Educational Services Commission of New Jersey surplus ballooned almost $70 million without a plan to use or return funds, state comptroller says

An audit showed that the Commission also improperly awarded $14 million in contracts without competition

A Middlesex County-based cooperative that coordinates purchasing for school districts and municipalities across the state has amassed a surplus of $69.6 million with no official plan for how to use the money or return excess taxpayer funds to the school districts and municipalities it serves, according to an audit by the New Jersey Office of the State Comptroller.

The Educational Services Commission of New Jersey, a cooperative that serves more than 700 school districts and local governments, has an official mission to save tax dollars by providing educational and business services cost-efficiently. However, an audit by the Office of the State Comptroller found that the Commission regularly collected revenues that substantially exceeded actual costs. The Commission accumulated a surplus that more than doubled between 2020 and 2023, increasing from $32.8 million to $69.6 million.

By comparison, the other educational services commissions in the state maintain relatively stable surpluses, also known as fund balances, with most falling far below $30 million, according to the Office of the State Comptroller.

The Educational Services Commission of New Jersey also failed to follow procurement rules. Public entities must submit procurements of $2.5 million or more to the Office of the State Comptroller for review to ensure compliance with procurement laws and guard against cronyism, corruption, and waste. The Educational Services Commission of New Jersey never submitted contracts, despite receiving multiple notices from the Office of the State Comptroller directing it to do so.

“The routine lack of compliance with procurement laws and sound financial controls is a red flag because it raises the risk of waste,” said Acting State Comptroller Kevin Walsh. “When an entity has tens of millions of dollars sitting around, along with these red flags, the potential for waste grows exponentially.”

Founded in 1977, the Educational Services Commission of New Jersey says it is now the largest of the state’s 10 educational service commissions. The organization operates six special education schools, provides bus service for 14,000 students, and manages a cooperative purchasing program that procures everything from computers to commodities like electricity for its members. The Commission’s revenue for the 2023 fiscal year was more than $147 million.

By law, school districts are subject to limits on the surplus they can maintain from one year to the next. Educational service commissions in the state do not have the same constraints.

According to the Office of the State Comptroller’s report, representatives for the Educational Services Commission of New Jersey said the organization deliberately grew its surplus to have adequate funds for operations and future capital projects. However, the Office of the State Comptroller found that the organization had no approved plans for capital projects. There was also no policy in place to determine how much money the organization should maintain in the surplus or when to return funds or reduce fees if revenues far exceed spending. As a result, the Educational Services Commission of New Jersey’s surplus grew to more than $69 million in the 2023 fiscal year, which most likely resulted in higher costs for local governments, school districts, and taxpayers.

The Office of the State Comptroller also found that the Commission hired seven professional services firms and consultants that were paid $14.6 million without using a competitive procurement process or obtaining the documentation required by the state’s Public School Contracts Law. This reduced the likelihood that the organization secured the best deal for taxpayers. One of those seven vendors—a lobbying firm—was paid $42,000 in fiscal year 2022. The Educational Services Commission of New Jersey couldn’t produce a contract or prove why hiring the lobbying firm was necessary. The firm’s invoices also did not contain itemized descriptions of services rendered.

In New Jersey, public entities, including educational service commissions, must submit procurements exceeding $2.5 million to the Office of the State Comptroller for review. If contracts are valued at $12.5 million or more, agencies must seek the comptroller’s review and approval before even seeking proposals. The Office of the State Comptroller found that the Educational Services Commission of New Jersey had never submitted a contract for review until 2024 when the organization received a draft of the audit report. According to the comptroller, in the 2021 and 2022 fiscal years, the organization failed to submit about 43 contracts valued at more than $900 million.

The Commission’s procurement of health insurance coverage and health insurance brokerage services also did not comply with state requirements. The organization failed to consider alternative health insurance providers. An analysis by the Office of the State Comptroller found that the Commission could have potentially saved a total of about $1 million over three years by using the School Employees Health Benefits Program. The Commission also paid $343,000 more in medical claims than was actually billed in the 2023 fiscal year.

The Office of the State Comptroller provided a draft copy to the Educational Services Commission of New Jersey for review and comment.

“The Commission generally agreed with our audit findings and conclusions, and its response indicated that it will implement corrective actions to address our recommendations,” reads the report.

The report notes that the Commission disagreed with differences identified in the report between health benefit charges and payments made by its claims administrator. The State Comptroller’s Office countered that the figures used in the report were backed by supporting documentation that was provided during the audit.

The Commission has agreed to review its claims administrator contract to determine if limiting payments for health benefit claims to the lower of the billed charges or a contracted rate would be feasible and would lower the overall expenses of the Commission.

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