Arcane Accounting Rule Is Draining Millions From New York Classrooms

In mid-February, 390 school districts around the state received an unwelcome letter from the state Education Department: They were about to lose $25 million combined from their next state aid payments.

Those districts had been overpaid between the 2011-12 and 2017-18 school years, and the state was taking its money back. The payments were for services for special education students.

Another 255 districts learned that they had been underpaid by the state during that same time period — about $11 million total, according to an analysis by the Association of School Business Officials. In fact, New York state owes more than $300 million to schools statewide in outstanding claims.

But those districts won’t receive the money any time soon. That’s because of an accounting practice called “prior year adjustments.”

The state Education Department pays school districts throughout the year via direct aid and reimbursements. School budgets are partly based on estimates of what districts think they will spend. If the education department later identifies discrepancies between those estimates and actual expenses, it will settle up the differences by adding to or deducting from upcoming aid payments.

However, changes that happen more than a year after a school year ends are made through prior year adjustments.

Following its budgetary reconciliations, if the agency mistakenly overpaid a district, it can take back the money by deducting from the district’s next aid payment. In February, districts had only about six weeks’ notice.

However, if the department underpays a district, the district gets added to a “queue,” and the claims are paid out on a first come, first serve basis.

There are nearly 4,000 outstanding claims currently in the queue that stretch back to February 2012, according to state data.

Before 2021, the state legislature would appropriate about $18 million a year to chip away at the queue. That money got divvied up among those districts with the oldest claims, with no district receiving more than 40 percent of the total pot in one year.

The state removed the appropriation amid the Covid-19 economic downturn and never added it back into the budget. Meanwhile, the queue continued to swell.

This year, the legislature included an $18.6 million appropriation in their budget proposals, but the line item didn’t make it into the final budget that passed last week.

Even if they had added it in, at that rate it would take 19 years to finish paying off the current claims, according to calculations made by the Association of School Business Officials.

“These claims are born and graduate high school before they get paid,” said Brian Cechnicki, the organization’s executive director.

The Impact on School Districts

The missing funds are a small fraction of the state’s $36 billion education budget — certainly not a panacea to districts facing the rising costs of providing a sound, basic education. But the money would provide some relief to districts that face unpredictable funding allocations and may be navigating budgetary shortfalls.

Assemblymember Gary Pretlow, who had pushed for the state to start paying off the claims again this year, said the situation is unfair to school districts.

“I have a particular problem with half of my assembly district,” Pretlow, who represents parts of Westchester County, told New York Focus. “The city of Mount Vernon is owed $4 million right now, and they’re in dire need of cash to the point where they have to borrow money from themselves to make ends meet for the next school year.”

By the time the districts do get the money, its value has declined due to inflation.

Filing a claim to get onto the queue may seem like an exercise in futility. Given how long the payouts take, school district administrators said that they approach their budgets as though the money doesn’t even exist.

Smithtown, a district of 7,450 students on Long Island, is owed more than $6 million. Most of that was promised to the district in 2014.

“It’s hard for us,” said Andrew Tobin, Smithtown’s assistant superintendent for finance and operations. “My assumption as a business official here is we can’t count on that money because there’s no guarantee we’ll get it. And if we do get it, how long are we looking at?”

New York City is owed the most of any district: more than $135 million. The largest individual claim from the city is nearly $44 million — from March 2014. That claim would be worth about $59 million today with inflation.

The New York City Department of Education said in a statement, “We will continue to bill the state as appropriate, and advocate for sufficient appropriations to ensure all payments may be issued timely.”

In a February joint legislative budget hearing, State Education Commissioner Betty Rosa acknowledged that the payouts are “way overdue,” but pointed to the legislature’s failure to appropriate the money during the last several budget cycles.

The state Education Department did not respond to a further request for comment.

The New York State Educational Conference Board, led by the Association of School Business Officials, had asked the state to consider paying out all future claims as part of districts’ regular aid payments and to commit to paying off the current queue in the next few years.

“If this were enacted now, five years from now this problem would go away entirely,” Cechnicki said.