Cafeteria Fund Part 5 – Allowable Renovation
Costs Welcome and thank you all for attending today’s
Webinar on Cafeteria Funds, Part 5. This Webinar provides an overview of allowable renovation
costs. I am Sean Hardin, Staff Services Manager of
the Resource Management Unit, with the California Department of Education, Nutrition Services
Division also presenting today is Nutrition Education Consultant Lisa Melhouse. Today we will cover the federal and state
regulations, laws, and policy guidance that the Resource Management Unit (RMU) references
when assisting you on the allowability of your renovations. There are several federal and state resources
your district or agency should consult prior to beginning a renovation, please note that
this presentation will go into more detail of this list in later slides
1. Title 7, Code of Federal Regulations (7 CFR) ,Section 210.14(a) – basically this
regulation limits the expenditure of cafeteria funds to renovations and equipment
2. 2 CFR Part 225, Appendix B Item 15 – cover Capital Expenditure Equipment
Item 25 – covers Maintenance and repairs Item 35 -covers Rearrangement and alteration
costs Item 36 – covers Reconversion
Item 37 – covers Rental costs of building and equipment
Also the USDA Policy Memo SP 41-2011 – page 21 provides an excellent narrative on the
distinction between renovation and construction This slide provides you with the state laws
and guidance that cover renovation costs. 1. EC sections 38091 and 38100 provide you
with an explanation of which costs belong to the district and which costs the cafeteria
fund can cover. 2. Management Bulletins Also referred to as
MB a) 00-109 – provides several good examples
of what are allowable and unallowable costs to the cafeteria fund.
b) SNP-07-2013- is an excellent resource that explains for both you, the Food Service
Director, and your Chief Business Official (CBO) to understand what are allowable and
unallowable costs to the cafeteria fund. This MB is being revised to SNP-10-2015 An excellent place to locate all these resources
is on the CDE’s cafeteria fund guidance Web page, (the link has been provided to you
on the slide). Don’t worry if you don’t have the address
readily available, all you need to do is go to your favorite search engine and type in
“CDE Cafeteria Fund Guidance” and the Web page will be one of the first entries,
if not the first one. Now let’s go into further detail of some
of these listed resources. The RMU has received numerous requests regarding
the use of Cafeteria Funds for construction. School food authorities (SFA) may not use
revenues from the cafeteria account to buy land or buildings or to construct buildings.
This prohibition is taken directly from 7 CFR Section 210.14(a) . . .
Because the regulation indicates the USDA can approve construction requests, shouldn’t
I just write to the USDA for approval; or, instead, how do I submit a request to the
USDA for a waiver? Historically, the USDA FNS has not approved
the cost of building purchases because program funds are made available to help support the
cost of nutritional benefits for children in school settings and not to construct school
related facilities ‘major expenses’ should be borne by the school district’s general
fund As you can see from USDA School Policy Memo
SP 41-2011 – the USDA does not approve the cost of building purchases because the revenue
is intended to “help support the costs of nutritional benefits for children . . . and
not to construct school related facilities.” Please note that you are more likely to be
struck by lightning after winning the lottery before receiving USDA approval for construction
costs. If the building or purchase of buildings has
not been historically approved by the USDA, what about renovations? Well it depends on
whether the renovation is considered to be construction or non-construction. But before proceeding, let’s begin with
what is meant by the term renovation. At its most basic level, a renovation is a
process in which older facilities are modernized, remodeled, or restored. So a renovation can
be as basic as installing new flooring or moving internal walls around, and can be as
complex as upgrading the electrical wiring to expanding the overall footprint of the
building. Since the definition of a renovation can encompass
so many different activities the USDA has provided us with a couple of items of cost
from 2 CFR, Part 225 to help determine what is an allowable and unallowable type of renovation. The first item of cost to help us understand
the distinction between allowable and unallowable renovations will be Item 35, from the aforementioned
2 CFR. Costs incurred for ordinary and normal rearrangement
and alteration of facilities are an allowable charge to the cafeteria fund. Seems a bit vague, right? What is meant by
“ordinary and normal?” The answer to this question will be the key
to understanding the distinction between construction and non-construction type renovations. What
you will find is that a construction type of renovation is never allowable and a non-construction
type of renovation may be allowable. Let me repeat that last part again . . . a non-construction
type of renovation MAY BE ALLOWABLE. The criteria you will help you distinguish
between a construction and non-construction type of renovation is located at 2 CFR 225,
Appendix B, Item 25. Necessary maintenance, normal repairs and
alterations “…are allowable to the extent that the do not add to permanent value of
property or appreciably prolong its intended life.” The criteria the RMU uses to distinguish between
construction and non-construction type renovations are.
