Legislative Analyst's Office Analysis of the 2002-03 Budget Bill

Special Education

The Governor's budget includes $2.7 billion in General Fund support (Proposition 98) for special education in 2002-03. As Figure 1 shows, the Governor's budget provides a total increase in special education funding of $117 million or about 3 percent. This increase is comprised of (1) a decrease in the General Fund contribution of $17.8 million, (2) an increase in local property taxes earmarked for special education of $22.6 million, and (3) an increase in federal special education funds of $112.3 million.

The budget uses the net additional monies to fund the special education cost-of-living adjustment (COLA) and growth. Specifically, the Governor's budget contains $77.5 million for a 2.15 percent COLA, the same percentage increase proposed for K-12 revenue limits and other categorical programs, and $39.6 million to pay for enrollment growth of 1.1 percent.

In addition, the Governor's budget contains the second of ten annual installments of $25 million each in accordance with the terms of the special education settlement agreement set forth in Chapter 203, Statutes of 2001 (SB 982, O'Connell).

Background

In 2000-01, approximately 651,000 pupils age 22 and under were enrolled in public-funded special education throughout the state. Federal law defines the disabilities that qualify a child for special education and mandates school responsibilities and parental rights. Federal law sets out three basic principles that apply to children with disabilities: (1) all children with disabilities must be provided a free, appropriate public education; (2) each child's education must be determined on an individualized basis and designed to meet his or her unique needs in the "least restrictive environment;" and (3) the rights of children and their families must be ensured and protected through procedural safeguards.

Consistent with these federal requirements, California's Master Plan for Special Education (MPSE) requires schools to assess each child's unique education needs and to develop an individualized educational plan. The MPSE, implemented statewide in 1980 with the enactment of Chapter 797, Statutes of 1980 (SB 1870, Rodda), established an area-wide approach to the delivery of special education services. The current areas are called Special Education Local Plan Areas (SELPAs).

The intent of the SELPA structure is to deliver special education services in an efficient and cost-effective manner. Differing population densities around the state have resulted in SELPAs of differing geographical size, ranging from multiple-county SELPAs to single school district SELPAs. In 2000-01, there were 116 SELPAs. Of these, 3 were multicounty, 33 were countywide, 48 were multidistrict, and 32 were single-district SELPAs.

Federal Special Education Funds

For 2002-03, the state will receive a total increase of $131.6 million of federal special education monies from the Individuals with Disabilities Education Act (IDEA) Part B funds (special education funding for children ages 3 through 21). This is $19.3 million more than is reflected in the Governor's budget because, at the time the Department of Finance (DOF) put together the 2002-03 budget in November 2001, the federal government had not finalized its appropriation level. This level turned out to be higher than what DOF built into the budget.

In 1975, Congress enacted the Education for All Handicapped Children Act of 1975, now known as IDEA, to ensure that all disabled children have available to them special education and related services that are designed to meet their unique needs. In this bill, Congress stated its intent to provide 40 percent of the additional cost of meeting special education requirements (computed on a national average). More recently, in 1997 Congress recommitted to the 40 percent funding share.

Despite the federal government's promise, it has never contributed more than 17 percent (compared to the 40 percent goal) of the costs of educating children with disabilities under IDEA. In California, the federal share of cost is close to 10 percent. The State Department of Education (SDE) estimates that California would receive about $1.7 billion annually—more than double the current amount—if the federal government met its 40 percent promise.

The Governor's Budget Proposal

The Governor's budget proposes to fund baseline increases in special education and uses the $112.3 million of additional federal special education funds to "free up" budget-year Proposition 98 General Fund monies. Given the state's fiscal situation and the sizable funding increases that special education has received over the last few years, we think the Governor's proposal for these federal funds is reasonable.

Recommendation for Allocating Additional Federal Funds

We recommend that the Legislature use the additional $19.3 million of federal special education funds that California will receive for 2002-03 for the following purposes: (1) $4 million to further offset the state's General Fund contribution, (2) $300,000 to conduct a study to calculate new factors for the special disabilities adjustment, and (3) $15 million split between special education equalization and per-average daily attendance (ADA) distributions.

In the 2001-02 Budget Act, the Legislature signaled its intent to use additional federal special education funds for special education augmentations. The Legislature has the opportunity to appropriate $19.3 million of additional federal special education funds that are not currently scheduled in the Governor's budget to help meet its legislative priorities.

We make the following recommendations:

• Meet Other Legislative Priorities ($4 Million). We recommend the Legislature use $4 million of the additional $19.3 million California will receive to free up Proposition 98 funds for other legislative priorities. Within the confines of federal nonsupplanting language, the Legislature may only use $4 million of federal special education funds for this purpose.
• Fund Special Disabilities Adjustment Study ($300,000). As part of recent special education funding reform, the state created a funding mechanism to provide additional funding to SELPAs that have a disproportionately large number of high-cost special education students. In 1998, the state completed a study that calculated a special disability adjustment factor to determine appropriate funding adjustments for these SELPAs. Current law states that these factors expire after 2002-03 and calls for a new study to be completed by March 2003. In order to update the factors and assess appropriate funding adjustments, we recommend that the Legislature fund a new study for 2002-03. The Governor's budget does not include funding for this study. We estimate it would take about a year to complete this study and it would cost about $300,000.
• Split Remaining $15 Million Between Equalization and Per-ADA Distribution. With the remaining $15 million of federal special education funds, we recommend that the Legislature follow the precedent it set in the 2001-02 Budget Act and allocate half of the funds for further equalization of special education funding levels and distribute the other half to all SELPAs on a per-ADA basis. This distribution recognizes that special education funding levels vary considerably and trail the progress made in revenue limit equalization. It also provides some additional funding to all SELPAs rather than just the low-funded SELPAs.