‘Bounty’ Funding Pushes More Kids into Special Ed

Published February 1, 2003

Does the prospect of getting more money–a “bounty”–for each extra special education student persuade some educators to identify more children as disabled? Apparently so, according to a new study from the Manhattan Institute, which finds states with “bounty” systems for special education have significantly higher growth rates for special education enrollment than states with no such incentives.

The timely report comes as Congress prepares to reform and reauthorize the Individuals with Disabilities Education Act (IDEA), and its policy implications were quickly noted by U.S. Rep. John Boehner (R-Ohio), chairman of the House Committee on Education and the Workforce, and Rep. Mike Castle (R-Delaware), chairman of the House Subcommittee on Education Reform.

“As this report suggests, many states have not updated their funding systems and appear to include built-in incentives for school districts to over-identify students for special education services,” the Congressmen said in a joint statement. “And since there is not an endless supply of resources, the ultimate effect of this system may be that less money is available per student for those children in need of special help.”

This is “a cause for concern,” they concluded, and “an issue Congress is compelled to consider.”

Growing Enrollment

Although special education enrollment had been increasing steadily prior to 1990, the growth rate accelerated in the following decade, lifting enrollment from 10.6 percent of all U.S. students in school year 1991-92 to 12.3 percent in 2000-01. With no sign the acceleration is abating, and with demands for increased special education funding, policymakers want to understand what is driving the enrollment increase.

Several explanations have been suggested, note the authors of the study, Jay P. Greene and Greg Forster, both with the Manhattan Institute’s Education Research Office. Greene’s studies of school choice were cited four times in the U.S. Supreme Court’s ruling on the Cleveland voucher program last June.

These explanations for the enrollment increases may be reduced to two:

  • There really are more disabled children; or,
  • Schools are taking children without special needs and diagnosing them as disabled in response to financial or other incentives.

In their December 2002 report, “Effects of Funding Incentives on Special Education Enrollment,” Greene and Forster quickly dispose of the first explanation, noting that for 25 years there has been little change in the incidence of disabilities that can be diagnosed objectively.

But some critics of high-stakes testing have suggested this accountability mechanism could function as a perverse incentive to increase special education enrollment. When schools are held accountable for their students’ test scores, they argue, educators might have an incentive to place lower-scoring students in special education in order to remove them from the testing pool.

The Manhattan Institute study finds no evidence educators are succumbing to this temptation. An analysis of state-by-state growth rates of special education enrollment shows the effect of high-stakes testing on enrollment to be statistically insignificant.

Funding Incentives

Money, however, does appear to be an incentive for increasing special education populations. The study finds the financial incentives built into special education funding represent the biggest driver for the increase in special education enrollment, an analysis made possible since states fund special education in two different ways.

The funding system used in most states pays school districts more for each additional student diagnosed with a disability–what some education officials decry as a “bounty” system. This provides schools with a perverse incentive to diagnose more disabled children. By contrast, 16 states have funding systems that allocate a lump sum for special education. This provides schools with no incentive to diagnose additional disabled students.

When Green and Forster compared the 1990s special education growth rates in states with and without the bounty funding system, they found:

  • Total special education enrollment under lump-sum funding systems grew from 10.5 percent to 11.5 percent, an increase of 1.0 percentage points over the 10-year period;
  • Total special education enrollment under bounty funding systems grew from 10.6 percent to 12.6 percent, an increase of 2.0 percentage points.

Further analysis showed 62 percent of the increase in special education enrollment in bounty states is attributable to the financial incentives. That represents approximately 390,000 extra students classified as disabled because of financial incentives, resulting in additional spending of more than $2.3 billion per year.

“While we would like to think that something as important as placing a student in special education would be immune to financial considerations, the hard reality is that incentives alter people’s behavior,” note Greene and Forster. They point out the best proof that financial incentives do matter is that special education has been growing much faster in states where financial incentives are present.

“If it is financially advantageous to move students into special education, school systems will seek to influence the rate at which students are diagnosed,” they continue. “It is no coincidence that the overwhelming majority of the growth in special education has taken place in the specific learning disability category, which is both among the most subjective disabilities to diagnose and among the cheapest to serve.”

Implications for Policymakers

The report’s authors offer several responses to policymakers as possible solutions to the problem of perverse incentives:

  • For states currently using the bounty system states, adopt lump-sum funding systems for special education.
  • Provide private school scholarships to all special education students, based on Florida’s McKay Scholarship Program.
  • Make federal IDEA funding portable so parents could seek third-party services while their children stay in public school for regular classes.
  • Initiate federal auditing of special education placements, particularly in districts with especially high or low enrollment rates.
  • Restructure IDEA spending priorities to give higher financial priority to disabilities that have more clearly objective diagnostic standards.

“Dr. Greene’s report underscores the need for Congress to focus not simply on pumping money into the special education system, but also on how this money is used on behalf of children with special needs,” said Congressmen Boehner and Castle. “Results, not just funding, must be our focus in renewing the IDEA.”

George A. Clowes is managing editor of School Reform News.

For more information …

The December 2002 Manhattan Institute report by Jay P. Greene and Greg Forster, “Effects of Funding Incentives on Special Education Enrollment,” Civic Report No. 32, is available from the Institute’s Web site at http://www.manhattan-institute.org/cr_32.pdf.

Complete breakdowns of the disabilities found in McKay and Florida student populations is available at the Web site of the Manhattan Institute’s Education Research Office at http://www.miedresearchoffice.org/mckayscholarship.htm#_Types_of_disabilities.