Overview of Special Education Funding Models

Overview of Special Education Funding Models Summary Since the 1970s, federal law has required public schools to provide special education services to students with disabilities that interfere with their ability to learn. Schools in California cover special education costs through a combination of local unrestricted, state categorical, and federal categorical funding. Trailer legislation from the 2021-22 budget package specifies that state special education funds will only be allocated in the 2022-23 budget if statutory changes designed to improve the academic outcomes of students with disabilities are included in the budget. These changes may include modifications to the existing funding allocations, clarification of different roles and responsibilities within the special education system, and expansion of inclusive practices. To help inform future discussions, this brief provides an overview of special education models used by California and other states and provides the Legislature with a framework for evaluating these models. The brief begins by providing background on the state’s current funding allocation formula for special education. California provides most special education funding based on overall student attendance, with roughly 16 percent of state special education funding provided through other programs based on alternative formulas and/or for specific types of special education services, including those for students with higher-cost disabilities. The brief also describes the four primary models used by states to distribute special education funding to schools—census-based, weighted, reimbursement, and resource-based. Next, the brief sets forth a simplified framework that describes three key criteria for evaluating special education funding models: (1) appropriate fiscal incentives, (2) alignment of funding and costs, and (3) transparency and ease of implementation. These criteria were developed based on our review of the academic literature. The brief concludes by offering some issues for the Legislature to consider. Specifically, we note that (1) all funding models have specific strengths and weaknesses, (2) legislative policy priorities and state context should drive changes to the funding formula, (3) the state can also make changes within its existing funding system, and (4) other changes are likely required to address key policy priorities. GABRIEL PETEK | LEGISLATIVE ANALYST DECEMBER 2021 AN LAO REPORT Background Share of California Students Receiving Special Education Has Increased in Last Decade, Despite Special Education Supported by Combination Declining Student Attendance. The share of of Local, State, and Federal Funding. Schools California students receiving special education was receive billions of dollars each year (mainly as local virtually flat from 1997-98 through 2007-08, then general purpose funding from the Local Control grew notably in subsequent years—increasing from Funding Formula) to educate all students, including about 10 percent in 2008-09 to almost 12 percent in students with disabilities. These funds can be 2019-20. Much of this growth is due to an increasing used for any educational purpose but primarily share of students diagnosed with relatively severe cover general education costs such as teacher disabilities, most notably autism, which typically compensation. Beyond these general education require more costly services. Although the share of costs, schools incur additional costs to serve students receiving special education has increased students with disabilities (for example, to provide in the past decade, overall statewide student specialized instructional support and adaptive attendance has declined every year since 2013-14. equipment). To help cover these additional costs, As AB 602 provides funding based on overall in 2021-22, schools received about $6 billion student attendance, the formula generally allocates combined from state and federal categorical less funding when statewide attendance declines, funding specifically for special education. These even if the share of students receiving special fund sources together cover roughly one-third of education increases. As a result, schools have the additional cost of special education services. reported covering an increasing share of their special Schools cover remaining special education costs education expenditures with local general purpose with their local general purpose funding. funding. California Provides Most Special Education State Has Provided Significant Special Funding Based on Overall Student Attendance. Education Base Augmentations in Recent The state allocates most special education funding Years. Since 2019-20, the state has increased (84 percent in 2021-22) through a base rate special education base funding by almost $1 billion formula commonly called AB 602 (after its enacting (30 percent) beyond annual cost-of-living and legislation). The formula distributes funding attendance adjustments. The corresponding based on total student attendance in Transitional statewide base rate grew from $557 per student Kindergarten through grade 12— regardless of the in 2019-20 to $715 per student in 2021-22. These number of students receiving special education, augmentations were provided largely due to the specific disabilities of those students, or concerns over schools’ growing special education the types of services those students receive. costs. In addition to increased base funding, the Roughly 16 percent of state special education state