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Decoding Congress’ Stealth Formula for Raising the Price of School Lunch

March 7th, 2011 · 11 Comments · Posted in kids, school food

Higher prices mean fewer kids in the lunch line

A little knowledge can be a dangerous thing—especially when it results in a stealthy government formula for raising lunch prices at the nation’s schools that will cause hundreds of thousands of children—perhaps millions–to abandon the program.

In its recent re-authorization of the school meals program, Congress included a provision that would force schools to raise the price they charge students who don’t qualify as low-income.

Some hailed this little-noted mandate as a way to generate what the USDA estimates could be a $2.6 billion windfall for schools over 10 years. But I wondered, did this estimate include all the kids who will stop buying the much-maligned school lunch if it gets more expensive? And how could the federal government possibly know how many kids would drop out of the lunch line rather than pay the higher tab?

It took some weeks of prodding, but I finally obtained an internal document from the USDA’s Food and Nutrition Services branch revealing how the agency at the Senate’s behest formulated the magic number–$2.6 billion—that it then passed on to the committee where the price mandate was hatched.

It also confirms what I originally suspected: The government can’t really know what will happen to participation in the lunch program if schools raise prices. You might expect the federal government to bring every possible resource to bear and weigh ever so carefully a decision that stands to affect some 90,000 public schools. But that is not the case.

“We do not prepare or publish cost estimate memoranda in the way that the Congressional Budget Office sends such materials to members of Congress,” explained a USDA spokesman. “There was no formal document or methodological write-up given to the committee.  The agency gave the committee a number in answer to a question.”

So here’s where the number came from:

School food experts for years have known that raising the price of lunch means some students who pay “full price”–about 12 million of the 32 million who participate in the school lunch program on any given day—will stop buying it.

In 2005, Mathematica Policy Research, contracted by the USDA to conduct one of the agency’s periodic reviews [PDF] of the school meals program, created a statistical model that estimated 56 percent of paying students would buy lunch if the price were $1.50, but that fewer—50 percent—would pay if the price were $2.00.

It’s important to note that Mathematica did not conduct a study of children’s actual purchasing behavior at different price levels. What they gave the USDA was a modeled prediction based on all sorts of data the firm collected from 2,314 students at 398 schools that year, including the types of food served, the amount of time kids were given to eat, prices charged, and interviews with children and their parents revealing what the kids typically ate in the course of a day and family income.

Based on Mathematica’s prediction within this narrow price range, Food and Nutrition Services extrapolated its own formula in order to respond to the Senate committee’s request for an estimate: For every cent the price of lunch increases, students who pay full price will drop out at a rate of .11 percent. It then calculated that the Senate’s proposed lunch price mandate would generate $2.6 billion more income over 10 years—and cause nearly 500,000 paying students to stop buying lunch.

But that’s hardly the end of the story. Under the new mandate, schools will be required to raise prices each year by an amount equal to the rate of inflation plus two percent until they are completely caught up with what the USDA estimates is the actual cost of providing a school lunch, currently $2.72. Many schools now charge as little as $1.50.

As if things couldn’t get any more complicated, the government’s baseline is a moving target. What the USDA calculates as the cost of providing lunch—the amount it gives schools to pay for a fully-reimbursable meal–is adjusted upward annually with the rate of inflation. Thus, the vast majority of schools will take longer than 10 years to reach the government’s baseline. Nearly half will take more than 20 years.

Could the USDA’s formula for calculating drop-outs possibly hold up that long and under all sorts of different economic conditions?

 “They [the USDA] asked us that, and we told them we had a problem with it,” said Mathematica senior researcher Anne Gordon, one of the report’s primary authors. “I don’t remember exactly, but I think it was around $3 we couldn’t make a prediction. We can’t know what will happen at that price, because none of the schools we looked at charged that much.”

In other words, accepting the USDA’s predictions years into the future requires a leap of faith. “It’s probably the best they can do,” Gordon said.

The prospect of annual price hikes out to the horizon has caused great alarm among the nation’s lunch ladies. In the current recession, they are grappling with millions of dollars’ worth of meals eaten by children whose families are deemed able to pay, but haven’t.

