ANN ARBOR—Many school districts classify students as disabled in order to receive more state funding, says University of Michigan economist Julie Berry Cullen.
“Student disability rates nationwide have grown by more than 50 percent over the past two decades and are continuing to rise,” says Cullen, an assistant professor of economics. “This trend has been linked to state funding formulas that reward local school districts for identifying additional students with special needs, but until now, there has been little empirical evidence on the role of these fiscal parameters in explaining student disability rates.”
In a six-year study of more than 1,000 school districts in Texas, Cullen found that a 10-percent increase in supplemental revenue generated by a special education student in excess of that generated by a regular student leads to a 1.4 percent increase in the student disability rate.
Moreover, recent changes in state revenue generosity have accounted for more than 35 percent of the growth in disability rates from the 1991-92 to 1996-97 school years, she says. During that time, average yearly disability rates increased 3.6 percent in Texas, while actual revenue gains rose, on average, 9 percent annually.
The importance of financial incentives in determining the rate at which students are classified as disabled depends on the amount of discretion local officials have in implementing special education programs, Cullen says. Although federal and state mandates, she adds, attempt to limit local discretion by explicitly prescribing the procedure for identifying and serving students with special needs, local school districts have substantial latitude.
For example, while many eligible students may be severely physically or mentally disabled, many others in special education are difficult to distinguish from non-disabled, slow-learning students, she says. In all, more than 80 percent of special education students nationwide have non-physical disabilities, such as a learning disorder, speech impairment or emotional disturbance.
“Special education has evolved into a program that primarily serves students with mild learning disabilities,” Cullen says. “Fiscal incentives to classify marginal students as disabled arise because the claim that a local district can make on state education funds typically increases with the number of students classified.
“Local responses to state incentives, therefore, play an important role in determining the ultimate size of special education programs and in determining the allocation of resources within and
across schools.”
Labeling students as disabled is not without its costs, however. If it were, Cullen says, school districts could be expected to classify all students as needing special education. Financial costs for assessment and additional instruction and non-fiscal costs, such as possible state audits or censure and parental objections, are deterrents for not identifying more students as disabled.
“Only those districts that face revenue incentives that outweigh the costs will engage in re-labeling,” Cullen says.
Her study also found that minority students, especially if they attend schools with large majority student populations, and students at districts with small enrollments and low levels of per-pupil state aid are more likely to be classified as disabled in response to increases in financial incentives.
In all, Cullen says, more than 12 percent of elementary and secondary students are now classified as disabled, due in part to financial incentives and vague definitions of disabling conditions. As a result, a national reform effort is currently under way to reduce the incentives in state school finance policies for local districts to inflate student disability rates.

Julie Berry Culleneconomics