Special Education Finance



School districts across Minnesota have increasingly found themselves delivering two lines of educational product, as it were.  Both lines are important.  One line--special education and other special mandates--is run at a financial loss; the other line--regular education is not. In fact, in each district, unless there is local operating levy support, the school district must cut back educational services to regular education students, in order to fund the state imposed deficit in special education.   Now the funding across school districts for general education is nearly uniform, although there are minor differences from district to district.   That means that  districts with high special education expenses, must reduce their regular education services by a greater amount than districts with smaller special education expenses.  

The funding transfer out of general education into special mandated services is often called a "cross subsidy."  Basically, the way that the cross-subsidy works is that the district must take funds out of its regular education classes to make up the funding gap between the services that are mandated and the revenues provided to meet those mandates.

The special education deficit has an impact to some extent on all school districts, but it impacts districts quite differently.  The problem is that students who qualify for special mandated programs are not equally distributed amongst school districts.    There are a number of reasons for that:
What this means is that nearby school districts may have significantly different cross subsidy deficits.  That makes it difficult for the public to understand why one school district may seem to struggle financially, while a neighboring school district is able to provide strong regular education programs seemingly without significant financial stress.  

Because of these mandate cross subsidies, it is possible for a school district to have an overall funding level per-student that is in the high range, but still have  significantly lower funding per student in its regular education programs.  In essence, State and Federal law are extracting money from non-special students in order to fund the education of mandated programs.    The regular education students are being asked to accept reduced programs in order to meet the State's responsibility.  

The history of the special education budget in District 742 is provided on a chart located on the District Website.  Follow this link, please"
 742 Special Education Budget

Minnesota School Finance, A guide For Legislators  October 2007 contains the following:

Local school districts are required by state law to provide appropriate and necessary special education to children with disabilities from birth to 21 years of age. Children with disabilities are defined in statute to include children who have a hearing impairment, visual disability, speech or language impairment, physical handicap, mental handicap, emotional/behavioral disorder, specific learning disability, deaf/blind disability, or other health impairment. The definition of a child with a disability also includes every child under age five who needs special instruction and services, as determined by state standards, because the child has a substantial delay or an identifiable and known physical or mental condition. The mandate for service does not include pupils with short-term or temporary physical or emotional disabilities.

Special instruction and services for children with disabilities must be based on the assessment and individual education plan (IEP). The statutes and rules specify school district responsibilities for program decisions for children with disabilities and for the education of children who are placed outside the district where their parents reside. Districts are required to provide special education on a shared time basis to pupils enrolled in nonpublic schools. Approximately 121,511 students, or roughly 14.4 percent of the public K-12 pupils in the state, receive some special education services.

In the 1990's, the legislature removed all special education from local levies and committed conceptually to covering the full cost of special education from state provided revenues.  Initially, when the legislature established its bi-annual budget, it would by tradition begin by determining the projected special education costs for school districts throughout the state and allocating sufficient funds to fund that state mandated obligation.   But as the cost of special education continued to rise,  the governor and legislators began to look for a way to take special education costs off the state budget.  The easiest way to do that was to continue the mandate, but to reduce state funding for those mandates.  

Legislative memoranda contain the following information:  

Statewide special education revenue caps were imposed in the late 1990s.  These began to diminish state support for special education funding as both the regular special education formula and the excess cost formula inflation factors were set below the actual level of inflation in school district special education costs. The outright elimination of the inflation factors has severely exacerbated this problem. Since special education costs must be funded, a greater share of each district’s undesignated general fund must be used each year for unreimbursed special education costs.   These costs increased each year and were disproportionately spread among the state’s school districts, with regional centers and other areas where families with special needs reside, bearing the largest burdens.

The current special education funding formula consists of two parts and is a capped, reimbursement-based, formula. The major portion of the formula is called the “regular special education revenue.” The regular special education formula counts 68% of the district’s special education personnel salary costs and 52% of its contracted costs for purposes of determining the base year funding. This funding is then subject to a statewide revenue cap of roughly $630 million per year, which is no longer subject to an inflationary increase (--- the inflation factors were eliminated as part of the budget saving activities approved by the 2003 Legislature beginning with FY 2004 and later). The result is that the regular special education base revenue is scaled back by a greater percentage and has a greater shortfall each succeeding year.

 The other portion of the special education funding formula is called the excess cost formula. This formula was created as a way to lessen the impact of the statewide cap on regular special education revenue. Excess cost revenue was designed to fund 75% of the district’s unreimbursed special education costs once the district had spent 4.36% of its general education revenue (about $325 per pupil) on these expenditures.

Prior to fiscal year 2004, the statewide revenue amount was increased yearly by an inflation factor called the program growth factor (which was set at 1.08 for fiscal year 2002 and 1.046 for fiscal year 2003).  But then, for the next four years, excess cost revenue was subject to a statewide revenue cap of $104 million and its inflation factor was also removed by the 2003 Legislature.  

