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Youth Consultation Service, Inc. v. New Jersey State Dep't of Education


March 27, 2008


On appeal from a Final Decision of the State Board of Education, 34-06.

Per curiam.


Submitted January 22, 2008

Before Judges Sabatino and Alvarez.

This appeal arises out of a financial audit by the Department of Education ("the Department") of a private company that provided services to disabled schoolchildren in 2001-02.

The provider, Youth Consultation Service, Inc. ("YCS"), appeals a final administrative decision of the State Board of Education ("the State Board") issued on March 7, 2007. That final agency decision disallowed certain payroll costs and associated tuition charges claimed by YCS, based upon the results of the Department's audit. For the reasons we set forth in this opinion, we affirm the State Board's final agency decision.


YCS is a multi-purpose private firm that provides more than eighty-five educational and therapeutic programs at about seventy locations. Among those programs, YCS operates Sawtelle Learning Center-Collingswood ("Sawtelle South"), a private school for the disabled, which is licensed by the Department.

Pursuant to N.J.S.A. 18A:46-13, every school district in New Jersey is obligated to provide an education to students who are classified as disabled and in need of special services. A school district that is unable to deliver those required services, in full or in part, may satisfy its obligation by sending the special-needs student to a facility or program approved by the Department, such as Sawtelle South. N.J.S.A. 18A:46-14.

As the provider of such services at Sawtelle South, YCS is statutorily authorized to charge tuition to the school districts that send children to that facility. N.J.S.A. 18A:46-21. The tuition assessed must not exceed the "actual cost per pupil." Ibid. That "actual cost" limitation on tuition is to be calculated in accordance with "rules prescribed by the [C]commissioner [of Education] and approved by the State Board." Ibid. Those rules are codified in regulations presently appearing at N.J.A.C. 6A:23-4.1 to 4.16.

During the 2001-02 fiscal year in question, YCS operated many programs, apart from Sawtelle South, which were outside of the purview of the State Board and the Department. Those other programs included residential facilities for juveniles, foster homes, community programs, family preservation services, and outpatient care facilities. Several of those other programs were regulated or financially supported by other State agencies, including the Department of Human Services and the Juvenile Justice Commission. These various business units collectively have resulted in the company receiving annual revenues in excess of $60 million.

The President and Chief Executive Officer ("CEO") of YCS during the 2001-02 fiscal year was Richard Mingoia. As President and CEO of that entire enterprise, Mingoia received a salary that year of $226,424. Mingoia's executive responsibilities extended well beyond Sawtelle South, to the host of other YCS programs not regulated by the Department. Hence, Mingoia's personal oversight of Sawtelle South was only a part-time endeavor.

In calculating tuition to charge back to school districts for the pupils at Sawtelle South, YCS and its accountants prorated Mingoia's salary, assertedly pursuant to generally accepted accounting principles, based upon the total costs involved in the respective programs. This resulted in $7178,*fn1

representing 3.17% of Mingoia's overall salary for 2001-02, being allocated to Sawtelle South. YCS treated this portion of Mingoia's salary as a compensable indirect cost within the general and administrative costs for the school.

In July 2003, the Department's Office of Compliance Investigation ("OCI") completed an audit of Sawtelle South's services and tuition charges for 2001-02. The OCI auditors found that Sawtelle South had included in its tuition billings two separate non-allowable items: (1) an overpayment of $17,880 to an uncertified teacher and (2) an excessive salary allocation for Mingoia amounting to $4110. These two audit items totaled $21,990 in unauthorized charges.

YCS accepted the auditors' finding concerning the costs of the uncertified teacher, but it challenged the finding relating to Mingoia's salary allocation. Consequently, YCS filed an administrative appeal of that particular determination. In October 2003, the Department's Chief of Staff denied the appeal, ruling that the OCI auditors' finding on that item was appropriate and consistent with the Department's then-applicable regulations.

YCS pursued the matter further to the Office of Administrative Law ("OAL"). The OAL conducted a hearing, mainly on joint stipulated facts, in November 2005. After the administrative record was further supplemented, the ALJ assigned to the case issued an initial decision on February 23, 2005. The initial decision concluded that the Department's methodology*fn2 in allocating Mingoia's salary to the Sawtelle South facility was justifiable and consistent with the public interest and the Department's policy objectives. The ALJ, declined, however, to apply the Department's methodology to YCS for the 2001-02 fiscal year, finding that the methodology had not been sufficiently made clear in the Department's then-existing regulations and therefore should only be applied prospectively. See Metromedia, Inc. v. Dir., Div. of Taxation, 97 N.J. 313, 329 (1984).

