School Finance: Circuit Breaker

Circuit Breaker Update

As you all know, we are implementing the new "circuit breaker" special education reimbursement program this year. This memo will review the program's current status, so that the budget discussions in your local districts and at the state level can be based on the most up-to-date information.

First, I want to announce that we have been able to adjust the preliminary rate up to 35%, which we think will be much closer to the final rate than the previously announced rate. We will not be able to set the final rate until much later in the year, when we can make a more accurate projection of claims. I hope that this upward adjustment will provide at least some short-term budget relief for districts.

Even at 35%, the rate is still well below the 75% target rate set in statute. There are a number of reasons for this. The number of claims received, particularly for high cost in-district students, has greatly exceeded the projections we made when the program was first enacted. There are more than 10,000 students eligible for reimbursement under the circuit breaker, compared to less than 1400 under the old 50/50 program. Because we did not previously collect data on these additional students, it was difficult to project their costs. Our best estimates, along with estimates made by others who have studied the program, turned out to be too low. Compounding this problem was the recently-enacted increase in the reimbursement rate for out-of-district placements from 65% to 75%. We also needed to apply some FY04 funds to the remaining deficit in the 50/50 program. We are still processing late 50/50 claims, but it appears that the final shortfall from FY03 will be approximately $9 million. Finally, we needed to set aside a circuit breaker contingency for anticipated late claims and rate adjustments. Any remaining contingency funds at the end of the year will be factored into the final rate calculation.

We are posting on our website a spreadsheet showing the estimated FY04 circuit breaker payments for each district using the 35% rate, based on the unaudited claims submitted earlier this year. Some important caveats to keep in mind in looking at these projected payments:

• All claims are subject to audit. Because this is the first data collection cycle, it will take several months to review all the submissions in detail. If any claims are disallowed, a retroactive adjustment will be made in the second, third, or fourth quarter payments.
• Final payment amounts will also be adjusted to reflect placement changes and tuition rate adjustments which occur throughout the year.
• Costs for certain students placed by DSS or DTA are eligible for a higher reimbursement rate. This extra amount has not yet been factored into the estimated payments.
• A number of students were reported by more than one district. Claimed costs for these students are not included in the chart, pending further review.
• Because the final amount of approved claims will not be known until later in the year, the preliminary 35% rate is subject to change.

We expect to make the first quarter payments during the week of November 24. Normally the first quarter payment would represent half of the estimated payment for the entire year. Because this is the first year of data collection and we still need to verify a significant number of claims, we need to limit the first quarter payment to one-fourth of the estimated payment for the entire year. We will catch up with the planned payment schedule later in the year, as we complete our review of the initial submissions. Also, please keep in mind that the Department will be making some payments directly to private schools, which will reduce the amount of the direct payment to districts. Our school finance office will provide each district with detailed payment information so that you can reconcile the payment amount. If this change in the payment schedule creates a significant cash flow problem for any district, please let us know and we will try to work out a solution.

With respect to final 50/50 payments from FY03, we will continue to process and pay all claims previously submitted to the Department. It is extremely unlikely that we will be able to pay any additional prior year claims submitted by districts.

Much of the discussion in recent weeks has centered around the question of whether state funding for districts' special education costs has increased or decreased under the circuit breaker program this year. The second page of the attached spreadsheet shows two additional amounts for purposes of comparison: the amount paid on behalf of each district under the 50/50 program in FY03, and the amount to which each district would have been entitled if the 50/50 program had continued in FY04. In comparing FY03 50/50 payments to FY04 circuit breaker payments, keep in mind that some of the change may be attributable to a change in the number of students. And the FY04 50/50 estimate depends on the questionable assumption that the 50/50 program would have been fully funded. But despite the difficulty in making a valid comparison among these numbers, several observations can be made:

1. The total appropriation for the FY04 circuit breaker program ($122 million) represents a more than $50 million increase over the total appropriation for the FY03 50/50 program ($71 million). News reports that the state has "slashed" special education funding are untrue and, in my opinion, do a disservice to the Governor and the members of the Legislature who worked very hard to provide this funding increase in a very difficult fiscal year.
2. The increase in claim payments between FY03 and FY04 will be about $26 million. This increase is less than the $50 million increase in the total appropriation because of the accumulated deficit in the 50/50 program, which was addressed partly by one-time federal grants and partly by a transfer from the FY04 circuit breaker appropriation. (See the third page of the attached spreadsheet for a reconciliation of the amounts appropriated and claims paid.)
3. Because special education costs are continuing to rise, much of the $26 million net increase in claims payments is going to defray higher costs. Without this extra state funding, districts would have been required to cover the cost increases with local funds.
4. At the current appropriation level, about two-thirds of the districts receive more funding under the circuit breaker formula (with the 35% reimbursement rate). About one-third of the districts would have received more funding under the old 50/50 formula, generally because those districts have a relatively high percentage of residential placements. As funding for the program increases in future years and the reimbursement rate moves closer to the 75% target level, all districts will benefit from the new formula.
5. I hope this information is useful in understanding the funding situation for the circuit breaker. I appreciate the feedback you have given us, and I thank you for your patience as we work to implement this important new program. If you need any additional information or assistance, please contact associate commissioner Jeff Wulfson or school business services manager Jay Sullivan.