Legislative Analyst's Office Analysis of the 2001-02 Budget Bill

Special Education

The Governor's budget includes $2.7 billion in General Fund support (Proposition 98) for special education in 2001-02. This is an increase of $260 million, or almost 11 percent. In addition, there are $652 million of federal special education funds—an increase of $130 million, or 25 percent. The budget reflects the following changes:

• $126.5 million for a 3.91 percent cost-of-living adjustment (COLA), the same percentage increase proposed for K-12 revenue limits and other categorical programs.
• $100 million to Special Education Local Plan Areas (SELPAs) as part of the proposed settlement agreement for the special education mandate claim. (See the narrative following the K-12 Education Introduction section of this chapter for a description of the agreement.)
• $98 million to increase funding per average daily attendance (ADA) equally for all SELPAs.
• $41.5 million to pay for enrollment growth. This is an increase of 1.1 percent.
• $6.9 million to complete funding equalization for SELPAs.
• Chapter 854, Statutes of 1997 (AB 602, Davis and Poochigian), specified a methodology to bring all SELPAs to at least the same "target" amount. The target is equal to the 1997-98 average spending per ADA adjusted annually by the statutory COLA. The budget estimates that this $6.9 million augmentation will provide the remaining funds needed to reach that objective.
• $5.8 million for the "incidence multiplier." This incidence multiplier provides additional funding to SELPAs having higher incidences of children whose service costs are significantly above average. The budget estimates that this $5.8 million augmentation will provide the remaining funds needed to reach that objective.
• $14 million increase to expand the workability program from the current service level of 75,000 students to 121,000 students. Current-year funding totals $22.9 million ($7.4 million from the General Fund and $15.5 million from federal funds). This program provides comprehensive preemployment training, employment placement and follow-up for high school students in special education who are making the transition from school to work, independent living or postsecondary education or training.

Increases in federal funds of $12.7 million offset the General Fund amounts needed for equalization and the incidence multiplier, while local property tax increases of $22 million also partially offset needed General Fund amounts.

Background and Enrollment

In 1999-00 approximately 646,000 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 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 1999-00 there were 116 SELPAs. Of these, 3 were multicounty, 33 were countywide, 48 were multidistrict, and 32 were single-district SELPAs.

Continued Compliance Reporting is Warranted

We recommend that the Legislature extend the special education reporting requirements from the Supplemental Report of the 2000-01 Budget Act for an additional year so that the Legislature can obtain information it needs to fulfill its oversight responsibilities regarding compliance with federal special education requirements.

Background. The Legislature adopted special education reporting requirements in the Supplemental Report of the 2000-01 Budget Act in order to (1) to monitor the State Department of Education's (SDE) progress on resolving compliance issues raised by the U.S. Department of Education's Office of Special Education Programs (OSEP), and (2) exercise legislative oversight by holding SDE accountable for their use of funds and staff in achieving statutory objectives and goals. In the supplemental report, the Legislature directed SDE to increase the number of verification reviews of local education agencies and to provide staffing and compliance monitoring reports.

Additionally, in the 2000-01 Budget Act, the Legislature approved
54 positions to enhance SDE's monitoring capabilities. The Governor, however, vetoed 22 of these positions.

Report Shows Progress, But Oversight Still Warranted. The SDE submitted the first reports in December 2000 and January 2001. The reports indicate that SDE has conducted 10 of the 55 verification reviews it plans to complete by June 2001. The reports also show that SDE has 30 vacant positions out of 143 positions in the Special Education Division. We are concerned this vacancy level will impair SDE's ability not only to conduct quality verification reviews, but also to resolve ongoing compliance issues.

Given the Legislature's role overseeing special education policy and the federal special education funds at stake, we recommend that the Legislature extend the special education supplemental report requirements for an additional year to monitor SDE's progress in addressing special education compliance issues.

