LAO 2006-07 Budget Analysis: Education

Analysis of the 2006-07 Budget Bill

Legislative Analyst's Office
February 2006

Special Education

In 2004-05, 682,000 students age 22 and under were enrolled in special education programs in California, accounting for about 11 percent of K-12 students. Special education is administered through a regional planning system consisting of Special Education Local Plan Areas (SELPAs). There are currently 116 SELPAs.

Figure 1 displays the amounts proposed for special education in 2005-06 and 2006-07. The Governor’s budget proposes total expenditures of $4.4 billion for special education in 2006-07, an increase of $188 million, or 4.5 percent. Under this proposal, General Fund support for special education would increase by $156 million, or 5.4 percent. The budget proposes sufficient funding to accommodate growth in the student population (0.2 percent) and a cost-of-living adjustment (COLA) (5.2 percent) on the portion of the special education budget funded from the General Fund and local property taxes. The budget does not fully fund the cost of growth and COLA on the federal fund portion of the budget (discussed in more detail below). The budget also provides $5.6 million in base technical adjustments to address changes in attendance and local property tax revenue estimates. In addition, the budget would continue in 2006-07 a $52.6 million appropriation of discretionary funds that was added in the 2005-06 Budget Act.


Figure 1

Special Education Funding

(Dollars in Millions)


Revised 2005‑06

Proposed 2006‑07




General Fund





Local property taxes





Federal funds











Detail my not total due to rounding.


Fully Fund the Base Special Education Budget

We recommend the Legislature redirect virtually all of the $52.6 million in one-time discretionary funds to pay for technical adjustments to the base special education budget and fully fund growth and inflation adjustments on the federal portion of the program.

The 2005-06 Budget Act contains two new provisions that alter the development of the budget-year funding proposal for special education. First, state law no longer guarantees funding for growth and COLA increases on the prior-year level of federal funds. Instead, the amount provided for these cost increases is subject to the annual increase in federal funds. The Legislature may supplement this increase as part of the annual budget if the increase in federal funds is less than the amount needed for growth and COLA.

Second, the current-year budget includes $52.6 million that is allocated to SELPAs for one-time purposes. These are not one-time funds-they are ongoing funds that are part of the base special education budget. The budget act, however, distributes these funds on a one-time basis, which allows the Legislature to reconsider the use of these funds as part of the 2006-07 budget process. Provisional language in the proposed budget bill places a priority on the use of these funds for helping special education students pass the California High School Exit Examination.

The $52.6 million in discretionary funds also is accompanied by a “balancer” provision, which specifies that first call on the funds is to pay for any shortfalls in the special education budget. This can happen if federal or local property tax funds are lower than estimated in the annual budget. Thus, the balancer provision provides significant protection to SELPAs by ensuring the availability of additional funds in the event of a shortfall. As a result, however, the amount of one-time discretionary funds distributed to SELPAs could be less than $52.6 million if there are funding shortfalls.

We have identified two major fiscal issues in the proposed 2006-07 special education budget. First, the budget overstates the amount of discretionary funds that will be available in the budget year due to technical errors in the development of the budget-year proposal. Second, the budget does not propose to provide growth and inflation adjustments to the federally funded portion of the budget. Below, we discuss these issues in greater detail.

Technical Issues Involve 2004-05 and 2005-06 Revisions

As part of the development of the 2006-07 Governor’s Budget, the Department of Finance (DOF) revised the estimate of 2004-05 and 2005-06 special education spending in order to calculate its estimate of special education costs for the budget year. Our review indicates that DOF made several technical errors in determining these prior- and current-year adjustments. To correct these technical errors, we recommend the Legislature make the following adjustments to the proposed budget.

Higher Base Costs Will Reduce One-Time Discretionary Grants in 2005-06. As discussed above, the $52.6 million current-year appropriation for one-time purposes is the balancer for expected costs in 2005-06. The DOF’s revised estimate of special education spending in 2005-06 does not reflect the automatic adjustment to the discretionary appropriation. Our estimate of the current-year special education budget indicates that costs are $7.6 million higher than assumed in the budget act, and that local property tax revenues are $11.1 million lower (based on DOF estimates). Thus, 2005-06 will have an estimated $18.8 million shortfall. Our combined figure is higher than DOF’s because of technical errors in 2004-05 special education costs, and growth and COLA adjustments in 2005-06. Because of the balancer provision, the amount of the one-time grants will fall from $52.6 million to $33.8 million in the current year.

