Special Education Providers Managing Tuition Rates

Recently, the New York State Education Department (NYSED), in coordination with State Executive and Legislative Leadership, has taken steps to stabilize funding for providers operating school‐age programs under Article 81 and/or Article 89 of the Education Law, including providers that operate school-age programs under Chapter 853 of the laws of New York State of 1976 and preschools that operate under Section 4410 of New York State Education Law. Such steps include substantial Cost of Living Adjustments for both the 2022-23 and 2023-24 school years of 11% and 6.25%, respectively; changing the reconciliation process to enable providers to retain excess funding in certain years; changing the interim funding rates methodology to include current year trends that are approved in the current year methodology rate; increasing the New York State minimum wage regulatory adjustment; implementing hold harmless adjustments for decreases in enrollment caused by the COVID 10 pandemic; and increasing the non-direct cost screen to 35% of total program costs from 30%.

Although all of these are positive steps to assist in financially stabilizing Special Education providers through economic impact of the COVID19 pandemic, there are still a number of issues that providers need to successfully manage to ensure the long-term financial viability of their education programs. The following is a summary of issues that we have identified that providers must address.

Interim Rate Plus Methodology

For the 2023‐24 school year, interim rates were issued for programs on June 29, 2023. These rates are in effect until the prospective 2023‐24 rates are approved, which cannot occur until a program’s 2021-22 tuition rates are reconciled. The interim rates include the approved 2023‐24 trend factor. However, for many providers, the interim rate did not include trend factors for 2021-22 and 2022-23, as these years did not have either a reconciled rate or prospective rate that could be used as the base for the interim rate calculation.

Prospective Rate

As noted in the current rate methodology letter issued by NYSED, prospective rates include significant trend factors along with additional minimum wage and excessive teacher turnover funding. When a provider’s rate reconciliation process is delayed from being finalized by one of several key factors (i.e., cost screen waivers, cost reporting issues, staffing), the more current years’ prospective rates are delayed or never issued, thus requiring the provider to rely on the interim rate to fund its operations. However, the interim rates include only the current year trend factor and not prior years’ factors if a prospective rate had not been issued (some providers are missing several years of trends, dependent on their rate reconciliation process). Providers without a 2022-23 (or earlier years) prospective rate will have to fund cash deficits in their programs, which could be in excess of 15%.

Reconciliation Process

NYSED is required to reconcile a provider’s tuition rate under existing rate methodology regulations established by the Commissioner’s regulations and NYS Education laws, as communicated to providers for the year in the Rate Methodology letter. To complete the reconciliation of the tuition rate (aka Reconciled Rate), NYSED applies the Greater of Methodology, which is described as follows:

1. The 2022‐23 reconciliation per diem rate plus 6.25 percent or

2. The 2023‐24 prospective per diem rate

In the reconciliation process, several other factors are also considered, including the non-direct costs parameter limit and the hold harmless adjustment to providers related to decreases in enrollment compared to the three-year average enrollment to capacity for 2016-17 to 2018-19. These recent changes in the Reconciliation Methodology, along with a higher non‐direct care cost parameter limit and the ability of providers to retain surpluses up to 11% of the tuition rate, with conditions for surpluses of greater 1%, will assist in improved rated and cash flows. However, providers should still consider the following six Key Factors to effectively manage their NYSED programs:

1. Student Enrollment – Managing capacity and the number of current referrals and expected referrals to the program for at least the upcoming 24 months is critical. This should include a current regional needs assessment and a thorough understanding of the program’s quality of service reputation with the Committee of Special Education Chairpersons.
2. Staffing – Recruiting and retention of Direct Care staff is critical. Providers have been incurring large staffing vacancies, which can cause a reduction of student in enrollment and potentially impact on non-direct costs and total cost parameters. Understanding the current labor market for the education industry, along with your program’s current compensation structure to that market, is an essential part of developing sustainable staffing levels for the program.
3. Other Than Personal Services and Facilities Costs – The development of a spending plan for the current year and upcoming year is critical for both OTPS and Facilities costs. Management should consider condition of equipment and facilities as part of this assessment. The general rule is to complete an assessment of equipment and facilities to develop a five-year maintenance and replacement plan, with a cost estimate, by year and expenditure type. Lastly, if additional or replacement space is needed, the program must work with the NYSED Rate Setting Unit and Education Department staff to determine if a Capital Project will be required for proper reimbursement in the program’s tuition rate (before any agreements or commitments are made).
4. Rate Management System – The program should consider developing a Management system that mimics the rate methodology used by NYSED to allow Management to predict the program’s reconciled rate throughout the current and at least the next school year.
5. Cash Flow Projections of the Program – For many providers, cash flow is challenging, and understanding your cash expenditure needs in comparison with cash received becomes challenging when NYSED is reimbursing you for services using an Interim Rate basis, which could be 15% less than your expected final rate. Developing a cash flow projection model is critical to ensure that the provider has adequate resources to meet the short-term deficit between expenditures and cash received using the interim rate.
6. Rate Reconciliation Process Management – If the program’s most recent reconciled rate is from before 2019-20, it is significantly behind in Trend Factors approved by NYSED and the Division of Budget. Management must be diligent working with the Rate Setting Unit to complete the rate reconciliation process, with a goal of getting reconciled rates caught up to the 2021-22 year by December 31, 2023. This would allow for prospective rates with trends, minimum wage adjustments, and excess teacher turnover funding.

If you need further guidance or have any questions on this topic, we are here to help. Please do not hesitate to reach out to discuss your specific situation.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.