On further review, the Acting Commissioner of Education issued a written decision dated July 26, 2006. That decision sustained the ALJ's determination that the auditors' methodology, disallowing Mingoia's excess salary, was reasonable. The Acting Commissioner reversed the ALJ's separate finding of impermissible retroactivity, concluding instead that "the Department [had] arrived at its calculation through a reasonable application of then-existing rules." Consequently, the Acting Commissioner reinstated the auditors' determination.

YCS appealed the Acting Commissioner's decision to the State Board. In its final decision, issued on March 7, 2007, the State Board affirmed the Acting Commissioner's rulings. The State Board also denied a motion by YCS to further supplement the record.

YCS now appeals, contending that the State Board's decision was arbitrary and capricious, that the Department misapplied the statute and the then-existing regulations, and that the methodology utilized by the OCI auditors violated the Metromedia doctrine in the absence of more detailed rulemaking. YCS also contests the State Board's denial of its request to supplement the record.


We begin our analysis with a recognition of the well-established principles governing the judicial review of final decisions of State administrative agencies. Our role as an appellate court is restricted to four inquiries:

(1) whether the agency's decision offends the State or Federal Constitution; (2) whether the agency's action violates express or implied legislative policies; (3) whether the record contains substantial evidence to support the findings on which the agency based its action; and (4) whether in applying the legislative policies to the facts, the agency clearly erred in reaching a conclusion that could not reasonably have been made on a showing of the relevant factors. [George Harms Constr. Co. v. N.J. Tpk. Auth., 137 N.J. 8, 27 (1994).]

On the whole, "[o]ur function is to determine whether the administrative action was arbitrary, capricious or unreasonable." Burris v. Police Dep't, Twp. of W. Orange, 338 N.J. Super. 493, 496 (App. Div. 2001) (citing Henry v. Rahway State Prison, 81 N.J. 571, 580 (1980)); see also Aqua Beach Condo. Ass'n v. Dept. of Cmty. Affairs, 186 N.J. 5, 16 (2006). "The burden of demonstrating that the agency's action was arbitrary, capricious or unreasonable rests upon the [party] challenging the administrative action." In re Arenas, 385 N.J. Super. 440, 443-44 (App. Div.), certif. denied, 188 N.J. 219 (2006); see also Barone v. Dep't of Human Servs., 210 N.J. Super. 276, 285 (App. Div. 1986), aff'd, 107 N.J. 355 (1987).

In evaluating YCS's claim that the State Board and the Acting Commissioner have misapplied the pertinent statutes and regulations concerning the maximum tuition that private providers may charge school districts for disabled children, we note that "[i]t is settled that '[a]n administrative agency's interpretation of statutes and regulations within its implementing and enforcing responsibility is ordinarily entitled to our deference.'" Wnuck v. N.J. Div. of Motor Vehicles, 337 N.J. Super. 52, 56 (App. Div. 2001) (quoting In re Appeal by Progressive Cas. Ins. Co., 307 N.J. Super. 93, 102 (App. Div. 1997)). Such deference is not unlimited, as we are not, of course, bound by the agency's opinions on matters of regulatory law. Levine v. State, Dep't of Transp., 338 N.J. Super. 28, 32 (App. Div. 2001) (citing G.S. v. Dep't of Human Servs., 157 N.J. 161, 170 (1999)); see also Mayflower Sec. Co. v. Bureau of Sec., 64 N.J. 85, 93 (1973).

As we stated in Part I, the Legislature has directed that any "private school for the handicapped which receives pupils from a sending [school] district . . . shall determine a tuition rate to be paid by the sending board of education, but in no case shall the tuition rate exceed the actual cost per pupil."

N.J.S.A. 18A:46-21 (emphasis added). The Legislature has entrusted our State's education agencies with the authority to ascertain such per-pupil costs, specifically "under rules prescribed by the [C]commissioner and approved by the State Board." Ibid. YCS does not question this delegation of statutory authority, but instead contends that the State Board and the Acting Commissioner have misapplied it.

During the 2001-02 fiscal year, the Department's general regulations pertinent to the financial issues before us were set forth at N.J.A.C. 6A:23-1.1 to -7.4. Those regulations were adopted, after extensive public notice and comment, by the State Board on April 5, 2001, and made effective May 7, 2001. See 33 N.J.R. 1415(a) (May 7, 2001). As part of their objectives, the regulations sought, among other things, "to ensure sound administrative practices and [the] proper expenditure of funds by a district board of education." N.J.A.C. 6A:23-1.1(a). In applying those goals to educational providers such as YCS, the regulations specified that "N.J.A.C. 6A:23-4 [including N.J.A.C. 6A:23-4.1 to -4.16] governs the finance and business services for private schools for the disabled." N.J.A.C. 6A:23-1.1(b).*fn3

