Just as in the regular segment of the system, the Special Education program is marked with funding inequities, on both a child-by-child and district-by-district basis. There is little rational basis for the differences.

In addition, adequacy of funding -- an often-debated concern in the regular education program -- is a key issue in the Special Education program, where the costs of providing mandated services to children quickly outstrip the willingness of state and federal policy makers to allocate funds.

Finally, both systems seek accountability by measuring inputs and auditing procedures rather than by measuring student results. This is especially troubling in the Special Education system where the federal mandate is to meet the individual child's needs -- not to spend a certain amount of money on each student or to give them a certain set of services, but to provide them a meaningful education.

As part of its examination of California's education financing system, the Little Hoover Commission has approached Special Education solely from a funding perspective. The complex and often-emotional issues surrounding Special Education methods and entitlement are not addressed here. Instead, the focus is on how the funding mechanism affects decisions made by districts, parents and others and what steps hold the potential for improving efficiency and equity.

The Commission also is aware of ongoing reform efforts and prior studies documenting problems with Special Education funding. The intent of this finding is to summarize those efforts and broaden the input by including perspectives shared with the Commission during public hearings and advisory committee meetings.

The Mandate

The Special Education program is designed to meet the needs of individuals from birth to age 22 who have learning disabilities, developmental disabilities and other physical and mental impairments. Schools are mandated by federal law -- the Individuals with Disabilities Education Act originally passed in 1975 -- to serve the needs of these students in the least-restrictive environment through methods identified in individualized education plans (IEPs). In this context, "least restrictive" means a setting that is closest to a normal classroom with non-disabled children as allowed by whatever accommodations are needed.

Under federal law, the instruction must be both free and appropriate, delivered in a manner that permits the child to benefit from the services. Special Education covers services that are related to education, including home-to-school transportation, speech pathology, audiology, psychological services, physical and occupational therapy and counseling.

Parents have due-process rights that protect their ability to have a major say in how and what services are provided. They have the option of obtaining an independent evaluation at no cost, and may appeal any decisions they disagree with through administrative and court remedies.

While California law echoes and even slightly expands the obligations of schools under the federal law, there is general agreement that the program's major requirements are in the hands of federal policy makers and are not subject to much modification by the State. The federal law is currently in the reauthorization process in Congress. The state law sunsets on June 30, 1998.

California has about 594,000 Special Education students, a number that has grown by 100,000 in the past five years and that is about 11 percent of the total student population.⁽⁶⁴⁾ This compares to a national figure for 1995 of 5.4 million, which has grown from 4.8 million in five years.⁽⁶⁵⁾ The State's program is huge compared to other states: Only two other states serve more than 300,000 Special Education students (Texas and New York) and only four more states serve more than 200,000. The State's Special Education program is larger than the total K-12 education program in 21 states.⁽⁶⁶⁾

Despite the large number of students, California is at the low end nationally of percentages of students identified by school districts as entitled to Special Education. While many states identify 12 percent or more of their students as Special Education (with Massachusetts leading the nation at 17 percent), California identified 9.5 percent as needing special services in 1990, placing its national ranking at 44.⁽⁶⁷⁾

Special Education covers a wide variety of disabilities, including the physical and mental impairments listed in the table on the previous page. As the table indicates, the largest number of students in California fall into two categories: More than half have learning disabilities, such as dyslexia or attention deficit disorder, and another quarter have speech impairments. The fastest growth has come in the learning disabled category, which now includes Attention Deficit Disorder.⁽⁶⁸⁾ Some have pointed out that the growth in this diagnosis also coincided with the increasing size of California's classes and the State's disastrous conversion to teaching reading with a whole-language approach, leaving many children "disabled" by an inability to read.⁽⁶⁹⁾

Funding for Special Education is a mix of earmarked allocations from the state and federal governments, as well as money from local school districts' general funds. When the federal law was first enacted in 1975, there was a commitment by Congress to supply 40 percent of the necessary funding. But the federal government has never even come close to that figure, in most years supplying less than 10 percent.