School food service directors opposed a congressional edict to raise prices, but would have preferred a House version that “sunsetted” the law after 10 years and required the USDA to conduct an impact assessment after four years. In a last-minute rush to enact the child nutrition legislation, that version never came up for a vote.

When I asked the School Nutrition Association, representing some 53,000 school food workers, to comment on the new law, they reported results from some recent price increases in different school districts.

When the lunch price rose 15 cents to $1.75 in Munster, Ind., in 2008, for instance, nine percent of the kids dropped out. In Caroline County, Md., the price rose 35 cents to $2 in 2007 and participation plummeted 16 percent. In Franklin Township, Ind., schools hiked the price 15 cents to $2.10 in 2009 and 12 percent of the kids stopped buying. Schools in Willoughby-Eastlake, Ohio, raised the price 10 cents in 2008 to $2.60 and participation fell 10 percent.

SNA spokeswoman Diane Pratt-Heavner said that while food service directors accept Mathematica’s 2005 report as “the most comprehensive data available to FNS, they question it’s accuracy in portraying how families will react to current price increases.”

“The economy is worse than in school year 2004-2005, and their own experience tells them that participation drops when you increase prices,” Pratt-Heavner said.

The School Nutrition Association is asking the USDA to test increasing lunch prices on a pilot basis before imposing the congressional mandate nationwide.

Besides higher prices, other looming factors will likely suppress school lunch participation and upset the cafeteria business model.  Upgraded nutrition standards—including more helpings of vegetables, more whole grains, fewer French fries and other potato products, and much less salt in food—are expected to cause more paying kids to reject the federally-subsidized hot meal.

In a 2010 report to the USDA [PDF], Mathematica predicted that adopting a full range of improvements to make meals “healthier” would result in 5 percent of elementary school children dropping out of the program, and even more—12 percent—at the secondary school level.

Sociologist Janet Poppendieck, whose book on the national school lunch program, Free for All, has become a widely-cited text, rejects the idea of forcing schools to raise prices across the board.

Undercharging may give an unfair advantage to some families who can afford to pay at the expense of low-income children. But Poppendieck says the USDA is probably underestimating the number of parents who will react angrily to higher prices and pull their children out of the lunch line. And that could hurt the entire program’s ability to function.

She fears for millions of children on the margins–those who aren’t exactly affluent, but don’t qualify as “low income” either.

“If we lose them, it’s not just the loss of children, we lose the claim that this is not just a welfare program,” Poppendieck said. “And the more school lunch has the label of being a welfare program, it imposes a kind of a shame tax on kids who do want to participate. I think that’s the wrong direction to go.”

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  • Alexia

    I’m wondering how much this price-vs-participation is affected by the quality of the food in question. For example, I’d be disinclined to have my child buy school lunches in our public school system because I don’t think they’re very high quality. For many, I think having crap food is acceptable if it’s cheap enough but if they’re going to pay more they want better quality. How many people would buy a McDonald’s burger if the price went up to $3? I’m guessing a lot fewer, unless there was a corollary increase in quality. I don’t think increases in quality have generally been in lockstep with price increases in school lunchrooms.

    At my child’s daycare, while meals are technically “included” in the fees I pay they obviously still influence the total cost of care there. I serve on the Board and can tell you that the costs are not inconsiderable, though they do their best to keep them as low as possible. However, I am willing to pay the extra amount because the meals are mostly organic, vegetarian, seasonal, local, and produced from scratch. My daughter doesn’t actually like a lot of the food, but to me that’s not the only point here — I am willing to pay for the fact that the only food my daughter gets exposed to is healthful and nutritious. I can only lead the horse to water, I can’t make it drink.

  • Anonymous

    I have a couple questions. You and many other writers (it isn’t just you) discuss the various recent changes within the school lunch program so negatively. We all agree that school lunches stink. The quality is poor, there is too much corporate food service involvement, not enough nutrients. We all recognize that many many poor children essentially live on school food to meet their daily caloric requirements.
    I get it, you raise the price for these crappy lunches and parents who don’t have to feed their kids school lunch opt out of the program. Not enough participants mean that the kids who pay nothing are put at risk of not having a program.
    But as any business that is required to break even, have you ever thought that even with a 10-15% decrease in participation costs would also decrease because less food would be needed. And the additional income from the students paying full price who do stick around would indeed bring in an influx of cash into the program. It seems that there has been alot of thought put into how many parents would opt out of the program. But has anyone does an analysis of what the cost savings were to be if the program were 10-15% smaller? Anyone in the business of selling products knows that more business doesn’t necessarily mean more profit.

