In general, public agencies have poor mechanisms for controlling and identifying costs, and sometime operate under perverse financial incentives to the detriment of students and taxpayers alike.

"If you try to get the actual cost of providing a program in the public school, you can't get the numbers because they don't count the superintendent, they don't count the rent for the building. They count the teacher and the books."

a. Total Costing

Public administrators often cannot identify how much money is spent providing education for special-needs students. Writes special-education finance scholar Thomas Parrish:

Of the 24 states responding to a recent survey administered by the national Center for Special Education Finance (CSEF), exactly one-half reported that they did not know the statewide cost of their special education programs. In addition, while national special education data were reported for the 1982-83 through 1987-88 school years, the federal government no longer requests these data from the states. While three different studies measuring the cost of special education to the nation have been conducted since the inception of the IDEA, the last of these was completed in 1988 and reported data from the 1985-86 school year. Thus, as there is no current information on the national expenditure for special education, the CSEF estimate of over $32 billion, presented at the beginning of this paper, is based on 10-year-old estimates. Given this, what can be said about changes in the cost of special education across the states?103

The lack of information about costs at the state and federal level frustrates efforts to craft thoughtfully considered special-education policy. At the local level, public administrators lack the cost data they need to make informed decisions. Most public-agency accounting policies are not designed in a way that enables administrators to identify the total costs of a given program. Indirect costs such as overhead, employee benefits, pensions, facilities, administration, and transportation are frequently excluded from the calculation of program costs. As a result, comparisons about the costs of various placements are often based on inaccurate financial data. For example, when a 1995 legislative task force in New Jersey compared the costs of a nonpublic placement with a public placement, it overlooked the public placement’s pension and social-security costs.104 The result? The nonpublic placement appeared to be the higher-cost setting. Had total costs been included, the nonpublic placement actually had lower costs.105

Says Thomas McCool, executive director of Devereux Santa Barbara, "It’s very difficult to get comparative rates, except with the nonpublic schools. If you try to get the actual cost of providing a program in the public school, you can’t get the numbers because they don’t count the superintendent, they don’t count the rent for the building. They count the teacher and the books. I think legislators are entitled to, if they can get it, what it actually does cost."106

Total costs are often overlooked when more than one public agency is involved in providing services. For example, the Spokane Public Schools in cooperation with Spokane Mental Health and the police department operate a program for juvenile delinquents called MAP (Multi-Agency Program). The school director, who helps make the placement decisions, describes the placement as a "deal," compared to the cost of the district’s regular placement for this population, which he estimates at $12,000 per student. He says MAP costs only $7,000 per student.107 His estimate, however, only includes the costs of those services provided directly by the school district and excludes the cost of services from the other two publicly funded agencies involved in MAP.

Though the program was promoted as being cost-efficient, school-district program administrators did not in fact know MAP’s total costs. Officials from Spokane Mental Health, the private organization which administers MAP, would not provide any information about MAP’s total costs after repeated inquiries.

This case study illustrates three points. First, public administrators often lack the information they need to make financially informed decisions. The Spokane school official was under the impression that the per-pupil cost of MAP was $7,000 when its true cost is actually greater.

Second, even if the school-district administrator had been aware of the program’s total costs, he may still have made the same decision since he is concerned only with minimizing district costs, not total public costs. In this situation, the incentives of public officials should be aligned with the broader public interest, rather than the interest of a single public agency. Third, publicly supported agencies can and do withhold information that, by law, must be readily available to the public for purposes of oversight and accountability.

Making local agencies directly responsible for a larger portion of total costs, by consolidating funding streams, may lead to better cost control. It may also reduce adverse financial incentives to place students in settings which minimize local costs without regard to total costs. In California, for example, the local school district, which makes placement decisions, pays just 30 percent of nonpublic-school placement costs. The 70 percent balance is reimbursed by the state. The relatively small local payment share creates a financial incentive for the local district to place students in nonpublic schools where the state is responsible for the bulk of education costs, even when an appropriate, lower-cost, placement might be available.