This lack of follow-through by the federal governments does not fall under the prohibition that blocks Congress from mandating services without providing funding. Technically, the program is voluntary -- a state can choose to reject federal Special Education funding rather than comply with the mandates. Also, the unfunded mandate prohibition does not cover programs that prohibit discrimination, such as the Americans with Disabilities Act -- which many believe would provide the same level of protection for students today as the 1975 Special Education act mandates.⁽⁷⁰⁾

The failure of the federal government to provide more funding has left states and school districts to make up the shortfall, even as costs have risen and the population needing services has expanded. The current ratio in California is about 70 percent state, 25 percent local and 5 percent federal.⁽⁷¹⁾

National data indicate that about 12 percent of total K-12 budgets are allocated to Special Education, and that the cost per student runs roughly 2.3 times the cost of regular education.⁽⁷²⁾ Those ratios, however, do not hold up in California. This year, California has budgeted about $2.8 billion for Special Education, with local contributions pushing the total past $3 billion -- less than 10 percent of the State's total education spending. The per-student cost of Special Education in California was $5,664 in 1994-95 -- a cost that is only about two-thirds higher than the per-pupil cost of $3,836 for students in regular school programs.⁽⁷³⁾

As the chart on the previous page shows, most of the funding in California's Special Education program is devoted to special classes and extra instructional help, with small amounts going for testing and consultants. Reimbursements to private schools cost about $200 million.

California's Special Education funding does not track most of the other types of categorical funding -- it is not given out on an ADA basis, for instance, and coordination comes from Special Education Local Plan Areas (SELPAs) rather than districts. There are 116 SELPAs: 32 single large school districts, 48 multi-district, 33 county-wide and three multi-county.⁽⁷⁴⁾ The SELPAs act as traffic directors, giving districts the ability to group together to provide services more efficiently to children with unusual or rare disabling conditions.

Funding for all districts is based on what they spent in 1979-80, the year California put its system into place, with some level of growth and cost-of-living adjustments since then. The funding is keyed to instructional personnel service units and the support services for that unit -- the cost of a teacher, aide and support services to provide education in different types of settings. These settings include special day classes, resource specialist programs where children are assisted on a pull-out basis from the regular classroom, and designated instruction and service. Children can also be served in non-public schools when appropriate or, in the case of deaf, blind or neurologically handicapped children, service can be provided in a state residential institution.

Under the system, districts report the types and hours of services being provided in different settings to the SELPA, which in turn aggregates the information and sends it to the State. The State allocates funding based on the instructional personnel service units required to meet the aggregate numbers and the SELPA directs the distribution of the funds to its member districts.

By design, the system could cover the total cost of providing Special Education services since it is keyed to the personnel that must be hired to perform services. But there is no pretense that the system does so. Enrollment that counts towards reimbursement is capped at 10 percent of a district's ADA, regardless of the actual number of Special Education students. Cost-of-living adjustments rarely cover inflation. Allowances for growth in enrollment never cover the actual population increase. And for most districts, the reimbursement rate for the instructional personnel service units bears no relation to actual expenses.

The result is a shortfall in funding. In 1993-94, the total actual cost reported by schools for Special Education was $3.2 billion -- an amount that was $814 million more than provided in earmarked state and federal funding for Special Education. The State mandates a local funding match, which accounted for $169 million of this excess. But the rest -- $645 million -- was also squeezed by districts out of general education funding to cover the costs of providing services that, under federal law, are mandated regardless of available resources.⁽⁷⁵⁾ This shortfall of Special Education funding is called encroachment -- a word that angers parents, both those who believe their general education children are being shortchanged and those who feel the word stigmatizes their Special Education children as burdens.

