Equity and Unrestricted Funds in Special Education

A state's special education funding structure affects both the level of special education services provided and how equitably these services are distributed across districts. Irrespective of the funding system, districts in almost all states use unrestricted funds to pay for special education services not covered by revenue designated for special education. This study focuses on how district wealth and the provision of special education services are related to this use of unrestricted funds. Using a unique panel dataset that includes detailed annual district level financial and enrollment information for 604 local and intermediate school districts in Michigan, our main findings are that: (i) the financial burden associated with using unrestricted funds for special education expenditures is significantly greater for the poorest districts due to their larger fraction of special need students; and (ii) students receiving special education services vary with district wealth and this variation is likely attributable to both compositional differences of special need students and financial incentives that create differences in the special education identification and services. While unable to quantify the compositional and incentive effects, our results clearly document large inequities in special education funding across Michigan school districts.