One thing that's sad about this is that the program comes with so much red tape that the owners of the most of the good, legitimate for-profit daycare centers in Hoboken and in downtown Jersey City all stayed away from the program.

I know that St. Bridget's, for example, has a good reputation, but it would be good if there were a lot more St. Bridget's out there.

Wow, that makes me pretty fricking angry. Hope the new governor's staff slams these cheats hard. Who cares whether there were no rules about how the funds can be spent--fraud is fraud.

This is a real shame -- I think the Abbott preschools are a vital thing for the poor children in NJ. Like Head start this is the best way for NJ to spend money -- every dollar spent here saves tons of money that the state will end up having to pay otherwise. I wonder if these news articles are just trying to justify cutting funds to these programs.

I am all for going after the people who run these programs and then turn around and steal from these kids, but these programs are really needed!

It is really wrong to take away from the most needy in NJ and give more breaks to the rich suburbs who already have the best schools and services.

Just my 2 cents.

-------------------------here is part 2----------------

Monday, April 10, 2006

By JEAN RIMBACH and KATHLEEN CARROLL
STAFF WRITERS



Second of four parts

The allegation could not have been more blunt:

"Wendy Williams, director of the Right Direction Day Care, has embezzled funds for personal gain," an audit of the taxpayer-funded preschool began.

State education auditors flagged $182,833 in "questionable" expenses at the privately owned Irvington center, including ATM withdrawals in Las Vegas and payments for cruises, airfare, motels, restaurants and clothing. The state was so alarmed that it referred its findings to New Jersey's chief law enforcement officer.

The state Attorney General's Office closed the Williams case. No action was taken against her.

In all, five of the seven preschool cases forwarded to then-Attorney General Peter Harvey by the state Department of Education were closed under his watch.

The reason given: The state's contracts with the private preschools were so lax and loosely written that they failed to spell out even the simplest rules on what taxpayer dollars could -- and could not -- be used for.
LESSONS IN WASTE

Sunday: A look at waste and mismanagement in the state's multibillion-dollar preschool program.

Monday: Why no one has been prosecuted despite the misuse of public funds.

Tuesday: How underpaid preschool teachers are demanding their rights.

Sunday: What could be next for Abbott preschools.

"You may have misappropriation of government dollars or theft by deception or something of that nature," spokesman John Hagerty said in an interview late last year. "But the way the contracts were, the way the monies were provided to the day cares, it didn't place limitations on the dollars per se. Therefore, we can't charge a crime."

Education officials say they've tightened their contracts and spending guidelines for the so-called Abbott preschool program, begun seven years ago under a court mandate to provide free classes to 3- and 4-year-olds in the state's 31 neediest communities.

But they remain frustrated by the attorney general's lack of movement.

"I've never been given a satisfactory explanation for why what was seen at the start as criminal activity was not prosecuted," said Gordon MacInnes, the assistant state education commissioner who oversees the program.

Now, those cases will be getting a second look. Last week, four days before the start of an investigative series by The Record, Hagerty said the dormant cases could be revived under the new attorney general, Zulima Farber.

"The Division of Criminal Justice is reassessing all of the Abbott preschool cases to determine whether or not any of the cases should be reopened for additional investigation," Hagerty said.

The preschool program will hand out more than $560 million in taxpayer dollars this year to try to help 38,400 disadvantaged children catch up to their more affluent peers. The program relies on private centers to serve two-thirds of the children because the public school districts don't have enough space to accommodate them.

State audits sent to the attorney general uncovered apparent financial abuses -- from rent kickback schemes and gambling to Jaguar car payments and indulgent spending sprees.

Closed cases

# Right Direction Day Care in Irvington

"Suspected Embezzlement of Funds" was the title of the auditors' report on Right Direction Day Care. They determined that personal expenses were classified as "loans" -- including payments to Williams' Right Direction bus company and Right Path charter school. They found $51,000 in cash withdrawals but no record of how the money had been spent. Endorsements on $11,414 in checks made out to employees looked suspiciously like Williams' own handwriting.

Before Right Direction's contract expired last year, public dollars filled the storefront preschool with supplies. Today, two abandoned classrooms are still packed with blocks and toys. Little wooden chairs are pulled up to matching desks. Child-sized easels, picture books and computers are visible from the street. Shelves lined with plastic jugs of paint are gathering dust.

State education officials said they did not know the supplies had never been retrieved.

Irvington school district officials declined to discuss Right Direction, believing the matter remained under investigation. Howard Weinstein, Williams' attorney, said he had heard nothing since his client turned over "a load of documents" two years ago.

"I'm presuming the investigation has not uncovered any unlawful activity," he said.

