STATE OF NORTH CAROLINA
COUNTY OF SCOTLAND
IN THE OFFICE OF ADMINISTRATIVE HEARINGS
08 DHR 2990
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God’s Lil Angels Child Care Center,
Petitioner,
v.
N.C. Department of Health and Human Services, Child and Adult Care Food Program,
Respondent.
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DECISION
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THIS MATTER came on for hearing before the Honorable Donald W. Overby, Administrative Law Judge, on February 9, 2009, in Fayetteville, North Carolina.
APPEARANCES
For Petitioner: Rochelle Davis (owner of God’s Lil Angels), pro se
For Respondent: Thomas D. Henry, Assistant Attorney General, N.C. Department of Justice
ISSUE
Whether Respondent had sufficient grounds to propose to terminate Petitioner’s Child and Adult Care Food Program (hereinafter CACFP) agreement and to disqualify Petitioner and its owners from future participation in CACFP?
STATUTES AND RULES
7 C.F.R. § 226.2
7 C.F.R. § 226.6
7 C.F.R. § 226.15
7 C.F.R. § 226.23
10A N.C.A.C. 43J.0101.
EXHIBITS
Respondent’s Exhibits 1 through 12 were admitted in evidence.
Petitioner offered no exhibits into evidence.
BASED UPON careful consideration of the sworn testimony of the witnesses presented at the hearing, along with documents and exhibits received and admitted in evidence and the entire record in this proceeding, the Undersigned makes the following Findings of Fact. In making the Findings of Fact, the Undersigned has weighed all the evidence and has assessed the credibility of the witnesses by taking into account the appropriate factors for judging credibility, including but not limited to the demeanor of the witnesses, any interests, bias, or prejudice the witness may have, the opportunity of the witness to see, hear, know, or remember the facts or occurrences about which the witness testified, whether the testimony of the witness is reasonable, and whether the testimony is consistent with all other believable evidence in the case.
FINDINGS OF FACT
1. The Child and Adult Care Food Program (CACFP) is a federally-funded program administered in North Carolina by Respondent, the North Carolina Department of Health and Human Services. CACFP is designed as a reimbursement program; the program provides monetary support to day care centers for their meal services. The United States Department of Agriculture (hereinafter USDA) is the federal agency that both funds and governs CACFP and has codified a set of program regulations found at 7 C.F.R. Part 226. Respondent is held accountable by USDA for the administration of CACFP in this State.
2. Arnette Cowan is the program supervisor for Respondent. Her primary responsibility is to ensure that CACFP is administered in accordance with federal regulations and that institutions are in compliance. She works with the federal regulations on a daily basis and is familiar with those regulations.
3. Kathryn Seawell is the audit unit supervisor for Respondent. Ms. Seawell supervises a staff of CACFP auditors. The mission of the audit team is to ensure that CACFP funds are being used appropriately and in accordance with program guidelines. Ms. Seawell had previously personally performed an audit on Petitioner.
4. Frank Erbeznik is one of the auditors on Respondent’s staff. Mr. Erbeznik conducted an audit of Petitioner’s CACFP activities, beginning in the fall of 2007.
5. Vicki Johnson is another auditor on Respondent’s staff. Ms. Johnson made several trips to Petitioner’s facility in 2008, performing functions both as an auditor and as a follow up on an administrative review, which are separate and distinct procedures.
6. Petitioner is an operator of child care centers and has been participating as an institution in CACFP for several years. Rochelle Davis and Rosetta Campbell are the owners of Petitioner’s business.
7. Although for-profit businesses, such as Petitioner, may participate in the program, their activities related to CACFP must remain in a non-profit status. Any reimbursement earned through the program is solely intended to offset eligible, program-related expenses, such as food, supplies, and labor.
8. Petitioner signed a standard CACFP Agreement (“Agreement”) with Respondent to operate CACFP during program year 2005-06 and a separate Agreement for program year 2007-08. The Agreements set forth the obligations of institutions that participate in CACFP. Under these Agreements, Petitioner agreed to comply with all applicable federal and state laws, regulations, and policies governing the CACFP.
9. Petitioner was not allowed to renew its Agreement for fiscal year 2008-09 because the agency had determined Petitioner to be “seriously deficient” in its CACFP operations. Instead, the agency temporarily extended Petitioner’s prior-year Agreement (2007-08) pending the resolution of the instant contested case.