But the system has far more wrong with it than shortfalls and semantics. In February 1994, the Legislative Analyst's Office highlighted four problems with the existing system. These were unjustified funding variations, unnecessary complexity, constraints on local innovation and inappropriate fiscal incentives. The Legislature responded by directing the Legislative Analyst, the Department of Finance and the Department of Education to propose a new funding model. Although the eventual product was not embraced by the Legislature in 1996, a modified version is being pushed in 1997. The following sections describe the problems identified by the Legislative Analyst, SELPA directors and others, the reform proposals and the issues raised by those who are not backing the current reform movement.

Problems

There appears to be widespread consensus that the present system of funding Special Education is not good. One expert writes:

One thing is very clear about California's current system for funding special education -- nobody likes it. The system is incredibly complicated, is full of rules and rigid requirements, and is both underfunded and inequitably funded.⁽⁷⁶⁾

The problems are multiple, including:

Inequity: The problems begin with a flawed set of data used in an inappropriate way. This data has driven all expenditures since 1979 despite the universal recognition of the lack of rationale and equity. That year, school districts were asked to report their average costs for Special Education in each defined setting. Districts had never used the form before and there was no oversight to guarantee universal reporting procedures. Many believe that at worst the forms were filled with errors and at best they were filled out using different assumptions in different districts.

The data was used to establish base-line reimbursements for districts. If a district had several senior Special Education teachers, earning near the top of the district's salary schedule, its average Special Education costs would be high. A district with only novice teachers would have low average costs. Those 1979 staffing patterns were locked into each district's permanent reimbursement base, regardless of future changes. In addition, some districts carefully attributed all incremental and marginal costs to Special Education on the forms, while others may have been less precise, failing to list many costs.

The result is reimbursement rates that have been inequitable -- based on errors and poor logic -- for more than 15 years. As the table at the right indicates districts have different reimbursement rates that vary as much as $50,000 and $60,000. Many districts at the low end, and even those at top rates, do not receive enough to cover the salary and benefits for a single Special Education teacher, let alone aides and support services.⁽⁷⁷⁾

District-to-district inequity was further ensured by the State's approach to setting the amount of local match that a district must provide from its general funds. Because state aid was not meant to supplant existing local efforts, each district's required match was based on its pre-established programs for Special Education. A district that had intensive services -- one that recognized an obligation to serve Special Education students and did something about it -- was penalized by having a high local match. Districts that had ignored their obligation to meet the needs of difficult-to-serve students got off lightly. As a result, local match amounts range from nothing to more than $300 per ADA.⁽⁷⁸⁾

The discrepancy between real Special Education student growth and the barometer established in statute is aggravated by the fact that even permissible growth is not fully funded. In 1996-97, SELPA directors say schools were serving enough Special Education students to require 4,000 additional instructional personnel service units. Under the statutory caps, statewide allowable growth was only 1,800 units. The budget, however, supplied funding for only 794 new units -- 43 percent of so-called allowable growth and less than 20 percent of the units needed based on actual identified students.⁽⁸⁰⁾

The underfunding, even more than the statutory caps, discourages districts from over-identifying students -- a perennial concern of the program's critics. Each student who is classified as Special Education requires services that should be provided, with the typical district covering about 25 percent of the costs out of general funding.

Just as growth has been largely glossed over by the Special Education funding system, inflation is typically ignored. COLAs between 1990-91 and 1995-96 called for 15.75 percent growth in funding, but the program was granted only a 3 percent increase in 1990 and a 2.73 percent increase in 1995.⁽⁸¹⁾

While a district "loses" money on Special Education in general, the district may maximize its revenues by selecting high-reimbursement services for an identified child. Selection may be driven by something other than a professional judgment about the educational needs of the student and the best way of meeting those needs.

