Unjust Desserts


On a typical Monday when school’s in session, the narrow office of Watermelons Plus in Canarsie would be humming—with food orders streaming in from hundreds of schools in Brooklyn and Staten Island, staff placing delivery requests with companies as far away as California, and packed trucks rumbling out with the frozen food, produce, and groceries for New York City’s 1.1 million public school children.

But last Monday, it was quiet and nearly empty on the second floor of the company’s stall at the Brooklyn Terminal Market. About 60 people who worked for the firm were out of a job. Only a handful of employees remained. Some $800,000 in new trucks were sitting idle. And with bills from food manufacturers piling up, company president Mike Pagano was struggling to keep his family business out of bankruptcy.

The sudden change in fortune was only the latest tremor to hit New York City’s system for delivering food to the city’s schools.

The second-largest feeding system in the country (the Defense Department ranks No. 1), New York’s school food program has been plagued for years with problems ranging from bid-rigging charges to costly inefficiencies. Two years ago, on the million-dollar advice of the consulting firm Accenture and under new leadership, the school food office decided to try something different: Rather than have a dozen or more contracts for delivering food across the sprawling school system, the city decided to save money by hiring only three companies to do the job.

There were problems from the outset in fall 2004, with schools not getting enough food and the delivery companies getting thousands of dollars in fines (“Recipe for Trouble,” April 5, 2005). The city had to advance money to Watermelons and the other two delivery firms, and emergency contractors were brought in to divvy up the workload. By spring 2005, the Department of Education said the situation had stabilized.

But in the past six months, two of the original three vendors have stopped serving the schools, and each maintains that the city owes it more than $1 million—a dispute that could end up in court. In the meantime, the Watermelons Plus trucks sit empty. The Department of Education says the company dropped out of its contract, but Pagano denies that. “I didn’t quit,” he insists. “They forced me out.”

On paper, the new delivery system looked like a sure money saver for the taxpayer. Three delivery companies would distribute their own food products, the large amounts of federally donated food, and products by other manufacturers—like Perdue and Kellogg’s—who cut direct deals with the city.

But in practical terms, it didn’t work. The big food companies had never heard of little guys like Watermelons Plus and worried about getting paid. Pagano had to refinance his house to pay for a credit line in order to get deliveries. It was also costly for Watermelons Plus to handle the school department’s payments to the big food companies. In the contract, the Department of Education granted itself a discount if it made “prompt payment” to the delivery firms. The big food companies, however, didn’t agree to a discount. So when the city paid a company like Perdue on time, Pagano had to eat the discount. With Watermelons Plus just scraping by, that hurt.

Meanwhile, the extra warehouse space Pagano had acquired for the deal was overwhelmed by the amount of donated food coming in. So he rented a new warehouse; he says it cost him more than $60,000 a month. But the donated food had to be inspected before it went to the schools, and if the inspector didn’t show up on time, the deliveries went out late and Watermelons Plus risked a fine. Eventually, Watermelons Plus was hit with more than $400,000 in fines—far more than its counterparts elsewhere in the city. Pagano hired two people solely to work on contesting those charges.

At the same time, the schools themselves were sometimes late in placing their orders. Most were on time, but there were a few days like February 11, 2005, when 21 orders were timely and 88 were logged after the deadline of two weeks before delivery. Some requests came in just a couple of days before delivery. That wasn’t enough time when a food manufacturer was located out of state and needed to inspect and ship the product. Complicating matters were problems with the city’s computer tracking system that led to overpayments and underpayments of the delivery companies.

The fines and payment problems squeezed Pagano. Then came news that Louis Foods, which delivered to all the schools in Queens, was pulling out of its contract. “We just got tired of losing money every month,” says Louis Foods’ director of purchasing Joel Warshaw.

Louis Foods’ pullout worsened Pagano’s credit problems. As the fall wore on, Watermelons Plus was running out of money to finance its purchases. Its service suffered.

In early December the city told Watermelons Plus that it would be thrown out of the contract in July. “We had more shortages than we want,” says school food director David Berkowitz. “We have very high requirements.”

Pagano demanded that the city pay what it owed him if he was going to continue at all. The city refused, so Pagano ran up the white flag. The drivers, helpers, and clerks who were hired to work the five-year school deal were sent home.

Pagano claims that the city owes him $1.6 million for underpayments, unjust fines, and improper charges. In addition, the Department of Education has withheld the final payment to Watermelons Plus for services rendered, worth about $1.1 million, until all accounts are settled. “We’re just protecting the city’s interest,” Berkowitz says.

The companies that are replacing Louis Foods and Watermelons Plus had lost the initial bid because they charged more. Now, those higher charges apply, and they’re eating into whatever savings the new program was expected to generate.
One of the replacements, U.S. Foodservice—which has former executives under federal indictment for securities fraud—is charging six times more per pound than Watermelons Plus did.

So is the program saving any money at all? “It’s hard to say,” says Berkowitz, who points to the administrative advantages of the system. “One vendor per region is a big, big plus and it came in handy in something like the transit strike and other emergencies,” he says, when, in Manhattan, “we had one company to deal with.”

The Department of Education still says service is OK, and people who monitor it told the Voice they mostly agree. After months of delay, a new contract was opened up for bidding last week for the areas that have gone to emergency vendors. The revised plan divides the school system into smaller geographic zones and reworks the language on the prompt-payment discount. Work to improve the computer system continues. In other words, the department is fixing some of the problems that Pagano blames for his early departure.

Pagano’s roots in the food business run deep. His grandfather peddled on the streets of Brooklyn, and then his dad and uncle took the family into the produce business. Pagano himself came on in 1968, and he works with two of his brothers, sometimes seven days a week. The school food contract held out the promise of gentler hours and a steady stream of money that in a few years would allow Pagano, 60, to hand the business to his son and nephew.

That hope is dashed, and now instead of stabilizing his business, Pagano might lose it. Immediate problems include paying off his produce suppliers, who are protected by a federal law that demands they get their checks on time. Louis Foods is a bigger company, but it’s damaged too. The $3 million, aircraft-hangar-sized warehouse it built for the deal is mostly empty, and 60 people lost jobs.

Pagano acknowledges that the bid might have been a mistake for his little firm, but he thinks it could have worked. “I’m blaming all of us,” he says. Now that the kinks are being worked out, Watermelons Plus would like to be in on the action. Its trucks, however, remain empty. “You’re going to use us as a guinea pig? OK,” Pagano says. “But we thought this was a partnership. They dumped the total responsibility on us.”