Systemic Inequities and Cross-subsidization: Special ...conlinmi/summerdraftspecialed6-20-13.pdf · of special education services across the state. The Durant funding scheme, where

Special Education Financing

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Systemic Inequities and Cross-subsidization: Special Education Financing in Michigan

Meg Jalilevand

Michael Conlin

Michigan State University

Abstract: Since the implementation of IDEA in 1975, as spending on education has continued to grow, a large portion of that spending has been dedicated to students with special needs. This study examines special education funding in the State of Michigan, examining two related issues: 1) the possible existence of encroachment or cross-subsidization, where funding intended to benefit general students is instead being redirected towards special education; 2) the significant special education spending disparities among different school districts in Michigan. Results show that a significant portion of special education spending, about 25%, must come from a district’s general fund, funds designated for the general student population. Large variations in per pupil spending exist, related to a school district’s property wealth and reinforced by special education financing rules.


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Systemic Inequities and Cross-subsidization: Special Education Financing in Michigan

I. Introduction

The unique educational needs of handicapped children were not addressed by the

American public education system until relatively recently. In 1975, congress passed the

Education for All Handicapped Children Act. This law requires that states provide a “free and

appropriate” public education in the “least restrictive environment” to all children, including

those with disabilities (PL 94-142, 1975). The law also stipulates that these services are to be

provided “regardless of cost.” Since the implementation of this law, renamed the Individuals

with Disabilities Education Act (IDEA) in 1990, as spending on education has continued to

grow, a large portion of that spending has been dedicated to students with special needs.

Rothstein (2010) estimates that special education consumes around 20% of all school spending,

while just over 10% of children nationwide are identified as having special needs (Gordon,

2008).

The recent economic downturn has increased the scrutiny on educational expenditures,

and states have been challenged to do more with less as school budgets have been reduced.

Students with special needs require a disproportional amount of resources, raising questions

about the nature of special education expenditures. What level of spending is reasonable? How

should funding be provided? How can schools design and provide special education services

with the best outcomes for students at a reasonable cost? Many states have been forced to cut

education spending during the prolonged recession (Rich, 2012), creating potential competition


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for education dollars between general education and special education programs. Asimov

(2006) wonders if Special Education services that are mandated by federal law are encroaching

on resources for general education students, asserting that 28% of special education expenditures

in California in 2004 came from general education funds, an amount that has grown in recent

years. In the State of Michigan, which plummeted into recession well ahead of the rest of the

nation, ten consecutive years of employment loss resulted in repeated cuts to educational

funding. Addonizio (2012) states “Michigan public schools have experienced fiscal pressures of

a magnitude not seen in the state since the 1980’s (p. 24).” In this environment of continued

funding reductions and inadequate financing of education, the encroachment of federally

mandated special education services on the general education budget seems likely.

This study examines special education funding in the State of Michigan, and its

relationship with general education funding, examining two related issues. First is the possible

existence of encroachment or cross-subsidization, where funding intended to benefit one group

of students is instead being redirected towards another. The second issue is the significant

special education spending disparities among different school districts in Michigan. Looking

closely at special education funding rules may uncover reasons for the dramatic spending

differences. Results of this study show how inadequate funding for special education coupled

with education funding reductions has increasingly burdened school districts and perpetuated

inequities among districts in the provision of special education services.

II. Background

Berne & Steifel (1984) introduced the concept of vertical equity in educational spending

as “unequal treatment of unequals”. Under this conceptualization, some students with

identifiably different educational needs would require additional resources in order to have an


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equal educational opportunity. In other words, some students are simply more expensive to

educate than others. Federal law, IDEA, while providing some funding for special education

services, has established and protected the rights of disabled students and ensured that states and

local districts provide adequate special education services. States vary widely in how they

provide funding for these services, but for the average school district, the provision of special

education services requires significant financial resources and consumes a large portion of the

budget.

