State of New York Office of the State Comptroller Division of Management Audit

STATE UNIVERSITY OF NEW YORK STUDENT FOOD SERVICES REPORT 95-S-6

H. Carl McCall Comptroller

State of New York Office of the State Comptroller

Division of Management Audit Report 95-S-6 Dr. Thomas A. Bartlett Chancellor State University of New York University Plaza Albany, NY 12246 Dear Dr. Bartlett: The following is our report on selected aspects of food service operations at the State University of New York. The audit was performed pursuant to the State Comptroller's authority as set forth in Section 1, Article V of the State Constitution and Section 8, Article 2 of the State Finance Law. Major contributors to this report are listed in Appendix A.

Executive Summary State University of New York Student Food Services Scope of Audit

The State University of New York (SUNY) is one of the largest higher education systems in the nation with 29 State-operated campuses and 5 Statefunded statutory colleges. Each SUNY campus manages all aspects of campus operations, including providing food services to students for a fee. Our audit focused on 24 food service providers. Three campuses contract with private, for-profit food service providers for these services. The other 21 campuses provide food operations through contracts with Auxiliary Service Corporations (ASCs). ASCs are campus-based, not-for-profit corporations established to provide services such as campus stores and food services to SUNY campuses. Our audit addressed the following question about SUNY's student food services: ! Is SUNY providing food services economically and efficiently?

Audit Observations and Conclusions

The contracts between SUNY and the ASCs require that if the ASCs are providing a service to students at a price, the price should be as low as feasible considering the services provided. We found that the ASCs we visited have adequate purchasing procedures in their local environments. However, we identified various approaches for utilizing consolidated purchasing power that appear to have the potential to reduce food costs. One approach would be for the ASCs to purchase commodities from State contracts. The Office of General Services (OGS) contracts with vendors for various commodities at prices that are usually very favorable. There are almost 500 food items currently available through OGS. We compared the ASCs' costs for a one-year period to those on OGS contracts for four items and found the ASCs' costs totaled $690,473, while the same items would have been $565,545 through OGS, creating a potential savings of $124,928 or 18 percent. Currently, ASCs cannot legally use OGS services because they are not State agencies. However, SUNY officials could initiate a change in the legislation to enable the ASCs to utilize State contracts. The ASCs could then procure from the contracts when it is more cost effective. (see pp. 3-5) Another approach to reducing costs would be for the ASCs to consolidate their purchasing power. For example, we reviewed eight items purchased by 13 ASCs and found that prices paid for similar items varied considerably. If the ASCs consolidated their purchasing to achieve the lower prices paid by some ASCs, they would have saved over $234,000 annually for the eight items reviewed. There is the potential for significant savings if the ASCs consolidated their purchasing. (see pp. 5-7)

We also determined that at SUNY Binghamton there was an excess of $225,000 in commissions paid to the campus by the food service provider. These monies were used for other Binghamton expenses, unrelated to food service. Although ASC guidelines allow these surplus funds to be used to promote educationally-related services for the campus community, we believe it is more appropriate that excess commissions be used to reduce the students' meal costs or to improve the food services program. We also found that there were significant variations in the administrative costs being charged to the food service programs by the various ASCs that subcontract with vendors to provide food service. For example, Binghamton reported administrative costs of $70,000 for a food service contract in excess of $8 million and serving 3,835 students. In contrast, New Paltz reported over $200,000 in administrative costs for a $4 million contract serving 2,570 students. Such variations should be investigated by SUNY Central. (see pp. 9-11)

Comments of SUNY Officials

SUNY officials concur with most of our report recommendations and indicate they are taking steps to implement them.

Contents

Introduction

Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Audit Scope, Objectives and Methodology . . . . . . . . . . . . . . . . . . . . . 1 Response of SUNY Officials to Audit . . . . . . . . . . . . . . . . . . . . . . . . 2

Purchasing Strategies

State Commodity Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 ASC Collective Purchasing Power . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Other Matters

Binghamton Food Service Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Administrative Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Appendix A

Major Contributors to This Report

Appendix B

Comments of SUNY Officials

The comments of Agency Officials are not available in an electronic format. Please contact our Office if you would like us to mail you a copy of the report that contains their comments.

