Under state law, the California Department of Education (Education) is required to administer a variety of child‑care and child development programs throughout the State. To fulfill this responsibility, Education contracts with various local entities, such as the Community Child Care Council of Santa Clara County (4Cs), to provide low‑income families with safe and healthy environments for education and child care. 4Cs provides a variety of comprehensive services with the stated goal of serving as a link between families and child‑care professionals in the greater Silicon Valley. Its seven contracts with Education during our audit period covered approximately 2,800 children from families enrolled in child‑care programs. In this audit, we reviewed 4Cs' expenditures, policies and procedures, and administration pertaining to these contracts as well as Education's oversight of 4Cs' management of the contracts.
4Cs Disrupted Services to Some Families by Recording Inaccurate Information, Delaying Payments to Child‑Care Providers, and Ending Its Preschool Program
In communicating with families, 4Cs recorded incorrect dates in more than 15 percent of its Notices of Action (notices) that it sent between July 2015 and June 2017 regarding proposed changes in services. These incorrect dates created unreasonable deadlines for many of these families to respond, thereby leading to certain families having their child‑care services terminated unjustly. Further, Education's oversight of 4Cs was not sufficient to detect 4Cs' practice of misdating its notices, and the absence of families appealing the unreasonable deadlines indicates that 4Cs is not providing sufficient information to families about their appeal rights. Additionally, 4Cs has not consistently followed its policies on payments to its service providers, resulting in some late payments.
In addition, 4Cs appears to have terminated its California State Preschool Program contract in order to avoid increased scrutiny of its other child‑care contracts. 4Cs' decision placed an unnecessary burden on the affected families and undermined the continuity of care and education for some children the program was serving. However, Education increased its scrutiny of 4Cs by conducting a performance audit of 4Cs' remaining Education contracts, which it expects to complete in September 2018.
4Cs Made Unallowable Purchases and Failed to Meet Other Requirements of Its Contracts With Education
We reviewed 69 administrative costs that 4Cs incurred from July 2014 through June 2017 and found that 22 were not eligible for reimbursement per state and federal regulations and Education's child development contract provisions, resulting in an unallowable use of $11,217 in state funds. Education did not detect these misuses of state funds, and without any additional monitoring beyond its reliance on 4Cs' annual independent financial and compliance audit, Education's inability to identify similar misuses is likely to continue. 4Cs also did not comply with the terms of its contracts in the areas of eligibility for child‑care services, staff development, and program evaluation, and Education did not identify the instances of noncompliance that we found in the latter two areas.
Late in our audit process, we discovered that a group of current and former employees of 4Cs had filed a class action lawsuit in federal court alleging that 4Cs violated federal and state law in administering its retirement plans. In order to avoid interfering with pending legal proceedings, we do not reach any legal conclusions on those matters that are the subject of the litigation.
We were able to conclude that 4Cs has used questionable management practices in handling its retirement plans. Its former executive director committed 4Cs to retirement accounts with high withdrawal charges based on the advice of 4Cs' financial adviser, who subsequently received substantial financial commissions. 4Cs also did not report certain required information for its primary retirement plan. In addition, 4Cs may have improperly used education grant money to fund a supplemental employee retirement plan without assigning the funds to specific individuals.
Summary of Recommendations
To ensure that families have sufficient time to respond to notices about eligibility, 4Cs should establish specific controls in its child‑care data system by July 2018 to prevent staff from recording incorrect dates on the notices, and it should begin conducting periodic reviews of dates in the data system by October 2018 to ensure that the controls are effective.
To ensure that it can justify the costs for which it seeks reimbursement, 4Cs should, by October 2018, strengthen its controls over its approval of the expenditures it charges to the State's share of its funding. These controls should include retention of all documentation to justify appropriate approval of these expenditures.
To allow beneficiaries reasonable access to their retirement funds, 4Cs should, by October 2018, move the funds for its retirement plans out of the current accounts with high withdrawal charges to the extent possible without incurring additional charges for beneficiaries and assign funds for new participants to securities without extensive charges for transferring or rolling over the funds.
To make its appeal process more accessible to families who may not receive a satisfactory resolution from its contractors, Education should, by October 2018, begin requiring its contractors to share key information in their communications with families about the process for appealing notices.
In order to rectify 4Cs' inappropriate use of state funding, Education should, by October 2018, recalculate the amount of 4Cs' reimbursable costs based on the unallowable costs we identified and recover any state funds that should be repaid.
To ensure the appropriate use of state grant funds, Education should determine, to the extent possible, the amount of supplemental plan funds that did not comply with funding regulations, and it should require 4Cs to reimburse the State for improper payments of state funds it made to the supplemental plan.
4Cs stated that it takes seriously the issues identified in our report; however, it did not specifically comment on whether it agreed with the recommendations. Instead, 4Cs indicated that it will provide a plan addressing the issues within 60 days of the report's publication. We look forward to learning about 4Cs' progress in addressing each of our recommendations. Education agreed with the majority of our recommendations but disagreed with our recommendations pertaining to its appeal process and its requirements for contractors' boards to assess contractors' educational programs.