    I am also confused as to why you consistently refer to the recent passing of stricter nutritional standards as something that is bad. Is it simply because it will raise the base cost of preparing the lunches? Thus creating the pricing situation you discuss above? I don’t see how we can talk out of both sides of our mouth. It isn’t fair that so many people under pay into the system, and I see the missing funds as forcing foodservice to make up the difference by offering crappy food. I don’t think it is fair to serve poor kids crappy food, even if we can figure out a way for it to be free. I would rather see some middle class kids opt out of the system rather than continue the unsustainable business model which yeilds lousy food for all. I kind of think right sizing this business means better food for everyone (including those that will choose to start packing peanut butter and jelly sandwiches).

    And forgive me if I am wrong, but it is my understanding that those who will be required to pay $2.72 per lunch would be people who can afford it–not those who financially qualify for a subsidized lunch?

    I would love to hear your thoughts.

  • Ed Bruske

    Alexia, food quality is definitely one of the more important factors that affect participation. The quandry is, kids actually have greater influence in the decision to buy or not to buy the school lunch, and they would rather eat chicken nuggets and tater tots than fruits and green vegetables.

  • Ed Bruske

    Anonymous, I don’t normally reply to anonymous comments. But economies of scale and marginal costs are important in the school meal program. Also, go back and read the comments by Jane Poppendieck. She expresses the same concerns as many food service directors who would rather not see school lunch become a welfare program. I have not consistently referred to the recent child nutrition as something bad. But I do think it’s important to look at the sometimes enormous difference between what happens on the policy level and what actually takes place in cafeterias.

  • Anonymous

    Thank you for responding. I don’t normally comment as anonymous. But, I didn’t feel comfortable given the questioning nature of my comments. Totally agree withyou about the differences between policy and what happens inside a cafeteria. Involved parents really matter.

    I am not sure that I have ever read what YOU think is the best cours of action? What is the solution? I thought the Child Nutrition Act was a good start. But whole communities of united parents are needed to make it happen (and to make education work in the first place). Where do we start?

    And on a side note– agree that economies of scale ar important. But will a ten percent reduction of participating students mean a loss of those economies of scale? There is a critical mass in all things such as this. Do you feel that the school lunch program will drop below that critical mass level if 10-15% of participating kids drop out?

  • Ed Bruske

    Reducing the customer base raises the marginal cost of the operation, which means it becomes more expensive, not less expensive, to serve a smaller customer base. At a certain point, they then have to start laying people off. A major objective of the school lunch program is to increase participation, not suppress it. The price mandate in question is targeted at paying children, and it’s feared that losing them stigmatizes the program and the children who rely on it for food.

  • Anonymous

    I won’t disagree that kids must participate in the program for it to be healthy. And my gut says that if a third of participating kids opted out of the program suddenly, then yes, the marginal costs of running the program might not match the income coming in and the program would be in crisis.

    However it is not a hard economic fact that reducing a customer base automatically raises the marginal cost of the operation. At some point yes, the cost of running a big operation gets too great when customer participation falls below critical mass. But also, an operation can grow too large, discount product too much and become unsustainable.

    I know a little about wholesale fashion. And during the height of the recession in 2008 and early 2009 many brands saw an INCREASE in gross sales for a short period of time because consumers went out in droves to buy up goods at steep discounts. But many brand went out of business because they did not make enough profit selling these goods on sale. Some brands tried to continue the big sales numbers by focusing on selling sale priced goods. But in the long run, all the customer gets is a cheap suit for a cheap price and the brands didn’t make very much money either. Look at Macy’s, they play this game every day. At a certain point, in order to capture more business and grow you must lower prices. And that can hurt a business if it is not managed properly. Oftentimes a business can shrink it’s gross sales by 10-15% and increase bottom line profits by 30% or more. I have seen it happen first hand.