Higher Base Costs Continue Into 2006-07. The effect of the two technical adjustments discussed in the previous section will carry forward to 2006-07. In fact, these adjustments ($18.8 million) will grow slightly in 2006-07 because growth and COLA is applied to them. Adding $700,000 for these adjustments, a total of $19.5 million is needed to fully fund the base program in 2006-07. This is in contrast to the $5.6 million base adjustment included in the Governor’s budget. We recommend the Legislature redirect $19.5 million in 2006-07 from the combined discretionary funds to pay for these special education technical adjustments.

Fully Fund Growth and COLA on Federal Funds

The budget projects a $13.8 million increase in the federal special education grant, which translates into a 1.4 percent increase for this portion of the program. No additional funds are included to provide a full growth and COLA adjustment on the federally funded portion of the program. Providing a full growth and COLA increase would cost $52.3 million, or $38.6 million more than is included in the Governor’s budget.

Prior to 2005-06, state law required full growth and inflation adjustments on the federally funded portion of the special education program. In 2005-06, this statutory guarantee was deleted. The elimination of the state’s guarantee was a response to a federal amendment that disallowed the use of federal funds to pay for state-guaranteed growth and inflation adjustments on the state or federal portion of the program. Under the new federal law, federal funds may be used to provide these adjustments on the federal portion of the program-so long as state law does not guarantee such increases. The state’s response in 2005-06 was to eliminate the guarantee in state law, thereby freeing the state to use any increase in federal funds for growth and inflation increases on the federal portion of the program.

In our view, the elimination of the state guarantee places the issue of a full growth and inflation adjustment into the budget process, where the cost of providing a full adjustment must compete with other uses of available Proposition 98 funds. The DOF provides two reasons for not proposing a full adjustment in 2006-07. First, DOF believes the change in state law means that maintaining the spending power of the federal grant is a federal-not state-responsibility. The DOF notes that the state does not use state funds to provide a full growth and COLA adjustment for any other federal education program. Second, DOF believes SELPAs would be able to use funding provided through the one-time discretionary grants to pay for costs associated with growth and inflation.

We disagree with the DOF rationale. Providing a full adjustment is a priority because it would maintain the integrity of the special education funding model that was created by Chapter 854, Statutes of 1997, (AB 602, Poochigian and Davis). The special education funding model provides a grant of funds to SELPAs based on the overall number of K-12 students attending school in each SELPA. The model includes local property taxes and federal funds in determining the amount of total special education funds provided to SELPAs. Failure to fully adjust the federally funded portion of the model for the effects of growth and inflation would slowly erode the purchasing power of the AB 602 grants. We are concerned that, over time, this loss of purchasing power could undermine the funding model.

We also believe that SELPAs would not be able to use the discretionary funds to pay for costs associated with growth and COLA. The provisional language clearly directs SELPAs to use the discretionary funds for “one-time purposes.” Since growth and COLA costs are ongoing base expenditures, the language would preclude SELPAs from using the discretionary funds to pay for such costs.

Therefore, we recommend the Legislature supplement the additional federal funds with $38.6 million to provide a full growth and inflation adjustment on the federally funded portion of the program. We think the Legislature should place a high priority on maintaining the existing funding model as it provides for a simple, relatively fair method of allocating funds for special education. The $38.6 million in growth and COLA costs combined with the $19.5 million in base technical adjustments is roughly the same amount proposed in the budget for the discretionary grants ($52.6 million) and the base technical adjustments ($5.6 million). We recommend redirecting funding from these two sources to pay for the growth and COLA costs.

Because of last-minute changes in the federal budget (federal fiscal year October 2005 to September 2006) applying across-the-board reductions to federal programs, it appears likely that the federal special education grant will be lower than projected in the Governor’s budget. In that event, we recommend the Legislature redirect sufficient Proposition 98 funds to ensure full growth and COLA increases on AB 602 grants.

No New Proposal for Mental Health Services

In signing the 2005-06 Budget Act, the Governor directed the Department of Mental Health (DMH) to convene a working group to develop a proposal for revamping the existing program that supports mental health services for special education students. This program currently operates as a state-mandated local program. The Governor charged DMH with developing a proposal to convert the program into a categorical funding program.

The DMH budget for 2006-07 does not include such a proposal. Instead, the DOF advises that DMH will convene a working group with the goal of submitting a proposal to the Legislature later this spring. Please see our discussion of this issue in The 2006-07 Budget: Perspectives and Issues.

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