Charter schools are public schools that operate under a state charter (or contract) specifying the terms under which the schools may operate. They are established under state law, do not charge tuition, and are nonsectarian. State charter school laws and policies vary widely with respect to the degree of autonomy provided to the schools, the number of charter schools that may be established, the qualifications required for charter school applicants and teachers, and the accountability criteria that charter schools must meet. Since 1991, 29 states and the District of Columbia have enacted laws authorizing charter schools. In school year 1996-97, over 100,000 students were enrolled in nearly 500 charter schools in sixteen states and the District of Columbia. Most charter schools are newly created. According to the Department of Education, of the charter schools operating as of January 1996, about 56 percent were newly created, while about 33 percent were converted from preexisting public schools and about 11 percent were converted from preexisting private schools. Appendix II shows the states that have enacted charter laws, and the number of charter schools in operation during the 1996-97 school year, by state. Both the Congress and the administration have shown support for charter schools. For example, in amending the Elementary and Secondary Education Act in 1994, the Congress established a grant program to support the design and implementation of charter schools. In addition, under the Goals 2000: Educate America Act, states are allowed to use federal funds to promote charter schools. The administration proposed doubling the roughly $50 million made available under the new charter school grant program in fiscal year 1997 to $100 million for fiscal year 1998. Finally, in his 1997 State of the Union Address, the President called for the establishment of 3,000 charter schools nationwide by the next century. focused on the recent development of charter schools in various states. Concerns were raised during the hearings by charter school operators and others about whether charter schools were receiving equitable allocations of federal categorical grant funds. Recent research conducted by the Department of Education and by the Hudson Institute, a private, not-for-profit public policy research organization, raised similar concerns. Although dozens of financial aid programs exist for public elementary and secondary schools, two programs—title I and IDEA—are by far the largest federal programs. Title I is the largest federal elementary and secondary education aid program. The Department of Education administers title I, which received over $7 billion in federal funding in fiscal year 1997. Under the program, grants are provided to school districts—or local education agencies (LEA), as defined in federal statute and regulations—to assist them in educating disadvantaged children—those with low academic achievement attending schools serving relatively low-income areas. The program is designed to provide increasing levels of assistance to schools that have higher numbers of poor children. Nationwide, the Department of Education makes available to LEAs an annual average of about $800 for each child counted in the title I allocation formula. Under title I, the federal government awards grants to LEAs through state education agencies (SEA). SEAs are responsible for administering the grants and distributing the funds to LEAs. About 90 percent of the funds the Congress appropriates is distributed in the form of basic grants, while about 10 percent is distributed as concentration grants, which are awarded to LEAs serving relatively higher numbers of children from low-income families. Roughly 90 percent of LEAs nationwide receive basic grants. 2 percent of their school-aged population. To be eligible for concentration grants, LEAs generally must have enrolled more than 6,500 children from low-income families, or more than 15 percent of their students must be from low-income families. An LEA that receives title I funds and has more than one school within its district has some discretion in allocating these funds to individual schools. The LEA must rank its schools according to the proportion of children that come from low-income families enrolled in each school. LEAs must use the same measure of poverty in ranking all their schools, but LEAs have some discretion in choosing a particular measure. LEAs must allocate title I funds or provide title I services first to schools that have more than 75 percent of their students coming from low-income families. After providing funds or services to these schools, LEAs have the option of serving schools that do not meet the 75-percent criterion with remaining funds. Although a LEA is not required to allocate the same per-child amount to each school in its district, it may not allocate a higher amount per child to schools with lower poverty rates than to schools with higher poverty rates. IDEA, part B, is a federal grant program administered by the Department of Education that is designed to assist states in paying the costs of providing an education to children aged 3 to 21 with disabilities. The act requires, among other things, states to provide a free appropriate public education to all children with disabilities and requires that they be served in the least restrictive environment possible. The Congress appropriated $3.5 billion for the program in fiscal year 1997. These funds were expected to provide, on average, about $625 of services for each of 577,000 eligible preschool children, and $536 of services for each of 5.8 million eligible elementary and secondary school students. during the preceding fiscal year, the national average per-pupil expenditure, and the amount appropriated by the Congress for the program. The per-disabled-pupil amount that can be allocated for IDEA services is capped at 40 percent of the national average per-pupil expenditure. States use their own formulas to allocate funds. States must provide at least 75 percent of the IDEA funds they receive to eligible LEAs or other public authorities, and they may reserve the rest for statewide programs. Before the 1997 IDEA reauthorization, an LEA entitled to an allotment of less than $7,500 could not receive funding directly, according to federal statutory provisions. Instead, the LEA had to either rely on the state for services or join with other LEAs to collectively meet the $7,500 threshold and receive funds to serve eligible students. In reauthorizing IDEA, the Congress removed the $7,500 threshold. As a result, LEAs, including charter schools that are treated as LEAs, are no longer required to join with other LEAs in order to meet that threshold. Each state has different procedures for allocating special education aid to LEAs. Some states use census information to allocate a fixed amount per eligible student. Other states allocate funds on the basis of reimbursement rates for allowable expenses. Still other states allocate funding to LEAs on the basis of the severity and types of students’ disabilities. States use several arrangements to provide funds to charter schools. In general, states allocate title I funds, and IDEA funds or services, to charter schools using one of three approaches. The seven states in our review used all three. allocate title I funds and IDEA funds or services to charter schools’ parent LEAs. Charter schools, along with other public schools in the district, then receive their share of funds or services from their parent LEAs. The third approach for allocating funds to charter schools involves a mixture of the first and second approaches. In general, a charter school in a state using this approach receives federal funds directly from the SEA—and thus is treated as an LEA—if the school was chartered by a state agency, or through a parent LEA, if the school was chartered by a district or substate agency. States using this model include Arizona, Michigan, and Texas. Regardless of which of the three approaches states use, individual charter schools are generally allocated funds on the basis of whether they are treated as (1) an independent LEA, or school district (independent model), or as (2) a dependent of an LEA—that is, as a public school component of a preexisting school district (dependent model). Throughout my testimony, I refer to these two methods in allocating funds to charter schools as the (1) independent model and the (2) dependent model, respectively. Under title I and IDEA, the Department of Education is responsible for allocating funds to SEAs, which are required to allocate funds to LEAs. LEAs, in turn, may allocate funds to individual schools in their districts. While charter schools operating under the independent model are considered LEAs, charter schools operating under the dependent model are not. Because LEAs are allowed some discretion in allocating funds to individual schools within their districts, whether a charter school is treated as an LEA or as a dependent of an LEA is important. Under the title I program, SEAs distribute funds directly to eligible LEAs. To be eligible for funds, LEAs—including charter schools operating under the independent model—must meet the minimum statutory eligibility criteria of having enrolled at least 10 children from low-income families and having their low-income children constitute more than 2 percent of their school-aged population. No further distribution of funds needs to occur when an LEA has only one school, as is the case when an individual charter school is treated as an LEA under the independent model. LEAs that have more than one school—including charter schools operating under the dependent model—are responsible for allocating title I funds among their several schools. The federal statute and regulations lay out a complex set of criteria and conditions that LEAs use in deciding how to allocate funds to their schools. The intent of the statute is to shift title I funds received by LEAs to individual schools with relatively higher numbers and percentages of students from low-income families. Individual schools—including charter schools—within a multiple-school LEA, therefore, must potentially meet higher eligibility thresholds than they would if they were each considered an independent LEA. As a result, some charter schools that would have received title I funds under the independent model may not receive such funds because they are components of LEAs.