How public money fed private greed
Sunday, April 9, 2006

By JEAN RIMBACH and KATHLEEN CARROLL
STAFF WRITERS -BERGEN RECORD

 

First of four parts - LESSONS IN WASTE

A Jersey City preschool owner charged state taxpayers for a Caribbean time share two years in a row. She said it would help her teachers relax. They never vacationed there, but she did.

A Hoboken center collected hundreds of thousands of dollars in state funds without telling New Jersey that the federal government had already paid for the same preschoolers.

And taxpayers are still supporting an Irvington preschool even though the director did such a "horrible" job in Newark that her program was shut down.

Seven years after New Jersey launched its landmark program for disadvantaged preschoolers -- with $561 million budgeted this year alone -- the state continues to send tax dollars to programs that have flagrantly misspent or wasted money. The state's slow reaction to early problems and sluggishness in pursuing and punishing the cheats have allowed uncounted millions to flow out of the classroom and into preschool owners' pockets. Only the very worst have been denied new contracts.

And when programs shut down, the state doesn't go after the squandered money.

That means Rise & Shine Day Care Center in Jersey City is not being pressured to return $239,000 in questionable spending. And it means Regina Okafor, who gave herself a $291,000 salary, has defiantly kept state-funded computers, books and furniture since her contract expired.

The Record analyzed audits of more than 100 state-funded preschools in New Jersey's poorest communities, reviewed tax returns, financial documents and contracts and interviewed dozens of state and local officials, owners and teachers in an effort to detail the fiscal workings of the program.

The four-month investigation of the 2003-04 accounts, the last full year available, found:

·  Sloppy bookkeeping at virtually every school, so bad in most cases that auditors couldn't tell how much money had been spent on the program. Payments for luxury car leases, Omaha steaks, shrimp, Godiva chocolates, wedding gifts, motorcycle insurance, even cat food were buried in the books.

·  Inflated rents, six-figure salaries and $900,000 in personal loans while some schools shortchanged teachers' wages and benefits.

·  Uninterrupted funding for schools showing clear financial distress, such as tax liens, negative bank balances, lapsed insurance policies and failure to meet payroll. One agency rang up more than $24,000 in bank fees alone on 758 bounced checks.

·  Contracts so loosely worded that the Attorney General's Office said it couldn't prosecute. Cases involving blatant abuses were closed. But four days before publication, a spokesman said the office is reassessing those decisions.

·  Windfalls for owners who walk away from the program; they have been able to escape their debts to taxpayers and some have kept entire classrooms of state-funded supplies.

·  A backlash against state efforts to take back some wasted tax dollars from existing programs. Schools are threatening to close -- one shut its doors last month -- and a major social service agency is suing. The case could cost taxpayers millions if the state loses.

·  Little financial scrutiny by the agency that doles out a fifth of the state funding and no plans to change that approach.

The taxpayer-funded preschool program -- ordered by the state Supreme Court in its Abbott v. Burke ruling -- is an unprecedented effort to provide free classes to all 3- and 4-year-olds in New Jersey's 31 poorest communities. Since 1999, two state agencies have poured more than $2.5 billion into the initiative. Much of that money has gone to hundreds of private day-care centers and community agencies recruited to meet the mandate to help disadvantaged kids catch up to their suburban peers.

Indeed, educational experts say the program -- one of the most ambitious in the country -- is working. Students' test scores are improving, enrollment has doubled and virtually all teachers are certified. State officials say they are reining in misspending and taking steps to recover wasted tax dollars.

But those attempts to fix the program's financial troubles come after years of chaos and in some cases have backfired.

Attorney David Sciarra, whose Education Law Center sued to create the preschool program, expressed frustration -- but not surprise -- at the problems.

"We have a Department of Education that simply isn't capable, that has shown itself incapable of really performing the oversight and management responsibilities," he said.

Years of missing funds

No one will ever know how much money went missing in the program's early years.

The state didn't verify spending or enrollment. The priority was to add classes quickly, and the state told overcrowded school districts to hire licensed day-care centers to serve the kids.