also recently funded several work groups and funding is provided through other programs studies aimed at reforming different aspects of the based on alternative formulas and/or for specific special education system—including improving types of special education services, including the state’s special education governance and those for students with higher-cost disabilities. accountability system, expanding access to a regular For instance, the Low-Incidence Disabilities high school diploma for students with disabilities, and program allocates funding based on the number studying placements in nonpublic schools. The final of students who are deaf, hard of hearing, visually recommendations from most of these studies were impaired, or orthopedically impaired. The state released in fall 2021. also runs an extraordinary cost pool which provides reimbursement for very expensive student Currently, Other States Use Various Special placements in nonpublic schools exclusively serving Education Funding Models. Figure 1 describes students with disabilities. the four primary models used by states to distribute special education funding to schools. With the exception of the census-based model, most models include some indicator of special education cost. For instance, weighted formulas—the most common 2 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT model used by states—typically allocate Figure 1 funds based on counts of students Types of Special Education Funding Models with disabilities. As with California, many states use a combination of Used by States these approaches to allocate funds. Description For example, Massachusetts allocates Census-Based Provides funding based on overall student attendance or most special education funding under enrollment. Assumes per-student special education costs do a census-based model but also not significantly vary across the state. maintains an extraordinary cost pool to Weighted Allocates funds based on counts of students with disabilities. reimburse schools serving students with Variations of this model include (1) a single, flat weight where students with disabilities generate the same amount of funding high-cost services. and (2) tiered weights where students with disabilities generate different levels of funding based on disability category, Framework for Evaluating placement type, or service levels. Special Education Funding Resource-Based Provides funding based on special education resources, including teachers, instructional aides, and specialists. Level Models of resources typically are determined by staff-to-student ratios that can vary by disability category, placement type, or service Framework Focuses on Three Key levels. Criteria. Based on our review of the Reimbursement Reimburses schools for all or a percentage of actual, eligible academic literature, we developed the expenditures. May include high-cost formulas that only simplified framework shown in Figure 2 provide reimbursement after a certain cost threshold. that describes three key criteria for evaluating special education funding models. (We list some of the key work that informed this brief in the Appendix.) Figure 2 We discuss each of these criteria in more Three Key Criteria for Evaluating detail below. Special Education Funding Models Appropriate Fiscal Incentives. One key criterion is to assess how the fiscal incentives created by a specific funding formula align with broader goals, such as improving student outcomes and Appropriate Fiscal Incentives delivering services efficiently. Special Does the formula education funding models can affect encourage schools to take the actions decision-making in schools in several key that lead to improved ways. Formulas can affect the share of student outcomes? students that schools identify as requiring special education services—either by encouraging higher identification to generate greater funding or lower identification to reduce costs for schools. Transparency and Ease Alignment of Funding and Costs Funding models can also encourage o f Implementation Does the formula provide or discourage schools to be more cost Is the formula easy to more funding for students implement and understand? with higher-cost services? efficient or innovative in service delivery, as we discuss in more detail below. Finally, models can affect how schools respond to key state policy priorities, such as promoting early intervention, encouraging inclusive practices, and improving coordination between general education and special education. www.lao.ca.gov 3 AN LAO REPORT Alignment of Funding and Costs. Students states can use a mix of funding formulas, set with disabilities require additional services and aside incentive funding to encourage certain best supports to access their education. The cost practices, implement a robust accountability associated with providing these special education system to ensure students are appropriately services varies based on each student’s specific identified and served, and streamline data needs. Costs can also substantially vary within each collection to reduce administrative burden. disability category, across different regions of a Census-Based Model Avoids Adverse Fiscal state, the educational setting, and by other factors. Incentives While Being Easy to Understand... As a result, special education costs can vary The primary benefit of a census-based model significantly across schools. Models that closely is its ability to avoid encouraging schools to link special education funding to the actual costs overidentify students for special