STATE OF NORTH CAROLINA

COUNTY OF WAKE


IN THE OFFICE OF ADMINISTRATIVE HEARINGS

05 DHR 0653

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Peachstate Nutrition Services, Inc.,

Karen Riner,

Petitioner,

vs.

North Carolina Department of Health and Human Services, Division of Public Health, Child and Adult Care Food Program,

Respondent.


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DECISION

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THIS MATTER came on for hearing before Fred G. Morrison Jr., Senior Administrative Law Judge, on September 26, 2005, in Raleigh, North Carolina.

APPEARANCES

For Petitioner: Howard Kramer, Attorney at Law

For Respondent: The Honorable Roy A. Cooper III, Attorney General

North Carolina Department of Justice

Raleigh, North Carolina

Iain M. Stauffer, Assistant Attorney General, appearing

ISSUE

Whether the Respondent acted properly and followed proper procedure in issuing a Notice of Proposed Termination and Proposed Disqualification to the Petitioner.

STIPULATIONS

The parties stipulate to the admission in evidence of Respondent’s Exhibits 1-31.

BASED UPON careful consideration of the testimony and evidence presented at the hearing, and the arguments and briefs of the parties, the undersigned makes the following:

FINDINGS OF FACT

1. The Child and Adult Care Food Program (“CACFP”) is a federally funded program administered in North Carolina by the North Carolina Department of Health and Human Services, Division of Public Health (“Respondent”).

2. The purpose of the CACFP is to reimburse child care centers, day care homes or adult care centers for providing nutritious meals to qualified participants.

3. The Petitioner, Peachstate Nutrition Services, Inc., is a corporation incorporated in the state of Georgia.

4. Petitioner operates as a sponsoring organization in the CACFP.

5. A sponsoring organization is an institution that oversees the operation of the CACFP in its sponsored facilities, and it accepts final financial and administrative responsibilities for its sponsored facilities.

6. A sponsoring organization performs administrative responsibilities and files claims for its sponsored centers.

7. A sponsoring organization is entitled to retain up to 15% of its sponsored centers’ reimbursements for meals served as an administrative fee, provided it has documentation to support expenses incurred.

8. Petitioner sponsors child care centers located in North Carolina.

9. The Petitioner first participated in the CACFP in North Carolina in 2000 or 2001.

10. The Respondent approved the Petitioner’s most recent application and agreement for participation in the CACFP on December 13, 2002. This agreement was effective until September 30, 2003.

11. In its agreement with the Respondent, the Petitioner agreed to comply with the terms of the agreement and all applicable federal and state laws, regulations, and policies governing the CACFP. The Petitioner also agreed to take corrective action on matters of noncompliance with CACFP laws, regulations, and policies within the timeframes specified by the Respondent.

12. Karen Riner signed the Agreement on behalf of Peachstate Nutrition Services, Inc. and is the Chairperson of Peachstate Nutrition Services, Inc.

13. Floyd Smith is the President of Peachstate Nutrition Services, Inc.

14. The Respondent conducted an Agreed Upon Procedures of the Petitioner on or about May 2003. An agreed upon procedures is an audit of a non-profit entity.

15. During the Agreed Upon Procedures, the Respondent discovered areas of program noncompliance and program violations.

16. The lead auditor, Vicki Johnson, issued the Agreed Upon Procedures Report in August 2003 that detailed the discovered program violations.

17. Violations that were found included: failure to operate the program in conformance with the performance standards, 7 C.F.R. § 226.6(c)(3)(ii)(C); failure to return to the state agency any advance payments that exceed the amount earned for serving eligible meals, 7 C.F.R. § 226.6(c)(3)(ii)(E); failure to maintain adequate records, 7 C.F.R. § 226.6(c)(3)(ii)(F); claiming reimbursement for meals served by a proprietary Title XX child care center during a calendar month in which less than 25 percent of its enrolled children, or 25 percent of its licensed capacity, whichever is less, were Title XX beneficiaries, 7 C.F.R. § 226.6(c)(3)(ii)(L); and failure by a sponsoring organization to properly train or monitor sponsored facilities, 7 C.F.R. § 226.6(c)(3)(ii)(O).

18. The Respondent determined that the discovered program violations were serious.

19. A serious deficiency is a violation that causes an institution to be out of compliance with the federal regulations that govern the CACFP.

20. Pursuant to 7 C.F.R. § 226.6(c)(3)(ii)(C), one serious deficiency for a participating institution is failure to operate the program in conformance with the performance standards.

21. A claim for reimbursement is paid according to an institution’s claiming percentage. The claiming percentage is “the ratio of the number of enrolled participants in an institution in each reimbursement category to the total of enrolled participants.” C.F.R. § 226.2.

