Purpose

To determine whether the costs reported by NYSARC, Inc. – NYC Chapter (NYSARC), also known as AHRC NYC, 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). The audit focused primarily on expenses claimed on NYSARC’s CFR for the fiscal year ended June 30, 2015, and included certain expenses claimed on NYSARC’s CFRs for the two fiscal years ended June 30, 2014.

Background

NYSARC is a New York City-based not-for-profit organization authorized by SED to provide preschool special education services to children with disabilities between the ages of three and five years. During our audit period, NYSARC operated full-day and half-day special education classes and a full-day Integrated Special Class. For the purposes of this report, these programs are referred to as the SED cost-based programs. According to NYSARC officials, they served 759 preschool students during the 2014-15 school year. The New York City Department of Education (DoE) refers students to NYSARC and pays for its services using rates established by SED. The DoE is reimbursed by SED for a portion of its payments to NYSARC. For the three fiscal years ended June 30, 2015, NYSARC reported approximately $61.8 million in reimbursable costs for the SED cost-based programs. During the audit scope period, NYSARC also provided management and administrative services to eight related entities.

Key Findings

For the three fiscal years ended June 30, 2015, we identified $1,311,070 in reported costs that did not comply with the RCM’s requirements and recommend such costs be disallowed. These ineligible costs included $791,114 in personal service costs and $519,956 in other than personal service costs, as follows:

• $519,956 in ineligible rent expenses, including $368,104 in unsupported/overallocated rent and utility expenses for its Central Park instructional site and $151,852 in overallocated agency administrative facility expenses;
• $402,520 in employee bonuses that were not in compliance with the RCM’s guidelines;
• $132,026 in costs applicable to 1:1 Aides program that were incorrectly allocated to the SED cost-based programs;
• $121,570 in non-mandated fringe benefits contributions that were not proportionately similar to the amounts received by other classes or groups of NYSARC employees;
• $55,387 in excess executive compensation;
• $48,986 in overallocated compensation costs for 18 shared employees; and
• $30,625 in non-program compensation costs for three program directors that were incorrectly allocated to the SED cost-based programs. NYSARC officials could not support the costs reported for reimbursement for these staff and could not provide evidence that these costs were directly related to the SED cost-based programs.

We also identified $4,938,101 in agency administration costs that NYSARC charged to the SED cost-based programs. As NYSARC did not maintain records of actual costs associated with providing management and administrative services to its affiliates, we could not determine if the $4,938,101 should have been charged to the SED cost-based programs. Therefore, we did not recommend that the $4,938,101 be disallowed. Instead, we recommend that SED work with NYSARC to formulate a fair and reasonable allocation of these costs to NYSARC’s SED cost-based programs.

Key Recommendations

To SED:

• Review the recommended disallowances resulting from our audit and make the appropriate adjustments to NYSARC’s CFRs and reimbursement rates, as warranted.
• Work with NYSARC officials to help ensure their compliance with the provisions of the RCM.
• Determine how much of the $4,938,101 in agency administration costs should be allocated to the SED cost-based programs. Work with NYSARC officials to formulate an allocation methodology that meets the requirements of the RCM and will result in a fair and reasonable allocation of agency administration costs to the SED cost-based programs.

To NYSARC:

• Ensure that costs reported on future CFRs comply with SED’s reimbursement requirements.

Other Related Audits/Reports of Interest

New York League for Early Learning, Inc.: Compliance With the Reimbursable Cost Manual (2015-S-43)
Brookville Center for Children’s Services, Inc.: Compliance With the Reimbursable Cost Manual (2016-S-75)