Purpose

To determine whether the costs reported by Birch Family Services, Inc. (Birch) 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 (RCM) and the Consolidated Fiscal Reporting and Claiming Manual (CFR Manual). The audit focused primarily on expenses claimed on Birch’s CFR for the fiscal year ended June 30, 2013, and included certain expenses claimed on its CFR for the fiscal year ended June 30, 2012.

Background

Birch is a New York City-based not-for-profit organization authorized by SED to provide preschool special education services to children with disabilities who are between the ages of three and five years. During the 2012-13 school year, Birch served about 1,103 students. The New York City Department of Education (DoE) refers students to Birch and pays for its services using rates established by SED. The DoE is reimbursed by SED for a portion of its payments to Birch. For the two fiscal years ended June 30, 2013, Birch reported approximately $52.1 million in reimbursable costs for the SED preschool cost-based programs (full-day and half-day Special Classes and a Special Class in an Integrated Setting). In addition to the preschool cost-based programs, Birch operates two other SED-approved preschool programs: Evaluations and 1:1 Aides. However, payments for services under these other programs are based on fixed fees. Birch also operates an SED school-age special education program; Headstart, Day Care, and Universal Pre-Kindergarten (UPK) programs; a Training Institute; Day Rehabilitation and Residential programs; Family Support Services; a job coaching program; and the Herbert G. Birch Fund (Fund) – a related fundraising entity.

Key Findings

For the two fiscal years ended June 30, 2013, we identified $1,376,319 in reported costs that did not comply with the RCM’s requirements, as follows:

• $605,667 in compensation paid to employees who did not work for Birch’s SED preschool cost-based programs. These individuals provided services to Birch’s SED fixed-fee 1:1 Aides program and to the Day Care, Headstart, UPK, and other Birch programs;

• $310,778 in incorrectly allocated other than personal service costs, including $208,506 in property-related costs and $102,272 in Day Care costs that were incorrectly allocated to the SED preschool cost-based programs;

• $227,831 in compensation costs that should have been charged to the Fund, Birch’s Training Institute, Evaluations, and other Birch programs rather than to the SED preschool cost-based programs. Moreover, to the extent that the compensation costs were reimbursable, fees collected from services provided by the Training Institute should have been used to offset some of these costs;

• $92,862 in incorrectly allocated personal service costs, including $54,281 in Day Care costs, $14,637 in agency administrative costs, $14,602 in fringe benefits, and $9,342 in fundraising costs;

• $88,266 in insufficiently documented costs, including $53,384 in related services costs, $16,796 in rent expenses, $9,599 in staff reimbursements, $5,487 in legal expenses, and $3,000 in utility expenses;

• $38,096 in excessive executive compensation for three executives that did not comply with the RCM’s requirements. The compensation for the three executives exceeded SED’s reimbursement limits for the preschool cost-based programs; and

• $12,819 in bonuses. Payment of these bonuses did not comply with the requirements in the RCM.

Key Recommendations

To SED:

• Review the recommended disallowances resulting from our audit and make the appropriate adjustments to Birch’s CFRs and reimbursement rates, as warranted.

• Work with Birch officials to help ensure their compliance with SED’s reimbursement requirements.

• Investigate the $284,063 in compensation costs in the Other Matters section of this report and determine if a disallowance is warranted.

To Birch:

• Ensure that costs reported on future CFRs comply with the RCM’s requirements.

Other Related Audits/Reports of Interest

New York Center for Child Development, Inc.: Compliance With the Reimbursable Cost Manual (2015-S-101)

Brookville Center for Children’s Services, Inc.: Compliance With the Reimbursable Cost Manual (2016-S-75)