On appeal from the Commissioner, Department of Education, Docket No. 74-2/06.
The opinion of the court was delivered by: Cuff, P.J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued: September 23, 2009
Before Judges Cuff, Payne and C.L. Miniman.
In this appeal, we review a final decision of the Commissioner of Education (Commissioner) that upheld an audit of the Abbott*fn1 Preschool Program conducted by Catholic Family & Community Services (CFCS) for the 2003-04 school year and ordered repayment of funds expended for ineligible administrative services and computer equipment. At issue in this appeal is whether approved expenses calculated in accordance with budget guidelines promulgated by the New Jersey Department of Education (DOE) may be disallowed. We reverse.
CFCS is a not-for-profit corporation that operates various social service programs through the Roman Catholic Diocese of Paterson. It operates an early childhood education program for 360 children under the name Friendship Corner Schools for the Paterson Public School District (Paterson District). As a State-operated school district under the guidance of the DOE, the Paterson District must implement that Abbott Preschool Program by offering high quality early educational programs to its students. The Paterson District may contract with State-approved private community organizations, like CFCS, to meet this obligation.
On July 3, 2003, the Paterson District and CFCS entered a contract for the provision of early childhood education services at CFCS's Friendship Corner Schools from July 1, 2003 to June 30, 2004. This Abbott Preschool Educational Program Contract (Abbott Contract) provides that the Friendship Corner Schools will "provide a full-day, full-year preschool program to children residing in the [Paterson District]." During the ten hour school day, six hours consist of a "comprehensive educational program" funded with Abbott monies. The remaining four hours are funded under a separate agreement through a Department of Human Services "wrap-around care" program.
The Abbott Contract outlines the financial responsibilities of both parties. Pursuant to Section VI, paragraph F, the Paterson District makes prorated monthly payments to CFCS based on the approved 2003-04 budget. Section VI, paragraph G requires CFCS to submit quarterly expenditure reports to the Paterson District. If CFCS has "unexpended or misspent funds during and at the end of the school year based on the quarterly expenditure reports, enrollment records and monthly payments made by the district," the Paterson District will recoup the funds.
More generally, Section VI, paragraph K of the Abbott Contract states that CFCS: shall implement sound fiscal practices including, but not limited to, maintaining a financial management system that provides timely, accurate, current and complete disclosure of all financial activities related to the Agreement, in accordance with Generally Accepted Accounting Principles; making expenditures in strict accordance with the budget approved by the Paterson [District] and the [DOE]; and amending the approved budget with the approval by the board of education and the [DOE].
In addition, Section XII, paragraphs A and E of the Abbott Contract require CFCS to retain "[a]ny and all records concerning the operation of the program" and to have records available for audit and/or inspection.
The Paterson District's financial responsibilities under the Abbott Contract, indicated in paragraph M of Section VIII, include the provision of "financial management assistance to [CFCS] in the development and monitoring of [CFCS]'s annual budget and implementation of the preschool program." Additionally, paragraph Q requires the Paterson District to "conduct on-site monitoring at least twice in each contract year to assess compliance" and "ensure that [CFCS] is complying with the contract requirements."
As an Abbott Preschool Program provider, CFCS is also required to submit a budget to the Paterson District. The DOE provides written budget instructions and guidelines to Paterson and all other Abbott districts, which in turn, are distributed to providers such as CFCS. After the provider formulates a budget, the district incorporates it into a master budget for submission to the DOE.
On July 3, 2003, CFCS submitted a budget for the 2003-04 school year and the Paterson District approved it. In creating its budget, CFCS followed the DOE-prepared Private Provider One-Year Programmatic Budget, School Year 2003-04: Budget Instructions and Guidelines (Budget Guidelines). At issue in this appeal are administrative and indirect costs. As to this issue, the Budget Guidelines state that "[n]o more than 17.65 percent of a provider's total approved Abbott Educational Program budget may be allocated for administrative and indirect costs associated with operating the Abbott preschool program." The Budget Guidelines also state that "[p]roviders do not need to document their administrative and indirect costs, as each provider will receive a fixed amount for such costs based on their approved Abbott Educational Program Costs." Finally, the Budget Guidelines supply a formula that providers can use in creating a budget for these costs: "Approved Abbott Educational Program Costs x 17.65% = Administrative/Indirect Cost[s]." The Budget Guidelines categorize administrative and indirect costs for the Abbott Preschool Program as: "all administrative and clerical salaries, including the director's salary, . . . accounting and payroll fees, office equipment, office supplies, . . . office space, utilities, telephone, insurance, and building maintenance and repair."
The 2003-04 budget submitted by CFCS and approved by the Paterson District included 17.65% for administrative/indirect costs. CFCS incorporated in its budget all the indirect costs and administrative expenses incurred to operate the preschool program, including the expenses associated with the preschool program director, one secretary, one custodian, and prorated expenses for the CFCS Executive Director and other administrative support personnel who participate in the management and supervision of the preschool program up to the allowed 17.65%. Following an audit by the DOE's Paterson Internal Audit Unit (Paterson IAU), CFCS was informed that administrative/indirect costs were limited to the costs of the program director, a secretary and a custodian. Based on this finding and others, the Paterson IAU recommended that the Paterson District recover $223,800.14 from CFCS.
The Paterson District accepted this recommendation and reduced the funds due to CFCS for the 2005-06 school year by that amount. CFCS sought and obtained injunctive relief in the Superior Court pending an appeal to the DOE Commissioner. The matter was forwarded to the Office of Administrative Law as a contested case in March 2007. By the close of the proceedings, the parties had resolved all disputed expenditures, except for the ...