 11 cents for each free, reduced price or paid school lunch . The total estimated entitlement shall be adjusted , as necessary, in accordance with existing U.S.

Department of Agriculture procedures that are applied to the calculated State-level entitle-ment estimates under the existing commodity donation program. However, the School Food Authority's estimated entitlement shall, in any case, represent a proportionate share of a State's overall entitlement based on the number of reimbursable lunches served by the School Food Authority relative to the total number of such lunches served by the State in question.

(NOTE 6)

b) School Food A~thorities participa~ing as control sites shal l receive a commpdity entitlement in accord with existing State Agency distribution procedures.

c) To as si st the Office of Policy , Planning and Eval uation in determining and monitoring com-modity entitlements, School Food Authorities shall forward copies of monthly claim reports to Virginia Tech on a regular basis during the course of the demo nstration effort.

d) The Office of Policy, Planning, and Evaluation shall provide the Food Distribution Division the total esti ~3ted er.titie~ent ad j ustments that ~ust be ~ade, on a State-by- State basis, to annual commodity purchase plans for the

CC!ITROL

Commodity entitlement for control sites

CC~:i~~L.