This appears to be particularly true about districts that make heavy use of non-public school placements. The State reimburses 70 percent of the cost of these placements, leaving districts to pick up the other 30 percent. While that sounds like an expense that would discourage such placements, districts that face high costs from setting up specialized intensive programs for a few students may find it is cheaper to pay 30 percent of a private school's fee. Such placements may be in the best interest of the child -- but since they remove the child from the neighborhood school setting, they may not be the least-restrictive choice that meets a child's needs.⁽⁸²⁾

In addition, since the component districts of a SELPA each have different reimbursement rates, decisions about a child's identification or placement may be altered by the SELPA's desire to maximize allowable instructional units or maximize certain types of reimbursement.

One of the major concerns is the failure of the system to link funding to outcome. Only 3 to 4 percent of students with disabilities ever return to the regular education program. Almost half of all students labeled learning disabled drop out of school. Fewer than 15 percent who do graduate find a full-time job.⁽⁸³⁾ This is particularly alarming considering that the purpose of Special Education is to give the disabled tools to participate in life as fully as possible. Parents pointed out that individualized education plans may not have clear-cut objectives, there is no mechanism for ensuring that goals are reached and that the money flows to programs regardless of whether they are suitable or effective.

Another concern is related to the theoretically unlimited federal mandate and the very real limits of the chronic underfunding of the system. Within the Special Education community, it is recognized that parents who advocate ceaselessly on behalf of their children -- including the use of due-process hearings and court remedies -- are able to pry services out of a district, often at a disproportionately higher price than the district receives in reimbursement for services to the child. This higher cost comes at the expense of the general education program -- and by underserving other Special Education students. Silent, unsophisticated or intimidated parents may accept a much lower level of service than their child needs or deserves without realizing that they have options. Because there are no clear standards of achievement for Special Education children, parents may have difficulty recognizing when their children are underserved.

Parents also complain vigorously that the SELPA structure dissipates responsibility and accountability. Parents sometimes go from district to SELPA and back to the district without being able to get clear answers. The structure also allows districts -- which in the eyes of federal and state law are the liable party -- to view the student as the SELPA's problem rather than as their own responsibility.

Proposed Reforms

The need for reform is widely recognized and well documented. But the details have proven difficult to reach consensus on. As mentioned above, 1996's reform proposal by the Legislative Analyst, Department of Finance and Department of Education -- the tri-agency report -- did not move forward in the Legislature. A 1997 version has been modified by SELPA directors and introduced in the Legislature with the support of the State Advisory Commission on Special Education. Other advocates have their own proposals.

Two national experts on Special Education have listed the following criteria as important elements in evaluating funding systems:⁽⁸⁴⁾

Understandability -- The formulas should be easily understood, procedures should be straightforward and complexity should be avoided.

Equity -- All districts should receive comparable resources for comparable students.

Adequacy -- Funding should be sufficient to provide appropriate programs.

Predictability -- Educators should be able to plan on stable funding across years and a system that produces predictable demands for state funding.

Flexibility -- Districts should have maximum latitude in use of resources in exchange for outcome accountability.

Identification neutrality -- The number of students identified should not drive eligibility for funding.

Reasonable reporting burden -- Data requirements, record keeping and reporting should be kept to a reasonable level.

Fiscal accountability -- Conventional accounting procedures should be followed, with controls to prohibit excessive costs.

Cost-based -- Funding should be linked to the costs districts face in providing services.

Placement neutrality -- Funding should not be based on type of placement or type of disability label.

Cost control -- Patterns of growth in Special Education costs and identification rates should be stabilized over time.

Outcome accountability -- State monitoring should be based on student outcomes as judged by statewide standards. Schools showing positive results should be given maximum latitude.

Connection to general education funding -- Special Education funding should have a clear conceptual link to general education funding. Integration of funding is likely to lead to integrated services.

Political acceptability -- Reform implementation should avoid major short-term loss of funding and should not disrupt existing services.

The tri-agency report was in accord with many of these criteria. Issued as a final report in November 1995, it contained the following reform elements:⁽⁸⁵⁾

Continuing the regional approach of SELPAs and sending funds directly to SELPAs for distribution to districts. (Some advocates worried that this would give SELPAs new powers without adequate controls).

