Financing Special Education: Analyses and Challenges March 2012
In the early 1970’s Michigan was a leader among the states when it passed a seminal law to guarantee that disabled students receive special education services. Forty years later, after Michigan’s pioneering efforts, both federal and state laws across the country mandate that all eligible students receive a free appropriate public education in the least restrictive environment. In Michigan, these federal and state mandates can have serious financial implications for both state government and the school districts responsible for providing nearly 225,000 disabled students each year with services and programs tailored to their individual educational needs.
The report collects and synthesizes data from various sources, including the Michigan Department of Education, Michigan Department of Treasury, and individual intermediate school districts (ISD) to develop a comprehensive picture of special education finances — something that does not exist in a single source because of the structure of the finance system. The picture reveals fairly significant differences among school districts in a number of key areas; per-pupil revenues/spending, reliance on local property taxes, and the concentration of special education students in districts. After looking at the historical financial data, the report examines the challenges, prospectively, associated with financing special education and how these challenges spill over to affect general K-12 finances.
Key findings from the report include:
About 225,000 students in Michigan received special education services in 2010, representing nearly 14 percent of the total K-12 population. This was about the same number of students that received services in 2000, but fewer than the number of students in 2005, when almost 251,000 students received special education services. For the most part, annual changes in the special education population have tracked the general student enrollment trends since the mid-2000s. The dispersion of disabled students varied among individual school districts and among types of public schools.
In 2010, the percentage of special education students among traditional local public school districts ranged from 4 percent (Nottawa Community School) to 29 percent (Redford Union School District). Even districts of similar overall size and demographic composition had very differently sized special education populations. For example, 13 percent of the students at South Redford School District in Wayne County received special education compared to 29 percent of the students at nearby Redford Union School District.
Compared to 2000, the percentage of disabled students in the traditional public school environment in 2010 was relatively unchanged at 13 percent. Over the same ten-year period, the percentage of disabled students in charter schools statewide increased from 5.4 percent in 2000 to 9.7 percent in 2010. While the number of students enrolled in charters nearly doubled during this period, the number of charter students in special education nearly tripled.
For a ten-year period ending in Fiscal Year 2010 (FY2010), statewide total special education spending increased at an average annual rate of 4.8 percent per year, double the average annual increase in inflation over the period.
In FY2010 (most recent data), school districts reported $3.4 billion in combined special education expenditures, up 60 percent from the amount in FY2000. Significant annual spending increases from 2000 to 2006 (between 6 and 8 percent annually) accompanied the growing special education population. As special education annual enrollment growth tapered off and began to decline in 2006, spending growth moderated (around 3 percent per year). Over the last decade, total spending increased at a 4.8 percent annualized rate or twice as fast as the change in inflation (2.4 percent per year).
Adjusted for inflation, per-pupil special education spending increased from $12,327 in FY2000 to $14,397 in FY2010, or 17 percent. In comparison, total K-12 per-pupil spending, adjusted for inflation, increased 1.4 percent over the same period (from $9,503 per pupil in FY2000 to $9,633 per pupil in FY2010).
Over the last ten years, special education spending grew faster than overall K-12 spending, both in the aggregate and on a per-pupil basis. Further, this spending exceeded changes in inflation. A key factor in this growth was the steady increase in enrollment. Another likely factor that contributed to this growth was the higher costs associated with delivering special education services and running related programs. These costs are driven by smaller class sizes, the need for special education aides in the classroom, the rising number of specialists, and the costs of diagnostic and professional support services (nursing and various therapies).
Per-pupil spending varies significantly among intermediate school districts and the disparities have grown in recent years. This contrasts with the per-pupil spending differences for general K-12 education where the gap between the highest and lowest spending districts has eroded over the years.
In 2010, per-pupil special education spending (excluding transportation) averaged just over $13,800 statewide. However, amounts among ISDs ranged from $8,832 per pupil (Delta-Schoolcraft ISD) to $18,932 per pupil (Washtenaw ISD). The highest per-pupil amount was more than twice the lowest amount.
