Purpose

To determine whether the costs reported by New York League for Early Learning, Inc. (NYL) on its Consolidated Fiscal Reports (CFRs) were reasonable, necessary, directly related to the special education program, and sufficiently documented pursuant to the State Education Department’s (SED) Reimbursable Cost Manual (Manual). The audit included expenses claimed on NYL’s CFR for the three fiscal years ended June 30, 2014.

Background

NYL is a New York-based not-for-profit organization authorized by SED to provide Special Education Itinerant Teacher (SEIT), full-day and half-day Special Class (SC), and full-day and half-day Special Class in an Integrated Setting (SCIS) preschool special education services to children with disabilities between the ages of three and five years. For purposes of this report, these programs are collectively referred to as the SED cost-based programs. During the 2013-14 school year, NYL served about 818 students. In addition to the SED cost-based programs, NYL operated three other SED-approved programs: Evaluations, Related Services, and 1:1 Aides. However, payments for services under these other programs were based on fixed fees, as opposed to the cost-based rates established through CFR-reported financial information. NYL also operated an Early Intervention, a private day care, and a Universal Pre-K program. During the three audited years, NYL shared space with Manhattan Star Academy (MSA), a private school that serves schoolage children with special needs.

The New York City Department of Education (DoE) refers students to NYL based on clinical evaluations and pays for NYL’s services using rates established by SED. The rates are based on the financial information that NYL reports to SED on its annual CFRs. SED reimburses DoE for a portion of its payments to NYL based on statutory rates. Reimbursable costs must be reasonable, necessary, directly related to the special education program, and sufficiently documented. For the three fiscal years ended June 30, 2014, NYL reported approximately $138 million in reimbursable costs for the cost-based programs.

During the three fiscal years ended June 30, 2014, NYL was a member of the eight-member Young Adult Institute Network (Network), which also included the Young Adult Institute (YAI) and MSA. The relationships among the Network’s members were intertwined. During the same three-year period, NYL was a signatory to a Management Agreement (or Agreement) with YAI, wherein YAI agreed to provide management services to NYL. In November 2015, after our audit fieldwork was underway, the Agreement with YAI was terminated.

Key Findings

For the three fiscal years ended June 30, 2014, we identified $5,771,008 in reported costs that did not comply with the requirements in the Manual and recommend such costs be disallowed. These ineligible costs included $3,676,434 in personal service costs and $2,094,574 in other than personal service costs, as follows:

• $1,728,270 in duplicate administrative costs for NYL’s Executive Director, Assistant Executive Director, and seven agency administrative staff. The costs for the functions performed by these individuals were covered under the Management Agreement and should not have been charged separately to NYL;
• $1,209,263 in costs applicable to 1:1 Aides program. NYL incorrectly allocated these costs to its cost-based programs rather than to the fixed-fee 1:1 Aides program;
• $1,132,895 in other than personal service costs, including $801,660 in costs for services that were covered by the Management Agreement and $331,235 in various adjusting entries that were insufficiently documented;
• $738,901 in employee bonuses that did not comply with the requirements in the Manual;
• $584,641 in various costs, including $292,279 for food, $270,879 in property costs, and $21,483 in vehicle costs. These costs were unsupported and/or ineligible per the Manual’s provisions and those in the Consolidated Fiscal Reporting and Claiming Manual as well; and
• $377,038 charged to the SED cost-based programs for the services of two consultants. The consultant costs are duplicative as their functions should have been covered under the Agreement. Additionally, the costs for one of the two consultants were insufficiently documented.

Key Recommendations

To SED:

• Review the recommended disallowances resulting from our audit and make the appropriate adjustments to NYL’s CFRs and reimbursement rates.
• Work with NYL officials to help ensure their compliance with Manual provisions.

To NYL:

• Ensure that costs reported on future CFRs comply with all Manual requirements.

Other Related Audits/Reports of Interest

Sunshine Developmental School: Compliance With the Reimbursable Cost Manual (2012-S-64)
Starting Point Services for Children: Compliance With the Reimbursable Cost Manual (2014-S-64)