Introduction

Background

The State University of New York (SUNY) is one of the largest higher education systems in the nation. Its teaching, public service and research mission is conducted by 29 State-operated campuses and 5 State-funded colleges located at Cornell and Alfred Universities. A 16-member Board of Trustees sets SUNY policy, and a Central Administration Unit (SUNY Central) provides direction and leadership for the SUNY system. Each campus manages all aspects of campus operations, including providing food services to students for a fee. Our audit focused on 24 food service providers and did not include food service activities related to the health science centers at Syracuse and Brooklyn, the statutory colleges at Cornell and Alfred, or specialty colleges of Optometry, Empire State, and Forestry. Three campuses contract with private, for-profit food service providers for food services. The other 21 campuses provide food operations through contracts with Auxiliary Service Corporations (ASCs). ASCs are campus-based, not-for-profit corporations established to provide services to SUNY campuses including food services, vending services, campus stores, recreational facilities and laundry services. Each ASC is guided by a Board of Directors, which includes representatives of the campus administration, faculty and students. SUNY Central has established guidelines covering the operations of the ASCs. ASCs may provide services either directly or through a subcontractor. Currently, 14 of the ASCs operate a food service program, while the remaining 7 subcontract with private, for-profit food service providers. The 24 campuses generated revenues totaling approximately $100 million in 1992-93 and $109 million in 1993-94 from meal plan sales, cash sales, and catering services.

Audit Scope, Objectives and Methodology

We audited SUNY Central and campus/ASC controls over student food service costs for the period April 1, 1992 through August 31, 1994. The primary objective of our performance audit was to determine whether SUNY was providing food services economically and efficiently. To accomplish our objective, we reviewed applicable statutes, as well as SUNY and ASC policies and procedures. In addition, we interviewed SUNY and ASC staff. We also had discussions with officials from the Office of General Services and a major food distributor. We analyzed data we obtained from audit site visits to seven campuses (Binghamton, Brockport, University of Buffalo, Cobleskill, Fredonia, New Paltz, and Plattsburgh) and questionnaire responses from the remaining

campuses. We did not audit the data reported by the campuses. Oneonta did not respond in time to be included in the audit. We conducted our audit in accordance with generally accepted government auditing standards. Such standards require that we plan and perform our audit to adequately assess the SUNY and ASC operations which are included in our audit scope. Further, these standards require that we understand SUNY's and the ASCs' system of internal controls and compliance with those laws, rules and regulations that are relevant to the food service operations which are included in our audit scope. An audit includes examining, on a test basis, evidence supporting transactions recorded in the accounting and operating records and applying such other auditing procedures as we consider necessary in the circumstances. An audit also includes assessing the estimates, judgments, and decisions made by management. We believe that our audit provides a reasonable basis for our findings, conclusions, and recommendations. We use a risk-based approach to select activities to be audited. This approach focuses our audit efforts on those operations that have been identified through a preliminary survey as having the greatest probability for needing improvement. Consequently, by design, finite audit resources are used to identify where and how improvements can be made. Thus, little audit effort is devoted to reviewing operations that may be relatively efficient or effective. As a result, our audit reports are prepared on an "exception basis." This report, therefore, highlights those areas needing improvement and does not address activities that may be functioning properly.

Response of SUNY Officials to Audit

A draft copy of this report was provided to SUNY officials for their review and comment. Their comments have been considered in preparing this report and are included as Appendix B. Within 90 days after final release of this report, as required by Section 170 of the Executive Law, the Chancellor of the State University of New York shall report to the Governor, the State Comptroller, and the leaders of the Legislature and fiscal committees, advising what steps were taken to implement the recommendations contained herein, and where recommendations were not implemented, the reasons therefor.

