The Formula Does Not Capture Certain Taxable Resources

While proper measures of need and cost are important for both beneficiary  and taxpayer equity, the VR funding formula lacks equity for state  taxpayers, in particular, because its measure of a state’s ability to  contribute to the VR program is limited to per capita income and does not  include all potentially taxable resources. This provision of the formula served a purpose when the formula was last  revised, in 1978, to ensure that no state experienced a funding decrease. We present three options, or prototypes, to illustrate the range of options. Challenge of basing incentive awards on an agency’s performance,  without accounting for factors outside its control: A variety of factors  outside an agency’s control may influence performance outcomes, such as  the state’s economy and the characteristics and needs of the individuals  who seek rehabilitation services. Although Education uses multiple  measures to evaluate state VR agencies’ performance, an issue to consider  is whether or not the current measures would be appropriate to use for  distributing incentive awards. Adjusting performance standards to account for differences in local  economies and program clients: The level of performance required of  each state VR agency to receive an incentive award could be adjusted to  account for the challenges they face. Appendix I: Objectives, Scope, & Methodology

Our objectives were to: (1) assess the extent to which the funding formula  meets generally accepted equity standards, (2) develop options for revising  the formula to better meet these standards, and (3) identify issues to  consider with incorporating performance incentives into the formula. As a result, they were  included in our measure. We assessed the reliability and validity of ACS data by interviewing Census  Bureau officials and disability experts, reviewing documentation and  literature, and conducting comparisons with other disability data. Measuring State Financing Capacity

A taxpayer equity standard stipulates that funds are distributed so that  states can provide individuals comparable services using both state and  federal funds, while each state contributes about the same proportion of  their resources to a given federal program. These  proportions are presented in appendix III. Allotments per working-aged person with a disability (cost-adjusted):  To determine for each state the allotment per working-aged person with a  disability, as adjusted for the costs of providing services, we used  Education data on the VR grant allotments that states received in fiscal  year 2008, ACS data on state disability populations in 2007 (using the five  disability questions, as described earlier), and the cost index, as described  earlier. Analysis of Formula Options

For our second objective, we developed three formula options based upon  equity standards commonly used to design and evaluate funding formulas. Education  obtains the data from the Department of Commerce’s Bureau of Economic  Analysis. Appendix VII: Description of Formula Options

This appendix provides detailed information on three formula options or  prototypes for revising the VR funding formula: (1) a partial beneficiary  equity formula that distributes funds based only on the size of a state’s  population potentially needing services, (2) a full beneficiary equity  formula with the addition of a cost of services factor, and (3) a taxpayer  equity formula with the addition of a measure of state resources. It would only partially achieve beneficiary  equity because it does not account for differences among states in the cost  of providing services.
Why GAO Did This Study

State vocational rehabilitation (VR) agencies play a crucial role in helping individuals with disabilities obtain employment. In fiscal year 2008, the Department of Education (Education) distributed over $2.8 billion in grants to state agencies, using a funding formula that was last revised in 1978. Questions have been raised about whether this formula is outdated, allocates funds equitably, and adequately accounts for state agencies' performance. GAO was asked to: (1) examine the extent to which the current formula meets generally accepted equity standards, (2) present options for revising the formula, and (3) identify issues to consider with incorporating performance incentives into the formula. To address these objectives, GAO relied upon two equity standards commonly used to design and evaluate funding formulas: beneficiary equity, which stipulates that funds should be distributed so that each state can provide the same level of services to each person in need; and taxpayer equity, which stipulates that states should contribute about the same proportion of their resources to a given program. GAO analyzed data from Education, Department of the Treasury, Census Bureau, and other agencies; surveyed state VR agencies; interviewed agency officials and disability experts; and reviewed literature on performance incentives.

What GAO Found

The VR funding formula falls short of meeting equity standards because it uses imprecise measures of state needs and resources. The formula does not account for differences among states in the proportion of people with a disability or the costs of providing services. As a result, the amount of services that states can purchase per person with a disability varies, from $83 to $277 (see figure). In addition, the formula uses only per capita income to measure a state's ability to contribute to the program, excluding other taxable resources. GAO presents three options for revising the formula to illustrate a range of possibilities: the first distributes funds based on states' disability populations, the second also accounts for costs of providing services, and the third further accounts for state resources beyond per capita income. Because any formula change would redistribute funds among states, potentially disrupting services to individuals, GAO also presents options for establishing a transition period. Including performance incentives in the funding formula has potential for improving performance but can also pose challenges. These include: effectively balancing the VR program's multiple goals, rewarding agencies for meeting individuals' specific needs, and basing awards on an agency's performance rather than influences outside its control. GAO identified ways to mitigate these risks, such as using multiple performance measures to address different goals, and adjusting the performance level required for an agency to receive an incentive award. However, these approaches would still require careful consideration of several issues, such as how to account for clients' varying disability levels and needs and provide appropriate incentives for achieving desired outcomes.