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 schoolage special education services to children with disabilities who are between the ages of 5 and 21 years. During our audit period, NYSARC operated a full-day School-Age Special Class program (referred to as the school-age cost-based program). According to NYSARC officials, about 260 school-age students were enrolled in this program 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. For the three fiscal years ended June 30, 2015, NYSARC reported approximately $38 million in reimbursable costs for the school-age cost-based program. During the same three fiscal years, NYSARC also provided services to preschool special education students, operated non-SED programs, and provided management and administrative services to eight related entities.

Key Findings

For the three fiscal years ended June 30, 2015, we identified $513,279 in reported costs that did not comply with the RCM’s requirements and recommend such costs be disallowed. These ineligible costs included $403,915 in personal service costs, $82,634 in other than personal service costs, and $26,730 in parent agency administration costs, as follows:

• $266,339 in employee bonuses that were not in compliance with the RCM’s guidelines.
• $82,634 in ineligible rent expenses, including $81,976 in over-allocated agency administration facility expenses and $658 in unsupported rent for its school’s instructional site.
• $72,924 in non-mandated fringe benefits contributions that were not proportionately similar to the amounts received by other classes or groups of NYSARC’s employees.
• $35,066 in excess executive compensation.
• $26,730 in unsupported expenses allocated from The ARC, New York, Inc. (The ARC) – NYSARC’s parent company – to the school-age cost-based program. NYSARC officials did not provide details of the actual services The ARC provided to NYSARC.
• $19,197 in non-program compensation costs. NYSARC officials allocated compensation costs associated with three program directors to the school-age cost-based program. However, NYSARC officials could not provide evidence that these costs were directly related to that program.
• $10,389 in costs applicable to 1:1 Aides program. NYSARC officials incorrectly allocated these costs to its school-age cost-based program rather than to the fixed-fee 1:1 Aides program.

We also identified $3,022,083 in agency administration costs that NYSARC charged to the schoolage cost-based program. 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 $3,022,083 should have been charged to the school-age cost-based program. We did not recommend that the $3,022,083 be disallowed. Instead, we recommend that SED work with NYSARC officials to formulate a fair and reasonable allocation of these costs to NYSARC’s schoolage cost-based program.

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 $3,022,083 in agency administration costs should be allocated to the school-age cost-based program. 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 school-age cost-based program.

To NYSARC:

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

Other Related Audits/Reports of Interest

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