The state of California is considering a revised special-education funding model, which would push funding responsibility (and accompanying state funds) down to the local level. Creating a single point of accountability in which the party making the placement decision is also responsible for paying the total costs involved may create better cost-control incentives. A potential impediment to the success of this approach, however, is the inability of public agencies to accurately assess their own in-house costs. Given the choice between a nonpublic-school placement in which total costs are easily identifiable, and a public placement, in which indirect costs such as employee benefits, insurance, and depreciation are often excluded, public administrators may choose the public placement in the mistaken belief that it is the lower-cost option. To make more accurate comparisons, and to better understand true costs, accounting procedures which encourage total costing for programs at the site level are needed.

b. Financial Incentives

Government funding formulas for difficult-to-educate students may inadvertently create incentives leading to wasteful spending, mislabeling of students, or the underserving of students. (See Appendix I for a discussion of funding formulas and the incentives they create.)

Students may be underserved when funding is provided regardless of whether or not the student is being served. For example, public schools in some states continue to receive funding throughout the year for students who may have already dropped out. John Hall, president of Options for Youth, a private alternative-education program, encountered this situation in Colorado. "If the district gets ADA [Average Daily Attendance money] for kids who drop out, why would they want to contract? The schools are getting $5,000 and the kid’s not there. There’s no incentive for recovering kids because the school already gets paid for them."108 Hall recommends that funding be tied directly to student attendance. "Let the money follow the kid. Why should a taxpayer pay for a kid who has dropped out?"

Pupil-based funding in the public-school system is not without adverse incentives either, especially when additional funding can be obtained for special-needs students. Schools may have incentives to label borderline students in order to obtain additional funds; they may retain students in a particular program if it generates extra funding. Occasionally, district administrators have refused to refer students to more suitable placements outside the district if doing so causes the district to "lose" the funds associated with that student.

To better focus resources on the special-needs child for which they were intended, total per-pupil funding should follow the child to the placement—public or private, in-district or out-of-district—in which the student enrolls. To protect students from being poorly served or misclassified for financial gain, the public-sector’s role as gatekeeper could be moderated by giving parents more direct control over placement decisions provided no increases in public-sector costs are involved. In other words, allow parents to choose how best to educate their child given a fixed amount of public dollars.

c agencies have poor mechanisms for controlling and identifying costs, and sometime operate under perverse financial incentives to the detriment of students and taxpayers alike.

a. Total Costing

Public administrators often cannot identify how much money is spent providing education for special-needs students. Writes special-education finance scholar Thomas Parrish:

Of the 24 states responding to a recent survey administered by the national Center for Special Education Finance (CSEF), exactly one-half reported that they did not know the statewide cost of their special education programs. In addition, while national special education data were reported for the 1982-83 through 1987-88 school years, the federal government no longer requests these data from the states. While three different studies measuring the cost of special education to the nation have been conducted since the inception of the IDEA, the last of these was completed in 1988 and reported data from the 1985-86 school year. Thus, as there is no current information on the national expenditure for special education, the CSEF estimate of over $32 billion, presented at the beginning of this paper, is based on 10-year-old estimates. Given this, what can be said about changes in the cost of special education across the states?103

The lack of information about costs at the state and federal level frustrates efforts to craft thoughtfully considered special-education policy. At the local level, public administrators lack the cost data they need to make informed decisions. Most public-agency accounting policies are not designed in a way that enables administrators to identify the total costs of a given program. Indirect costs such as overhead, employee benefits, pensions, facilities, administration, and transportation are frequently excluded from the calculation of program costs. As a result, comparisons about the costs of various placements are often based on inaccurate financial data. For example, when a 1995 legislative task force in New Jersey compared the costs of a nonpublic placement with a public placement, it overlooked the public placement’s pension and social-security costs.104 The result? The nonpublic placement appeared to be the higher-cost setting. Had total costs been included, the nonpublic placement actually had lower costs.105

Says Thomas McCool, executive director of Devereux Santa Barbara, "It’s very difficult to get comparative rates, except with the nonpublic schools. If you try to get the actual cost of providing a program in the public school, you can’t get the numbers because they don’t count the superintendent, they don’t count the rent for the building. They count the teacher and the books. I think legislators are entitled to, if they can get it, what it actually does cost."106

Total costs are often overlooked when more than one public agency is involved in providing services. For example, the Spokane Public Schools in cooperation with Spokane Mental Health and the police department operate a program for juvenile delinquents called MAP (Multi-Agency Program). The school director, who helps make the placement decisions, describes the placement as a "deal," compared to the cost of the district’s regular placement for this population, which he estimates at $12,000 per student. He says MAP costs only $7,000 per student.107 His estimate, however, only includes the costs of those services provided directly by the school district and excludes the cost of services from the other two publicly funded agencies involved in MAP.