Hagerty said late last year, during The Record's four-month investigation of the Abbott program, that any possible case against Right Direction was hampered by the Education Department's failure to detail its spending rules. Auditors' findings, he added, are a long way from a criminal prosecution.

"While a report may say one thing, you've got to have the proofs, the evidence, the contracts, the paperwork, the expenditures -- a paper trail," Hagerty explained at the time. "If it doesn't come up to that, it doesn't matter what a recommendation or referral says. We have a far different standard than an audit in order to move a case to a court for trial."

# Kidz Pre-school Academy in Paterson

It was nearly six months before Malikah Abdullah, the owner of Kidz Pre-school Academy and a former nine-year member of the Paterson Board of Education, answered auditors' requests for her financial records.

When documents were made available, auditors found that Abdullah wrote herself more than $46,000 in checks from the company account -- not counting any salary she was collecting. She wrote an additional $7,000 in checks to a property management company in Manhattan, they said.

Meanwhile, Abdullah was sending monthly checks to a local Board of Education member. Jonathan Hodges, a former co-owner who had sold his share of the business to her for $500,000, was paid monthly installments of $2,666. Hodges eventually faced a hearing before the state School Ethics Commission. The matter was dismissed with a reprimand and Hodges is still on the board.

In an interview, Abdullah said she stopped paying Hodges after her Abbott contract ended.

"We're not able to make any type of payments, my funds have dwindled so," she said, also noting a costly legal dispute with her preschool landlord. "I'm just barely surviving, because the contract was taken."

She maintains that the audit report was "unfounded," and that a decision to end her contract in 2002 was politically motivated. She said she never spoke with state investigators.

Local education officials told reporters they had been alarmed when they visited Kidz.

"They would say, 'Look at that corner there -- that's the science corner,' " said Anna DeMolli, director of early childhood education in Paterson. "And all there would be is a sign that said 'Science Corner.' No materials, no desks, no books. You would go by and see three dolls with their hair pulled out. They're filthy dirty, no clothes on them. That's the corner for 'housekeeping.' "

Abdullah tried unsuccessfully to regain a Board of Education seat in 2003. She now runs a day-care center called Wee Kidz, serving children whose tuition is paid by taxpayer-funded voucher programs.

Abdullah asked Paterson for another Abbott preschool contract in the fall. She never received a response, she said.

# Miss Dot's Small World in Paterson

Auditors say they also got the runaround at Miss Dot's, where, they said, public funds intended for New Jersey children appeared to have been used by owner Dorothy Williams to buy land for a camp in Pennsylvania and to promote her city-based transportation service.

Williams, who had moved to Pennsylvania, said she was too busy to meet with auditors. Her records were being reconstructed by her daughter and son-in-law -- in California.

Eventually, her accountant dropped off "all the records he had on hand." Williams and her son delivered more paperwork two days later, including bank statements and canceled checks.

The records that materialized were "unorganized, incomplete, and lacked supporting documentation," the auditors found.

Petty cash and non-payroll checks made out to Williams totaled nearly $30,000. Money was used to pay for "a driver, a tow truck, repairs, and insurance for several vehicles." There were checks to Jaguar and Ford dealerships in two states. Checks written to "Rick" were marked as bus inspection and repair payments. Williams' accountant said she owed about $100,000 in payroll taxes.

And tickets for bus trips to Atlantic City were for sale at the preschool, where auditors believed Williams was also operating Miss Dot's Transportation.

Auditors said there was evidence she had purchased property in Pennsylvania with preschool funds and planned to open a camp. They cited, for example, checks to a lawyer marked "Pa. land."

Public records show that Dorothy Williams filed to open a business named Miss Dot's Small World in Freeland, Pa., in 2002. Efforts to reach Williams were unsuccessful.

# First Steps Day Care in Jersey City

In 2003, auditors found nearly $180,000 in personal spending at First Steps, including $11,381 for gambling in Atlantic City, $6,276 for Princess Cruises and $4,887 for the Diamond Den.

Director Jacqueline DiFranco said in a 2004 interview that she had done nothing wrong -- she just didn't know she was supposed to keep money from her other day-care center separated from state tax dollars. She said all the state money given to her for the preschool program was spent properly.

DiFranco said the Attorney General's Office took documents from the preschool and returned them 18 months later.

"Nothing was found that I did anything inappropriate," she said last week. "I was cleared."

The Jersey City school district renewed DiFranco's contract for two more years, entrusting her with hundreds of thousands more in tax dollars.

But in early 2005, auditors returned to First Steps and found that an additional $2,500 had been spent in Atlantic City, including cash withdrawals at the Caesars casino. The company hadn't completed its tax returns, financial statements or required independent audits since 2002.