Michigan per pupil revenues and expenditures over the past ten years, in real terms, have

declined by roughly fifteen percent (Figure 1), creating a persistent environment of financial

hardship. The federal government, in tempering the impact of the recession on schools

Figure 1. Weighted Per Pupil Revenue and Expenditure Averages, by district type, in 2012

dollars.


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provided $100 billion to states for education as part of the American Recovery and Reinvestment

Act (ARRA) of 2009 and an additional $10 billion approved by congress as the Education Jobs

Fund. This is reflected in Figure 1 in the increase in per pupil revenues and expenditures in 2009

and 2010. Per pupil revenue and expenditure levels have remained well below their historic

highs in 2002, however, and the ARRA supplemental funding ceased in 2011. Michigan schools

continue to struggle financially.

Figure 2, in contrast, presents a relatively stable picture for Special Education

expenditures over the eight year period from FY2003-FY2010 for which data is available. The

graph measures special education in two different ways: by special education student FTE and by

the number of Individual Education Programs (IEP). In this graph, trends are relatively flat, and

do not mirror the downward sloping revenue trend in Figure 1. The IEP represents a contract

between school districts, parents and students and outlines planned special education services

that will be provided for the student. All disabled students will have an IEP, whether severely or

mildly impaired. Special Education FTE’s are more representative of severely handicapped

students. Again, federal ARRA stimulus spending is apparent in Figure 2 in per pupil increases

during 2009 and 2010. Spending by IEP did decline modestly before the increase in federal

spending, but spending levels appear relatively stable.

Given that special education services are determined and delivered through a contractual

arrangement between the student’s family and the school district (Harr et al, 2006), and that

districts are bound by law to provide a “free and appropriate education”, perhaps it is not

surprising that there has been no apparent reduction in special education expenditures. A

reduction in special education services could be interpreted as a breach of contract and expose

districts to lawsuits.


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Figure 2. Per Pupil Average Special Education Spending (By FTE) in Michigan, by District Type in 2005 Dollars.

More importantly, the federal IDEA funding reauthorization law has a “maintenance of

effort” requirement (Section 34 CFR 300.203) stating that funds "(i) Shall be used only to pay the

excess cost of providing special education and related services to children with disabilities; (ii)

Shall be used to supplement State, local and other Federal funds and not to supplant such funds;

and (iii) Shall not be used …to reduce the level of expenditures for the education of children

with disabilities made by the local education agency from local funds below the level of those

expenditures for the preceding fiscal year.” Maintenance of effort for local school districts is

evaluated based on the level of expenditures for the previous year. Districts must budget “at

least the same total per-capita amount” (Federal Register, 1999, Attachment A) in order to be

eligible for federal IDEA funds in that year. The purpose of the law is to ensure that special

education spending levels are maintained, regardless of the levels of federal funding. Figure 2

provides some evidence that the maintenance of effort requirement has determined special

education funding levels in Michigan. States and school districts that reduce special education


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funding, even due to fiscal distress, risk the elimination of any federal funds for special

education, according to federal law. Thus, there is substantial pressure on school districts and

the State of Michigan to continue special education programs without spending reductions, at a

time when all other education spending is being reduced.

III. School Finance in Michigan

The State of Michigan has a highly centralized school financing system. Michigan funds

special education services through a combination of per-pupil funding and cost reimbursement

(Citizen’s Research Council (CRC), 2012). According to Parrish & Chambers (1996), in 1987-

88, Michigan ranked near the bottom on special education expenditures, reimbursing only 22%

of special education costs. Only four states contributed a lower percentage. Seventeen years of

litigation between the state and local schools resulted in the Durant (1997) decision, which

mandated that the state pay “28.6138% of total approved costs for special education” and

“70.4165% of total approved costs for special education transportation (Seilke & Russo, 1999).”

Durant was not much of a victory for school districts, however. The Michigan education

funding terrain changed in 1994 with the passage of Proposal A, centralizing education funding

so that the state provides 74% of district general education revenues, on average (Israeli &

Murphy, 2007). The State of Michigan chose to interpret the Durant decision to include the

general per-pupil funding already allocated for every student as satisfying its legal obligation.

