In a nutshell:

• Districts and charter schools are required by federal and state law to provide special education services.
• Governor Whitmer’s proposed FY2020 budget includes $120 million to increase state reimbursement of school special education costs.
• Instead of a budget increase for special education, the money will be used to offset what districts currently spend from their general funds.

Governor Gretchen Whitmer’s FY2020 budget proposal increases special education funding by $120 million. Great news for this vital, little-understood wedge of public education, right?

Not really. The $120 million increase, if included in the final budget, would only offset what districts already spend to cover special ed. It would free up existing funding schools receive for general education students. It’s complicated how it works, but we’ll try to keep it simple.

Unlike general education, since the early 1970s students with disabilities have been guaranteed special education services by both federal and state laws. Specifically, these students are entitled to free and appropriate services in the least restrictive environment. In most instances, a complex web of laws stipulate that services must be provided without consideration for the costs involved.  

Dedicated federal and state funding has never been sufficient to cover the full costs of services. So this arrangement effectively constituted an unfunded mandate for local schools.

However, the 1978 Headlee Amendment to the 1963 Michigan Constitution prohibits state government from mandating services of local governments without providing the funding to support them. The state has a sketchy record adhering to this prohibition in a number of cases, but schools successfully sued the state in 1997 to enforce this provision as it relates to special education services.

The seminal case testing the unfunded mandate clause of the constitution was originally filed in 1980. The state Supreme Court’s 1997 ruling in the Durant decision established the foundation for the current special education financing system. That decision requires the state to reimburse school districts for roughly 29 percent of their special ed operating costs and about 70 percent of their transportation costs. Since the court ruling, the state has funded special education at these fixed percentages, providing the minimum required reimbursement.

That means schools pick up the remainder of the costs from other sources, including federal funds and intermediate school districts (ISD) millages shared with local districts. For most districts, the combination of state reimbursement, ISD millage, and federal funds doesn’t cover all costs. In effect, special education is an underfunded mandate, forcing districts to provide some of their General Fund resources to make up the difference.

This is a problem known as “encroachment” – money spent on special education reduces or “encroaches” on the financial support intended for other students.

Statewide, encroachment was estimated at about $700 million in FY2016 (see chart). This was equal to about $460 per general education student enrolled in public schools in 2016. The amount of encroachment varies across districts; some urban schools with very high special education costs experience substantial amount of encroachment.

For example, in the Detroit Public Schools Community District where nearly 18 percent of the student enrollment received special education services, encroachment topped $1,000 per general education student in 2016, up from $970 per pupil in 2013. For Detroit and other urban districts with high concentrations of special education students, many with very involved and expensive educational needs, encroachment is a major financial consideration that cannot be avoided because of the federal and state laws involved.

Governor’s budget proposal

Back to that $120 million in the Governor’s budget proposal. Statewide, it is estimated that the additional funding will allow the state to raise its reimbursement rate by four percentage points, from roughly 29 percent to 33 percent.

The state will distribute these funds to districts and charter schools in a separate allocation after meeting the required 29 percent reimbursement rate. Because this is a fixed amount of money, the actual increase (as a percentage of costs) will depend on the total costs incurred by each district and charter school in FY2020, a figure we won’t know until sometime in late 2020 or early 2021. The state would continue to reimburse districts’ special education transportation costs at the required minimum rate of 70 percent.

The additional state funds in the Governor’s budget will have different effects on school funding depending on the level of analysis – statewide or individual district impact. To examine the statewide impact, consider the pie chart presented here. The $120 million will NOT affect the overall size of the pie (i.e., amount of services provided and costs incurred), but it will change the size of individual shares (i.e., financing sources of total costs). Specifically, the share of the special education costs funded by the state will increase, while the share of these costs covered by local districts’ will fall by a like amount.

Overall, the money will lower the state’s encroachment rate and thus the amount districts must contribute from their general funds to finance special education. That shakes out at about $80 per student for districts to program in their schools. Districts are not obligated to direct these funds to special education classrooms, but some might. Certainly, many will use the money in their general education classrooms after years of allocating some of their discretionary funding to special ed.  

The effect on individual district finances will vary depending on a host of factors, most notably the current degree of encroachment. For most, the additional state dollars would likely go to offset, dollar for dollar, a district’s general fund contribution to the special education classroom. Given that encroachment averaged about $460 per general education student in 2016, many districts will use the funding to reduce, not eliminate, their encroachment rate.

The Governor should be applauded for directing attention and financial resources to special education. This topic has received scant attention by state policymakers despite calls from advocates, school officials, and researchers to address the challenges posed by Michigan’s current funding approach (here, here, and here). This approach is unfair to special education students because of the limited state reimbursement and restrictions placed on other dedicated revenue sources. Also, the finance system affects the general education student population because of the high degree of encroachment that requires districts to finance costs with resources intended for the general education classroom. The governor’s budget recommendation begins an important conversation in which policymakers should participate.