22. The Affidavit of Enrollment is a form completed by the sponsoring organization which provides the number of enrolled participants classified as Free, Reduced, Denied, or no application, which is classified as Denied. These figures establish the claiming percentage or rate of reimbursement

23. The claiming percentage is multiplied by the number of meals that are claimed for reimbursement to calculate the total number of meals paid at the free, reduced or denied rate. That figure is then multiplied by the applicable free, reduced, or denied rate, which results in the amount the Respondent will pay for the claim.

24. A participant classified as free receives the highest reimbursement from the Respondent, while a participant classified as denied receives the lowest.

25. The Petitioner completed an Affidavit of Enrollment to establish its claiming percentage for the 2002-2003 CACFP year. The Petitioner used a date of July 1, 2002 and only fourteen of its centers to determine enrolled participants. The Affidavit of Enrollment completed and submitted by the Petitioner provided 298 participants classified as free, 90 classified as reduced, and 46 classified as denied. This established a claiming percentage of 68.66% for free, 20.74% for reduced, and 10.60% for denied.

26. Karen Riner signed the Affidavit of Enrollment on September 26, 2002.

27. Petitioner used the Affidavit of Enrollment to establish the claiming percentage for October 2002, the first month of the 2002-2003 CACFP year.

28. The Petitioner had signed agreements with approximately thirty-eight additional centers between July 1, 2002, and September 26, 2002. The enrolled participants from these centers were not included in the Affidavit of Enrollment.

29. The Petitioner sponsored approximately 50 centers in August and September 2002. The Petitioner only sponsored 14 centers for October 2002. The Petitioner sponsored approximately 45 to 54 centers from November 2002 through September 2003.

30. These thirty-eight centers were then added in November 2002, one month after the first month of the 2002-2003 program year. If the figures from the thirty-eight additional centers were included in the Affidavit of Enrollment, the correct figures would be: 564 participants classified as free, 226 classified as reduced, and 1,933 classified as denied. The claiming percentages then would have been: 20.71% for free, 8.30% for reduced, and 70.99% for denied.

31. The Petitioner did not adjust its claiming percentage in November when it added the additional centers. The Petitioner continued to use the favorable claiming percentage established in October 2002 for the 2002-2003 CACFP year.

32. This increased the amount of reimbursement the Petitioner was able to receive by approximately $500,000.00.

33. The Petitioner was not using a method to reconcile milk purchases with meals claimed for reimbursement, in accordance with the procedure established by USDA.

34. 7 C.F.R. § 226.6(b)(18)(i)(2003) requires that program funds be expended and accounted for in accordance with the requirements of 7 C.F.R. § 226 and FNS Instruction 796-2, Rev. 3, Financial Management in the CACFP. (Presently at 7 C.F.R. § 226.6(b)(vii)(A)).

35. Institutions are required to have a financial system in place with management controls specified in writing. 7 C.F.R. § 226.6(b)(18)(iii)(B)(2003)(Presently at 7 C.F.R. § 226.6(b)(2)(vii)(C)(2)).

36. FNS Instruction 796-2, Rev. 3 provides, among other things, procedures for costs (allowable and unallowable) and travel expenses.

37. During the Agreed Upon Procedures, the Respondent found that the Petitioner did not have a written compensation policy; did not have accounting records to provide an audit trail; that salaries exceeded budgeted amounts; that Petitioner did not maintain timesheets for employees; that checks were made payable to cash without documentation; that payments were made to AMSouth with CACFP funds for a vehicle that was not in the budget; that payments were made to a Capital One visa card with CACFP funds for unallowable or personal expenses; that checks were made payable to individuals indicating repayment of a loan without any evidence of a loan ; that payments were made for fuel without any invoices to support the expense; and that the Petitioner claimed the 15% administrative fee while not maintaining a ledger or schedule to reconcile the administrative costs to those costs that were claimed.

38. The Petitioner only had documentation to support $11,504.92 in administrative costs when it retained $190,529.93 in administrative costs from its sponsored centers.

39. Pursuant to 7 C.F.R. § 226.6(c)(3)(ii)(E), one serious deficiency for a participating institution is failure to return to the state agency any advance payments that exceed the amount earned for serving eligible meals.

40. The Petitioner applied for and received an advance for its sponsored centers from the Respondent in the amount of $122,801.00 after its 2002 - 2003 Agreement was approved in December 2002.

41. The Petitioner did not distribute the advance to its sponsored centers in accordance with the federal regulations.

42. Pursuant to 7 C.F.R. § 226.6(c)(3)(ii)(F), one serious deficiency for a participating institution is failure to maintain adequate records.

