What’s Happening in the World of SED?

What’s Happening in the World of SED?

We produce the Special Ed-ition to keep everyone abreast of the issues that impact New York State schools working with some of the most vulnerable populations. As experts in the field, we consider it our job to monitor the SED sector and disseminate information to you, the providers, so that you are better informed. So how come when I look at what’s going on in the sector, it seems that all I have is questions without answers?

So, where are we?

The OSC Audits:

The OSC has stated that it will continue to perform audits of SED providers, principally 4410 schools, until its auditors have completed their audits of all agencies. The OSC is less than 50% done with its audits. If you are following the OSC audits, you will see that some of the issues that have been identified during the more recent audits have been:

Staffing patterns – the OSC disallowed certain teacher assistants in excess of ratio. Providers have a need for floaters, especially in an environment with high levels of staff shortages. Furthermore, staffing patterns are something that SED reviews during its desk audit process, so this should have been properly addressed at that time. Providers need to ensure that they are documenting their staffing patterns, how they are utilizing staff in excess of ratio, and retain and archive all communication with RSU surrounding these issues.

Non-audit services provided by the providers audit firm – There have been several recent disallowances of non-attest services, including the disallowance of the form 990 preparation. The audit engagement letter should clearly include the 990 as part of the services rendered and should contain a single price for the bundled service. In addition, there should be clear documentation of the non-attest services performed (financial statement, CFR, and 990 preparation), the individual within the provider organization taking responsibility for these services, and a formal assessment of independence to ensure that performing these services does not impact the auditor’s independence. Even with these, it is unsure how the OSC and ultimately SED, will consider these and other non-attest services performed by your auditors.

Related party transactions – Both not limiting the expense for services paid for by a related party to the actual cost incurred by a related party and charging certain duplicative services performed by both a management company and the provider, were flagged and disallowed. It is clear that related party transactions will continue to garner a significant level of the OSC auditor’s attention. Make sure that all related party transactions are properly identified, reviewed in detail, and properly treated in accordance with the RCM.

Square footage – The OSC challenged how the use of the building, and thus the related occupancy costs were being charged on the CFR. It is important for providers to review their square footage statistics on an annual basis to ensure that the use of space is updated accordingly within the financial records, and ultimately the CFR.

Pension costs – The OSC disallowed pension costs to administrative staff that were in excess of the benefits charged to direct staff. Normally the disallowances occurs if management receives excess compensation, in this case it wasn’t just management staff.

Expensed equipment – The OSC stated certain equipment acquisitions should have been capitalized because the purchases made during the year were in excess of $5,000 for similar items, even though the items were purchased at different times of the year and at different sites. Remember, the RCM has a capitalization threshold of $5,000 and clearly states that homogeneous purchases should be considered in determining if assets should be capitalized.

SED Corrective Action Plans and Audit Rates:

If you have undergone an OSC audit and received your final report, don’t forget, you need to submit a corrective action plan to SED. SED will be utilizing this plan to see that you have implemented appropriate change and to determine the extent, if any, of the OSC findings on your school’s future rates. Also, if you remember, SED notified the field that if there are disagreements with the OSC findings, providers can discuss them with SED for possible change. In dealing with RSU on trying to have findings “thrown-out,” RSU has been clear that if the findings are a result of audit procedures (e.g. lack of documentation, allocation methodologies, etc.) they will not overturn the OSC’s findings. However, if the disallowance is due to an interpretation of the RCM, then they will be willing to listen. It is unsure how much impact these discussions with the SED will have. Finally, there have been very few of the OSC audit disallowances that have manifested themselves in audit rates published by the SED. We are unsure how the SED will handle these disallowances or when final audit rates will be issued by SED. Stay tuned.

Another One Bites the Dust:

Over the last 3.5 years, 61 pre-school 4410 providers have closed. That is approximately 20% of agencies statewide. In addition, several other providers have given their 90-day notice, so the number of closings is expected to increase. While many of the students have been accommodated in other programs, in May, NY City BOE released a letter outlining that there were 720 preschool seats needed across the 5 boroughs. With on-going staff shortages, delays in processing waiver requests, and the continuation of the OSC audits, the number of provider closures is anticipated to continue to rise.

