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Huge Reserves Untapped in Special Ed Funding Controversy

The S.C. Department of Education had tens of millions of dollars in reserves over the past several years that could have been used to help offset state funding cuts for special education programs – and possibly avert a showdown this month with the federal government, a review by The Nerve has found.

The Nerve examined Office of State Budget (OSB) records after S.C. Superintendent of Education Mick Zais unexpectedly announced at a special legislative panel hearing last Wednesday that the U.S. Department of Education was threatening to cut off $111.5 million “in perpetuity” because the state since fiscal year 2009 has failed to maintain a base level of state funding for special education.

According to the federal government, South Carolina missed its “maintenance of effort” (MOE ) requirement by $75.3 million this fiscal year, $67.4 million in fiscal year 2010 and $20.3 million in fiscal year 2009.

Despite the shortfalls, though, the department carried over nearly $74.2 million in unused “other” funds from fiscal year 2009 into last fiscal year, and was projected to carry over $78.1 million from fiscal year 2010 into this fiscal year and the same amount into the new fiscal year that starts Friday, according to The Nerve’s review of OSB records.

Other funds for the agency are made up in large part of Education Improvement Act (EIA) revenues funded with 1 cent of the 6-cent state sales tax. EIA funds are used for special education and other K-12 programs.

As of Friday, the cash balance in the EIA account was $57.2 million, but a $34 million deposit on Monday put the balance at $91.2 million, department spokesman Jay Ragley told The Nerve.

The balance grew rapidly at the end of the fiscal year because of better-than-expected retail sales in the state and lower-than-expected expenditures, mainly falling diesel fuel prices for school buses, Ragley said.

Typically, other funds are restricted for specific purposes. But a state budget proviso that has been in place since fiscal year 2009 allows state agencies to dip into restricted “special revenue” funds to make up for general fund cuts.

During last Wednesday’s hearing before the Joint Other Funds Oversight Committee, Shelly Kelly, the Department of Education’s chief attorney, told the committee that her agency would rely on a flexibility spending proviso (89.87) in this fiscal year’s budget to immediately allocate $75.3 million from the EIA account to local school districts.

John Cooley, the department’s deputy superintendent, backed up Kelly, telling the committee that EIA funds and lottery money are designated “special revenue” funds under the flexibility spending proviso. He also said carryover funds from the previous year could “become available.”

“These are not new funds, so taxpayers are not being asked for more money,” Zais told the committee about the EIA account.

Finger Pointing

Asked Friday why other fund reserves weren’t tapped in earlier years to offset general fund cuts, Ragley said in a written response, “If you want to discuss decisions made about flexibility provisos in previous years, you’ll need to call (former S.C. Superintendent of Education) Dr. Jim Rex.”

“This entire situation arose during the Rex administration,” Ragley continued, “and Dr. Zais is trying to remedy it as best he can for the benefit for special education students and their families."

Ragley said when Rex last September submitted his proposed budget for next fiscal year, there was "no mention of this issue or a request for funds to resolve this issue for any fiscal year.”

Contacted Monday by The Nerve, Rex said during his administration he regularly “talked about the need to establish maintenance-of-effort funding.” He noted that his office asked the U.S. Department of Education to waive the required funding level for fiscal year 2010, though the feds had not decided on the request by the time he left office last year.

“This has been general knowledge for at least three years,” Rex said. “I think it’s a little bit of scapegoating (by Zais' office). … They should have acted much more quickly.  It’s a tricky issue, but it’s something that should have been dealt with in the last six months.”

Rex acknowledged that under the flexibility spending provisos, his administration could have tapped reserves to help offset general fund cuts for special education. But he said he didn’t want to do that at the time because of the possibility that the U.S. Department of Education might have granted the waiver request.

He also said he believed that the S.C. General Assembly would have “balked if we had taken some money that had some flexibility to reverse those cuts.”

Zais, who became the state’s top education official in January, said during last Wednesday’s hearing that he had briefed the budget-writing Senate Finance and House Ways and Means committees on March 9, as well as the governor’s office, about the situation after discovering the problem. He also said his office worked with the U.S. Department of Education over the ensuing months on the waiver requests.

But Zais said he didn’t learn until June 17 that the U.S. Department of Education had denied his department’s request for a waiver to make up the $75.3 million shortfall for this fiscal year. In the same letter, the federal government granted a full waiver for the $20.3 million shortfall for fiscal year 2009, but granted only a partial waiver for fiscal year 2010.

Oversight Committee Co-Chairman Rep. Brian White, R-Anderson and the incoming chairman of the House Ways and Means Committee, questioned why agency officials didn’t request the additional money earlier for special education programs.

“Why didn’t we request through the normal budgetary process instead of having an almost train wreck at the 11th hour?” White asked.

Ragley told The Nerve that according to some local school district finance directors, “more local tax dollars were used to support special education programs when state support decreased,” adding that “other programs at the district level could have been affected because local tax dollars were being used to support special education.”

'Devastating' Shortfall

With the partial waiver for fiscal year 2010, the state’s  shortfall for that year was officially set by the U.S. Department of Education at $36.2 million, bringing the total shortfall to $111.5 million, records show.

A corresponding reduction of $111.5 million in federal aid annually to South Carolina “would be devastating” to special education programs, Zais told the oversight committee last Wednesday.

The federal government has informed the state that “no allocation of state funds could be used to resolve” the $36.2 million shortfall for fiscal year 2010, meaning that, unless Washington changes its mind, federal aid to South Carolina will be reduced by that amount annually, Ragley told The Nerve.

“The (S.C.) Department (of Education) will exhaust all administrative, legal and legislative remedies,” Ragley said. “The first step is to appeal the decision, which the department will do.”

The eight-member legislative oversight committee, which began meeting for the first time in November, approved Zais’ proposal to disperse $20 million from the Education Improvement Act fund to local school districts by July 15.

The committee’s recommendation would be reviewed by the Office of State Budget, with final approval resting with the S.C. Budget and Control Board, which oversees OSB, according to Sen. Nikki Setzler, D-Lexington, the committee’s co-chairman. Setzler expressed concerns at last Wednesday’s meeting that the department would distribute the money to local school districts using a formula not allowed by state law.

Zais said his agency didn’t need the committee’s authorization to spend another $55 million from the EIA fund to meet the U.S. Department of Education’s demand that the state disperse a total of $75.3 million to local districts by July 15 or risk losing that amount annually going forward.

Zais and other agency officials didn’t say why authorization wasn’t needed for the $55 million, though the oversight committee was set up only to recommend whether state agencies could increase certain other fund spending during the fiscal year, not to control an agency’s use of its entire other funds budget.

Going forward, Zais briefed the committee about a state budget proviso (1A.54) for next fiscal year allocating nearly $45.5 million to meet the MOE requirement for 2011-12. The proviso also requires that the Legislature and governor be informed by Dec. 1 of the estimated MOE requirement.

Ragley told The Nerve that with the $45.5 million, state support for special education programs will be about $410 million, or about $4,091 per eligible student.

As determined by the federal government, the required state funding level was $410.2 million for this fiscal year, $413.3 million in fiscal year 2010, $416.8 million if fiscal year 2009, and $424.3 million in fiscal year 2008 – the last year South Carolina met its requirement, records show.

Reach Brundrett at (803) 254-4411 or rick@thenerve.org.

Budget Budget and Control Board General Assembly K-12