1. Do the repairs and alterations add to the permanent value of the property?
2. Do the repairs and alterations appreciably prolong the property’s intended life? If you answer “Yes” to either of these
questions, then the proposed renovation is a construction type renovation and will not
be allowable. Conversely, if you answer “No” to both
questions then the proposed renovation is considered to be a non-construction type of
renovation and may be allowable. Now we have a couple poll questions for you
to answer. Poll Question No. 1
You want to install new linoleum in your kitchen, is this a construction type renovation?
a. Yes b. No
c. Both To repeat the question
You want to install new linoleum in your kitchen, is this a construction type renovation?
The answer is B. No. Installing new linoleum in the kitchen is a non-construction type
renovation. Let’s review the two criteria we discussed
in slide 10 to explain how we arrived at this answer Criteria number one: Do the repairs and alterations
add to the permanent value of the property? No, the installation of the new linoleum will
have no appreciable effect on the permanent value of the facility. Criteria number two: Do the repairs and alterations
appreciably prolong the property’s intended life?
No, the installation has no effect upon the facility’s projected economic life. Poll Question No. 2
You just installed a new walk in freezer and you find that the existing electrical system
is inadequate for your new equipment. Is upgrading the electrical system a construction type
renovation? a. Yes
b. No c. Both To repeat the question
Is upgrading the electrical system a construction type renovation?
The answer is A. Yes. Returning to slide 10 and using the two criteria
located on that slide. Let’s review the question to explain how we arrived at this
answer Criteria number one: Do the repairs and alterations
add to the permanent value of the property? Yes. Upgrading the facility’s electrical
system would increase the fair market value of the facility. For example, would you expect
to pay more for a home constructed in the 1950s with an upgraded electrical system versus
purchasing the same 1950s constructed home that never had its electrical system upgraded? Criteria number two: Do the repairs and alterations
appreciably prolong the property’s intended life? Yes.
The upgraded electrical system does prolong the facility’s highest and best use. An
economic life, as understood in real estate, is the period over which improvements to real
property contribute to property value. Since the electrical system is integral to the facility’s
functionality, upgrading it will increase its overall economic life. Now that we know the two criteria that distinguish
between construction and non-construction type renovations, is this where the analysis
ends? Unfortunately, this is not the end of the analysis, we must also look at where the
renovation is located and if it expands the footprint of the food service area.
Let’s return to the USDA Policy Memo SP 41-2011 for further clarification. FNS has allowed limited renovations within
the inside perimeter of a kitchen/cafeteria space. So what does this mean? To answer this, let
me ask the question – what is the most important determiner of value for real estate? Location,
location, location. Well, it is the same for figuring out if your
renovation will be allowable. Federal regulations and guidance limits renovations to non-construction
type activities AND only to the food service area, which means that renovations encroaching
into any area outside the perimeter of the food service area (i.e., multipurpose room)
is usually not allowable. When discussing allowable renovation costs
I usually provide this rule of thumb for the food service director:
– Everything from the drywall to the outside is usually a district expense, and
– Everything from the drywall in MAY be an allowable charge to the Cafeteria Fund Here is
Poll Question No. 3 My school has breakfast in the classroom and
my CBO wants to use cafeteria funds to replace the linoleum in the classroom. Is this an
allowable cost? a. Yes
b. No c. Both To repeat the question
My school has breakfast in the classroom and my CBO wants to use cafeteria funds to replace
the linoleum in the classroom. Is this an allowable expense? The answer is B. No.
Let’s review the criteria we discussed in slides 10, 15 and 16 to explain how we arrived
at this answer: Criteria number one: Do the repairs and alterations
add to the permanent value of the property? No. The installation of the new linoleum will
have no appreciable effect on the permanent value of the facility.
Criteria number two: Do the repairs and alterations appreciably prolong the property’s intended
life? No. The installation has no effect upon the
facility’s projected economic life. Criteria number three: Is the renovation located
within the perimeter of the food service area? No. Although food is being consumed in the
classroom, this area is considered to be instructional space. Therefore, the renovation to install
the new linoleum is not located within the perimeter of the food service area. Poll Question No. 4
We are remodeling the food service area and are constructing a partition wall. We want
to install a sink into the partition wall and will need to extend the plumbing to the
new sink, is this allowable? a. Yes
b. No c. Both So, is the installation of the sink, partition
wall and plumbing allowable? The answer is C. Both.