education to of providing services more efficiently distribute generate additional funding. Under a census-based state funding and allow schools to better support model, schools have limited influence over how students with varying needs, including those with funds are allocated. In theory, this allows schools higher-cost services. to appropriately identify and serve students with Transparency and Ease of Implementation. disabilities without influence from fiscal incentives A formula that is simple and easy to understand to do otherwise. By providing a set amount based reduces administrative burden at both the state on overall student attendance, the formula also and local level and allows for more efficient is easy to understand and implement without use of special education funding. A formula significant administrative burden and encourages that relies on straightforward procedures for a schools to consider the cost efficiency of services school to receive funding is also likely to reduce to contain overall special education costs. With administrative burden, as well as potentially very few spending restrictions, the census-based allow schools to project anticipated special model also allows for innovation and flexibility in education funding for budgeting and planning services. These benefits are consistent with those purposes. Funding formulas that require frequent, identified by California when the census-based complex modifications are more administratively AB 602 model was first implemented in 1998. burdensome to update and require more work from We note that the federal government allocates most program administrators to stay aware of formula special education funding through a census-based changes. If these modifications are challenging or formula based on a state’s share of the national only sporadically implemented, funding models can child population and national population of children become outdated and, over time, no longer aligned living in poverty. to the initial legislative intent. …But Does Not Account for Significant Differences in Cost. The most notable drawback Review of Four of a census-based model is that it does not direct Most Common Funding Models additional funding to schools serving students Each Funding Model Is Associated With with higher-cost services. For instance, if a large Certain Trade-Offs. In this section, we apply the school district serves disproportionately higher simplified framework to the four types of special shares of students with high-cost disabilities— education funding models used by different states such as traumatic brain injury or orthopedic and discuss the strengths and limitations of each impairment—the census-based model would model. Figure 3 summarizes the key trade-offs provide this district the same amount of funding associated with each model. As the figure shows, as a similarly sized district serving a low share of each of the funding models has a set of unique students with high-cost disabilities. In California strengths and limitations. In building their overall and in other states, the organization of smaller approach to funding special education, states can districts into regional collaboratives for special take a variety of approaches to address limitations education purposes helps to address variations in of their primary funding models. For example, identification rates across the state. Furthermore, 4 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT the state funds several categorical programs formulas use counts of students with disabilities aimed at higher-cost students with disabilities. as a proxy for cost and can account for cost For instance, the Low-Incidence Disabilities and variations due to differences in the share of students extraordinary cost pool programs target some identified for special education, the severity levels of additional funding for students known to have disabilities, the types of placements, and the number high-cost services and support needs. The of services students receive. Resource-based Out-of-Home Care program provides additional formulas provide funding based on staffing levels— funding for students with developmental disabilities the costliest component of special education—by and foster youth, known to be identified for allocating funds according to staffing needs and special education at higher rates than other established staff-to-student ratios. Reimbursement students. (In the early 2000s, the state also had formulas provide funding based on actual, allowable a special disabilities adjustment that provided special education costs. Although these formulas can additional funding for schools serving higher better target special education funds, they have other shares of high-cost students but was eliminated in limitations, which we discuss below. 