Further Equalize Special Education Funding Levels

We recommend that the Legislature further equalize special education funding levels—using $98 million of General Fund monies "freed up" by new federal funds—to bring approximately 75 percent of the state's average daily attendance to the same special education funding level because (1) a large funding variation remains, and (2) special education equalization should move toward the equalization level of general education revenue limits.

The budget includes $98 million of additional funds for special education to increase funding per ADA equally for all SELPAs (Item 6110-161-0001, Provision 15). The administration intends to propose trailer legislation for this purpose.

Background. In 2000-01, the state is expected to meet part of the special education equalization goals adopted in Chapter 854, Statutes of 1997 (AB 602, Davis and Poochigian). That is, all low-funded SELPAs will receive at least the statewide target funding level of $474 per ADA. Current law specifies that any increase in federal special education funds results in an offsetting reduction in state General Fund contributions for equalization. By raising all low-funded SELPAs to the target in the current year, the state will have $98 million of General Fund monies in the budget year that are, in effect, "released" from this equalization requirement. Consequently, the funds will be available for other special education purposes or for other general state purposes.

The $98 million of General Fund monies made available by the infusion of that amount of new federal funds affords the Legislature an unusual budgeting opportunity. Below, we discuss an alternative use for the $98 million. Rather than provide funding to all SELPAs as proposed by the administration, we believe that the Legislature should further equalize special education funding levels.

Not Much Gain from Equal Distribution. The primary benefit of distributing funds equally per ADA is that all SELPAs would receive funding. We estimate SELPAs would receive approximately $17 per ADA under the Governor's proposal. One justification for this approach is that high-funded SELPAs deserve a portion of these funds since they have been left out of previous equalization money.

In our view, this justification is not persuasive. Although high-funded SELPAs have not received equalization funds, they still receive funding for COLAs, ADA growth and, in some cases, the special disabilities adjustment—an adjustment providing additional funding to SELPAs with a disproportionately large number of very high-cost special education students. Furthermore, high-funded SELPAs would receive an increase of about $17 per ADA per year under the budget's proposed special education settlement agreement. (This agreement is discussed in detail earlier in this chapter.) For these reasons, we do not view the budget proposal as compelling.

Further Equalization Promotes Legislative Goals. Alternatively, the Legislature could use the General Fund monies freed up by the additional federal funds to further equalize per-ADA allocations to SELPAs. With the available $98 million the Legislature could bring approximately 75 percent of the state's ADA to the same special education funding level (about $500). As of 1999-00, about 70 percent of the state's ADA was within 5 percent of the lowest special education funding level. The other 30 percent of ADA was above that level.

We consider this alternative preferable to the budget proposal for three reasons.

• Equalization Goals Are Ongoing. The equalization funding in AB 602 is one component of a three-pronged strategy to reduce funding variation by (1) raising the low-funded SELPAs to the target level, (2) applying a uniform COLA amount that prevents further funding variations, and (3) providing funding for new students at the statewide target. The latter two components indicate that the Legislature did not intend to "close the books" on equalization, but signaled a continued commitment to reducing funding variation.
• Large Funding Variation Remains. Although the state will achieve part of the equalization target of AB 602, a relatively large variation in funding levels remains. The range of funding levels between the highest- and lowest-funded SELPA is approximately $600 per ADA.
• Trails Revenue Limit Equalization. Special education funding is not as far along in the equalization process as general education revenue limits. For example, about 90 percent of the ADA for large unified districts—which accounts for over two-thirds of the statewide ADA—is within 5 percent of the lowest revenue limit per ADA. The Legislature has demonstrated its desire to coordinate special education and revenue limit funding by directing that both receive the same COLA percentage. Under this option, the Legislature has the opportunity to make rapid progress in having special education equalization "catch up" with revenue limits equalization.

Analyst's Recommendation. For all the above reasons, we recommend that the Legislature use the $98 million of released funds to continue equalization of special education funding levels. Specifically, we recommend the enactment of trailer legislation bringing approximately 75 percent of the state's ADA to the same special education funding level.