Let’s review the criteria we discussed in slides 10, 15 and 16 to explain how we arrived
at this answer: Criteria number one Do the repairs and alterations
add to the permanent value of the property? Installation of the partition wall and sink
– the answer is No. The installation of a partition wall and sink has a negligible
effect upon the fair market value of the facility. Extension of the plumbing, just as with the
electrical system in Poll Question 2, is integral to the value of the facility and therefore,
any modifications to the plumbing system (e.g. extending, upgrading or replacing) will increase
the facility’s fair market value. Criteria number two Do the repairs and alterations
appreciably prolong the property’s intended life? Installation of the partition wall and sink – the answer is No. The installation of
a partition wall and sink will have no effect on the facility’s intended/economic life.
Extension of the plumbing, just as with the electrical system in Poll Question 2, is integral
to the value of the facility and therefore, any modifications to the plumbing system will
increase the facility’s intended/economic life Criteria number three Is the renovation located
within the perimeter of the food service area? Yes. All three proposed renovations are located
within the perimeter of the food service area. The partition wall and sink do not add to
the permanent value of the facility nor will they increase the intended/economic life of
the facility, and they are located within the perimeter of the food service area, they
are an allowable charge to the cafeteria fund. However, the extension of the plumbing to
the partition wall is a construction type renovation it is unallowable even though it
is within the perimeter of the food service area. Although in slide 16 we have provided you
with a clear and easy rule of thumb to follow, we must now provide you with the ever-present
exception to that rule, one which I think you will like. Renovating a kitchen by cutting away a portion
of the wall to allow room for a walk-in refrigerator and related electrical wiring would be an
allowable expense if the renovation is necessary to accommodate increased participation of
students in the school meal programs. If we recall the criteria we use to distinguish
between construction and non-construction type renovations (slide 10) and that renovations
should always be within the perimeter of the food service area (slides 15 and 16), we can
see that this guidance from the USDA provides us with an important exception to everything
we have just discussed. It is because of this passage that the RMU
can allow the following types of renovations: 1. The installation of a walk-in freezer or
refrigerator. 2. Limited expansion of the food service area
resulting from the installation of replacement equipment. For example, you are replacing
a six burner stove with an eight burner stove; the new stove is deeper than the previous
stove so you can modify the adjacent wall to accommodate the new stove. This exception is not intended for the purchase
of new equipment – you cannot use this exception to purchase a new service line which will
be installed in the multipurpose area. Please note that the USDA provides a limitation
to this allowance. The exception can only be used when the renovation is necessary to
accommodate increased participation of students – it cannot be invoked for purely aesthetic
reasons. Additionally, it would be to replace equipment; the exception cannot be used if
the SFA purchases more equipment than can be held within their food service area, e.g.,
you decide to purchase two new stoves to replace the old stove. Now Lisa Melhouse will take over. Thank you Sean. Let’s now turn to the state
laws and guidance that the Resource Management Unit references when assisting you on the
allowability of your renovations. The cost of providing adequate housing for
cafeterias, including, but not limited to, kitchen facilities, is a charge against the
funds of the school district. The cost of the lease or purchase of cafeteria equipment
and of vending machines and their installation and housing shall be a charge against cafeteria
funds, in accordance with Section 38091. Because this section of the Education Code
has significant implications for what are and are not allowable Cafeteria Fund charges,
let’s breakdown this quote 1. Adequate Housing is a district expense
2. Cost of equipment and vending machines is a cafeteria fund expense Let me first speak to the second item – the
cost of equipment and vending machines. As you review this section of the Education Code,
you will see that this is basically a restatement of the federal regulations covering capital
expenditures. And if the unit cost of an item is $5,000 or greater and is not on our USDA
Capital Expenditure approval list you must seek state approval.
Now for the first item – and you’ll see how this is very important. It is the District’s
responsibility to provide adequate housing for cafeterias. What does the term “adequate”
mean? The term “adequate” is understood as meaning that the housing for the cafeteria
must be sufficient for the facility to meet its intended purpose, i.e., housing must be
able to provide adequate shelter for the cafeteria; therefore, repairs to the roof and external
walls would be an expense for the District. Is there anything else that is considered
part of the housing and therefore always a district expense? Yes – service systems and this is an item
of cost that creates a great deal of confusion amongst our sponsors.
Here is a good list of service items – air conditioners, ventilation systems, computer lines
Another frequently asked question that RMU receives regarding service systems is “if
the service system only benefits food services (for example it is located in a Central Kitchen
which is only used by the food service), then why can’t the cafeteria fund pay for the
repair, replacement, or extension of the service system?”
On the previous slide we noted that it is the District’s responsibility to provide
adequate housing. There are two typical responses to this question
Let’s do an analysis using the construction/non-construction criteria that we use from slide No. 10.