43. Institutions are required to collect and maintain all CACFP records required by the federal regulations. 7 C.F.R. § 226.15(e).

44. “In submitting a Claim for Reimbursement, each institution shall certify that the claim is correct and that records are available to support that claim.” 7 C.F.R. § 226.10(c).

45. During the Agreed Upon Procedures, the Respondent discovered that five of the Petitioner’s sponsored centers did not maintain adequate records to justify and support the claims filed for reimbursement. The required records included menus and cost documentation.

46. Pursuant to 7 C.F.R. § 226.6(c)(3)(ii)(L), one serious deficiency for a participating institution is claiming reimbursement for meals served by a proprietary Title XX child care center during a calendar month in which less than 25 percent of its enrolled children, or 25 percent of its licensed capacity, whichever is less, were Title XX beneficiaries.

47. Sponsoring organizations “shall not submit claims for child care centers in which less than 25 percent of the enrolled children and licensed capacity were title XX beneficiaries for the month claimed.” 7 C.F.R. § 226.10(c).

48. During the Agreed Upon Procedures, the Respondent examined claims for the month of March 2003. The Petitioner was using February Title XX data to support March’s claim for reimbursement. One sponsored center did not make a claim for one month but the Petitioner submitted a claim for that month for the center.

49. Pursuant to 7 C.F.R. § 226.6(c)(3)(ii)(O), one serious deficiency for a participating institution is failure by a sponsoring organization to properly train or monitor sponsored facilities.

50. Sponsoring organizations must perform reviews of their sponsored centers three times per year and must not allow more than six months to elapse between reviews. 7 C.F.R. § 226.16(d)(4)(iii).

51. As of May 2003, the Petitioner had only conducted 34 monitoring visits out of a total of 159 (53 centers x 3 visits) required visits for the year.

52. As follow up for the Agreed Upon Procedures, the Petitioner submitted additional documentation regarding monitoring of its sponsored centers.

53. The Petitioner submitted monitoring review forms for February 10, 2003, for child care centers in Knightdale and Raleigh. Ms. Riner signed these forms as the monitor conducting the visits, yet the times she indicated she was at both centers overlap. The same conflict exists for two visits conducted by Ms. Riner on March 13, 2003, at Betty’s Day Care Center and Creative Corner Child Care.

54. The Petitioner submitted monitoring review forms for March 13, 2003. Ms. Riner signed a review form stating that she was at Immanuel Baptist Daycare in Clemmons until 2:00 p.m., yet began another visit at Betty’s Day Care at 2:15 p.m. in Dallas, approximately 80 miles away. A similar inconsistency arises for visits on April 1, 2003.

55. The Petitioner provided a monitoring review form for February 27, 2003. Ms. Riner signed the monitoring review form stating that she conducted a visit at a child care center in Apex from 2:50 p.m. until 3:43 p.m.. Yet, the Petitioner submitted a receipt to justify its administrative costs which showed that a credit card issued to Karen Riner was used to purchase gas at 3:40 p.m. on Glenwood Avenue in Raleigh on February 27, 2003.

56. For a February 10, 2003, visit to the Growing Child in Knightdale, Ms. Riner signed the review form indicating she was at the center from 10:45 am until 11:15 am, yet submitted a receipt showing a meal was purchased at IHOP in Raleigh at 10:49 am.

57.  Petitioner submitted monitoring review forms for the Pumpkin Patch at various times during the follow-up process. One form was dated April 1, 2003, on the top, but signed and dated by Ms. Riner on April 1, 2002. The other form is purportedly dated and signed April 1, 2003. These forms contain exactly the same handwritten information about the monitoring visit. In the year on the form, the “2” in “2002” was changed to a “3”.

58.  Arnette Cowan, Head of the Special Nutrition Programs Unit, issued a Notice of Serious Deficiencies to the Petitioner, Karen Riner, and Floyd Smith, on September 8, 2003, which provided that the Respondent would propose to terminate the Petitioner’s agreement to participate in the CACFP and could propose to disqualify the Petitioner, Karen Riner, and Floyd Smith, if the Petitioner did not fully and permanently correct the serious deficiencies.

59.  The Serious Deficiencies which were identified in the Serious Deficiency Notice included: failure to operate the program in conformance with the performance standards; failure to return to the state agency any advance payments that exceed the amount earned for serving eligible meals; failure to maintain adequate records; claiming reimbursement for meals served by a proprietary Title XX child care center during a calendar month in which less than 25 percent of its enrolled children, or 25 percent of its licensed capacity, whichever is less, were Title XX beneficiaries; and failure of a sponsoring organization to properly train or monitor its facilities.