Recipe for Trouble

Among institutions in the United States, only the military feeds more people than the New York City schools, where cafeterias serve 800,000 meals every day of the school year. Getting all that food from the companies that produce it to the 1,200 lunchrooms where it’s served is a massive job. This year, on the advice of the consulting firm Accenture, the New York City Department of Education decided to hand the task to just three companies instead of the dozen or more that used to divvy up the work. The school system was warned by other vendors that it was too big a job and that the three selected companies had credit problems, but it went ahead anyway.

Seven months later, the school department has had to advance the delivery companies millions of dollars, fine them thousands, declare an emergency, and bring in extra firms to help. Now the contracts are under investigation and the scheme itself is under internal review—it’s not clear what’ll happen next year—all as Mayor Mike Bloomberg campaigns on the reforms he’s introduced to the city’s schools.

The new system kicked in as schools opened last fall. Right from the beginning, things went wrong. “We pretty much started to see problems the first couple of weeks,” says school food director David Berkowitz. “Deliveries were starting to get delivered late. They were short more products than we would have liked.” Some school staff clocked overtime to accept late deliveries. No one got sick, but in at least one instance, food that was supposed to be transported in a refrigerated truck was not.

Kids saw a lot of sloppy joes and PB&Js. “They had no variety,” says veteran nutrition advocate Agnes Molnar of the Children’s Defense Fund-New York. “Some schools had the same meals several days in a row.” Parents anticipated meal options that did not exist and learned later that their kids had eaten dishes they were supposed to avoid. “A lot more kids started bringing lunch from home than used to,” says Linda Levy, head of the parents’ association at the East Village Community School. “The parents were suddenly finding their kids refusing to eat the school food.”

After parents complained, the city declared an emergency and enlisted other delivery companies to help. Five months later, the problems have subsided but not disappeared: Chief Executive for School Support Services Marty Oestreicher says 90 percent of schools are now “on menu,” but Berkowitz said in a recent interview that two delivery companies still “have more shortages than we want.” Meanwhile, the school department’s special commissioner for investigations says in a letter that it is investigating. It won’t comment, but it’s believed to be looking at whether the three original delivery firms—Driscoll Foods, Louis Foods, and Watermelons Plus—passed their inspections last summer, as well as whether the schools department has discriminated against delivery company Chef’s Choice, whose director cooperated in previous investigations of the school foods office.

The timing of all this isn’t great for Bloomberg and schools chancellor Joel Klein. Their efforts to remake city schools—gaining mayoral control, ending social promotion, and launching smaller high schools—are central to the mayor’s re-election bid. Fixing school food was supposed to be another victory. In 2004, the Office of School Food and Nutrition Services started calling itself “SchoolFood” and hired an executive chef to improve menus, all with the aim of getting more kids to eat cafeteria food. Nutrition advocates for years have pressed the city to aggressively push school meals, which are usually cheaper and more nutritious than what kids might buy at a corner store or vending machine. “They’ve taken some first, first steps,” says Toni Liquori, director of food and nutrition services at Food Change.

But the botched delivery scheme could reverse those gains. “They have brought in people who know what they’re doing and are trying to make some changes,” says Kathy Goldman, another nutrition advocate working with CDF-NY, “and when something like this happens, it just discourages kids from wanting to participate.” Cafeteria statistics do not show any system-wide fall-off in kids buying lunch, but unless the city monitors the lunchroom trash, there’s no way to know if kids actually eat what they buy.

There’s also no way to know if the new scheme will deliver the cost savings it was supposed to. The city used to divide the school food system into 18 different contracts. The idea behind cutting that to just three contracts this year was to centralize operations—a standard theme of the Bloomberg era—and leverage the city’s buying power to save a projected $5 million to $6 million.

Accenture was paid $1 million for its role in developing the food delivery plan, which included recruiting bidders. But the company says its responsibility only goes so far.

“The city makes all the final decisions on any contracts that are awarded,” notes Accenture spokesman Peter Soh, “and they manage those contracts and the implementation of those contracts once awarded.” Overall, Accenture’s $12 million of work for city schools is supposed to save the department $70 million overall—assuming, of course, that other new procurement practices don’t hit costly snags like food deliveries did.

Critics contend that Accenture did not grasp the particulars of the food business—like the difficulties inherent in trying to cram both produce items and frozen food on the same truck (the produce can end up frozen). “You cannot always have these hotshot MBAs,” Goldman says. “People have to know the business that they’re talking about.”