SEIT Rates:

Don’t forget, effective July 1, 2018, the regional average rates for SEIT will be fully implemented. This will put all providers within a particular region on a level playing field in terms of rates received. Unfortunately, as this was a four-year phase in process, providers have not seen an increase in their SEIT rates (actually many providers have experienced a decrease) in a while. There is no indication as to what SED’s next steps will be with respect to SEIT –

  • They can move SEIT to a true fee-for-service rate, as it currently is a fee-for-service rate, however any unspent costs must be spent in future years on SEIT related services;
  • They can readjust the rates, up or down, depending on the last few years of filed CFRs; or
  • They can do absolutely nothing.

Whatever path the SED chooses, they need to be cognizant that it is getting tougher and tougher for SEIT providers to compete due to shrinking mandates, staff shortages, and diminishing rates available to pay staff. This is evidenced by several large SEIT providers discontinuing their SEIT programs over the last 2 years.

Minimum Wage:

SED recently released its minimum wage surveys that are due by July 13, 2018. While this could finally provide some relief to programs grappling with rising costs associated with the minimum wage mandates, it appears any minimum wage relief will only come in tuition-based programs (which means that providers will not receive increases in their 1:1 aide programs) and only for those programs that have overspent in those tuition-based programs, as the reimbursement methodology is still cost based, so SED will not just be handing extra money to programs that had sufficient resources to meet the added cost of the minimum wage increases. For more on the minimum wage survey, please click here.

Reimbursable Cost Manual:

On May 30, 2018, the SED sent around a memo to the field regarding updates to the reimbursable cost manual for 2018/19. Per the memo, the 2018/19 RCM will only include changes which clarify existing language for the field. These clarifying amendments would be consistent with technical assistance SED currently provides to stakeholders and to state and local auditors, and therefore, according to SED, should not impact the rules for reimbursement.

Rate Methodology:

During June 2018, SED’s Rate Setting Unit issued their methodology letters for the 2018/19 year. The methodology letters included, among other things:

  • A 3.4% increase for school age and a 2% increase for pre-school tuition-based programs and evaluations.
  • An $8 million increase in teacher retention funding to be shared by 4410, 853, and special act schools based upon a weighted FTE determined based upon each program’s salaries. This should push additional dollars to pre-school programs.
  • Limitation of offsetting revenue to SCIS programs to the actual revenue collected by these programs.
  • The addition of a “higher of” provision, similar to what exists for school age, for preschool providers. Under the higher of provision, a provider’s reconciliation rate will be the greater of the prior year’s reconciled rate adjusted for that year’s rate methodology or the provider’s prospective rate. In calculating the prospective rate, it would be the greater of the two-year prior reconciled rate trended for the rate methodology to the current year or the prior year prospective rate trended for the rate methodology to the current year. For example, for the 2018/19 year, the final rate will be the greater of your 2017/18 reconciled rate trended forward (multiplied by 1.02) or your 2018/19 prospective rate. In calculating your 2019 prospective rate, SED will utilize your 2017 reconciled rate trended forward (which is the way they have historically developed prospective rates) or your 2018 prospective rate trended forward to 2019 (2018 prospective multiplied by 1.02 to account for the 2% trend factor).

We will continue to monitor changes impacting SED funded providers and push this information out to our clients and friends.

This article was also featured in our newsletter Special Edition Vol. 19

Kenneth R. Cerini, CPA, CFP, FABFA

Kenneth R. Cerini, CPA, CFP, FABFA

Managing Partner

Ken is the Managing Partner of Cerini & Associates, LLP and is the executive responsible for the administration of our not-for-profit and educational provider practice groups. In addition to his extensive audit experience, Ken has been directly involved in providing consulting services for nonprofits and educational facilities of all sizes throughout New York State in such areas as cost reporting, financial analysis, Medicaid compliance, government audit representation, rate maximization, board training, budgeting and forecasting, and more.


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