Objective

To determine whether the costs reported by SteppingStone Day School, Inc. (SteppingStone) on its Consolidated Fiscal Reports (CFRs) were reasonable, necessary, directly related to the special programs, 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 SteppingStone’s CFR for the fiscal year ended June 30, 2018 and certain expenses claimed on its CFRs for the two fiscal years ended June 30, 2017.

About the Program

SteppingStone 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 our audit period, SteppingStone operated preschool special education full-day Special Class and full-day Special Class in an Integrated Setting programs. During the two fiscal years ended June 30, 2017, SteppingStone also operated a preschool special education half-day Special Class program. For the purposes of this report, these programs are collectively referred to as the SED preschool cost-based programs. SteppingStone also operated three other SED-approved preschool special education programs: Evaluations, Related Services, and 1:1 Aides. However, payments for services under these programs are based on fixed fees. SteppingStone operated several other programs, including a Universal Pre-Kindergarten funded by the New York City Department of Education (DOE) and, at its Queens location, a private-pay-funded day care service. However, SteppingStone officials operated these programs at periods beyond the SED preschool cost-based programs’ service hours. For example, for a fee, parents/guardians of children enrolled at SteppingStone’s Queens location can elect to drop off their children as early as 7:30 a.m. and/or request a late-pickup day care service up until 5:00 p.m. In contrast, SteppingStone operated the SED preschool cost-based programs for five and one-half hours for full-day programs (five program hours and a one-half-hour non-instructional lunch period) or for two and one-half hours for half-day programs.

During the 2017-18 school year, SteppingStone served approximately 582 students with disabilities at its two locations: one in Queens and the other in the Bronx. The DOE refers students to SteppingStone based on clinical evaluations, and pays for SteppingStone’s services using rates established by SED. The rates are based on the financial information that SteppingStone reports to SED on its annual CFRs. SED reimburses the DOE 59.5 percent of the statutory rate it pays to SteppingStone. For the three fiscal years ended June 30, 2018, SteppingStone reported approximately $46.3 million in reimbursable costs for the SED preschool cost-based programs.

Key Findings

For the three fiscal years ended June 30, 2018, we identified $562,609 in reported costs that did not comply with the requirements in the RCM and the CFR Manual, including:

• $319,896 in excessive day care and substitute teacher compensation expenses that were allocated to the SED preschool cost-based programs;
• $91,696 in ineligible costs, including $79,659 in excess mortgage interest expenses and $12,037 in unallowable expenses;
• $84,453 in overallocated other than personal service expenses, including $50,848 in supplies, $8,991 in repairs and  maintenance, $8,874 in mortgage interest, $6,663 in depreciation, $6,432 in utilities, and $2,645 in rent;
• $44,706 in non-reimbursable and unsupported compensation expenses;
• $12,469 in unreported offsetting revenue, resulting in an overstatement of SteppingStone’s reimbursable expenses; and
• $9,389 in excessive compensation paid to the Marketing Director, who also served as President of SteppingStone’s Board of Directors.

Key Recommendations

To SED:

• Review the recommended disallowances identified by our audit and make the necessary adjustments to the costs reported on SteppingStone’s CFRs and to SteppingStone’s tuition reimbursement rates, as warranted.
• Remind SteppingStone officials of the pertinent SED requirements that relate to the deficiencies we identified.

To SteppingStone:

• Ensure that costs reported on annual CFRs fully comply with SED’s requirements, and communicate with SED to obtain clarification as needed.