Developed through a literature review and a meeting with California policy makers, the paper examines the local special education variables necessary in developing state special education fiscal policies. The first chapter reviews the shifting focus in state special education and finance systems and finds three distinct phases of public policy and fiscal responses: Phase 1--the benefactor role (in which public education for handicapped children is seen as a charitable activity by the state); Phase 2--the programmatic role (in which the states became the driving force in mandating change in the provision of services to handicapped students); and Phase 3--the facilitator role (in which the state facilitates the local school district's provision of educational programing). Examined in the second chapter are the following eight policy factors and their associated local policy variables (in parentheses): population characteristics (population size, density, increasing or decreasing enrollment, eligibility criteria, interagency shifts, and the magnet effect); individual educational needs (procedural protections, intensity of services, duration of services, multiple agency criteria); service delivery systems (program services, service providers); governance structures (type of governance units, responsibility vs. authority, and special education and the local school budget); system costs (geographic location of the education agency, price level variations, contract negotiations); resources (revenue generating wealth, tas levying authority, availability of community resources, private services, personnel resources); timing and predictability (dollar flow, fiscal stability, and contingency capability); and accountability (state education agency responsibilities, local education agency responsibilities). The final chapter presents four general principles such as the following: the number of children requiring similar special education and related services will influence the per capita cost of delivering such services; and the range of special education services required by exceptional children in a school district and the manner in which such services are determined and provided will influence the cost of delivering such services. (DB)