July 18, 1997

THE CITY OF NEW YORK
INDEPENDENT BUDGET OFFICE
110 WILLIAM STREET, 14TH FLOOR
NEW YORK, NY 10038

Unsettled New York City
Prior-Year Education Aid Claims

The issue of State reimbursement of prior-year education expenditures
continues to remain unresolved as State budget negotiations proceed.
At stake for the City are $659 million in general support claims. The
State's 1997 surplus provides a unique opportunity to resolve these
claims. Below, IBO updates the discussion of this issue contained in our
March newsletter and our May review of the Mayor's Executive Budget.

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Background. New York State is a major contributor to public education funding throughout the State. In State Fiscal Year 1996, it distributed $9.8 billion in education aid to localities, representing over 40 percent of education spending statewide. A significant portion of State education aid is paid to localities only after they render the services and submit claims based on formulas for expense reimbursement.

Until a few years ago, school districts including New York City were not submitting all claims in a timely manner. Furthermore, the claims review and approval process, which involves both the State Education Department (SED) and the Office of the State Comptroller (OSC), often took several years to complete. As a result, there was a significant backlog of aid that localities had not yet claimed or that the State had not yet processed and paid.

In response to this situation, the State Legislature established a schedule of deadlines in the 1994-95 State budget for school districts to submit their prior-year claims. In addition, SED made efforts to facilitate the claim submission process, including the initiation of some electronic filing. However, the claims review process did not change significantly and the Legislature made no provision to actually reimburse school districts in a more timely manner. Thus, while New York City and other school districts have filed their claims more expeditiously in response to the new statutory deadlines, the State has not provided the cash to pay for the increased claims. The result has been to increase the amount of claims submitted without a corresponding increase in the outflow of reimbursement funds, exacerbating the backlog of claimed (but unpaid) prior-year expenses.

The prior-year claims consist of general support for public schools along with claims for summer school services for the handicapped and Family Court pre-kindergarten services.¹ Payment of claims for summer school and pre-K services has not been significantly backlogged in recent years. In contrast, payment of prior-year general support claims is constrained by current law that sets annual statewide funding at $21.8 million and further caps the portion of this amount that can go to any one school district at 40 percent (or $8.7 million). In practical terms, the $8.7 million limit is significant only to New York City since the amount owed to the City is so much greater than any other district in the State.

Current Claim Balance for New York City. SED and the New York City Board of Education (BOE) agree on the existence of $615 million worth of outstanding prior-year claims for the City as of the end of May. BOE indicates there is an additional $44 million of submitted claims that SED is reviewing, some of which were rejected by OSC. It is unclear how they will be resolved, but BOE expects that SED will eventually approve all these claims. The following figure presents the total of the $659 million of claims by fiscal year in which BOE provided the service:

Of the total claims, SED has audited and approved $100 million, has yet to audit $515 million, and is reviewing $44 million as discussed above. It is possible that the reviews by SED and OSC will result in the rejection of some of the pending $559 million in claims. On the other hand, it is likely that SED will receive additional prior-year claims in the coming months. In particular, two types of prior-year claims have grown in recent months and BOE expects further claims to be submitted in the near future: (1) BOE has submitted claims for School Construction Authority (SCA) building aid following the passage of legislation simplifying the claiming and review process; and (2) SED has calculated adjustments to claims for past operating aid based on changes to the City's past wealth index, a measure used to determine aid.

Implications of Present Practice. As the majority of claims remain unresolved, inflation and interest costs diminish the real value of payments. Illustrating this fact, if the annual reimbursement cap is maintained in current law, the City would receive payment of its current claims over 76 years, reducing the value of $659 million to $132 million in current dollars, or 20 percent of their booked value.²

Because of the lack of sufficient State funds to pay for prior-year education claims, many localities, including the City, have carried (or booked) prior-year claims as receivables on their balance sheets. According to BOE, $347 million of the $659 million in general education claims are receivables in the City's financial statement. The remaining $312 million have not been booked as receivables.³

In response to the unpaid backlog, the City Comptroller has instituted a policy of no longer accepting education claims as receivables unless a large portion of current receivables are settled. As a result, resources used for prior-year claims have been and will continue to be unavailable to the City pending reimbursement from the State. An explicit State commitment to make these reimbursements would allow the City to continue its practice of treating these expenses as receivables on the City's balance sheets. Thus far, the City's audited financial statements do not reflect changes to the City's financial condition as a result of this issue.

Finally, much of the $312 million of general education claims not yet booked as receivables would represent a source for additional City spending on education. While $76 million of this amount is already incorporated into the City's 1998 financial plan for BOE (and thus would become a liability if the receivables are not settled), the remaining funds would be available for educational needs, subject to the review of the City. Since these funds would be a one-time resource, the most appropriate use of them would be for non-recurring needs, such as pay-as-you-go school capital maintenance.

Resources to Settle Claims. Because these education claims are for prior-year operating expenses, they are most appropriately funded through the State's operating budget. In addition, the accumulation of claims has occurred over a number of years and has been exacerbated by the more timely submission of claims in recent years. Therefore, it would be appropriate to fund a payout with non-recurring resources, perhaps in a schedule of payments over a number of years. The State's 1997 surplus of $2.6 billion, twice as large as it has ever been, provides a unique opportunity to develop such a solution.

Finally, to avoid recurring backlogs, the State should consider streamlining the review and approval process as well as eliminating the cap and appropriating sufficient funds in the annual budget adoption process.

FOOTNOTES

1. General support for public schools is formula aid for general and special education services and support services such as transportation and building aid.

2. Assumes a discount rate of 7 percent, the City’s Executive Budget forecast for long term fixed rate debt.

3. The balance sheet, as maintained by the New York City Comptroller, includes a total of $698 million in prior-year receivables. This includes the $347 million of general support for public schools claims as well as $343 million in receivables for Family Court pre-K, summer school handicapped, and categorical services.