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Funding Special Education Needs

Jon Peacock and Debby Meyer

Executive Summary

Wisconsin’s public schools are struggling to cope with the rising cost of the state mandate to provide special education services for students with disabilities. Enrollment and spending levels have been increasing much faster in special education than in regular primary and secondary education. This poses a significant fiscal challenge for schools for a number of reasons, but especially because school revenue growth is capped by the state, and special education students are substantially more expensive for school districts.

A May 3, 1999, report by the Legislative Audit Bureau thoroughly explores the funding issues relating to special education. The Audit Bureau’s study included a survey of school administrators, which found widespread concerns with how special education is funded and the impact of growth in this program on funding needed for other purposes. Some of the sources of concerns about special education funding include the following:

• Wisconsin statutes call for state reimbursement of 63% of "aidable" special education costs from a categorical aid appropriation; yet the actual reimbursement rate has fallen far below that standard and is expected to be about 34% this year.
• The gap between the 63% standard in the statutes and the actual reimbursement level amounted to $223.5 million in 1997-98.
• Although total state aid for schools has increased significantly over the last five years, categorical aid for special education has been frozen, and it would continue to be frozen under the Governor’s budget.
• The special education appropriation has declined from 13.3% of state school aid in 1989-90 to 6.9% this year, and it would drop to 6.3% in FY 2000-01 under the proposed budget.

The Legislative Audit Bureau report suggests that the problems school officials are experiencing have less to do with the total amount of categorical and general aid available for special education than with the way in which state aid is allocated and spending is capped. The biggest problem is caused by the combination of growing special education enrollment and the state-imposed spending limits. When a district’s special education expenses grow at a rate greater than its expenditure restraints, it has to make cuts or forego improvements and inflationary increases in other areas of its budget. This is especially a problem for districts with growing special education enrollment and declining overall enrollment.
Although categorical aid for special education does not count against a district’s revenue growth limits, that exemption provides no relief to the vast majority of districts as long as the categorical appropriation remains frozen at its current level. The Audit Bureau report concluded that, "if special education costs had increased at the same rate as regular education from FY 1992-93 through FY 1997-98, $59.9 million more would have been available in FY 1997-98 to fund regular education."

To keep school districts from cutting other critical budget areas in order to fund special education, the Legislature would need to provide some type of relief from the revenue caps. There are two general ways in which that could be accomplished:

• One option is to exempt all or a portion of revenue used for increased special education spending from the cap.
• Increasing special education categorical aid, which is exempt from the revenue restraints, would also give schools some flexibility under the caps.

Background

Since the mid-1970’s, Wisconsin schools have been required to provide special education services for students with disabilities. The number of students receiving such services has been growing steadily in our state and reached more than 113,000 in public schools in the 1997-98 fiscal year – or 12.8% of all public school students in Wisconsin.

In light of the state and federal mandates to provide special education services, as well as the significant expense of special education, school officials and advocates for students with disabilities have argued that state and federal assistance should be earmarked for special education. In large part because of such arguments, the state has long had a categorical aid appropriation for special education, distinct from the general aid/equalization aid that public schools have broad discretion in spending.

Trends in Special Education Spending and Funding

From FY 1992-93 through 1997-98, special education enrollment has increased by 19.1% and costs have increased by 36.9%. In comparison, regular education enrollment increased 6.3% during that period, with cost increases of 25.5%. The average cost for special education students was $7,627 in 1997-98, 66% higher than the $4,580 average for regular education students.

Some people have argued that Wisconsin schools may be "over-identifying" special education students. They point out that Wisconsin’s rate of increase in identifying special education students (since 1976-77) was seventh highest in the nation. On the other hand, the Audit Bureau report notes that that Wisconsin’s higher rate of identification may be just a matter of catching up to the national average. The most recent national ranking (1996-97) placed Wisconsin 26th in the identification of special education students, compared to 45th twenty years earlier. Furthermore, those questioning the over-identification argument note that the fiscal challenges, noted above, create disincentives to the identification of special education students.

Both the state and federal statutes set high standards for the reimbursement of special education costs. Since 1982 state statutes have called for categorical aids equal to 63% of aidable special education costs; and federal law has long set the standard for federal reimbursement at 40% of costs. Yet both sources of financial assistance have fallen far shy of those statutory standards, and the gap between the statutory level and the actual state appropriation has grown substantially since the mid-1980s (see Chart 1).
Since 1984-85, when the state last met the 63% standard, the state reimbursement percentage has fallen steadily, and it is expected to be 34.3% of "aidable" costs for the current school year (or 31.9% of total special education spending). The federal reimbursement level was just 4.9% in 1997-98. For the 1997-98 fiscal year, the gap between the statutory standards and the actual appropriation levels was $223.5 million for the state funding ($219.7 million for schools and $3.8 million for County Children with Disabilities Education Boards) and $283 million in federal funds.