2011-12 due to various challenges with updating Weighted Formulas Could Introduce Fiscal the formula.) Incentives to Overidentify or Misclassify Students Other Formulas Can Better Target Additional With Disabilities. Under weighted formulas, schools Funding Based on Higher Costs. In contrast to only generate additional funding when a student is the census-based model, the other three special identified for special education. A notable concern education funding models better target funding, is that weighted formulas could create a fiscal as they include some indicator of cost. Weighted incentive for schools to overidentify or misclassify Figure 3 Summary of Trade-Offs for Special Education Funding Models Appropriate Fiscal Alignment of Transparency and Ease of Incentives Funding and Costs Implementation Census-Based + - + Does not encourage Does not account for Simple, easy to understand overidentification of students. significant differences in cost. formula. + + Allows for service flexibility Does not require routine and innovation. updating. + Encourages services to be delivered in most cost efficient way. Weighted - + + May introduce incentive Provides additional funding Easy to understand formula. to overidentify and serve based on students likely to - Formula weights may need students for special have higher costs. to be updated over time to education. reflect changes in relative cost. Reimbursement + + - Less likely to encourage Provides additional funding Typically administratively overidentification. for schools with higher burdensome to calculate special education costs. costs eligible for - Does not encourage cost reimbursement. efficiency. Resource-Based - + - Could constrain service Provides additional funding Specific funding requirements delivery based on how staff based on resources needed can vary in complexity. ratios are set. to support students with - May require updates to align disabilities. - Could encourage identifying with changes in service students to fill slots in more delivery. restrictive classrooms with higher funding. www.lao.ca.gov 5 AN LAO REPORT students with disabilities. Research using data from Reimbursement Formulas Can Be the 1990s showed that schools in Texas identified Administratively Burdensome and Do Not more students with speech language impairments Encourage Cost Efficiency. Since reimbursement and specific learning disabilities to increase funding formulas are most directly linked to actual special under the state’s weighted formula. The study education costs, schools with higher costs found an increase in the overall identification rate, receive more funding under such a model, without especially for districts with higher shares of black creating fiscal incentives to overidentify students students and fiscally constrained districts with with disabilities or place them in more restrictive limited state education funding. Formulas with settings. Reimbursement models, however, can weights that vary by different disability categories also be the most administratively complicated may also encourage misclassifying students as and burdensome approach, as schools need having more severe disabilities than they actually to submit records of actual allowable expenses do to qualify for higher funding levels. The fiscal to receive reimbursement. The state would incentives introduced by weighted formulas could also need to develop robust checks systems of undermine attempts in California and other states to oversight to ensure only eligible expenses are provide early intervention services and appropriate reimbursed. Additionally, a reimbursement model supports to students struggling academically in the could target more funding to schools that have general education classroom first. These activities higher costs for reasons other than their special are intended to prevent significant developmental education population—such as those that run less and academic delays, thereby reducing the number cost-efficient programs. of students who will need special education services Issues for Legislative Consideration and the associated funding generated under a weighted model. All Funding Models Have Specific Strengths and Limitations. As we discuss in the previous Resource-Based Formulas Can Result in More section, no single special education funding Restrictive Placements, Administrative Workload, model is perfect, and each funding model has key and Limited Innovation. Resource-based formulas limitations. During the forthcoming discussions could also introduce adverse fiscal incentives. For about changes to the existing special education instance, resource-based formulas can encourage funding system, the Legislature will want to schools to identify students to fill slots in specific consider whether the limitations of the existing classrooms—most likely classes attended only by system are preferable to those of other funding students with disabilities associated with lower models. In shifting to a census-based model in teacher-to-student ratios and more funding. Prior to the late 1990s, the state opted to use a primary AB 602, California used a resource-based formula formula that avoids adverse fiscal incentives and is to allocate special education funding, and the easy to implement despite a key limitation—namely, fiscal incentive to place students in more restricted the lack of accounting for significant differences settings to increase funding was a primary reason in costs across schools. The transition to a for the state’s transition to a census-based model. census-based model was intended to avoid some In addition, resource-based formulas can be more of the key shortcomings of the old resource-based administratively burdensome, as they typically model, which was overly complex and created require schools to document and report staffing incentives to place students in more restrictive and expenditure data to the state. Under California’s settings. Deciding to shift to a new funding model old resource-based formula, for example, schools should involve careful consideration of why a new sometimes hired outside consultants to help model and its associated trade-offs are preferable them navigate the complex formula. Furthermore, over the existing system, as well as how the new California’s resource-based formula only recognized model would be implemented to address any certain types of service models and did not reflect relevant shortcomings. changes in services and best practices over time, thus constraining schools’ ability to implement innovative programs. 