The state thus supplied a much lower percentage of costs for special education students

(28.6138%), requiring districts to fund the balance locally. Since property values vary across the

state and different communities place different values on special education, considerable

disparities in special education services across school districts in Michigan were the result. This

paper will explore the level of funding disparities in Section VI.


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Michigan school districts receive funding for special education from potentially four

sources: 1) Durant mandated aid from the state of about 30%, discussed above; 2) IDEA

funding from the federal government of up to 40% of special education costs, but traditionally

this amount has been closer to 10%; 3) Local funding through special education millages from

their county Intermediate School District (ISD); 4) Any shortfall comes from the district general

fund. Because special education services are mandated by law, this patchwork funding approach

creates financial tensions in districts that must comply with the law, while balancing their

budgets. Since school communities do have the ability to raise special education revenues

through local millage elections, the funding arrangement results in considerable non-uniformity

of special education services across the state. The Durant funding scheme, where districts

receive state payments based on a percentage of their costs also reinforces non-uniformity and

inequities, since districts that spend more are paid more.

Further complicating the special education landscape in Michigan is the fact that ISDs

also deliver special education services. School districts often contract for services with ISDs, but

some ISDs also maintain their own programs. There is a stunning variety of arrangements

among the fifty seven ISDs in the state and special education expenditures are more difficult to

track because of this. Local special education property taxes and federal special education funds

flow through the ISD, and the exact amounts which reach school districts are not precisely

known in many cases.

IV. Literature Review

Relevant research on special education finance is not abundant, but can offer important

context and insights into the current financing picture. Four national studies on spending for

special education have been conducted, with the most recent, the Special Education Expenditure


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Project (SEEP) completed in 2002. Summarized by Harr, Parrish, and Chambers (2008), the

four studies document a steady increase in spending on special education since the passage of the

Education for all Handicapped Children Act in 1975. SEEP (2002) found the average per

student special education expenditure was $12,474 in 1999-2000 dollars, almost double the

average per student spending on a general education student of $6,556. These studies do not

examine the adequacy of funding provided for special education, although Harr et al. (2006)

recommend several methodologies for calculating special education adequacy in California.

Harr, Parrish & Chambers (2008) note large variations in spending on special education across

all states.

Relatively little is known about the notion of encroachment, the subsidizing of special

education expenditures with general education funding, but Harr, Parrish, & Chambers (2008)

note the policy concern. While Asimov (2006) anecdotally asserts that encroachment is a

problem in California, there are few academic studies of the concept. Cullen (1997) in her study

of special education “crowd-out” does conclude that “special education mandates redistribute

funds from regular education students to special needs students (p. 49).” The Citizen’s Research

Council of Michigan (2012) found significant subsidization of special education from the general

fund in every Intermediate School District in Michigan.

Verstegen (2011) provides a comprehensive survey of state funding systems, and

generally places state special education funding methods into four categories: per-pupil funding,

cost reimbursement, instructional units, or census allocation. States with per-pupil funding

reimburse according to the number of special education students, often with weights to account

for more expensive services. Cost reimbursement systems return a portion of actual special

education costs. Instructional unit reimbursement systems focus on teachers and classrooms.


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Finally, census based reimbursements provides special education funding based on the total

number of general education students in the district, independent of special education costs and

services. Many studies in special education finance have focused on incentives created by

different states’ funding mechanisms. Mahitivanichcha & Parrish (2005) note that state funding

formulae “create fiscal incentives affecting special education identification, disability

classifications, and placement decisions,( p. 5)” While cost reimbursement programs incentivize

the identification and treatment of special education students without regard for costs, the authors

find that census based programs provide incentives to under-identify and under- treat special

education students. In both cases they find that incentives discourage best practices. Similarly,

Kwok (2010) found that when California changed their special education financing to a census

based system, reducing district financial incentives to classify students as disabled, disability

rates for special education students fell. Cullen (2003) also found that districts respond to

financial incentives when classifying students with disabilities. Reducing district financial

incentives to over-identify special education students by changing to census based funding has a

major drawback, however. The practice has led to inadequate special education funding in areas

where large numbers of special education students are clustered (Baker & Ramsey, 2010).