The Governor’s proposed budget would continue to freeze the categorical appropriation for special education at $275.5 million, where it has remained since the 1994-95 school year. Since that time, aidable costs for special education have risen by $179 million (based on estimates for 1998-99), or more than 28%. Under the budget proposal, the reimbursement level from the state’s categorical aids is expected to fall to about 30% of aidable special education costs for 2000-01. In addition, the Governor proposes repeal of the statutory reimbursement standard.

Shift to General Equalization Aids

Although the funding level for state special education aids has been frozen since FY 1994-95, total state education spending has grown dramatically – from $ 2.78 billion that year to $4.46 billion in the current school year, a 60.3% increase. The state’s equalization aids have grown by 74.6% during that time period. As a result, school districts that do relatively well under the equalization formula have been able to cover their growing special education expenses from their general aid allocation.

The recent report of the Legislative Audit Bureau estimates that equalization aid was used to pay for 22.7% of special education costs in FY 1992-93, but that percentage grew to 39.3% in 1997-98. The LAB report concludes, "total state funding accounted for 75.7% of special education funding in FY 1997-98, compared to 66.3% in FY 1992-93."

The Audit Bureau also conducted a survey of school board presidents and school district administrators. They found that more than 92% of the 331 respondents were either "somewhat dissatisfied" (26.5%) or "very dissatisfied" (65.9%) with the level of categorical aid for special education. In addition, more than 70% expressed dissatisfaction with the special education categorical aid formula.

By documenting the growth in general school aid, the audit report suggests that the concerns expressed by many educators and advocates relating to special education funding have more to do with how the aid is distributed and how it relates to expenditure restraints than with the overall level of categorical and general aid. These concerns generally fall into two categories: 1) the funding system doesn’t necessarily increase a school’s resources as its need for special education services grow; and 2) state revenue growth caps force growth in special education costs to cut into other areas of school spending. We discuss these issues more below.

Pros and Cons of Categorical Aid

There has been a longstanding debate in Wisconsin regarding how much of the state’s total school aids should be allocated as categorical aid versus general, non-earmarked aid (the vast majority of which is distributed through the "equalization" formula and referred to as "equalization aid").

Equalization aid has the obvious and important advantage of helping reduce the disparities in spending capacity between rich and poor school districts. To a lesser extent, equalization aid is also promoted on the basis that it is better to give schools general aid and let them decide how to spend it.

Advocates of categorical aid for special education argue that because these services are a costly mandate and a cost that districts have little ability to control, the state should earmark money for special education and share in the costs that a district incurs, regardless of the wealth of that district. Categorical aid proponents also note that districts with strong special education programs sometimes attract families who have children with significant disabilities. It is argued that a system of state aid that does not pick up a proportionate share of the growth in special education costs sends districts the wrong signals with respect to how they should respond to the challenge of educating these students.

The 63% statutory standard for categorical special education aid represents a key part of the balance between categorical and equalization aid that the Legislature struck in 1981 and which was applied until 1985. (From 1973 to 1980 the actual reimbursement rate was 70%.) As the state commitment to categorical aid for special education has waned, so has the commitment to categorical aid in general (see Chart 2). From 1989-90 to 1998-99, the proportion of state aid distributed through categorical aids declined from 17.0% to 10.8% of total state school aids). The special education categorical aid appropriation has declined even more sharply, dropping from 13.3% of state school aid in 1989-90 to 6.9% this year, and it would drop to 6.3% in FY 2000-01 under the Governor’s budget. The special education appropriation constitutes approximately 64% of total state categorical aids.

In essence, over the last decade, and especially over the last five years, the state has made a significant shift in the balance between categorical and equalization aid. The Governor’s budget would continue that shift toward a growing percentage of equalization aid. Although there may be some good reasons for such a shift, it has occurred with little debate about the pros and cons of earmarking aid for special education. The Legislature might want to engage in that debate to determine if or when the state should end the freeze on categorical aid for special education, and whether the state should simply repeal the 63% standard, as the Governor proposes, or replace it with a different target.

School Revenue Limits

The impact of the shift away from categorical aid for special education has been made much more problematic for many school districts by the state-imposed caps on school revenue growth. The school revenue caps, which first took effect in the 1993-94 school year, limit each district’s spending growth in 1998-99 to $208.88, which amounts to roughly 3% growth for most districts. Consequently, if a typical district experiences growth in its special education costs of more than 3%, the district must make cuts and/or provide less inflationary growth in other budget areas.