This is not the first trouble for the school food distribution system: In 1995, the investigations commissioner found rampant mismanagement and dangerous food-handling practices in the department. In 2000, when chancellor Klein was an assistant U.S. attorney general, his office indicted 22 people and 13 companies for rigging bids on school food delivery contracts. Several figures went to jail. A 2004 report by the investigations commissioner found that persistent flaws in the delivery bidding system cost the city millions of dollars—and, remarkably, fingered three of the same school officials slammed in 1995. According to the 2004 probe, two of them accepted gifts from a contractor, and both lied to the FBI. But two were allowed to retire, and one resigned and receives a pension. While several business figures went to jail for corruption, no school food officials have been fired or prosecuted.

The current problems might seem minor compared to the earlier woes. But the current crisis reflects lessons unlearned. In the past, as now, accepting the lowest bid spelled trouble for school cafeterias. The officials now in charge of school food—Berkowitz and Oestreicher—are not linked to the earlier problems; they arrived only in 2003 and helped develop the idea to centralize the distribution system.

If the Accenture-backed plan to centralize deliveries to three firms has faltered, at least there’s comfort in knowing it might have been worse. In 2003, the school department considered hiring not three firms, but just one company to handle the entire city. Smaller vendors, perhaps wanting to preserve their part of the action, say they warned the department that the job was just too big for one firm.

“I said there’s no way that one company can possibly handle the volume,” says Pat Russo, who runs Chef’s Choice. Russo’s father went to jail in the school food bid-rigging case and then Russo—a retired cop—bought the company and changed its name. Reports indicate that the school department was prepared to award the citywide contract to H. Schrier & Co., a firm that another city agency had declared “not a responsible bidder” because of its ties to one of the men indicted in 2000. Oestreicher, however, denies that his department was on the verge of giving Schrier the deal. He says officials dropped the one-company plan because “we thought it would probably be too much of a stretch.”

With the citywide scheme scrapped, the school department came up with a plan to award the contracts to three companies. Again, there were warnings from vendors. One was Eleftherios Vouyiouklis, president of a delivery company called Teri Nichols. When the school department last June named Watermelons, Louis, and Driscoll as the winners of the delivery bids, Vouyiouklis warned the department that the companies “either do not have existing or cannot establish the appropriate levels of credit.” He also complained that one of the winners, Watermelons Plus, did not have adequate warehouse space. Photographs obtained by the Voice show products being stored outside the Watermelons Flatbush warehouse. Watermelons did not return repeated phone calls.

Both Chef’s Choice and Teri Nichols bid for the distribution contracts (estimated at a total $33.5 million total over five years) and lost, so their complaints could be chalked up to sour grapes. But SchoolFood eventually insisted that Watermelons get a larger warehouse facility. And credit problems, or at least the fear of them, did crop up. Joel Warshaw at Louis Foods says food manufacturers began demanding cash up front from the delivery firms, adding, “So our start-up situation was really difficult.”

That’s why the city had to advance the delivery companies more than $3.3 million—to pay the manufacturers, who may have been worried about being stiffed by the delivery firms. The worry was founded: It turns out the USDA in February 2004 temporarily banned Driscoll Foods “from operating in the produce industry” for failing to pay a vendor. Driscoll’s president, Tim Driscoll, declines to answer questions but says in an e-mail, “The city contract is under control. Everything with my company is going great.”

Credit and warehousing weren’t the only issues. According to Oestreicher, the food manufacturers sometimes didn’t produce enough for the delivery companies to transport. What’s more, the delivery companies were given only a month from the official start of the contract to the first day of school. “At the very beginning the start-up period was supposed to be 90 days, but it never came to fruition and we had to rush, and rushing into it, there were a lot of problems,” Warshaw says. The reason for the delay, according to Berkowitz, was that the contractors had to gear up by installing more shelving or improving freezers.

That rush to add capacity foreshadowed the later problems. Warshaw admits that handling all of Queens and part of Brooklyn “was too much for us.” As the problems surfaced, the school department began fining the delivery firms. Watermelons Plus was hit for $148,380, Louis Foods for $77,881, and Driscoll for $59,759. Louis and Driscoll are challenging some fines.

The problems with the food contracts naturally raise the question of oversight. Most city agencies have to run their contracts through Comptroller Bill Thompson’s office, per the city charter. But the city schools department, although under mayoral control, is a creation of state law and therefore exempt from the charter. So the schools department makes its own purchasing rules. Its contract with Accenture, for example, has not even been registered with the comptroller. A comptroller’s audit of the 2003 Snapple deal with the schools found the bidding process was “fundamentally flawed,” and Thompson is pressing for the state legislature to impose more oversight of school department contracts. Klein’s office—which dubbed the Snapple audit “biased”—declines to comment on the legislative proposal.

While the delivery situation has stabilized, even the firms brought in to help have been fined for failures. Despite that, school officials say the new system allowed them to stop renting a warehouse and go directly to manufacturers to get bulk discounts. “In the long term,” insists Berkowitz, “this is going to be very successful for us.”