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Supervisors Opinion

The New IDEA Money for Special Education in the Federal Recovery Act

Schools are advised not to build it into budgets just yet.

As the economy descended into free fall in early 2009, education officials braced for the impact on school programs. In California, most school districts receive most of their funding from state coffers in Sacramento, not from local property taxes. As California’s budget is based mostly on revenue from sales taxes and the stock market, school budgets were in line for a direct hit. In fact, California has a $42 billion deficit, and early in 2009 schools were presented with severely reduced budgets for the next 18 months.

As the banking and insurance industries clamored for a bailout, so too did state governors hoping to shore up plummeting revenue streams. Relief arrived in the form of the American Recovery and Reinvestment Act (ARRA) and the $105.9 billion dedicated to education and training in the form of state stabilization funding and competitive grants. There was concern that the federal dollars would commit state governments to increased long-term spending, and some state governors spoke of rejecting some or all of the funds. California will accept the funds gleefully.

School superintendents across California looked to the State Fiscal Stabilization Fund portion of ARRA to backfill cuts to state programs in education and social services. As California’s economy continues to sour, there is a great deal of uncertainty as to whether the stimulus dollars will ever make it out of Sacramento—so much so that a group of congressional representatives from California wrote a letter on March 17, 2009, to Gov. Arnold Schwarzenegger urging him to pass the federal dollars on to local schools to save teaching jobs, as Congress intended. However, California has a serious cash flow problem, and many analysts here predict that the state will sit on federal money to at least help with this issue or—worst-case scenario—divert the funds to meet state needs. For example, the nonpartisan California Legislative Analysis Office predicts a further $8 billion deficit since the budget passed in February, and California’s share of the State Fiscal Stabilization Fund, $4.9 billion, is tempting to state legislators.

IDEA for Stability

School superintendents are looking to the increased funding of IDEA to help stabilize their budgets. The increase in IDEA funding is substantial and comes in three pieces, including the State Fiscal Stabilization Fund. The other two increases are to regular IDEA funding for 2009-2010 and to targeted or formula funds, known as IDEA recovery funds, built into ARRA. The increase to regular IDEA funding for the 2009-2010 school year includes:

? $557 million to regular IDEA Part B funds for students age 5-22; and

? $439 million to IDEA Part C funds for infant programs.

The money that is getting the most attention is the one-time increase to IDEA under ARRA, known as the IDEA recovery funds. This increase is substantial and will bring total federal spending to 26 percent, closer to the 40 percent of special education costs originally promised under federal special education law. This is a significant increase, with:

? $11.2 billion in targeted or formula funds for IDEA Part B over two years;

? $400 million for preschool; and

? $500 million for Part C for infants.

The IDEA recovery funds alone represent about a $5 million increase each year for two years to special education funding for a California district with 50,000 students and the typical 8-10 percent ratio of special education students. Some basic principles to remember are that ARRA funding is intended to promote student achievement through school reform and to ensure transparency in reporting and accounting—while admonishing districts to invest the funds thoughtfully to avoid “falling off a cliff” when the funds go away. This is the big caveat—this is a onetime increase, and districts must spend the money wisely in order to avoid long-term commitments that they may not be able to make down the road. The money was to begin flowing to states by mid-April.

Recovering Funds for Special Ed

This is a huge opportunity for districts to recover some funds required for special education programs. Special education, of course, is exceedingly expensive in most districts. Federal and state funding for special ed does not cover the entire cost of programs. Districts have to divert funds from their general operating funds to cover costs. This diversion, commonly known as encroachment, is contentious, as that money could be used to cover general costs such as salaries, transportation and textbooks. The average encroachment in California is about 25 percent, but in some districts it reaches nearly 50 percent. For example, many districts in Orange County contribute 45 percent of every dollar spent on special education from the general fund, with 55 percent coming from federal and state funds dedicated to special education.

The average encroachment in California is about 25 percent, but in some districts it reaches nearly 50 percent.

Some school officials initially saw this increase in funding as a chance to transfer ARRA funds to this encroachment—say, that a district could take $200,000 in IDEA recovery funds and transfer it to the general fund to offset a $200,000 encroachment there. This is not the case.

School districts must adhere to normal IDEA funding requirements. IDEA dollars are to cover the excess cost of special education. That is, they are to be used to supplement state and local funding, not supplant it. Districts will still be required to apply Maintenance of Effort (MOE) requirements, which dictate that total budgeted expenditures for special education from state and local funds must be at least as great as in the previous year, in total or per special education student. So if you spent $500,000 in state and local funds on special education in 2008, you must spend the same the next year. There is interest in relaxing or removing MOE because of the fiscal crisis, but that flexibility has not yet been, and is unlikely to be, granted.

Finding Flexibility

So how can the new federal money be used to reduce local expenditures on special education to free up much-needed dollars for the general fund to restore teachers or programs reduced in budget cuts? This is a complicated question with complex answers.

School business officials will look to a provision in federal funding regulations CFR 300.205 that provides some flexibility in special education funding. IDEA states that if a local education authority (LEA), usually a school district, receives an increase in Part B funds over the previous year, it may reduce its local expenditures to special education by up to 50 percent. It sounds good, but there are some strings attached. This option is only available if the LEA will use the freed up local funds for activities authorized under the federal Elementary and Secondary Education Act (ESEA). ESEA covers areas such as staff development, technology activities related to school reform, and instructional materials.

ESEA is a federal program; thus, you can only move funds in federal programs like Title I and II that have their own MOE requirements. More information is needed to see exactly how this will play out. As this is the first increase in federal funding since 2004, this is the first time that LEAs have been able to use this flexibility, and many school business officials are moving very cautiously.

At this point, there are many unanswered questions regarding the new IDEA recovery funds:

? How do school districts realize flexibility and savings in light of the supplement, not supplant requirements of IDEA funding?

? How do districts meet MOE requirements and achieve flexibility in ESEA activities?

? When will the new dollars actually arrive from the federal government and be distributed by the states?

But the biggest question many school superintendents still have is whether this new federal money requires districts to maintain current levels of funding on special education and whether the moneycan be shifted to backfill budget cuts elsewhere in the educational program offered to all students. This will become clear as we move into the summer months and the 2009-2010 school year.

Conventional wisdom would suggest that there will be an increase in spending on special education for one-time projects like technology or staff development. There may be flexibility to move federal dollars around to backfill costs elsewhere, but details are sketchy.

For now, district administrators must proceed cautiously and cannot budget the new IDEA money just yet. It is a matter of timing, but many districts are running out of time as they implement budgets that are increasingly dire.

Eamonn O’Donovan is assistant superintendent of special education services in Capistrano Unified School District in California.