In determining the expenditures that may be included in calculating tuition rates, the regulations distinguished between "direct" and "indirect" costs. Direct costs are "costs which can be identified specifically to a program and/or revenue source and shall be recorded in the prescribed bookkeeping and accounting system and used in determining the respective actual cost per student." N.J.A.C. 6A:23-4.2(c). By comparison, indirect costs are "costs that are incurred for a common or joint purpose and not readily assignable to a program and/or a revenue source." N.J.A.C. 6A:23-4.2(d). Indirect costs are, in turn, subdivided into "allowable costs" and "non-allowable costs." N.J.A.C. 6A:23-4.2(f)(2)i-ii. Only "allowable" indirect costs may be charged back to sending districts as part of tuition. Ibid.

The Department's regulations further prescribed that "allowable indirect costs" may be allocated in three ways: (1) in accordance with an "equitable allocation plan approved by the Commissioner," or in accordance with a ratio representing either, (2) the provider's direct costs per program compared to total direct costs, ("cost-to-cost") or, (3) average daily student enrollment for each program compared to the provider's total average daily enrollment ("enrollment-to-enrollment"). N.J.A.C. 6A:23-4.2(e). Because the Commissioner had not adopted "an equitable allocation plan," a provider such as YCS could perform the necessary allocation either on a cost-to-cost or on an enrollment-to-enrollment basis. Moreover, N.J.A.C. 6A:23-4.5(a)(8) then prescribed that a program director's salary "in excess of the associated maximum salary" for that position was a non-allowable cost. That subsection further directed that "[p]art-time or split-time positions shall be prorated." Ibid.

The parties do not dispute that, subject to pertinent limitations, salary costs expended by YCS may be included in tuition charges as an allowable indirect cost. The parties also do not dispute that a portion of Mingoia's 2001-02 salary as President/CEO of YCS may be allocated to Sawtelle South. The question is simply how much of his salary may be properly allocated. The Department takes the position that a $4110 portion of that salary was improperly allocated by YCS, and that a tuition refund in that collective sum should be repaid by YCS to its sending districts. YCS contends that its $7178 salary allocation was proper, and that no such refund is warranted.

The crux of the parties' disagreement involves N.J.A.C. 6A:23-4.2(p), a regulation that prescribes the maximum allowable reimbursable salary for certain job titles. That regulation provides:*fn4

(p) A list of maximum salaries by administrative job titles and county according to the job titles contained in N.J.A.C. 6:11 and 6A:23-4.1 which pertain to private schools for the disabled shall be calculated and published by the Commissioner. Maximum salaries shall be based on the highest contracted salary by administrative job title for the entire State in a district board of education, special services district board of education and educational services commissions with comparable average daily enrollments for any prior year indexed by the average increase in salary between the two preceding school years for each job title. Such salaries shall be based on a 12-month contract period from July 1 through June 30, and the maximum salary of the private school staff member shall be prorated for staff employed for less than 12 months. Each district board of education, special services district board of education and educational services commission with an ADE equal to or less than the highest private school ADE will be considered comparable. Under no circumstances shall the maximum salary calculated, be less than the corresponding salary in the prior year for the same job title. [N.J.A.C. 6A:23-4.2(p) (emphasis added).]

According to the State Board and the Acting Commissioner, this regulation functioned as a ceiling on the base figure that could be used in allocating Mingoia's salary as CEO/President to the operations at Sawtelle South. The Department specifically determined that Mingoia's functions for the school were comparable to the responsibilities of a superintendent of a public school district in Camden County, a position with a maximum salary of $161,604 during the 2001-02 fiscal year.*fn5

Hence, in calculating Mingoia's maximum allocable salary, the Department applied the $161,604 annual salary for a comparable full-time district superintendent, rather than Mingoia's actual salary for that fiscal year of $226,424. The application of that cap led to the $4110 discrepancy between the Department's calculations and the higher allocation calculated by YCS's own accountants.

YCS maintains that it was arbitrary and unfair for the Department to apply the $161,604 cap in allocating Mingoia's salary. It emphasizes that Mingoia was a "split-time" employee who devoted the vast majority of his work time to YCS programs other than Sawtelle South. YCS contends that as long as the salary allocation was performed on a cost-to-cost basis, consistent with generally accepted accounting principles, the Department may not quarrel with the net result of that arithmetic. YCS also emphasizes that the allocated salary figure it arrived at for Mingoia, using a cost ratio of slightly more than 3%, yielded a modest sum of only $7178 to be charged back to the sending districts.