During the period from 2001 to 2007, state policy began to squeeze school districts like St. Cloud like an orange.  The Minnesota Department of Education became quite aggressive in pushing districts to spend more.  At the same time the governor submitted budgets which hurt districts with high special education populations.  According to the Minnesota State Auditor, from 2001 to 2005, statewide special education expenditures increased at the rate of 33%, (6.6 percent per year) while regular instruction expenditures increased only 16.1% (3.2 percent per year).  During these five years, statewide overall enrollment declined by about 2.1 percent, but the statewide number of special education students increased by 5.3%, or just over one percent per year.   During this period, the statewide average cost of special education per special education student increased 24% to $11,885 (or 4.9 percent per year).    Our district, and similar districts were pressured from both ends:  we were pressured to spend more by state policy, but state support was tightened, causing increasing cross-subsidies to come from regular education.

Dozens of school districts all over the state were victimized by four years of neglect and policies imposing the greatest deficits on the districts with the greatest need.  As of 2004, 26 school districts had special education deficits of ten percent of their general fund or greater, but the number of these districts, and the size of these deficits, was growing further following 2004.  Representative FY 2004 special education deficits included White Bear Lake ($4.7 million), Hopkins ($4.5 million), Minneapolis ($25 million), St. Paul ($23.7 million) and St. Cloud ($6  million).   By 2006-2007 our special education deficit had grown to $7.5 million, well above the amount of our operating referendum support.  In other words, by 2006-2007, our special education deficit was so large, that the entire amount of our local referendum support was needed, plus several million additional dollars from regular education, to cover the deficit in state reimbursments for special education.  

In St. Cloud, we tried to address this problem in two ways.  First, we froze special education expenditures.  (Because of federal maintenance of effort requirements, save in extraordinary circumstances, if we cut the budget any lower, we would lose a dollar of federal aid for every additional reduction in our spending).  Second, we joined with other school districts across the state to seek legislative relief.   The superintendent, Executive Director of Business Services and several board members appeared to explain the problem faced by school districts like ours.   Locally, Senator Clark was specially active in a leadership role in insisting that the special education mandate deficit be confronted.  In order to address this problem, in the last biennium,  the regular special education aid revenue cap was increased from $529 million in fiscal year 2007 to $694 million for fiscal year 2008.  

The net result of these efforts provide us some relief from the growing special education deficit.  From 2003 to 2006, the special educatoin deficit rose from $5 million to $7.5 million, and before the implementation of legislative relief this biennium, was scheduled to go even higher.  In 2007-2008, our special education deficit dropped back to $6 million, and in the following budget year--next year--it is scheduled to drop back to $5.8 million.    But notice that still, our special education deficit remains about $800,000 higher than it was in 2003-2004.  

St. Cloud Schools
Special Education Financial Indicators
 
Budget Projected
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-2010
Year Year Year Year Year Year Year
Revenues
  Federal 1,686,789 2,229,177 2,979,230 2,602,762 2,709,825 2,455,977 2,500,000
  State Regular 8,474,271 8,679,851 8,223,195 7,484,048 8,727,637 8,719,254 8,800,000
  State Transportation 1,192,395 1,261,018 1,129,205 1,193,378 1,430,000 1,581,093 1,600,000
  State Excess Aid 2,728,300 2,322,507 2,070,668 2,290,690 2,200,000 2,200,000 2,200,000
Q Comp 513,261 266,414 270,000 266,414 270,000
  Tuition 794,814 1,079,130 782,388 966,754 900,000 900,000 900,000
  Third Party Billing 101,923 127,475 184,373 306,917 315,000 375,000 375,000
  General Ed.-Tuition 219,916 214,794 207,272 0 0 0
  General Ed.-Residents 2,662,045 2,589,614 2,568,047 2,608,130 2,600,000 2,600,000 2,600,000
    Total Revenues 17,860,453 18,503,566 18,657,639 17,719,093 19,152,462 19,097,738 19,245,000
State Revenues 12,394,966 12,263,376 11,423,068 10,968,116 12,357,637 12,500,347 12,600,000
Expenditures
Special Education
  Federal 1,686,789 2,229,177 2,979,230 2,601,773 2,706,285 2,455,977 2,500,000
  Q-Comp 0 0 513,261 266,414 270,000 266,414 270,000
  State Salaries & Benefits  18,259,524 18,736,931 19,158,207 19,572,272 19,657,301 19,745,306 20,436,000
  Other State Expenditures 1,519,073 1,970,364 1,926,412 1,128,974 881,943 811,464 850,000
  Transportation 1,355,056 1,487,157 1,624,692 1,701,874 1,732,325 1,714,406 1,750,000
    Total Expenditures 22,820,442 24,423,629 26,201,802 25,271,307 25,247,854 24,993,567 25,806,000
  Expenditures Over
    Revenues (4,959,989) (5,920,063) (7,544,163) (7,552,214) (6,095,392) (5,895,829) (6,561,000)