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Purchasing Strategies When two or more entities aggregate purchases, lower prices often result. We found that the ASCs we visited have adequate purchasing procedures in their local environments. However, greater effort could be made to obtain more competitive pricing through consolidating purchasing. This could result in students paying less for their meal plans. The contracts between SUNY and the ASCs require that if the ASCs are providing a service to students at a price, the price should be as low as feasible considering the services provided. We examined food purchases during the period April 1, 1993 through March 31, 1994. During that period, 13 of the 14 campuses where the ASCs directly operate the food service program (Oneonta was not included as they did not respond to our questionnaire), had total cost of goods (food) sold of nearly $24.6 million. We identified various approaches for utilizing consolidated purchasing power that appear to have the potential to reduce food costs. We believe that these approaches should be pursued.

State Commodity Contracts

The Office of General Services' (OGS) Division of Standards and Purchase and the Division of Supply Support contract with vendors for various commodities which then can be acquired by agencies authorized by the State Finance Law. These Statewide contracts often yield prices that are more competitive than can be obtained in the open market by a smaller customer. SUNY does not utilize OGS food contracts, but some SUNY ASCs have used OGS contracts to purchase some non-food items through campus departments. The ASC at Geneseo utilizes State contracts through the campus maintenance department. A recent purchase of carpeting saved the ASC $580 on a total purchase of $2,214. The Geneseo ASC also purchases floor stripper and wax through the campus maintenance department at about 40 percent less than the open market cost per container. The ASC at Cortland has found that vendors will often honor the State contract price. Officials from the remaining ASCs did state that they would be willing to utilize State contracts if this would be more cost effective, while considering quality, specifications and delivery requirements. OGS offers 487 food and 214 non-food commodities through Supply Support. There are an additional 885 State contracts available through OGS Standards and Purchase. We selected six food items that were procured by the 13 ASCs and found that four of the six items were significantly lower in cost on State contract. The other two items were also lower priced, but the differences were not as significant. We compared the average cost per unit of the items purchased by each ASC to the average cost per unit for the four items on State

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contract over a one-year period (costs are net of factors such as vendor rebates). Our analysis showed the following potential savings:

ASC COST

OGS COST

SAVINGS POTENTIAL

$482,688

$412,715

$ 69,973

106,296

85,160

21,136

Mayonnaise

88,625

59,273

29,352

Macaroni, Zita

12,864

8,397

4,467

$690,473

$565,545

$124,928

Turkey Breast Cheddar Cheese

Total

In response to a draft of this report, SUNY officials indicated that they believe the above analysis is not specific enough to ensure true comparability. We disagree. The items were selected because they are generic in nature. We matched the description of a specific OGS food item with that of an ASC food item. For example, we matched turkey breast, natural in juice, and did not compare other types such as smoked turkey breast. OGS contracts are currently not legally available to the ASCs. An amendment to Article 11, Section 181 of the State Finance Law is necessary to authorize the ASCs to purchase goods on State contract. OGS Counsel stated that they have no objection to having legislation amended to enable ASCs to utilize State contracts. The statute has already been amended numerous times for other non-state agencies, such as not-for-profit corporations that operate in the mental hygiene field. Given the significant potential savings that we identified, SUNY should work with OGS to facilitate the amendment of this statute. ASC officials have voiced concerns regarding timely deliveries. OGS delivers statewide to correctional facilities, State hospitals, Division for Youth facilities and SUNY campuses. OGS Supply Support officials indicate they could make bi-weekly deliveries if the volume of purchases by the ASCs warranted it. Officials from the 13 ASCs, with the exception of Delhi and Potsdam, stated that they had sufficient storage space for bi-weekly deliveries. ASC officials have also voiced concerns about the availability of specific brands requested by the population at their particular campus. Although OGS does not contract for specific brands unless it is a sole source provider or the lowest bidder (as required by State Finance Law), many of the items utilized in food service are generic in nature and are not affected by branding. These generic items are available on State contracts, and could be lower priced than what is available in the open market.