They also learned that DiFranco was charging families $2 a day for food, even though the state strictly prohibits such charges and pays the centers to provide meals and snacks.

DiFranco last week denied auditors' findings and said she had never seen their report. Auditors said she told them that she often deposited her personal money into the Abbott account to cover expenses, then reimbursed herself through the ATM and debit card. However, she had bounced 40 checks.

Jersey City school officials, who had defended DiFranco in the past, said they took the unusual step of ending her contract in the middle of the school year.

# My Little Friends in Vineland

Although owners Helen and John DiTomo received state funding for six computers for the children at My Little Friends -- a requirement of the Abbott program -- they provided the school with only two. They leased two other computers and brought them to Florida, where they moved in September 2003.

Meanwhile, teachers told auditors they had to use their own money to buy needed classroom supplies.

Auditors noted that the DiTomos' son had also moved to Florida during the school year, although he was still being paid as a janitor. But his timecards were missing for two months, and the owners were also making regular payments to a cleaning company. The school's director, Stephanie Knight, said she was instructed to punch the son's timecard in his absence, but did not.

An arrangement between the owners and Knight may have violated state and federal tax laws, auditors said. Knight, who rented a house next to the preschool from the DiTomos, was promoted to director after they moved. When she opened her next paycheck, she discovered her salary increased by $440 -- which was much more than negotiated. The DiTomos then told her to pay back the bulk of that money in a $340 monthly rent increase, auditors said.

In an interview, John DiTomo described the rental agreement as "my private issue. They can surmise whatever they want to surmise."

The preschool closed when the DiTomos lost their state contract in 2004.

Open cases

# Hoboken HOPES

HOPES -- the Hoboken Organization Against Poverty and Economic Stress -- charged taxpayers twice for the same preschoolers.

The state attorney general was alerted last year after a random audit.

"This is a serious and possibly criminal violation," the auditors wrote, "since public funds were inappropriately obtained resulting in a duplication of revenue."

When The Record took a close look at HOPES, reporters found an estimated $1.8 million in payments for Abbott preschool and day-care services that may have been duplicated by federal Head Start money.

HOPES identified itself as "fully state funded" on its budgets for 2003-04 and 2004-05 even though it was also receiving federal dollars for some of the same preschool costs for 120 children. As a result, state education officials say, HOPES was overpaid by as much as $800,000.

HOPES contends that the federal Head Start money was not spent on preschool, but on before- and after-school day care, food, and health and social services for the students.

However, the agency accepted nearly $1 million in additional state funding that was also earmarked for some of those costs during those same years: $777,000 from the Human Services Department and $209,000 from the Agriculture Department, The Record found.

Ora Welch, HOPES' president and chief executive, said the agency operated with good intentions.

"By doing good by these children, doing things they wouldn't ordinarily get -- health care and dental -- that is not something these kids take for granted," Welch said.

State education officials have kept HOPES in the Abbott program -- and even expanded the agency's contract this year to 135 children.

In a meeting last week, the Education Department gave HOPES a blank budget form for the 2003-04 school year and asked for a new accounting, to show how all of the Abbott dollars were spent, officials said. The apparent duplication of funds during the 2004-05 school year is still under review.

The Hoboken school district has recovered $205,000 from HOPES and state education officials say the duplicate funding has been eliminated in the current school year. The state's audit also revealed missing computers and employee contributions to health insurance premiums that had already been paid for by the state.

Meanwhile, officials at the Human Services Department and the federal Health and Human Services Department, which oversees the Head Start program, said they were not investigating how money was spent at HOPES.

# New Africa Day Care in Newark

New Africa Day Care was referred to investigators after owners failed to show how $160,677.99 was spent to benefit the children. Financial records included debits for Burlington Coat Factory, Macy's and Oriental Rug Warehouse. The 2003 report noted charges at flower and wig shops, restaurants and hotels -- including the Chicago Hilton.

"That was fraud," said Gail Griffin, head of early childhood education in the Newark school district. "We had records that showed they spent this on personal expenses. That was in the record. We could prove that this was criminal activity."

Attempts to contact Muslimah Suluki, owner of the defunct preschool, were unsuccessful.

Griffin said her staff never recovered any supplies from New Africa -- because "there was nothing for us to collect."

"They had stolen the money," she said.

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

How public money fed private greed

Sunday, April 9, 2006

By JEAN RIMBACH and KATHLEEN CARROLL
STAFF WRITERS

First of four parts

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.
LESSONS IN WASTE

Sunday: A look at waste and mismanagement in the state's multibillion-dollar preschool program.

Monday: Why no one has been prosecuted despite the misuse of public funds.

Tuesday: How underpaid preschool teachers are demanding their rights.

Sunday: What could be next for Abbott preschools.

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

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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