Tuesday, June 16, 2015

An administrative agency found to have acted in a manner inconsistent with its own rules and regulations will be deemed to have acted arbitrarily



An administrative agency found to have acted in a manner inconsistent with its own rules and regulations will be deemed to have acted arbitrarily
Matter of Mid Island Therapy Associations., LLC v New York State Educ. Dept., 2015 NY Slip Op 04707, Appellate Division, Third Department

Supreme Court dismissed Mid Island Therapy Association's [Mid Island] Article3 78 application to review a determination of the New York State Education Department’s, [DOE] setting Mid Island’s payment “reconciliation rates” for special education itinerant teacher services to preschool children with disabilities for certain school years. Such payments were to be made pursuant to contracts with the New York City Department of Education (NYCDOE) and the Counties of Westchester, Nassau and Suffolk.

A percentage of the municipalities' payments to Mid Island are reimbursed by DOE based on rates that DOE sets in accordance with its regulations. Where the reconciliation rate differs from the prospective rate that was initially used, a service provider such as Mid Island must pay back funds if it was overpaid and, in the alternative, it receives additional reimbursement if underpaid. This rate is to be calculated after a provider supplies DOE with an independently audited Consolidated Fiscal Report (CFR) and supporting independently audited financial statements.

Mid Island had been paid prospective rates of $49 and $50 per service unit, respectively, for the periods in question and its subsequent CFR and financial data reportedly resulted in reconciliation rates of $50 per service unit for each of the relevant years. DOE calculated the respective reconciliation rates as $49 and $47 per service unit, the key reason for the difference in rates being that DOE used total service units reported by the municipalities.

Mid Island disputed these rates and started the process of reconciling the discrepancies between service units that it had reported and those reported by the municipalities and ultimately challenged the reconciliation rates for the 2008-2009 and 2009-2010 school years, as well as the prospective rate for 2010-2011 and ultimately Supreme Court dismissed its Article 78 petition.

Mid Island appealed, contending that DOE “failed to follow its own regulations and otherwise acted arbitrarily," primarily by relying upon unaudited information from the municipalities, disregarding Mid Island's audited CFR and financial data, and refusing to consider Mid Island's explanation for the discrepancies between its audited information and the municipalities' data.”

The Appellate Division said that a court's review of an administrative agency's determination is limited to "ascertain[ing] whether there is a rational basis for the action in question or whether it is arbitrary and capricious," citing Gilman v New York State Div. of Housing and Community Renewal, 99 NY2d 144. The court also noted that it had “previously recognized that [DOE] has "broad discretion in setting the reconciliation rate."

However, said the Appellate Division, an agency determination arrived at in a manner inconsistent with its own regulations is not supported by a rational basis and although "an agency's interpretation of its own regulation is entitled to deference [citations omitted] courts are not required to embrace a regulatory construction that conflicts with the plain meaning of the promulgated language."

Here, said the court, DOE’s regulations define the reconciliation rate as "a tuition rate that has been calculated using actual program and financial data with the applicable reimbursement methodology applied” [and] the tuition rate "shall be based on financial reports, as prescribed by the commissioner, supported by financial statements certified by a licensed or certified public accountant independent of the program's operation" [and] the "[CFR] certified by a licensed or certified public accountant independent of the program's operation."

The Appellate Division said that the intent of the regulations, “consistent with common sense and good government,” is to gather and use correct data and the regulations provide no authority for DOE relying solely on unaudited information from municipalities. Where a service provider that has adhered to the regulations and provided a CFR and financial statement, both audited, it should be afforded a reasonable opportunity to explain and/or reconcile its information with the unaudited information of a municipality.  DOE, said the court, cannot simply reject audited information by reason of the existence of less reliable information without some articulable rational basis.

Noting that Mid Island “provided independently audited data in compliance with the regulations, the court said that:

1. Information supplied by the municipalities, and particularly NYCDOE, varied from Mid Island’s data;

2. NYCDOE had a history of supplying information that was not correct citing Matter of Mid. Is. Therapy Assoc., LLC v New York State Dept. of Educ., 99 AD3d at 1083 in which it was reporting that the State Comptroller upheld Mid Island's tuition rates for 2007-2008 based on 87,907 service units where NYCDOE had reported 100,669 service units; and

3. DOE made “little effort” to verify the municipalities' information but nonetheless accepted the municipalities' information and disregarded Mid Island’s data.

This, said the Appellate Division, was not an agency simply weighing and choosing between relatively equivalent but conflicting data, “particularly in light of the regulatory primacy for independently audited information,” with which Mid Island had complied, and the lack of regulatory authority for wholesale reliance on other information.

Under all the circumstances the Appellate Division concluded that DOE acted arbitrarily and inconsistent with its own regulations and, accordingly, its determination regarding the 2008-2009 and 2009-2010 reconciliation rates must be annulled.

Further, said the court, the 2010-2011 prospective rate must be annulled as it was based on the 2009-2010 reconciliation rate annulled herein

The decision is posted on the Internet at:

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