Over the last four years, the disparities in funding at the extremes have grown. In 2007, per-pupil spending ranged from $7,798 (Iosco ISD) to $15,572 (Oakland Schools), a difference of $7,774. Between 2007 and 2010, the range (difference between highest and lowest) increased to $10,100. The widening gap between the highest and lowest is further evidenced in the fact that the ratio of the two extremes increased from just below 2.0 in 2007 to nearly 2.2 in 2010.
Since the Supreme Court’s landmark Durant decision in 1997, the State of Michigan’s responsibility for funding special education has been a fixed percentage of eligible costs. Therefore, state special education costs change with total costs, regardless of the condition of the state budget or the needs of other state programs. As total special education costs rose faster than inflation since Durant, so has the amount of state special education funding.
State reimbursement increased steadily from $568 million in FY1998 to $923 million in FY2009, before exhibiting its first decline in FY2010 ($879 million). From FY1998 to FY2010, total state costs were up 55 percent compared to a 34 percent increase in inflation. State government’s responsibility for special education is fixed as a result of Durant; therefore, when the state budget faces challenges, special education funding is largely protected from cuts.
The decrease in School Aid Fund purchasing power since FY2000, combined with the inflation-adjusted growth of special education costs over the same period, meant that proportionately more School Aid Fund dollars had to go towards satisfying the Durant mandate. This has left fewer resources for other K-12 education services, namely the per-pupil foundation grant. Durant obligations, as a percent of total School Aid Fund revenue, grew steadily from 6.2 percent in FY1998 to 8.4 percent in FY2009, before falling to 8.1 percent in FY2010.
Intermediate school districts are expected to seek voter approval for millage rate increases to the special education property tax to make up for the tax base erosion that has occurred with the housing market decline and the Great Recession.
For most districts, the ISD special education property tax is the primary funding source for services and programs. This tax, like all other local property taxes, faces both constitutional and statutory limitations on the growth of the tax base. Also, there are hard caps on the maximum rate allowed (1.75 times 1993 rate). A total of 49 ISDs experienced a reduction in their total tax yield in 2011. Because of enrollment declines in many districts, only 27 districts had reductions in their per-pupil tax yield.
Michigan’s special education funding system is structured in such a way that general fund budgets (primarily those of local constituent districts, but also ISDs) serve as the “funders of last resort” when it comes to financing special education services. When the costs of mandated programs and services exceed the amount of dedicated special education revenues from all sources combined (federal, state, and local), districts’ general fund dollars must make up the difference. In recent years, the amount of the subsidy has declined, but going forward general funds may be asked to play a larger role with declines in property tax revenues.
For the entire state, the general fund subsidy amounted to 19 percent, or $655 million, of total costs in FY2010. This was the smallest piece of the total funding pie; just below the amount of federal funding (22 percent of total). From a historical perspective, the size of the general fund subsidy in FY2010 is somewhat misleading because of the infusion of federal stimulus funds. Prior to the availability of these one-time resources, the federal share was smaller and other components’ shares (including general funds) were larger. In FY2007, the general fund subsidy accounted for 25 percent of all reported costs, the third largest piece and larger than the amount of on-going federal dollars (15 percent of the total). Comparing FY2007 to FY2010 suggests that local and intermediate school districts were able to reduce, at least temporarily, the amount of general fund support they supplied for special education because of the availability of sizeable amounts of federal stimulus resources.
Special education finances benefited from substantial one-time federal stimulus funding during FY 2010 and FY2011. While these resources provided schools with short-term relief, the long-term challenges remain and will re-appear in full beginning in FY2012.
The federal stimulus legislation passed in early 2009 provided temporary general fund budget relief and, in effect, relieved some of the financing challenges facing special education. The amount of direct federal funding in FY2010 more than doubled, from $355 million to $755 million as a result of the stimulus. The federal resources helped reduce the amount of general fund resources going to finance special education in FY2010 ($655 million) compared to FY2007 ($791 million). The loss of these resources in FY2012 will place pressure on ongoing state and local revenue sources and require budget adjustments.