10. Respondent conducts periodic monitoring and audits to ensure that participating institutions are meeting CACFP requirements. During a review or an audit, Respondent’s staff will visit an institution and review those records that are relevant to CACFP. In particular, Respondent will be looking for documentation (e.g., invoices, receipts, labor records, bank statements, cancelled checks, etc.) demonstrating that CACFP reimbursement is being used for valid program purposes.
11. Ms. Seawell conducted an audit of Petitioner’s program activities sometime in 2004. This audit focused on Petitioner’s activities during the 2002-03 fiscal year.
12. The Report of Audit for the 2002-03 audit explained that Petitioner was found to be noncompliant with program regulations and that this noncompliance had “a material effect on the Institution’s administration of CACFP.” Respondent’s findings included, inter alia, the following:
a. “Labor, salary, and travel costs were not documented in accordance with FNS Instruction 796-2, Rev. 3” (p. 11). Petitioner’s “employees are not keeping up with the time spent on CACFP duties. Appropriate time sheets were not kept” (p. 12).
b. “The Institution is not operating a nonprofit food service operation as required” (p. 13). (Resp’t Ex. 1)
13. Mr. Erbeznik conducted an audit that focused on Petitioner’s activities during the 2005-06 fiscal year.
14. Similar to the previous audit, the 2005-06 audit found instances of noncompliance that had “a material effect on the Institution’s administration of CACFP.” In fact, Petitioner had been found noncompliant for some of the same reasons as in the 2002-03 audit. The 2005-06 Report of Audit included, inter alia, the following findings:
a. “A significant number of [eligibility] applications included false social security numbers. When applications with the same head of household were compared year to year the social security numbers were different” (p. 2).
b. “Reported costs were not supported by adequate and complete Cash Receipts and Disbursement Journals . . . . Original bank/credit union statements . . . were not available. Employees whose wages and salaries were charged to the CACFP were supposedly paid in cash . . . . Timesheets were inadequate” (p. 6).
c. “God’s Lil Angels did not operate a nonprofit food service. The institution earned $116,057.96 and had allowed Program expenditures of $67,874.99 . . . [E]arned revenue in excess of three months of average expenditures totaled $31,214.22” (p. 7). (Resp’t Ex. 2)
15. Based on her experience with CACFP, Ms. Seawell found it suspicious that Petitioner relied on cash for payment of employee wages.
16. Respondent allows institutions to keep a maximum of three months of operating funds on hand while still remaining a “non-profit” operation. Mr. Erbeznik’s audit revealed that Petitioner had unaccounted reimbursement far exceeding the allowable three months of operating funds.
17. Income eligibility applications (IEA) are forms used by Respondent to determine the rate of reimbursement that an institution is entitled to receive. IEAs capture the household income of children participating in CACFP. Children living in lowest-income households receive meals that are reimbursed at the highest monetary rate, translating into more funding for the institution. Because the amount of reimbursement is calculated based on the children’s IEAs, the accuracy and trustworthiness of the IEA is critical. IEAs are completed for each child on an annual basis.
18. As found in the audit, Petitioner’s IEAs contained numerous incorrect or false social security numbers. Ms. Seawell created a table summarizing all the IEAs of dubious authenticity. This table shows that, from year to year, the same head-of-household had varying social security numbers on the IEAs. In fact, an employee on Petitioner’s payroll (Ebony S. McLean) had a different social security number on her child’s IEA than on her payroll record.
19. The findings of the 2005-06 audit led Respondent to issue a Notice of Serious Deficiency to Petitioner by letter dated July 29, 2008. “Seriously deficient” is a term defined by 7 C.F.R. § 226.2 as “the status of an institution or a day care home that has been determined to be non-compliant in one or more aspects of its operation of the Program.”
20. The purpose of the Notice of Serious Deficiency was to inform Petitioner of its specific program violations and to inform Petitioner that a failure to correct these violations would lead to the termination and disqualification of the institution and its owners (Rochelle Davis and Rosetta Campbell). Ms. Davis and Ms. Campbell were identified as responsible for the violations because “as owners of God’s Lil Angels, you either knew or should have known of the failure of God’s Lil Angels to comply with CACFP regulatory requirements.” (Resp’t Ex. 4; Seawell testimony)
21. The Notice of Serious Deficiency listed three areas of noncompliance: (1) false income eligibility applications; (2) a failure to support claimed costs with adequate and complete records; and (3) a failure to maintain a non-profit status. Each area was assigned a “corrective action.” To resolve the false IEAs, Petitioner was instructed to provide documentation proving the veracity of its IEAs. To resolve the inadequate and incomplete expense documentation, Petitioner was instructed to “immediately begin keeping accurate financial records and develop internal controls to ensure these financial issues are corrected.” To resolve the failure to keep a non-profit status, Petitioner was instructed to provide, within 14 days, a “full accounting for program year 2006 to demonstrate that God’s Lil Angels did maintain a non-profit status and that CACFP funds were only used for valid CACFP purposes.”
