YELLOW SHEET Office of the State Auditor of Missouri Claire McCaskill

Report No. 2006-34

June 2006

The following findings were noted in our audit  of the Department of Social Services, Children's Division – Early Childhood and Prevention Services-Early Head Start Contract with KCMC Child Development Corporation.

Governor Blunt requested the State Auditor's Office to audit the contracts awarded to the Kansas City Model Cities (KCMC) Child Development Corporation by the Department of Social Services (DSS), Children's Division (CD), Early Childhood and Prevention Services (ECPS) for the state Early Head Start (EHS) program.   During the period July 1, 2001 through December 17, 2004, the DSS paid the KCMC over $5.3 million for the state EHS contract.   In total during the three years ended June 30, 2004, approximately 15 percent of KCMC's unrestricted revenues were received from state funding, which included other funds provided by the DSS and the Department of Health and Senior Services.

The contracts with the DSS for the period July 1, 2001 to December 17, 2004, required the KCMC to provide EHS services to children ages birth to three years whose families' incomes were under the federal poverty level and pregnant women in Jackson County, Missouri.  As required by the contract, the KCMC contracted with three partner agencies to provide services to 121 children and 22 pregnant women.  The KCMC also provided home-based services directly to 12 pregnant women and contracted with other family childcare providers to serve 12 children.  Over $4.5 million (approximately 86 percent of total EHS payments) paid by the state to the KCMC was then reimbursed to the partner agencies for their EHS services.  Our review of the KCMC's services provided and related records and the ECPS's management of the EHS program identified numerous problems. 

The ECPS did not adequately monitor the financial activities and records of the KCMC.  TThe ECPS met with the KCMC and federal Head Start personnel on a frequent basis regarding program activities; however, the ECPS did not review the financial records of the KCMC or partner agencies to ensure the amounts reported on quarterly claims and year-end reports were accurate and represented allowable costs as defined by the contract. Instead of reimbursing the KCMC for actual expenses paid, the ECPS allowed the KCMC to submit a quarterly claim for an advance of one-fourth of the annual contract amount.  As a result, the ECPS had little assurance that state funds were used for allowable costs and that all monies were accounted for properly. 

Although the KCMC paid the partner agencies the proper amounts based on the partners' claims and documentation, these payments were not always accurately recorded in  the KCMC's general ledger.  This resulted in inaccurate quarterly claims and year-end reports, and some overpayments to the KCMC.

Supporting documentation was not available to identify the specific expenses allocated to personnel and indirect costs, totaling more than $750,000, during the period July 1, 2001 to December 17, 2004.   

The ECPS did not adequately review financial activity related to the state funded EHS program during a joint monitoring visit with the U. S. Department of Health and Human Services (DHHS).   In addition, the ECPS, along with the DSS, did not obtain and review the KCMC's audit reports and related findings.  As a result, the ECPS missed opportunities to identify and address significant findings in the KCMC's operations which affected the state's EHS program.

As a result of news articles, a congressional inquiry, an audit by the DHHS, Office of Inspector General, and other management issues, on December 17, 2004, the KCMC relinquished its federal Head Start/Early Head Start grants and in September 2005, filed for Chapter 11 bankruptcy.  Another agency in the Kansas City area has since been awarded the Head Start grants.  Because of the numerous actions and changes that occurred regarding the KCMC's operations and records, we encountered substantial delays in obtaining records applicable to our audit.

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