Four years into the program, the state discovered that only 85 percent of the funded spots were actually filled, said Robert Ortley, chief auditor for the state Department of Education. And it took another year for education officials to begin to add some spending limits and do more than a dozen or so audits annually.

And officials at the Education Department, which distributes four-fifths of the funding, say they can't look back now.

"It's more important that we're taking actions that will produce either a decision that somebody shouldn't be a provider -- which has happened in a lot of cases -- or a decision that allows that provider to improve their management," said Gordon MacInnes, the assistant education commissioner who oversees the Abbott preschool program.

For the 2003-04 school year, the department audited about one-fifth of the centers, about 60 percent of those chosen at random. The Record's analysis of the audits found rife mismanagement.

School after school couldn't explain its spending. The majority were missing invoices or other documentation and the records that did exist were usually inaccurate or misleading. A few had no paperwork at all. About four out of five mixed education funds with day-care money or other revenue, making it difficult to track tax dollars.

"I think the findings were pretty much consistent," said Ray Montgomery, director of the Education Department's Office of Compliance Investigation. "Every time I would read a report I would say, 'My goodness, is everybody going to the same school in terms of doing the same kinds of things?' "

At least 40 percent of the schools had shaky finances. Some couldn't pay vendors, bounced checks or missed rent or insurance payments. Several stiffed the IRS.

Harmony Education & Life Partners in Irvington missed its payroll twice, and received shut-off notices from Public Service Electric & Gas. Sunnyside Academy in Jersey City had $92,000 in unpaid payroll taxes and an overdrawn bank account.

Babyland Family Services in Newark bounced 758 checks and rang up $24,635 in bank fees.

A previous audit cited "substandard conditions," such as cold food, no heat, staffing shortages, a lack of supplies and a wealth of administrative positions, with salaries as high as $230,000. Federal 2003 tax returns for the sprawling social service agency put the executive director's compensation at $350,000, including salary, retirement contributions and an expense account. Babyland officials have said the administrative salaries were not covered by Abbott funds.

Auditors also cited one in four centers for personal expenses, including unexplained credit-card charges, checks written to cash and questionable ATM withdrawals -- some from machines in Atlantic City, Las Vegas and Miami.

There were Christmas bonuses and wedding gifts from Macy's and Victoria's Secret. Auditors couldn't tell where the money came from for restaurant bills, liquor store payments and a $1,000 donation to the Asbury Park mayor's ball. A Volvo was on the books at a West New York center one year, two Volvos the next.

$900,000 in loans

There was no evidence that $900,000 in loans at more than a dozen locations were repaid.

At Tinyville Learning Center in Jersey City, the Rev. Rudolph Daniels ended up with $15,000 in loans in his pocket, auditors found. Daniels has told Jersey City officials he paid back the loans, but the district says it has no proof.

Over and over, auditors found inflated rents -- some had doubled, tripled, even quadrupled in a single year. The owners of Little Tots in Asbury Park took home an extra $136,500 by nearly doubling the rent, auditors said. They never told the state they were both landlord and tenant.

Rental costs at Little Kids College in Trenton shot up 31 percent. Owner Deborah Pontoriero told auditors that her landlord -- who was also her father -- had refinanced his mortgage and passed the costs on to the Abbott program.

One-third of the centers underpaid staff or charged employees insurance premiums that had already been paid for by the state. Some offered no benefits at all.

The owner of Happy Face in Jersey City charged the preschool program for federal and state corporate taxes and bonuses. Auditors said she underpaid teachers by as much as 15 percent. And she used state money to buy health insurance for her husband and to pay for the Caribbean timeshare -- $1,243 one year and $1,988 the next.

In an interview, owner Marly Caro said the vacation home was intended for the preschool's teachers, as a means of relaxation that she felt would contribute to their health. The money was eventually returned.

At Apple Tree Daycare in Paterson, the director diverted state-funded supplies to her other day-care center in a wealthy suburb, auditors found. She said that deliveries to Paterson get stolen -- but "could not explain why or by whom the invoices had been altered," the auditors reported.

