The 2017-18 Budget

Analysis of Special Education “Disconnect”

Some Groups Claim Special Education “Deficit.” For the past few years, some groups, including the California Department of Education (CDE), have expressed concerns about a deficit in state special education funding. This complaint relates to a somewhat complicated issue dating back to 2013‑14, a year in which the state special education budget appropriation and associated trailer legislation were disconnected. Below, we provide background on the issue and offer two options for rectifying the disconnect.

Most State Special Education Funding Distributed According to Overall Student Population. About 85 percent of state special education funding is distributed according to a student-based formula commonly called AB 602 (after the legislation that introduced it in 1998). This formula allocates funds to Special Education Local Planning Areas (SELPAs) based on their total student attendance, regardless of how many students are served in special education.

Before 2013‑14, Federal Funds Offset State Special Education Funding. The AB 602 formula calculates a funding level for each SELPA. As with the Local Control Funding Formula, the state first counts property tax revenue towards these funding levels and then contributes General Fund to fill any remaining gaps. Prior to 2013‑14, the state also included federal funds in the AB 602 formula. Due to complicated interactions between state and federal law, the state removed federal funds from AB 602 calculations starting in 2013‑14.

Starting in 2013‑14, Federal Special Education Funds Were Cut Due to Sequestration. As part of federal budget negotiations, total federal funding for special education was reduced about 15 percent in 2013‑14. Correspondingly, in California, federal special education funding was reduced an estimated $61 million in 2013‑14.

Legislature Decided Not to Backfill for Sequestration Cuts . . . Before 2013‑14, the state automatically backfilled reductions in federal special education funding as part of AB 602 calculations. Because federal funding was reduced at the same time it was removed from AB 602 calculations in 2013‑14, the state had to decide whether the AB 602 funding levels would be calculated before or after backfilling these cuts. The Governor’s 2013‑14 May Revision included funding to backfill the sequestration cuts. Ultimately, the Legislature decided not to backfill for the federal funding cuts, and it appropriated a General Fund amount consistent with that decision.

. . . But Budget Action Disconnected From Trailer Legislation. While the Legislature appropriated a General Fund amount assuming no backfill for federal funding cuts, it did not modify the May Revision trailer bill language, which assumed a backfill would be included in the new AB 602 calculations. This disconnect meant the budget appropriation for AB 602 was insufficient to pay the formula’s cost in 2013‑14 under the enacted Education Code language. In its initial 2013‑14 implementation, CDE prorated AB 602 funding levels downward (96 percent of the statutory level) for most SELPAs. Roughly ten SELPAs had sufficient local property tax revenue to cover their full statutory levels and were not initially prorated downward.

Appropriations Since 2013‑14 Have Been Insufficient to Fund Education Code Formula. Since 2013‑14, the AB 602 formula in Education Code (as enacted via the 2013‑14 trailer legislation) continues to derive higher funding levels than the state’s AB 602 budget appropriations. As a result, CDE has continued to initially prorate AB 602 funding levels downward (97 percent, 96 percent, and 97 percent of the 2014‑15, 2015‑16, and 2016‑17 statutory levels, respectively) for most SELPAs. As in 2013‑14, roughly ten SELPAs had sufficient local property tax revenue to cover their full statutory levels and were not initially prorated downward these years.

Situation Further Complicated in 2013‑14 and 2014‑15. Many months after the end of the 2013‑14 and 2014‑15 fiscal years, Santa Clara County reported substantial increases in its AB 602 property tax revenue, enough to pay its SELPAs’ full AB 602 funding levels without receiving any General Fund. The state redistributed General Fund from this county’s SELPAs to other SELPAs across the state—retroactively funding all SELPAs at their full statutory levels for each of these years. Starting in 2015‑16, the administration revised its property tax estimates upward to account for the adjustment in Santa Clara County and made a corresponding downward adjustment in that county’s AB 602 state General Fund revenue. As a result, there will no longer be any General Fund to redistribute away from Santa Clara County when its full property tax revenues are collected, and consequently most SELPAs’ statutory AB 602 funding levels likely will be prorated downward every year beginning in 2015‑16. In short, SELPAs did not ultimately experience pro rata reductions in 2013‑14 and 2014‑15, but most SELPAs did experience them in 2015‑16 and likely will continue to experience them moving forward absent any further state action.

Two Options for Eliminating Disconnect Between Education Code and Appropriation. The state could choose either to (1) amend the statutory AB 602 formula to match its budget appropriation or (2) increase its budget appropriation to match the statutory formula. The first of these options—revising Education Code—would be consistent with the Legislature’s 2013‑14 budget decision not to backfill for federal sequestration. The second option—increasing the state appropriation to conform to Education Code—is contrary to the Legislature’s earlier decision not to backfill for federal sequestration. At this point, we believe either option is a reasonable course of action, though only the first option comes at no additional state cost. (Roughly ten SELPAs will be most opposed to the first option, as they have sufficient property tax revenue to continue covering the higher statutory funding levels. These SELPAs would see some of their property tax revenue go to cities, counties, and/or trial courts, consistent with existing related statutory provisions.)