LAO 2003-04 Budget Analysis: Education

Legislative Analyst's Office

Analysis of the 2003-04 Budget Bill

Special Education

Budget Threatens Federal Funding

We recommend the State Department of Education report at budget hearings on the likelihood that the federal Department of Education would grant California a waiver of the special education maintenance of effort requirements for 2003-04.

The Governor's budget proposes $2.66 billion from the General Fund for special education in 2003-04, a reduction of $52.1 million from the revised 2002-03 estimate of $2.71 billion. The state supports special education costs with three sources of funding: General Fund, local property taxes, and federal funds. The General Fund covers the program's funding needs that are not met by federal funds or property taxes.

In our discussion of the 2002-03 budget reductions earlier in this chapter, we identified a federal maintenance-of-effort (MOE) problem created by the deferral of special education payments. Federal law contains an MOE requirement that states must meet to qualify for federal funding. This requirement mandates that state spending on special education must not decrease from the prior year as a condition of receiving federal funds. State spending for the purposes of the MOE is defined as state General Fund support and local property taxes going to special education.

The proposed 2003-04 special education budget presents two additional issues. First, state funds proposed by the budget fall $28.5 million short of meeting the MOE. Depending on the outcome of discussions with the federal government, this reduction could threaten a portion of our federal funds. Second, the budget includes $21 million in General Fund support to restore 2002-03 funds resulting from the Governor's across-the-board reduction. To date, the Legislature has not adopted this reduction, and therefore the restoration appears unnecessary. As a result, the Legislature could redirect these funds to other Proposition 98 priorities.

State Should Seek a Federal Waiver. According to the Department of Finance, the administration is considering two options to address the MOE issue: (1) apply for a federal waiver to allow California to continue receiving federal funds despite the fall in state funding for special education and (2) increase General Fund support for the program in the May Revision by $28.5 million.

California would appear to have a case for a waiver. The budget proposes to fully fund the projected need for special education funding (although without a cost-of-living adjustment), which would assure the federal government that student services as identified in each student plan would be provided. In addition, the state would have maintained its commitment to students at a time almost all other budgets are being reduced due to the state's fiscal crisis.

The waiver option is worth exploring given the savings it would generate. Therefore, we recommend the State Department of Education discuss the possibility of a waiver of MOE with the federal department and report to the budget committees during hearings on California's chances of obtaining a waiver.

If the waiver appears likely, the Legislature could not only recognize the $28.5 million in savings assumed in the budget, but also reduce the special education appropriation by $21 million. If a waiver does not appear likely, the Legislature will need to increase special education funding by the $28.5 million shortfall, and redirect the $21 million the Governor provided to restore the across-the-board cut to other special education purposes.

Return to Education Table of Contents, 2003-04 Budget Analysis