The above research suggests that Michigan school districts would under-identify special

education students, based on the low levels of funding. Figure 3 indicates, however, that there

has been relative stability in the number of students receiving special education services. The

CRC report (2012) states that at traditional public schools in Michigan, the number of special

education students as a percentage of total K-12 enrollment has stayed relatively constant,

around thirteen percent.


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Figure 3. Percent of Michigan students receiving Special Education Services.

In summary, existing research, while identifying some district behavior due to special

education financing incentives says little about cross-subsidization or spending variations. This

paper will seek to fill that gap, identifying levels of subsidization of special education services in

Michigan schools, the variation among districts in their levels of spending on special education,

and how funding rules affect spending level choices.

V. Data (Can this somehow appear as a footnote?)

Headcount and demographic data for the study comes from the Michigan Department of

Education (MDE) and from the Michigan Center for Educational Performance and Information

(CEPI). Special Education expenditure data comes from MDE report SE 4096 and SE 4094, a

district cost report required as part of Michigan’s special education reimbursement framework

and available from MDE. The Michigan Department of Treasury provided property taxable

values and tax rates. District revenue and expenditure data was retrieved from the National

Center for Education Statistics Common Core of Data.


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VI. Special Education Spending Variations and Property Taxes

As mentioned in Section III, there exist large differentials in spending on special education in

school districts in Michigan created by the patchwork funding approach and the fact that districts

rely on property taxes to supplement their special education revenues. Figures 4 and 5 compare

district per pupil spending by IEP and special education FTE across property wealth quintile.

Clearly, wealthy districts spend considerably more on special education services. When

considering the differentials by IEP, there is about a $4000 gap per pupil in spending, meaning

among more mildly disabled students, wealthy districts spend $4000 more per pupil. This could

reflect differences in services provided to diagnosed students with disabilities, but also suggests

that wealthy districts may provide better services to identify disabilities. The

“poorest”

Figure 4. Total Special Education Expenditures per Student with IEP, in 2012 dollars.

districts in Figure 4 have the second highest spending level, due to their receipt of more

significant federal support.


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Figure 5. Total Special Education Expenditures per Special Education FTE, in 2012 dollars.

The spending gap is even wider when looking at spending by special education FTE,

averaging about $20,000 (Figure 5). For students with severe disabilities, there appears to be a

striking difference in spending on special education services between wealthy and poor districts.

Special education students in districts with low property values receive consistently less and

probably poorer quality special education services. Headcount data indicates that the variation in

the percent of special education FTEs to the general student population, comparing wealthy to

poor districts, is around 3%. This suggests that students in poorer districts have more serious

disabilities, and explains why federal funding does not raise the level of spending in the

“poorest” districts in Figure 5.

The differences uncovered by a cursory look at special education expenditures in

Michigan are cause for concern, and lead naturally to questions about funding rules and

governance. Much of the spending variation can be traced to a school district’s ability to raise

additional revenues for special education. Figure 6 provides a comparison of the special


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Figure 6. Total ISD Special Education Taxes per student with IEP.

education tax effort across districts, based on their property wealth and special education

millage rate. The wealthiest school districts in Michigan raise almost $8000 more in revenue per

IEP than the poorest districts. The ability to raise additional special education revenue supports

the higher spending levels. On the other hand, poor districts that may want to spend more on

special education services are unable to raise property tax income to support expanded programs.

Property tax millage rates in poorer districts would need to be many times higher than rates in

wealthy districts to raise the same amount of revenue.