Fidela L. Mercedes of Franklin Lakes is collecting two full-time salaries, from two preschools she owns in neighboring towns, The Record found. In West New York, she goes by Fidela Mercedes and makes $60,000 as director of Little Angels. In Union City, she's called Lazara Mercedes and is paid $41,120 as director at Kiddie Corner. Holding more than one director's job violates Abbott rules.

And state education officials say a Hoboken agency collected as much as $800,000 in Abbott preschool funds that were duplicated by federal Head Start money. The agency then failed to reveal the federal dollars on the budget it gave the state.

The Hoboken Organization Against Poverty and Economic Stress -- called HOPES -- disputes any duplication but has yet to document how the money was spent.

"Our motives here are motives of good," said Ora Welch, president and chief executive.

All of these preschools are still getting state funds.

State officials say it's difficult to close down centers because the priority is to serve as many kids as possible. School districts don't have the room to do it on their own, so they rely on about 500 private centers to serve two-thirds of the students.

"It may not be as simple as: 'Look at what they're doing -- they are out of here,' " said David Joye, acting co-director of the state's Office of Early Childhood. "It's a scale. I mean, do they have someplace for these kids to go?"

School districts decide

The threat of being audited and losing a state contract should be enough to compel preschools to follow the rules, state officials say. And every year, they say, about 10 of the worst-managed schools are weeded out. But that's only after years of problems and many keep getting other public funds to provide day care or social services for poor families.

Even though state officials set policy and dole out the Abbott preschool money, they say it's up to individual school districts to decide who to keep and who to let go.

"In all cases, I leave it up to them," MacInnes said.

But some districts are more aggressive than others.

For example, officials in Camden have never canceled a preschool contract. Audits of five programs there reviewed by The Record showed serious problems, including double billing, possible labor and tax violations, questionable personal spending and haphazard financial records.

It's also possible for preschool owners who flunk out in one town to keep collecting state money in another.

Take Rosemary Nwosu, whose Rising Sun Academy lost its contract in Newark almost two years ago. Newark officials described the program as "terrible" and "horrible." They said teacher-student interaction was poor and financial records were a disaster.

"It was just -- just a mess," said Gayle Griffin, Newark's assistant superintendent in charge of early childhood.

Yet today, Nwosu is collecting $14,000 per child to run a three-room preschool in Irvington.

"It's not sufficient to say that a program operated by Mr. X in Newark was found wanting, and therefore we assume that Mr. X's program in Irvington will also be wanting and needs to be shut down," MacInnes said. "I don't think you can do that."

In an interview, Nwosu acknowledged the problems in Newark and admitted she held two full-time jobs as director at both preschools -- a violation of Abbott rules. She said her Irvington school is meeting all its obligations and that officials there have been more cooperative.

Two years later, New Jersey is back where it started with Rising Sun.

It's doing another audit.

Getting money back

State officials say they have moved to curb financial abuses and are recovering both misspent and surplus funds through audits and improved monitoring.

The Education Department says it saved $17 million by trying to match its 2003-04 funding with permitted expenses and enrollment numbers. Some $5.1 million of that had to be recovered after the year ended.

And it's not over yet.

Some agencies, including HOPES in Hoboken, are allowed to reconstruct their books more than once to justify spending. Last week, the state gave it another shot at building a 2003-04 budget, after auditors found funding was duplicated by the federal government.

Many smaller districts are up to date in recovering funds. But some of the larger ones are struggling. Jersey City and Newark are still collecting money owed from the 2003-04 school year.

Babyland in Newark has been given five years to pay back $772,626 in Education Department funding, and $678,453 is still outstanding. The federal government recently put it on "high-risk status" and is deciding whether to continue its Head Start grant.

The agency, which operates five preschools in Newark and one in East Orange, is still getting about $2.8 million a year from the Education Department for more than 300 children. In an interview, agency administrators said they have improved business practices and brought in a new chief financial officer.

Paterson recently began deducting debts for 2004-05 from preschools' checks after collecting $3 million from 2003-04. In response, Catholic Family & Community Services -- a large social service agency -- sued in February to stop the district from collecting more than half a million dollars in old debts from Friendship Corner preschool.