1. Would updating, extending, or replacing a service system add to the permanent value
of the building? If you were to talk to an appraiser, both the cost and sales comparable
approaches to value would definitely result in a “Yes.” Also,
2. Using Education Code Section 38100, the service system is considered to be part of
the housing for the food service and is therefore a district expense.
Regardless of whether or not other programs use the facility though, the expense always
belongs to the District. Poll Question No. 5 is taken from Management
Bulletin 00-109, question number three: It is commonly understood that food service funds
cannot be used to paint a cafeteria, but what is the definition of “paint?” Is a mural or
other graphics considered “paint?” a. Yes
b. No c. Both To repeat the question
Can food service funds be used to paint a cafeteria? what is the definition of “paint?”
Is a mural or other graphics considered “paint?” The answer is C. both Painting is an allowable expense when it is
used for the improvement of the school nutrition program . . . using a substantial amount of
food service funds for an expensive artist’s commission for food service murals or other
graphics would not be prudent. The poll question is included because we shouldn’t
forget that although a cost may be allowable, it still needs to be necessary, reasonable,
and prudent and that’s from 2 CFR 225, Appendix A. in this poll question,
the food service director wants to paint the walls of the serving area.
If the activity he or she described were merely applying a coat of paint to the walls, this
would be allowable under 2 CFR 225, Appendix B, Item 25 – necessary repairs and maintenance.
However, the director wants to also include a mural in order to make the area more aesthetically
appealing. The additional cost of an artist is not a reasonable use of cafeteria funds.
A cost is not reasonable if, in its nature and amount, it exceeds that which would be
incurred by a prudent person (the prudent person standard requires each person to owe
a duty to behave as a reasonable person would under the same circumstances). In this case,
the additional expense of the mural does not have anything to do with serving meals to
children. The CDE recommends that the Food Service Director
takes this opportunity to have the children participate in making the mural or looking
for community involvement in improving the food service area. In either case the Food
Service Director should see this as an opportunity to encourage others to participate in the
food service program rather than a restriction. Here is a quick review of construction and
non-construction type renovations: Construction Type Renovations
Anything that changes the dimensions of the structure – altering the footprint of the
building is almost always unallowable. Extending the food service into a non-food
service area – increasing the serving area into the multipurpose room.
Repairing exterior walls and roof – these are part of the housing of the facility and
are considered to be a district expense. Repairing, replacing, or extending the service
system. These are considered part of the housing of food service and would be considered a
district expense. Non-Construction Type Renovations
Replacing flooring in the kitchen and serving area – so long as you are not working on
the foundation this is typically an allowable cost. Building a partition wall – dividing up the food service area to create a small administration
room Removing an interior wall – this is allowable
if not a load bearing wall however, not allowable if a load bearing wall which will result in
construction type activity Modifications to the food service area resulting
from the installation of replacement equipment So this slide talks about special arrangements
and alterations. We have installation of a walk-in freezer and installation of a walk-in
refrigerator. This slide represents our exceptions to the
construction rule. Because both examples in the slide increase
the food service area footprint and modify its housing, these costs are typically considered
construction type of renovations, but the USDA has indicated in this case only that
it is an allowable charge to the cafeteria fund, so long as the food service director
receives prior approval from the CDE. In addition to the information we have provided
to you during this webinar, there are several resources available to you on our CDE cafeteria
fund guidance web page. the link to our CDE webpage is provided on this slide. The webpage
includes MB SNP-07-2013 cafeteria funds allowable uses and our frequently asked questions section
provides FAQ for renovations. For additional resources outside of CDE please refer to the
hyperlink on the slide for the USDA policy memorandums. For questions related to the SNP Cafeteria
Fund, please send an e-mail to the School Nutrition Programs Administration, Resource
Management Unit The e-mail address is provided on the top
of this slide. In your e-mail please be sure to include the
following information in the subject line and body of email as follows
In the subject line Assistance being requested, and your District
or Agency Name In the body of e-mail please include
Your SFA Name Your CNIPS ID #
Description of the issue and if this is a capital expenditure request,
explain why the equipment is necessary For additional questions and resources, please
contact: The CDE Field Services Unit for questions
about your 3-Year Administrative Review at the following phone number (916) 323-4558
For accounting questions you can either – E-mail the CDE School Fiscal Services
Division at [email protected] – Or visit the CDE Web page to view an electronic
copy of the California School Accounting Manual, the link is provided to you on the slide. We would like to thank you for your participation
in today’s Webinar. We hope that Part 5 of this Webinar series has built a foundation
of knowledge and provided you with the materials that will guide you through your next renovation.
Thank you for attending and this concludes the Webinar.