Since1992-93 (the initial base year for revenue cap purposes), special education spending has grown by 36.9%, whereas total school aid spending has grown by just 27.4%. For the period 1992-93 to 1997-98, Chart 3 shows the difference between the actual increase in spending for special education and what it would have cost school districts if this program had grown at the same rate as total school spending. Because most schools were bumping up against their revenue caps, the difference shown in Chart 3 is an approximation of the amount that districts had to shift from other educational needs to fund special education. As the Audit Bureau report points out, "if special education costs had increased at the same rate as regular education from FY 1992-93 through FY 1997-98, $59.9 million more would have been available in FY 1997-98 to fund regular education.

Districts with declining student populations are hit especially hard by the revenue caps, because the spending growth cap for each district increases or decreases in proportion to changes in the district’s overall enrollment. The Audit Bureau report explains that this aspect of the revenue caps has adversely affected not only the 20% of all districts with declining overall enrollment and increasing special education enrollment (from 1992-93 through 1997-98), but also an additional 22.3% of districts which experienced special education enrollment increases that exceeded overall enrollment increases by more than 20% during that time period.

In response to a question in the Audit Bureau’s survey of school administrators and board presidents, 80.9% of the 331 respondents indicated that special education costs in 1997-98 limited the increases in regular education programming.

The problems posed for school districts by revenue caps and the growth in special education enrollment are intertwined with the issue of the declining percentage of state categorical aid for special education. Unlike general education aid, categorical aid for special education and other types of categorical aid do not count against a district’s revenue growth limits. However, this exemption provides no relief to the vast majority of districts as long as the categorical appropriation remains frozen at its current level.

A significant increase in categorical aid for special education would help reduce revenue cap restraints on districts with rapidly rising special education costs. However, because the distribution of the categorical aid is based on the amount that a district spent a year earlier, a fluctuation in the aid allocation is delayed a year, as is the less restrictive spending cap that accompanies growth in the district’s categorical allocation.

Conclusion

The survey of school administrators and board presidents conducted by the Legislative Audit Bureau documented widespread concerns about the funding of special education and the impacts that growing enrollment and costs in this program are having on school budgets generally. These concerns stem primarily from two developments in state policy relating to the financing of primary and secondary education: the sharp decline in the percentage of total school aid that goes into categorical aid for special education (see Chart 2), and the impact of state-imposed revenue growth caps.

It appears that the best way to address these concerns is to give schools some sort of relief from the spending caps with respect to increased costs for students with disabilities. Toward that end, there are two types of strategies that the Legislature might want to consider:

• Placing outside of the revenue limit those special education costs that are not reimbursed through state categorical aid. If all or a portion of a district’s additional expenditures for these mandated services were exempt from the expenditure restraints, districts could more easily cover the higher costs associated with educating special education students without compromising other programming needs.
• Increasing the categorical appropriation for special education. (Categorical aids are exempt from the revenue restraints.)

Many variations of these two strategies could be developed, such as targeting increased categorical aid to high-cost students, or narrowing the spending limit exemption to the cost increases for certain categories of students with disabilities.
It should be noted that there could be some differences in the degree to which different districts would benefit from one strategy or the other. Any increase in the amount earmarked for special education would almost certainly result, at least in the short run, in a smaller increase in equalization aid, since it is highly unlikely the Legislature would appropriate total school aids and credits that exceed the two-thirds standard. Therefore, increasing the categorical appropriation would be less advantageous for districts with lower tax bases than for more affluent districts. Nevertheless, all districts with special education costs would get a portion of the increased categorical aid.

Efforts to significantly increase categorical aid could trigger arguments about the relative merits of equalization versus categorical aid. However, it would be healthy for the Legislature and the public to debate where to strike a balance between equalization and categorical aid, rather than continuing current trends without that deliberation.

If the state continues revenue caps in their current form and maintains the freeze in categorical aid for special education, many school districts will continue to have to make substantial cuts in other basic programs. These cuts will be imposed on districts in order to pay for the rising cost of the state and federal mandates to serve students with disabilities. Alternatively, they will have to cut back on the quality of their services for special education students. These fiscal pressures will be especially difficult for the growing number of districts that are facing declining overall enrollment but increasing enrollment in their special education programs.

Ultimately, current trends and fiscal pressures could lead to a reduced identification of special education students, with the result that deserving students are underserved. If that occurs, it could put additional strains on the regular classroom environments and lead to poorer educational services for all students