The suit says the preschool contract does not allow the district to take back money once a school year is over. Should the state lose, preschools that were forced to return such funds could ask to be reimbursed.

"This is really the first one that has come along," said Kathryn Forsyth, a spokeswoman for the Education Department. "So it really is a case of some significance."

Other preschool operators in Paterson are threatening to shut down.

One of them, Silver Fox Learning Center, closed last month. The executive director said he had no choice -- the district was withholding funding to cover old debts and he couldn't pay his bills. District officials, however, say the school repeatedly failed to document spending.

Part of the problem is that it took so long to put in any rules at all.

It wasn't until 2003-04 that the state required line-item budgets and quarterly financial reports and specified in contracts that it could take back money not spent as intended.

And it wasn't until the next year that the state spelled out what preschool owners were not allowed to purchase with tax dollars.

Budget guidelines now forbid spending on personal items, entertainment and first-class travel. Fiscal monitors installed in the districts are supposed to review financial records every quarter and track spending.

Next year, for the first time, directors' salaries will be capped at $108,000. Salaries that already exceed the limits, however, won't be cut. Also next year, preschools will have to justify their rent costs.

State auditors, who are reviewing 90 preschools from 2004-05, say those reports will show management is improving.

But some preschool operators say the growing list of spending rules is too strict and that they haven't been trained to keep up with the paperwork. The rules don't allow preschools to save money in one area -- say, on utilities -- and spend it on another part of the program.

"Every day they are coming up with something new. They used to say, 'It's a new program, we're still learning.' But the program has been around for years now," said Youssef Ismail, who owns Leaders of Tomorrow in Jersey City. "They are treating everybody as if they are thieves. They talk to you as if you are trying to take advantage and take money from the district."

Human Services funds

Although the Department of Education has been phasing in some spending rules, the Department of Human Services has not.

And that means one-fifth of taxpayer funding -- about $57,000 per classroom for before- and after-school care -- still comes without any spending restrictions at all and virtually no fiscal oversight.

That's how Yami Lasval of Fort Lee was able to spend tax dollars on expensive vehicles for herself and her husband.

When Education Department auditors looked at her Kiddie Land Learning Center in West New York, they found two leases totaling $1,229, which Lasval said in interviews paid for a BMW and a Chevrolet Tahoe. Lasval told auditors she paid for the cars with Human Services money.

And there was nothing the Education Department could do about it. Human Services pays strictly based on enrollment, with no budget required. So Lasval's actions didn't break any rules.

"DHS is not asking where that money goes," Lasval said in an interview before the district decided it would not renew her contract this summer, after six years. "They care whether we're open from 7:30 to 8:30 and 3:30 to 5:30."

The Education Department suggested that Human Services audit Lasval's program. It didn't happen. Human Services hardly ever audits preschools -- only six or eight have been done over the life of the program, officials said. The department requires attendance reports and visits the programs yearly.

"We're paying just based upon a rate," said Bonnie Beach, contract manager for the Division of Family Development. "We can't look at line items, because there are no line items to look at."

This fragmented system further hampers accountability.

"It would be a lot easier and more sensible if you were dealing with a single program and single funding source and all that. You're not. And so it may be a loophole," MacInnes agreed.

No one prosecuted

Even in cases of apparently flagrant abuse, state criminal investigations have not led to any prosecutions.

And for that, education and law enforcement officials blamed each other.

Seven cases were referred to then-Attorney General Peter Harvey's office, but a spokesman said the Education Department's vague contracts and lack of rules hurt chances for prosecution. Representatives of the Attorney General's Office discussed tightening the contracts and requiring more documentation for spending, said John Hagerty, a spokesman for the state Division of Criminal Justice.

MacInnes maintains that the Attorney General's Office didn't do its job.

"I am confident in saying they haven't pursued it in ways that I would want to see as a taxpayer," he said. He said Harvey was initially encouraging, as were investigators.

"[Harvey] looked it over and told me that based on the information we had provided -- whatever the contract may provide or not provide for -- there was clear evidence of probable offenses of a criminal nature," MacInnes said.