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State contracts may not meet all the needs of the ASCs, but there is a potential for savings by utilizing these contracts.

Recommendation 1.

ASC Collective Purchasing Power

SUNY Central should seek to amend Article 11, Section 181 of the State Finance Law to enable ASCs to utilize State commodity contracts.

Consolidating purchasing power through use of a primary supplier (one contractor who provides all goods) creates economies, as many large organizations have discovered. ARA Services, a nationwide food service provider, utilizes one primary supplier. Additionally, the United States Defense Department, including the United States Military Academy, utilizes a primary supplier. There are numerous benefits to utilizing a primary supplier. These include prices that are minimized and do not vary significantly, annualized volume incentives, and vendor discounts. Other benefits include customized, streamlined receiving and accounting procedures, as well as brand consistency and quality. A primary supplier can also act as a consortia for the ASCs, negotiating with manufacturers for optimum prices. We determined that 6 of the 13 ASCs are utilizing a primary supplier, but none of the ASCs have combined their purchasing power to enter into a statewide or regional agreement with a primary supplier. To demonstrate the differences in the prices being paid by the ASCs we calculated the average cost over a one-year period of eight items selected at random that are purchased in volume by the ASCs. The price ranges and percent of variation follow:

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UNIT PRICES HIGH LOW Catsup

PERCENT OF VARIATION

$25.50

$10.40

145%

29.67

12.97

129

Turkey Breast

2.53

1.62

56

Macaroni, Zita

14.00

9.00

56

Tuna Fish

45.00

29.93

54

2.53

1.70

49

29.99

22.59

33

1.67

1.29

29

Mayonnaise

Cheddar Cheese Fruit Cocktail American Cheese

To help demonstrate the potential savings that could be achieved by utilizing a primary supplier, we calculated what the 13 ASCs would have spent annually on the above items if they had all paid the lowest price in the range. A summary of the potential savings follows:

LOWEST

POTENTIAL SAVINGS

PERCENT

88,625

$ 64,117

$ 24,508

28%

Tuna Fish

160,398

121,756

38,642

24

Turkey Breast

482,688

386,608

96,080

20

Cheddar Cheese

106,296

86,160

20,136

19

American Cheese

279,104

231,560

47,544

17

Macaroni, Zita

12,864

11,011

1,853

14

Catsup

37,201

32,740

4,461

12

Fruit Cocktail

16,964

15,896

1,068

6

$1,130,140

$895,848

$234,292

ACTUAL Mayonnaise

Total

$

21%

Although this analysis does not consider the brands of the items or the distributor utilized, it does demonstrate that there is a potential for reducing costs if lower prices with minimal variation are achieved. ASC officials stated that they have discussed consolidating purchasing power through bulk purchases, but have not recently implemented any consolidated food purchasing. We did find that Canton and Potsdam ASCs consolidated

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purchases for tomato products several years ago. Additionally, Canton has recently consolidated purchases with a neighboring private college, St. Lawrence, for the purchase of paper goods. ASC officials believe that bulk purchasing may not be feasible for several reasons. First, there is a significant variation in campus brand preferences, making it very difficult to agree on product specifications. Second, there is a question as to which campus will be utilized to store the bulk shipment. The final concern is the problem of how the bulk delivery will be redistributed. Canton officials stated that working out the product specifications was the most difficult part of the process. They selected high volume items that were generic in nature and not subject to branding preferences. Some vendors were willing to split the bulk shipment between the Canton and Potsdam campuses. When the vendor was unwilling to split the shipment, the order was delivered to Potsdam, and Canton staff drove over and picked up their portion. The Canton Food Service Director stated that significant savings were still achieved by purchasing the product in bulk, even with the additional cost of driving and picking up the product.

Recommendation 2.

The ASCs should implement collective purchasing strategies that will result in the lowest price possible consistent with the quality of goods needed.