6 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT Legislative Policy Priorities and State Context funding for high-cost services, the Legislature could Should Drive Changes to the Funding Formula. modify or expand the existing funding system. In recent years, the Legislature has signaled interest It could, for example, expand the extraordinary in increasing early intervention services—which cost pool, as applications for reimbursement can reduce the number of students identified as consistently exceed the amount of funding set aside needing special education—and encouraging for the program. inclusive practices that serve students with Other Changes Likely Required to Address disabilities in a general education setting. Both Key Policy Priorities. Although trailer legislation of these actions can lead to improved outcomes from the 2021-22 budget package signals an for students. In considering changes to special interest in making changes to existing special education funding, the Legislature may want education funding allocations, additional changes to evaluate whether certain models can better beyond the funding formula are likely necessary promote these and/or other legislative priorities. to improve outcomes for students with disabilities. For instance, a weighted formula could introduce For example, eliminating key barriers to promoting fiscal incentives that discourage early intervention, inclusive practices likely requires actions beyond as schools would only generate funding once funding changes. Surveys of special education a student is identified for special education. In teachers and school districts suggest that key contrast, a census-based model could encourage barriers to inclusion include general education early intervention as a more cost-efficient approach teachers feeling unprepared to work with students to addressing learning gaps by removing fiscal with disabilities, restrictive program requirements incentives to identify students for special education. for inclusive early learning programs, and The Legislature may also want consider whether organizational structures that make collaboration certain models are more appropriate for California between general education and special education given our state context, such as our unique school more difficult. These barriers may be more finance system. For example, California school effectively addressed directly rather than through districts are constitutionally restricted in their ability the primary funding formula. to raise local revenue due to Proposition 13 (1978), whereas districts in many other states are able to Conclusion raise local taxes if they have extraordinarily high Each special education funding model has special education costs. Given these constraints certain strengths and limitations. During the last on raising local revenue, districts in California likely overhaul of the special education funding system rely more heavily on state education funding to align in 1997-98, the state identified many strengths to with their program costs, particularly when costs transitioning to a census-based model, namely are extraordinarily high. avoiding adverse fiscal incentives and being State Can Also Make Changes Within Existing administratively efficient. The strengths of the Funding System. To address the key shortcoming census-based model continue to apply today, of the census-based model, the state provides as does its inability to provide more funding for some funding through other programs that target significantly higher costs. As the Legislature higher-cost students with disabilities, such as the discusses potential changes to the current Low-Incidence Disabilities program, extraordinary special education funding system, it will want to cost pools, and Out-of-Home Care funding. The consider whether the strengths and limitations limited funding and specific requirements of these of an alternative funding model are preferable to programs allow the state to better target funding that of the census-based model, and whether while continuing to avoid incentives to overidentify the shortcomings of an alternative model can be students with disabilities or spend funds sufficiently addressed through other programs. inefficiently. If the Legislature wants more targeted www.lao.ca.gov 7 AN LAO REPORT APPENDIX: SELECTED REFERENCES Baker, B.D., Green, P.C., & Ramsey, M.J. (2012). Fischer, A., Syverson, E., & Duncombe, C. (2021). Financing Education for Children with Special Needs. 50-State Comparison: K-12 and Special Education In J.B. Crockett, B. Billingsley, & M.L. Boscardin (Eds.), Funding. Education Commission of the States. Handbook of Leadership and Administration Retrieved November 30, 2021, from https://www.ecs. (pp. 97–114). Routledge. org/50-state-comparison-k-12-and-special-education- Cullen, J.B. (2003). “The Impact of Fiscal Incentives funding/. on Student Disability Rates.” Journal of Public Kolbe, T. (2021). “State Funding for Special Economics, 87(2003), 1557-1589. Education: Aligning Policy With Priorities.” Journal of Special Education Leadership, 34(1), 19-31. LAO PUBLICATIONS This report was prepared by Amy Li, and reviewed by Edgar Cabral and Anthony Simbol. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, California 95814. 8 LEGISLATIVE ANALYST’S OFFICE