The investigated centers included Right Direction in Irvington, where auditors cited questionable costs of $182,883 and alleged the owner "embezzled funds for personal gain." Financial records for the two-room storefront showed expenses for cruises, airfare, motels, restaurants and clothing.

The problem in most cases: too much "wiggle room" in the contracts.

"While there may have been some excessive expenditures, the bottom line was it does not violate criminal statutes because it was not prohibited by the contracts," Hagerty said in an interview late last year.

"How can it be a crime if you are not violating any restrictions on how dollars are to be spent?" he added.

MacInnes said some changes were made to the contracts after the department was told it "would improve their ability to follow up and prosecute cases." But he questioned whether that was the real issue.

Perhaps, he said, the amount of money involved was too small.

"You accept this money so you can pay a teacher and an assistant teacher and have $2,500 in supplies and provide meals -- and instead you used the money to go to Atlantic City," he said. "Is that fraudulent? I think it is. Do you need to have it in a contract in order to enforce it? I doubt it."

Under Harvey's tenure, five cases were closed -- leaving only two, involving Abbott preschools in Hoboken and Newark, open. Education officials say the Attorney General's Office also contacted them about Babyland in Newark.

On Wednesday, in response to renewed questions from The Record, Hagerty said the office under Zulima V. Farber, the attorney general who took over in January, is taking another look at the preschool cases.

"This administration is assessing all of the cases and some of those cases may ultimately be reopened," Hagerty said.

No 'legal actions'

Mahmoud Arafat of Little Star Nursery School used preschool funds for Godiva chocolates, Omaha steaks, cellphones and electronics -- and paid himself $71,000 to run a two-room preschool in Jersey City. He paid his son $60,675 for a job labeled "clerical." He charged $44,100 for rent and $950 for a personal parking space.

In all, auditors concluded that 78 percent of Little Star's $185,000 budget went to Arafat and his family -- and that didn't include any extra funds he got for day-care. They said the excessive administrative salaries were made possible, in part, by underpaying teachers and not providing benefits.

Jersey City ended the contract -- but without collecting $76,596 that Little Star still owes. Arafat recently sold his building for $565,000, The Record found. Efforts to reach him were unsuccessful.

State officials say it's up to school districts to recover the funds, even if it means taking "legal actions."

Jersey City school officials said they are considering legal remedies against Little Star and two other preschools they cut loose. But early childhood supervisor Pat Bryant said, "We really haven't got much direction" from the Education Department.

Had officials placed a lien against Arafat, he would have been unable to sell his building without settling his debt with the school district.

One district that tried that approach was told to back off by the state. Newark officials said they filed a lien in 2004 on assets owned by Babyland. But in August, state officials told Newark to rescind the lien, Griffin said. Babyland also had federal and state tax liens against it, and the district was told that "taxes come first," she said.

At Tender Care in Newark, employee paychecks bounced. Bank balances ran into the red. Auditors found payments to Saab and Volvo and bills for satellite dish and travel services.

In 2003-04, the school's rent shot up by 20 percent, to $6,000 a month, and owner Roger Mendes charged four times the agreed amount for a janitor. The janitor and landlord were the same person: Rosa Fromkin. Public records also list Fromkin as the owner of Mendes' home in Livingston, a luxury town house, The Record found. Mendes did not respond to repeated messages.

The owner of Tender Care chose to shut down last summer rather than return $37,306.

"This is a perfect way out for them," said Nancy Rivera, director of Newark's early childhood program.

No one is pressing the owners of Rise & Shine Day Care Center I and II in Jersey City for any money. Saeed and Riffat Sheikh still owe $239,000, the district says.

They made $82,080 by padding their rent, auditors found. They skimmed from every teacher's state-funded salary but one -- a relative. When auditors asked them to substantiate their spending, the Sheikhs showed receipts for just 61 percent of the money.

Rise & Shine no longer exists. Efforts to reach the Sheikhs were unsuccessful.

MacInnes says it's not always worth it to chase providers that leave the program. Some go out of business so there may be nothing left to pursue. Sometimes, it would cost more for lawyers to collect the debt than the debt itself, he said.