Though the program was promoted as being cost-efficient, school-district program administrators did not in fact know MAP’s total costs. Officials from Spokane Mental Health, the private organization which administers MAP, would not provide any information about MAP’s total costs after repeated inquiries.

This case study illustrates three points. First, public administrators often lack the information they need to make financially informed decisions. The Spokane school official was under the impression that the per-pupil cost of MAP was $7,000 when its true cost is actually greater.

Second, even if the school-district administrator had been aware of the program’s total costs, he may still have made the same decision since he is concerned only with minimizing district costs, not total public costs. In this situation, the incentives of public officials should be aligned with the broader public interest, rather than the interest of a single public agency. Third, publicly supported agencies can and do withhold information that, by law, must be readily available to the public for purposes of oversight and accountability.

Making local agencies directly responsible for a larger portion of total costs, by consolidating funding streams, may lead to better cost control. It may also reduce adverse financial incentives to place students in settings which minimize local costs without regard to total costs. In California, for example, the local school district, which makes placement decisions, pays just 30 percent of nonpublic-school placement costs. The 70 percent balance is reimbursed by the state. The relatively small local payment share creates a financial incentive for the local district to place students in nonpublic schools where the state is responsible for the bulk of education costs, even when an appropriate, lower-cost, placement might be available.

The state of California is considering a revised special-education funding model, which would push funding responsibility (and accompanying state funds) down to the local level. Creating a single point of accountability in which the party making the placement decision is also responsible for paying the total costs involved may create better cost-control incentives. A potential impediment to the success of this approach, however, is the inability of public agencies to accurately assess their own in-house costs. Given the choice between a nonpublic-school placement in which total costs are easily identifiable, and a public placement, in which indirect costs such as employee benefits, insurance, and depreciation are often excluded, public administrators may choose the public placement in the mistaken belief that it is the lower-cost option. To make more accurate comparisons, and to better understand true costs, accounting procedures which encourage total costing for programs at the site level are needed.

b. Financial Incentives

Government funding formulas for difficult-to-educate students may inadvertently create incentives leading to wasteful spending, mislabeling of students, or the underserving of students. (See Appendix I for a discussion of funding formulas and the incentives they create.)

Students may be underserved when funding is provided regardless of whether or not the student is being served. For example, public schools in some states continue to receive funding throughout the year for students who may have already dropped out. John Hall, president of Options for Youth, a private alternative-education program, encountered this situation in Colorado. "If the district gets ADA [Average Daily Attendance money] for kids who drop out, why would they want to contract? The schools are getting $5,000 and the kid’s not there. There’s no incentive for recovering kids because the school already gets paid for them."108 Hall recommends that funding be tied directly to student attendance. "Let the money follow the kid. Why should a taxpayer pay for a kid who has dropped out?"

Pupil-based funding in the public-school system is not without adverse incentives either, especially when additional funding can be obtained for special-needs students. Schools may have incentives to label borderline students in order to obtain additional funds; they may retain students in a particular program if it generates extra funding. Occasionally, district administrators have refused to refer students to more suitable placements outside the district if doing so causes the district to "lose" the funds associated with that student.

To better focus resources on the special-needs child for which they were intended, total per-pupil funding should follow the child to the placement—public or private, in-district or out-of-district—in which the student enrolls. To protect students from being poorly served or misclassified for financial gain, the public-sector’s role as gatekeeper could be moderated by giving parents more direct control over placement decisions provided no increases in public-sector costs are involved. In other words, allow parents to choose how best to educate their child given a fixed amount of public dollars.