    Granted, school lunch is not the fashion industry. I kind of think that school lunch should be run as a not for profit, so that there are no profit dollars built into the cost of the food. It seems that the schools that are winning have in school kitchens who operate on this model. Please correct me if I am wrong-you are more knowledgeable abou this than me :)

    Given my business experience, which I understand is limited, I think that the gvmt recommendations for raising the base price of a lunch for those who can afford it are perfectly reasonable. In my mind, the first year would be about right sizing the program, cutting out unneeded product for kids no longer participating. And then using the additional funds to make the program better. Then in subsequent months and years, reaching out to those middle calss kids who previously had dropped out by showing them and parents that lunches are healthier and better quality. Then top line growth can begin again.

    At least this was you fix the problem–crappy unhealthy food–instead of trying to expand an already broken model. Because I, as a parent, would be all too thrilled to allow my child to eat school lunch for $2.72 a day. That’ cheaper than the sprouted bread and organic salami I buy. But I refuse to let him eat the food, because in my opinion, it isn’t food.

    I think we are in agreement about what the problems are, and what the end result should be. But we differ about how to get there.

  • Ed Bruske

    I don’t pretend to know what the solution is. And I’m absolutely positive you don’t either. But you are certainly entitled to your opinion.

  • Anonymous

    The intention was to have a dialogue here. Not to say that I know the answer or have a solution. I apologize if that wasn’t *crystal clear*.

    I simply was curious what your thoughts were on the best solution, or what seems most feasible. This is a complex issue on which I respect your thoughts. My wanting to ask these questions was *only* for additional education on my part.

  • Yale Rudd Center

    This blog raises some valid points, but there are a few ways to look at the problem.

    Currently, many school districts charge less for the paid lunch than the government reimbursement. Clearly, this is under pricing the meal, and the main reason a food service would do this is fear of lower participation rates. We agree that having more students participate in the NSLP is better because research has shown that the NSLP tends to be more nutritious than either the average meal sent in by parents and the average “meal” purchased using a la carte items. It would be really good to know if students who “drop out” of the lunch program are spending more or less money for their lunch. Specifically, in the Munster, ID and Caroline County, MD school districts where percentages dropped off after the prices went up – Did those students switch to a la carte and spend less than $2.72 on food that was nutritionally worse? Did those students start bringing their own lunch (that costs less than $2.27), and if so, were those lunches better or worse in terms of nutrition?

    Our concern (and we believe the motivation of the USDA rule) is that when schools that charge less than the government reimbursement are under pricing themselves, increasing their dependence on a la carte foods, and risking having their food service to operate in the red. Obviously, this is what has led to the current crisis and is not a sustainable situation for school districts.

    The reluctance to raise prices also really gets to a larger issue which is how parents view the NSLP. If they saw it as a valuable program that provided healthy meals, most parents would probably be willing to pay more, especially when you point out to them how the school lunch compares to restaurant lunches or the cost in time and money of making a comparable lunch at home. Rather than see the pricing requirement as an obstacle, we hope that food service directors see this as an opportunity to improve the quality of their lunches and then market those lunches to the parents and students.

  • Ed Bruske

    Thank you Rudd Center for weighing in on this important issue. One of the things school nutrition directors would object to, I think, is Congress and other who are not engaged in the daily business of managing school food service operations telling them the best way to do business. In may cases, they can give a quite lucid rationale for why meals are priced (or underpriced) the way they are. In other cases, the prices have been suppressed by school boards that are reluctant to raise them. But I am also linking to a piece I posted this morning on our sister blog–Better D.C. School Food–where it was explained that food service directors do not see a historical basis for parsing out federal subsidies as belonging to one income group of children as opposed to any other groups. They see all of these subsidies as being intended to support the program. So there is hardly 100 percent buy-in to the notion that low-income children are being underserved because “full price” kids are not being charged at least the full cost of producing a meal. Those are, I think, serious issues that groups like the Rudd Center should be discussing with representives of school food service professionals, who, as we speak, are swarming over Capitol Hill trying to convince their lawmakers that this particular provision of the child nutrition re-authorization should be put on hold and pilot tested.

    I don not pretend to know who is right. But I think the rationale for this policy and the way it has been legislated is really interesting.

    Here’s the link: http://betterdcschoolfood.blogspot.com/2011/03/putting-breaks-on-raising-lunch-prices.html