22. In mid-August 2008, Petitioner sent a packet of documentation to Respondent in an effort to satisfy the corrective actions. The cover letter accompanying the documentation stated, with respect to the IEA problems, that Petitioner would begin verifying the social security numbers in the future. Petitioner contends that she relied on the social security numbers as they were provided to her, and it may have been difficult for her to verify those social security numbers especially since it had been several years intervening; however, she offered nothing to show that she even attempted to do so. Other than to promise to do better in the future, she did nothing to prove the veracity of the previously-submitted IEAs. With respect to the problem of inadequate expense documentation, Petitioner’s cover letter did not detail any “internal controls” that would be put in place to ensure record reliability and integrity.
23. With respect to the issue of non-profit status, Petitioner attempted to claim an additional $76,023.38 of labor costs and attached a large stack of employee timesheets which purportedly showed the employees’ hours and wages during 2005-06. Petitioner admitted at the hearing that the employee timesheets were reconstructed after the fact in July or August 2008 (i.e., they were not completed during the 2005-06 period to which they purportedly corresponded). Since she did not have actual timesheets from that time period, it would have been impossible for her to comply with the requirement of a full accounting to demonstrate that she was in a non-profit status with the CACFP money. This was her attempt to provide the best information that she could.
24. The timesheets are not accurate in reflecting the actual time worked by the employees and therefore is not credible evidence of Petitioner’s alleged expenses. There is too much consistency among the timesheets (e.g., the timesheets show that each employee worked exactly 1 hour for breakfast service on every workday of every month). Respondent was not persuaded by the purported timesheets and, moreover, determined that these records did not meet program guidelines for labor records (FNS Instruction 796-2, Rev. 3). Petitioner did not fulfill the necessary corrective action of showing that she operated a non-profit CACFP program in 2005-06.
25. Petitioner did not directly address the corrective action aimed at resolving the problem of the IEA discrepancies.
26. Auditor Vicki Johnson was sent to Petitioner’s facility to assess whether Petitioner was implementing the corrective action that called for “immediate” maintenance of accurate financial records and expense documentation. Ms. Johnson focused on the institution’s labor records for the months of August and September 2008. Ms. Johnson compared CACFP timesheets to the employees’ work-hours that were recorded on Petitioner’s time-card system. Ms. Johnson’s review disclosed that Petitioner’s CACFP timesheets were, in many instances, not reconcilable with the time-card system printouts. For example, Petitioner’s CACFP timesheets would indicate that an employee worked until 3:30 p.m., but the time-card printouts would actually show that the employee had clocked-out much earlier than 3:30 p.m. There were also instances where Petitioner represented on the timesheet that an employee had shown up for work, but the time-card printouts revealed that the same employee did not clock-in at all.
27. Ms. Johnson sent her findings via email (with attachments) to her supervisor, Ms. Seawell. Ms. Johnson prepared a table showing the multiple discrepancies between the CACFP timesheets and the time cards.
28. Based on Ms. Johnson’s findings, it is clear that Petitioner did not immediately begin maintaining accurate records, as instructed by the Notice of Serious Deficiency. Petitioner failed to fulfill the required corrective action.
29. By letter dated November 20, 2008, Respondent issued a Notice of Proposed Termination and Disqualification. This letter informed Petitioner that, as a result of the ongoing, uncorrected serious deficiencies, Respondent was proposing to terminate Petitioner’s CACFP Agreement and proposing to disqualify the institution and its owners from the program. This case concerns Petitioner’s appeal of the Notice of Proposed Termination and Disqualification.
30. 7 C.F.R. § 226.2 provides as follows: “Institution means a sponsoring organization, child care center, at-risk afterschool care center, outside-school-hours care center, emergency shelter or adult day care center which enters into an agreement with the State agency to assume final administrative and financial responsibility for Program operations.”