As the final contours of the fiscal year 2014-15 New York State budget are shaped over the coming days the legislature should retain three little mentioned but important proposals by Governor Andrew Cuomo. Although compromises from positions supported by the Citizens Budget Commission, the Governor’s proposals are meaningful reforms; they should not be omitted or watered down as they were in the Senate and Assembly “one-house” budget resolutions. 

1) Eliminating Supplemental Medicare Part B Premium Reimbursement for Higher Income Retirees

Eligibility for Medicare starts at age 65. Medicare Part A covers hospital inpatient services; Part B covers doctor visits and other medical services. Part A is available without charge, but Part B requires payment of a premium adjusted according to income.  For 2014 the minimum premium for Part B is $104.90 per month, or about $1,259 annually,¹ for Individuals with annual incomes under $85,000 and couples with incomes under $170,000. Those with higher incomes pay premiums ranging from $146.90 per month to $272.70 per month.²

Some public employers, including the City of New York, reimburse retirees for the cost of the Part B premium, but the practice is limited. The federal government offers no reimbursement. A CBC survey of large city employers found that Chicago, Houston, Phoenix, and San Francisco offer no reimbursement. Boston and Los Angeles offer only partial reimbursement; 50 percent in Boston and only the basic premium (and not for spouses) in Los Angeles.³

Until 2010 retirees of the State of New York were fully reimbursed, but that policy was modified. The State now provides partial reimbursement based on the share of non-Medicare premiums workers are required to pay— from 84 to 90 percent for single policies and from 65 to 69 percent for family policies, depending on date of hire and salary.⁴

Governor Cuomo’s Executive Budget proposes the elimination of reimbursement for the portion of the Part B premium above the minimum level that is tied to income above $85,000 for singles and $170,000 for couples. A share of the minimum premium of $104.90 would continue to be reimbursed for everyone. This is a compromise from the CBC’s recommendation that Part B premium reimbursement be fully eliminated, but is still a significant positive step.⁵ The Division of Budget estimates that the change would affect fewer than 5 percent of the 145,000 State retirees and dependents with Medicare coverage,⁶ and would result in savings of $1.7 million in fiscal year 2014-15 growing to $7.0 million in fiscal year 2017-18.⁷ 

Reducing Medicare premium reimbursement has fiscal benefits beyond the immediate budget savings. The Governmental Accounting Standards Board Statement 45 requires governments to report the full cost of Other Post-Employment Benefits (OPEB), including health insurance, using actuarial guidelines that indicate the current value of the promised, but unpaid, obligations. New York State reported OPEB liabilities of $41.4 billion in 2008 (the first year they were reported), and the liability grew to $59.7 billion in 2010.⁸ After new premium-sharing arrangements took effect, however, the outstanding liability was reduced by more than $4 billion to $54.3 billion in 2012.⁹

In order to continue to address outstanding OPEB liabilities and rising costs the budget should include the Governor’s proposal. The Senate resolution omitted it, and the Assembly resolution reduced its benefits by increasing the income thresholds to $107,000 for single filers and $214,000 for joint filers.

2. Rate Setting Reforms for Preschool Special Education

New York State relies on an extensive network of private organizations to provide preschool special education services for children ages 3 to 5; in 2012, the State Education Department (SED) authorized nearly 700 agencies to provide services. The agencies are paid by counties according to rates set by SED, and the State reimburses the counties for 59.5 percent of the costs. The services include center-based programs or services at daycare or other early childhood programs, transportation to programs up to 50 miles from home, and special education itinerant teacher (SEIT) services and related speech or occupational therapy provided at a child’s home.  

