J.h. Coleman, Brody and Skillman. The opinion of the court was delivered by Skillman, J.A.D.
This appeal requires us to decide whether the Department of Health (Department) has the authority to regulate the composition of boards of trustees of grantees under the Narcotic and Drug Abuse Control Act of 1969, N.J.S.A. 26:2G-1 et seq. (the Act). We hold that the Department has this authority, but that it must be exercised pursuant to the rulemaking process of the Administrative Procedure Act (APA), N.J.S.A. 52:14B-1 et seq.
The Act authorizes the Department to conduct programs for the treatment of drug addiction. N.J.S.A. 26:2G-5(b). For many years, this power was exercised through drug treatment facilities operated by state employees. However, the Department concluded in 1983 that the state's drug treatment programs could be more efficiently operated by converting the state facilities to privately operated facilities funded by grants from the State. Consequently, the Department encouraged its employees who were involved in conducting drug treatment programs to establish private non-profit corporations to perform this responsibility. Appellant Paterson Counseling Center,
Inc. was formed in 1984 as one of fourteen non-profit corporations which became recipients of annual grants from the Department to operate private drug treatment facilities.*fn1
Initially, the Department did not impose any restrictions upon the composition of boards of trustees of its grantees. But in 1986 the Department circulated a new "Attachment C" to the terms and conditions of its grants, which precluded any employee of a grantee, other than its executive director, from sitting on its board and required an appropriate number of board members to represent the "ethnic, social and economic composition" of the local community. A cover memorandum indicated that the Department realized "the necessity for a phasing in period for compliance." Consequently, the Department did not enforce this directive rigorously in connection with grants for the fiscal year running from February 1, 1987 to January 31, 1988.
The Department adopted an expanded version of this directive with respect to grants for the fiscal year running from February 1, 1988 to January 31, 1989, which read as follows:
The Grantee's Board of Directors shall have an appropriate number of members but no less than seven representing the local community's ethnic, social and economic composition. Members of the Board with the sole exception of the Executive Director shall not be in the employ of the Grantee.
Relatives of the Executive Director shall not serve on the Board.
On November 25, 1987 appellant filed a petition with the Commissioner of Health seeking a declaration that the part of attachment C regulating the composition of boards of trustees of grantees is invalid. The Commissioner rejected this petition by a letter dated February 2, 1988, which gave the following reasons for the directives contained in attachment C:
These terms were developed for specific public purposes. They were meant to assure that drug treatment centers become more attuned to the needs of the
community they serve, and better able to gain support of that community for its activities. Hence the governing body is to be drawn from, and representative of, the ethnic, social and economic make-up of the community. Further, to provide broad and independent representation of the interests of the community, the Board members should not be employed by the facility itself (with the exception of the Executive Director), nor should they be related to the Executive Director. This restriction on Board membership by relatives of the Executive Director serves the additional purpose of avoiding the potential for a close-knit group to arrange business dealings of the agency for their personal financial benefit.
The Commissioner also advised appellant that the Department would not process its grant application for the February 1, 1988 to January 31, 1989 fiscal year until it submitted an acceptable plan and short timetable for compliance with the disputed portion of attachment C.
Appellant responded by requesting that the matter be transmitted to the Office of Administrative Law as a contested case. The Commissioner ...