YCS further asserts that it should not be penalized for paying an annual salary to Mingoia that is more generous than the salary of a public school district superintendent. It contends that the Department's methodology arbitrarily intrudes on its prerogatives as a private enterprise to pay its President/CEO a salary commensurable with his overall contributions to the business.

As the ALJ correctly recognized, this case is not about interfering with compensation in the private sector. To the contrary, as the ALJ aptly put it, nothing in the regulations . . . limit the salary an institution such as YCS can pay its chief executive officer; the limitation is on what portion of that salary can be calculated as an allowable cost to be included in the tuition to be charged to the public school district of a disabled child's residence.

The ALJ also correctly observed that the Department's imposition of a cap on the base salary used for such an allocation or a CEO's compensation advances the public policy of encouraging private schools for the disabled "to spend more on instructional needs impacting direct education and to spend less on administrative costs."

Indeed, if the Department's cap did not apply, school districts conceivably would pay more tuition in exchange for less administrative services from a CEO who serves in a "split-time" capacity. For example, if Mingoia hypothetically spent fifty percent of his time in managing Sawtelle South and were paid an annual salary of, say, $323,208, and the costs of Sawtelle South's operations represented one-half of YCS's total operating budget, YCS presumably would seek to charge districts who sent children to Sawtelle South half of his salary, or $161,604, in tuition. By comparison, a CEO dedicated to Sawtelle South on a full-time basis who was paid an annual salary of $161,604 would presumably cause the same tuition to be charged back to the sending districts, but the CEO would have devoted twice as much time and attention to the Sawtelle South pupils as his or her hypothetical split-time counterpart. The Department was well within its prerogatives in foreclosing that sort of skewed result.

YCS next contends that even if the Department legitimately could impose a cap on the base figure used in allocating the salary of its President/CEO, the Department engaged in improper ad hoc rulemaking by applying that methodology to YCS in 2001- 02, in violation of Metromedia, supra, 97 N.J. at 329. We agree with the State Board and the Acting Commissioner that YCS's claims in this regard are unpersuasive.

The Supreme Court in Metromedia held that an administrative agency should conduct formal rulemaking before imposing new standards upon the parties that it regulates. The Court determined that six factors guide the analysis of whether such formal rulemaking is necessary:

(1) [the decision] is intended to have wide coverage encompassing a large segment of the regulated or general public, rather than an individual or a narrow select group; (2) [it] is intended to be applied generally and uniformly to all similarly situated persons; (3) [it] is designed to operate only in future cases, that is, prospectively; (4) [it] prescribes a legal standard or directive that is not otherwise expressly provided by or clearly and obviously inferable from the enabling statutory authorization; (5) [it] reflects an administrative policy that (i) was not previously expressed in any official and explicit agency determination, adjudication or rule, or (ii) constitutes a material and significant change from a clear, past agency position on the identical subject matter; and (6) [it] reflects a decision on administrative regulatory policy in the nature of the interpretation of law or general policy. [Id. at 331-32.]

These factors, "either singly or in combination," determine whether agency action amounts to the promulgation of an administrative rule. Id. at 332.

Having considered each of these enumerated Metromedia factors, we are satisfied that the Department regulations then in force in 2001-02 were sufficient to justify the approach taken by the Department's auditors and the consequential imposition of the $4110 charge-back on YCS. We recognize that the Department's regulations were subsequently amended in 2004 to prescribe a specific time-based method for allocating administrative costs in a "split-time" situation. See N.J.A.C. 6A:23-4.5(a)(8) (as amended August 16, 2004). Nevertheless, we concur with the reasoning of the Acting Commissioner, as ratified by the State Board, that the regulations in force in 2001 reasonably supported the methodology employed by the Department's auditors.*fn6 Those regulations expressly referenced the salary cap in subsection 4.2(p). The obligation for proration was specified in that subsection, as well as in subsection 4.5(a)(8).

Even though the auditors' methodology was presumably intended to have general application and to be applied uniformly to similarly-situated providers (Metromedia factors (1) and (2)), we are persuaded that the methodology was sufficiently inferable from the existing statute and rules in 2001-02, and did not amount to a material and significant change in practice (Metromedia factors (4) and (5)). The methodology was not manifestly intended to be only prospective in nature (Metromedia factor (3)). Moreover, the methodology represents simply the Department's logical and reasonable interpretation of regulatory standards already in existence (Metromedia factor (6)).

In sum, we conclude that the final agency decision of the State Board was neither arbitrary nor capricious, and did not transgress the Metromedia doctrine.

We have considered the remaining arguments of YCS, including its claim that the State Board erred in denying YCS's effort to supplement the record, and find those arguments lacking in sufficient merit to warrant further discussion. R. 2:11-3(e)(1)(C) and (E).


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