"I think you could say at least in some cases this is just good business judgment," MacInnes said. "At some point the district may conclude the effort required is not worth the potential of the return."

He said it shouldn't come as any surprise that a program as large and expensive as Abbott is "not airtight."

"I think," he said, "there is a point at which you have to write off bad debt."

$377,000 for rent

Villa Maria preschool in Irvington was a modest, non-profit day-care center that received $142,000 in public dollars for child-care services in 1999. As director, Regina Okafor was paid less than $50,000, tax documents show.

Then she landed a preschool contract.

By 2001, the non-profit organization that owns Villa Maria had purchased two Mercedes-Benzes as company cars. By 2003, it was taking in $2.7 million a year to serve 135 preschoolers. Okafor's salary rocketed to $291,347. She changed her title to "chief executive officer."

Okafor also pocketed profits from a generous rental agreement for nine classrooms in a squat brick building she purchased for $240,000 in 1999. Four years later, she was charging the state $377,000 a year in rent.

Her luck finally ran out in 2004, when her contract was not renewed.

So what became of the fortune that taxpayers invested in Villa Maria?

Unopened boxes of school supplies and computers are gathering dust in a half-empty building renovated with a $200,000 state grant. Shelves of books, paints, blocks and other supplies fill classrooms that were meant for poor preschoolers.

Federal tax documents show Okafor took home $1 million in salary during her years in the program. Okafor said in an interview she didn't do anything wrong. Preschool, she said, is not a money-making venture.

"I want to make a difference for poor kids," she said.

She said the Irvington school district never sent her last monthly payment. When the district asked that she give back some supplies, Okafor refused.

"They have no right to do that," Okafor said, indignant. "It's not in the contract."

Taxpayers will never know if Elie Jean-Pierre, who runs two preschools in Orange and West Orange, walked away with hundreds of thousands of dollars of their money.

That's because nobody is bothering to add it all up.

State auditors noted that he took out $377,000 in IOUs from Christian Family Day Care. All the while, he was bouncing checks and racking up $41,000 in bank overdraft fees.

The Orange district ended its contract with Christian Family in 2004 and withheld $51,324 from its final check, said Kathleen Priestley, supervisor of early childhood programs. But it hasn't tried to recoup more money, she said, and hasn't been told by the state that it should.

In an interview, Jean-Pierre denied the findings and said the district did not withhold any money. The loans were appropriate, he said, because they were "personal money" that was owed to him.

"If I was so bad, why did they keep me in the program for three years?" he said. "As far as I'm concerned, we met all of the requirements. That's why we got the check every month."

E-mail: carroll@northjersey.com and rimbach@northjersey.com

* * *

BY THE NUMBERS

·  More than 38,000 students attend preschool in the 31 Abbott school districts.

·  About 500 private preschools serve two-thirds of the children. The rest are in public schools.

·  For each student, the state pays about $14,000 yearly -- about $10,100 for six hours of class time and $3,800 for before- and after-school care.

·  The state Department of Education pays for class time -- about 80 percent of the costs. That money is given to the districts, which distribute it to the schools.

·  The state Department of Human Services pays for before- and after-school care -- about 20 percent of the costs.

·  Classes are capped at 15 students.

·  More than 99 percent of the teachers are certified.

·  There is no cost to parents.

·  The centers provide two free meals and snacks each day.

* * *

OUTSTANDING DEBTS

Preschools can walk away from the program owing thousands in tax dollars. Some examples:

Mahmoud Arafat, Little Star, Jersey City

Used preschool funds for Godiva chocolates, Omaha steaks, cellphones and electronics.

Owes: $76,596

Roger Mendes, Tender Care, Newark

Auditors found payments to Saab and Volvo and bills for satellite dish and travel services in the books.

Owes: $37,306

Saeed and Riffat Sheikh, Rise & Shine Day Care Center I and II, Jersey City

Made $82,080 by padding rent; skimmed from every teacher's salary but one -- a relative.

Owes: $239,000

Elie Jean-Pierre, Christian Family Day Care, Orange

Auditors said he took out $377,000 in loans from preschool, but couldn't determine source of the cash.

Owes: unknown