Shifting from the existing fee-for-service approach to a population-based allocation, with each SELPA receiving the same amount per ADA of all districts within the SELPA.

Ensuring the same adjustments to Special Education funding that revenue limits receive -- COLAs and enrollment growth consistent with general education funding provisions.

Phasing in the new funding scheme over five years in a manner that ensures no district would lose funding.

Providing districts with flexibility to tailor services to address student needs.

Continuing due-process protections for parents and provisions that Special Education funding only be spent on Special Education. To further ensure accountability, the State would modify its oversight role (as outlined in a subsequent report from the Department of Education, which is described in the box at right).

Rolling the cost of non-public school placements, except whenthey are extraordinary, into the base allocation for Special Education. (This would give districts that now make such placements because of fiscal incentives a push toward developing their own programs. The California Association of Private Special Education Schools opposed rolling in the non-public school costs, arguing for continuation of the existing 70-30 state-district split on costs.)

Dealing separately with licensed children institution placements and specialized equipment needs for low-incidence, costly disabilities.

The proposal to shift to a per-ADA system of funding is being examined at the federal level and has been tried in other states as well.⁽⁸⁶⁾ It not only equalizes all funding but also disconnects the identification of children and placement options from fiscal issues. One advocate argued to the Little Hoover Commission that it would move the general education and Special Education systems closer to integration, as well. The National Association of State Boards of Education also offered that perspective:

The key to reform in the finance of Special Education is to ensure that students receive the services they need, while not mistakenly identifying students for special services or identifying students in ways that have detrimental consequences. Funding formulas should not encourage local districts to over-identify students, nor should they encourage restrictive school placement over a regular school placement. However, current state financing systems for Special Education often drive dual systems of general and Special Education, creating barriers to the establishment of inclusive education systems for all students.⁽⁸⁷⁾

The per-ADA shift was one of the most controversial elements of the proposal since many believe urban districts attract a disproportionate share of Special Education students. The tri-agency report found, after an extensive literature review and discussions with experts, that research demonstrating any link to poverty or other factors is inconclusive and that the most reliable predictor of Special Education population is a percentage of the total school population. The Legislative Analyst reported this year, however, that new data may be emerging on the national level to modify that finding. Several sources have suggested modifying the per-ADA amount with an adjustment for poverty since poor living conditions may contribute to disabilities covered by Special Education.

The second area of concern over this provision came from advocates who believe districts will have no incentive to provide services without strong accountability mechanisms. Keeping due-process provisions in place only protects those who have been identified as needing Special Education -- not those the system refuses to identify once funding is no longer an incentive.

The current reform effort modifies the per-ADA approach and allows districts to retain different reimbursement rates -- but provides equity increases for those below the state average. The simplicity of a single statewide rate is traded for recognition that districts are already serving differing types and levels of disabilities and therefore should retain different rates, according to its supporters.⁽⁸⁸⁾

The current reform effort begins with three steps:

Each district calculates a single rate for equalization purposes. All districts below the statewide average receive funding to bring their rates up to the average.

The reimbursement rate for each district is used -- along with federal grants and non-public school funding -- to calculate a SELPA level amount. This is converted to a SELPA-wide per-ADA rate.

All SELPA rates are then calculated to set a statewide average and those below the average are provided an equity boost to bring them up to average.

The combined cost of the two equity adjustments is $213 million, money that the proposal's advocates argue must be new money in the system rather than funding that would otherwise go for cost-of-living adjustments.

The remaining portions of the reform echo the tri-agency report: growth tied to ADA growth, funds distributed to the SELPA and extraordinary non-public school and licensed children institution settings being paid for separately. The State Advisory Commission on Special Education supports the reform proposal, with the addition of strong accountability and enhanced enforcement mechanisms.⁽⁸⁹⁾ These include the SELPAs setting performance standards, carrying out assessments, reporting effectiveness annually and creating processes for modifying and improving programs when results indicate it is necessary.