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Other Matters We determined that at SUNY Binghamton the food service commissions paid to the campus by the food service provider exceed the campus' expenses related to the monitoring and oversight of the contract. We also noted a significant variation in the administrative costs being charged to the food service programs by the various ASCs that subcontract with vendors to provide food service, which should be investigated by SUNY Central.

Binghamton Food Service Revenues

The standard food service contract contains provisions for certain commissions to be paid to the campus by the food service provider. The commissions are deposited into an Income Fund Reimbursable (IFR) account with the express purpose of paying any rent and utility costs related to the food service area, in addition to campus contract oversight and administration costs. We determined that commissions being paid to the Binghamton campus exceed the costs of administering the contract. In the two-year period from July 1, 1992 through June 30, 1994, the Binghamton campus received $647,152 in total commissions from the food service provider. The campus' costs related to the oversight and administration of this contract totaled $421,951, leaving an excess commission of $225,201. We found that the excess commissions were commingled with other monies within the IFR account. Further analysis of the expenditures in this account found that the money was used for various SUNY Binghamton expenses and special initiatives unrelated to food service. In response to a draft of this report, SUNY officials indicated that they believe that it is appropriate that surplus food service commissions be used to promote educationally-related services for the campus community. However, these excess commissions have resulted in students paying a higher price for meal plans. A more appropriate use of these commissions would be to either reduce the cost of the meal plans to students or to enhance or improve the food service program.

Recommendation 3.

Administrative Costs

Ensure that food service commissions paid to the campuses are used to either reduce the cost of meal plans to students or improve the food service program.

The campuses should run their food service operations as efficiently and economically as possible to minimize costs charged to students. SUNY

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Central's Office for University Business Services (Office) is responsible for overseeing operations of the ASCs. The Office reviews and analyzes annual budgets and financial statements to ensure the ASCs comply with guidelines and maintain sufficient reserves and cash balances to be fiscally sound. We compared food service administration costs at nine of the ten campuses that subcontract for food services (Old Westbury, Utica/Rome, Binghamton, Maritime, Farmingdale, Stony Brook, Plattsburgh, New Paltz, and Buffalo College - Purchase was not included) and noted significant inconsistencies. For example, during the 1992-93 fiscal year, Binghamton reported $49,890 in administration costs to oversee the food service contract, while five other campuses (Farmingdale, Buffalo College, New Paltz, Plattsburgh, and Stony Brook) each reported between two and four times that amount to perform the same activities, as follows: ADMINISTRATION COSTS 1992-93

1993-94

AVERAGE NUMBER OF STUDENTS

AVERAGE ANNUAL REVENUES

Binghamton

$ 49,890

$ 70,029

3,835

$8,420,153

Farmingdale

100,000

100,000

855

1,320,153

Plattsburgh

136,543

139,555

2,723

4,298,608

Buffalo College

227,951

194,859

1,800

3,761,072

New Paltz

206,039

218,660

2,570

4,209,400

Stony Brook

135,179

278,146

4,364

10,186,933

The Office should question why it costs significantly more at some campuses to oversee sub-contracts. The Office's review does not include any analysis of the reasonableness or appropriateness of expenditures. If administrative costs are excessive, students may be paying higher prices for food services than they need to. The Office should investigate these inconsistencies to ensure administrative costs are not excessive. SUNY officials state that comparisons of administrative costs assigned to food service operations can be misinterpreted since all campuses use different formulas and methodologies for allocating administrative costs. However, good cost accounting practices and accurate financial reporting should result in costs which reflect administrative activities regardless of the methodology used to arrive at the figures. The wide range of costs suggests that some campuses may be misallocating administrative costs or providing excessive or insufficient administrative support.

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Recommendation 4.

Examine administration costs at those campuses that subcontract for food service to ensure that costs charged are reasonable.

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Major Contributors to This Report David DeStefano Frank Houston Seymour Peltin Jerry Barber Martin Chauvin Marcia Petersen Melissa Little Mary Roenick Michael Wrobel Paul Bachman

Appendix A