Preschool special education costs have grown rapidly driven by the number of children served and the increasing intensity of services. From school year 2001-02 to 2011-12 public school enrollment declined 3.5 percent, but the number of children receiving preschool special education services increased 27 percent to 83,038. Service intensity for these children, as measured by the number receiving more than one type of service increased 91 percent to 19,836.  Total costs from 2001-02 to 2011-12 increased from $732 million to $1.4 billion, or 5.1 percent on average annually.¹⁰ Among the fastest growing costs are those for SEIT, which rose statewide from $56 million to $244.1 million from 2000-01 to 2011-12, or 293 percent. In New York City, the increase was 435 percent over the same time period.¹¹ 

Three problems have plagued the program in recent years—fraud among providers, limited incentives for efficient service levels, and irrational rate setting for providers. Audits by SED and the Office of the State Comptroller have revealed serious—and sometimes criminal—wrongdoings including billing the State for extravagant personal expenses, submitting fraudulent payrolls, and evading taxes.¹² The limited incentives for efficiency arise because school districts bear no financial obligation for the services they mandate. School districts’ Committees on Preschool Special Education develop service plans using materials prepared by an evaluator selected by the child’s parents, but the counties and the State pay for the services.

Rate setting is problematic, because historical costs feature prominently in the rates. As a result, similar services within regions vary widely. For example, in 2012 the rate for an hour of SEIT in Western New York ranged from $12 to $38 per hour; on Long Island SEIT rates ranged $23 to $58 per hour, and in New York City the range was $25 to $63 per hour for SEIT.¹³

The Governor’s proposals are a compromise from a comprehensive set of reforms advocated by the CBC.¹⁴ His measures would establish regional SEIT rates to minimize irrational variances for providers that have similar underlying costs. New York City would be authorized to select and negotiate rates with its SEIT providers, a change likely to drive down costs. In addition, reimbursement for SEIT services would be limited to the number of hours actually provided and not permitted for sessions that are missed.

The Senate resolution rejected these initiatives; the Assembly resolution watered them down by eliminating the new authority for New York City to select providers and set rates. The full proposal made by the Governor should be in the adopted budget.

3. Extension of Design-Build Procurement for Capital Projects

 n 2011 State legislation authorized for three years the use of “Design-build” procurement methods by the Department of Transportation (DOT), Thruway Authority, and several other state agencies. This method awards single contracts that encompass the design and build phases of a construction project; the standard ‘design-bid-build’ requires design under one contract and construction under another. Under the design-build process, architects, engineers, and contractors can collaborate to deliver projects that are less expensive, more rapidly completed, and better designed than those for which design and construction are separate, sequential steps. Design-build is used broadly internationally and in 41 states and the District of Columbia in the U.S. Of the nine remaining states, five including New York, allow design-build under limited circumstance and four do not.¹⁵

In New York the approach has proved its merits. Design-build has been used for $171.2 million worth of completed contracts with another $750 to $850 million in process. Successful projects include the completion of 32 bridges bundled into design-build projects based on geographical proximity, the acceleration by 42 months of the planned completion of repair on the Kosciuszko Bridge, and the combined design and construction contract for the new Tappan Zee Bridge. DOT estimates that costs on projects awarded pursuant to design-build have been reduced 27 percent.¹⁶ DOT plans more than $12 billion in highway and bridge construction projects over the next five years, and the savings from the extension of design-build procurement are likely to be substantial.

The 2011 legislation and the Governor’s current proposal are a compromise from a more comprehensive set of “public-private partnership” (P3) strategies supported by the CBC.¹⁷ These include “design-build-maintain” and “design-build-maintain and operate” contracts for capital facilities. When used appropriately, these strategies can significantly reduce asset life-cycle costs.

The Governor previously proposed making the temporary design-build authority permanent and expanding it to local governments. However, he has modified his proposal to a three-year extension that does not include localities. The Senate resolution rejected the proposed extension; the Assembly resolution added an annual reporting requirement and a requirement for written justification for certain projects over $10 million. With pressing infrastructure needs and a statutory debt limit set at 4 percent of personal income, New York should continue, and preferably expand, its ability to capture the benefits of P3 approaches.