The reform proposal would reduce complexity and inequity -- but not eliminate it since rates would still differ substantially. It also would break the rigidity of the present system, which ties districts into delivering services in certain patterns and settings. Instead, districts would have the flexibility to design services that are appropriate to the needs of students.

Unfortunately, trust is in short supply in the Special Education system. Advocacy groups and parents told the Commission that they believe "flexibility" can too easily become "no service." Accountability for services and results now is only achieved through due-process hearings and court remedies, according to many who deal with the system. When districts no longer have the constraints of at least supplying certain types of services -- special day classes, resources specialists, etc. -- there is no assurance that students will receive any level of service. Two national experts highlighted the need for new kinds of accountability:

In this era of scarce resources, increased demand for services and heightened scrutiny of education, concepts of accountability are more important than ever. As more states and perhaps the federal government relax traditional accountability measures to allow for more flexibility and freedom in the use of Special Education funds, what will replace them? Even advocates who support enhanced flexibility in the use of Special Education funds express concerns about replacing traditional accountability with simple trust.

As the same time, traditional accountability mechanisms have been more concerned with the legal use of funds than with whether they are being used well. If accountability systems were devised and implemented that could clearly measure the extent to which the children for whom these dollars are intended are making educational progress, then the linkage between Special Education eligibility, student counts and funding would certainly be less important. The development of such results-based accountability systems may well be one of the most critical components in the movement to revise Special Education finance policies.⁽⁹⁰⁾

Summary

The Special Education system has made significant advances in providing service to children who were once routinely excluded from public education and, thus, from much of life. But the system -- as implemented in California -- is fraught with inequities, complexity and rigidity. A student with special needs will be treated differently depending on where he lives, how his parents advocate for him and the established services available. None of these conditions help either parents or educators in the quest to find the best services to meet individual needs.

While reform proposals have been discussed for years, inertia and chronic underfunding have made it very difficult to build the necessary momentum to change the system. But the State's reviving economy and increasing resources offer the opportunity to sweeten reform steps with added funding, thus heightening the prospects for broad support and eventual success.

Recommendations

Recommendation 2: The Governor and the Legislature should redesign the Special Education funding system to achieve simplicity, equity and flexibility and to shift accountability to outcome.

Elements of both the tri-agency recommendation and the current reform proposal go far toward resolving problems with the current Special Education financing system. However, policy makers should be wary of continuing present inequitable patterns simply for the sake of obtaining the political consensus to move forward with reform. At some point, even if on a phased-in schedule, all Special Education children should have the equal opportunity to receive services regardless of the district they live in.

Recommendation 3: The Governor and the Legislature should ensure that primary responsibility for special-needs students rests in their home districts.

Money should not be routed directly to SELPAs if it is going to increase the already-existing tendency for districts to consider Special Education students someone else's problem. Districts should be able to purchase regionalized services from SELPAs, but any realignment of the financing system should not further divorce Special Education students from the general education population and structure. Parents should be assured of having single-point access at the home district for service, advice and complaint resolution.

Recommendation 4: The Governor and the Legislature should petition the federal government to live up to its original funding commitment -- and if it is unwilling to do so to consider realigning the Special Education mandate with fiscal realities.

Much of the tension and acrimony within the Special Education system comes from the irresolvable conflicts between funding shortfalls and legitimate demands for appropriate services. The existing system is not fair to educators, parents, students or taxpayers. Congress should be strongly urged to increase funding levels.

Any discussion of modifying the mandate to provide services to Special Education students needs to be handled with extreme sensitivity to the fact that -- prior to the enactment of the broad mandate -- schools often turned their backs on this population. They should be given no opportunity to do so again. But clarifying the mandate and bringing it in line with the slightly more narrow but still powerful protections of the Americans with Disabilities Act would give both schools and parents better guidelines for taking action.