These significant special education spending disparities among school districts are a

consequence of the reliance on property tax revenue to fund special education, but are also

related to maintenance of effort laws. Because districts are unable to change special education

spending, non-uniform per pupil spending levels have persisted and become an unintended

consequence of the law. High spending districts must maintain their high spending levels.


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Moderate and low spending districts do not have and cannot raise additional revenue to spend, so

all spending levels have become permanent fixtures of special education policy in Michigan.

VII. Cross-Subsidization

Figure 7 identifies the sources of special education funding in Michigan, per IEP. Federal

data for 2001 and 2002 was not available, and cross-subsidization for those years was not

Figure 7. Special Education Funding per Pupil with IEP, by source.

estimated. Initial cross-subsidization data indicates that traditional public school districts in

Michigan must subsidize special education services with funds from their general fund. On

average, districts subsidize over $3000 per IEP. This means a significant portion of special

education spending, about 25%, must come from a district’s general fund, funds designated for

the general student population. In Michigan, special education programs do “encroach”, or


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borrow resources from general education. How do cross-subsidization levels differ in wealthy

and poor districts? District cross-subsidization rates are difficult to pinpoint, since methods used

by ISDs to distribute tax revenue differ significantly by ISD. The estimates in Table 1 were

obtained by allocating tax revenue not claimed by the ISD, according to district special education

FTE. Amounts given represent the per pupil funds spent according to the state special education

cost report and not reimbursed with state or local funds. Districts could have received ARRA

funds in FY2010 to help cover these deficits.

Table 1. Comparison of Average Per Pupil Special Education Cross-subsidization by IEP and FTE, FY2010, by Property wealth quintile.

Ave PP Special Ed Cross-sub

IEP Poorest $ 4,008 Poor $ 3,112 Average $ 2,873 Wealthier $ 3,388 Wealthiest $ 3,532 Special Education FTE Poorest $ 10,951 Poor $ 11,114 Average $ 11,392 Wealthier $ 12,048 Wealthiest $ 13,493

The variability in cross-subsidization is not as striking as the spending variability. In Table 1,

one sees districts subsidizing special education in the range of $3,000-$4,000 per student with an

IEP. Districts seem to share the pain, with wealthier districts only providing modestly more

from their general fund. The poorest school districts are the exception. While these districts

spend less on special education per pupil, they are also subsidizing special education at the


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highest rates (by IEP), a situation that must lead to worse educational outcomes for all students.

Even with strong local funding, however, special education services are a drain on the general

fund budget. Inadequate revenue should incentivize districts to reduce their spending on special

education, but federal IDEA law and maintenance of effort provisions prevent any reductions.

Conclusion

It is clear from this analysis that special education services are not adequately funded in

the State of Michigan. As school funding has declined over the past ten years, special education

spending has remained constant, locked in place by federal special education mandates and

maintenance of effort rules. Further, an unintended consequence of federal maintenance of effort

rules is that school districts have been forced to continue historic special education spending

patterns, resulting in large differences in per-pupil spending. This suggests that some special

education students may not be getting the services that they need. In any case, the rules

surrounding special education preclude any consideration of appropriate levels of spending

related to best practices. Special education services should be based on the needs of the student,

not a rule to maintain the status quo. Some states have engaged in adequacy studies to determine

the level of funding necessary for robust educational outcomes in special education. Perhaps an

adequacy study in Michigan is a logical next step towards a more equitable and less

differentiated special education funding system.

There is also a basic unfairness in requiring districts to supplement special education

from their general funds, particularly during funding declines. The cross-subsidization occurring

in Michigan is deserving of more research to better quantify the impact at the district level and

understand the shifting of funds and the consequences for students. Adequate funding for special


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education, coupled with more flexibility in maintenance of effort rules, would likely improve

district finances and special education outcomes.


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Systemic Inequities and Cross-subsidization: Special ...conlinmi/summerdraftspecialed6-20-13.pdf · of special education services across the state. The Durant funding scheme, where