Audit Report on YMS Management Associates, Inc.’s Compliance with Its Contract with the New York City Administration for Children’s Services

Executive Summary

The New York City Administration for Children’s Services (ACS) provides subsidized child care by, among other things, issuing day care vouchers to families certified as eligible that enables those families to choose day care services from qualified service providers (Service Providers)¹.   To carry out its responsibilities under the day care voucher program, in 2007 ACS entered into a contract with YMS Management Associates, Inc. (YMS) to disburse payments to the Service Providers on a monthly basis and to carry out other fiduciary tasks necessary as the City’s payment agent.

ACS’ contract with YMS was for the period of May 1, 2007, to April 30, 2010, and totaled $1,206,575,382; $1,203,586,000 in program funds to be disbursed to Service Providers and $2,989,382 in administrative funds as a fee for YMS (the Contract).  The Contract also included a three-year renewal option that was exercised, which would extend it through April 30, 2013.  In November 2012, ACS extended the Contract for one year through April 2014 in order to ensure the continuity of services.  Using the negotiated acquisition method of procurement, ACS extended the Contract two more times through April 2016².  In connection with these procurements, ACS stated that it needed to enter into negotiated acquisitions to ensure continuity of services while it reviewed the child care voucher payment program and that it anticipated issuing a request for proposals (RFP) for a new contract with a service start date on or about May 1, 2016.  Since 2013, the Contract has been modified three times to increase the amount of funds to be disbursed to the Service Providers.  Total program funds and administrative funds were increased to $3,991,238,297 and $9,492,998, respectively.  During the last year of the Contract (May 1, 2015 to April 30, 2016) YMS received $451,704,542 in program funds and $973,056 in administrative fees.

Audit Findings and Conclusion

Our audit found that YMS generally complied with Contract requirements, including that YMS properly processed voucher payments in accordance with ACS’ instructions, provided the required number of clerical staff to ACS, installed and maintained a direct deposit system, properly paid ACS interest on programmatic funds, and maintained the required levels of insurance.

However, we also found that YMS failed to comply with two other obligations.   Specifically, YMS failed to validate Service Provider Tax Identification Numbers (TIN) and as a result, during Calendar Years 2014 and 2015, a total of $9.4 million in compensation was paid to Service Providers and reported to the Internal Revenue Service (IRS) without proper TINs³.   Further, we found that YMS did not implement and maintain a debit card system as required in the Contract.  Nonetheless, YMS continued to receive the full contract fees, which incorporated the costs associated with the debit card system, even though it never had to pay for it.

We also found that ACS did not exercise adequate oversight over YMS to ensure that it complied with the terms of the Contract, including the requirement for TIN validation, and the implementation and maintenance of the debit card system.  Finally, we found that ACS did not ensure the funds maintained by YMS were insured over the $250,000 Federal Insurance Deposit Corporation limit.

Audit Recommendations

ACS’ Contract with YMS expired on April 30, 2016.  In response to an RFP, YMS was awarded a new contract effective May 1, 2016.  The new contract provides a specific methodology on how YMS should validate TINs and continues to require YMS to establish a debit card system.  The report makes a total of 12 recommendations, 6 to ACS and 6 to YMS, including the following:

YMS should:

• Review the 112 Service Providers cited in the report and obtain a valid TIN.  If a valid TIN cannot be obtained, withhold payment in accordance with IRS regulations until one is provided;
• Repay ACS the implementation and maintenance costs of the debit card system required under the old Contract;
• Validate TINs in accordance with the methodology outlined in the new contract;
• Implement the debit card system in accordance with the new contract requirement;

ACS should:

• Review the payment records associated with the 135 providers who were previously paid without valid TINs, and determine if any payments may have been erroneously made and take appropriate action to recoup any payments that were;
• Continue to conduct a full review of Service Provider TINs.  If valid TINs cannot be obtained, ensure that YMS withholds payment in accordance with IRS regulations from the Service Provider until one is provided;
• Immediately enforce and continuously monitor compliance of all terms on the new contract.

YMS Response

YMS officials disagreed with the report’s findings and did not address the report’s recommendations.  In their response, YMS officials stated that “[i]t is YMS’ position that it complied with all areas of the audited Contract and that the findings in the Audit related to technical issues with the knowledge or consent of ACS and that should in no way reflect upon YMS’s abilities, integrity or satisfaction of its obligations under the Contract.” YMS also stated that it and ACS were unaware that their TIN validation process was not meeting requirements until 2013, and YMS has met with ACS repeatedly to address the issue thereafter.  According to YMS, it was unable to resolve the problem alone because it did not have access to confidential government databases or an accurate TIN matching database.  In addition, YMS stated that it was ACS’ decision not to implement a debit card system.

We do not agree with YMS’ response and note that the root cause of the invalid TINs identified in the report stems from the methodology used by YMS at the onset of the Contract in 2007.  Invalid TINs cannot be effectively identified by relying only on self-reported data provided by the Service Providers themselves.  Moreover, some of the TINs YMS purports to have “validated” consisted of only zeros which were obviously illegitimate TINs on their face.  Also, YMS failed to obtain copies of Service Provider Social Security cards as required by the Contract, which compounded the issue.

With regard to the debit card system, YMS stated it was ACS’ decision not to go forward with its implementation but this was not documented as is required by the Contract.  Further, there was no documented evidence that the system was even discussed for over six years since the inception of the Contract.

ACS Response

In its response, ACS officials agreed with four of the six recommendations but disagreed with the report’s findings.  ACS officials stated that “[t]he difficulties in TIN validation stemmed from factors beyond YMS’ control—specifically that the U.S. Internal Revenue Service would not allow vendors access to confidential, comprehensive government databases like the IRS eService TIN-Matching database.”  In addition, ACS officials stated that it was their decision not to implement the debit card system and that it “has been diligent in its oversight of the YMS contract. . . .”  ACS did not agree to recoup the implementation and maintenance costs of the debit card system from YMS and did not address the recommendation that it review the payment records associated with the 135 providers who were previously paid without valid TINs.

For the reasons stated above in response to YMS’ comments, we disagree with ACS’ response to the findings.  With regard to ACS’ failure to monitor YMS’ contract performance, we note that the fact that ACS was not aware that there were problems with Service Providers’ TINs prior to 2013 illustrates the lack of contract monitoring we describe in the audit report.  Because YMS was not performing its obligations and ACS was not properly monitoring it, the City had to expend resources to fix the failures associated with Service Provider TINs.  Specifically, multiple City agencies, including the Law Department, the Comptroller’s Office and ACS, were required to collaborate in order to rectify the issue.
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