This report summarizes and discusses some of the major fiscal policy questions surrounding the funding of special education in the current era of school reform. Part 1, "Current Special Education Financing: Issues and Provisions," addresses how special education is currently funded and the different formulas used for special education funding. Issues that are driving the reform of special education funding are outlined, including the need for greater flexibility in placement and use, rising special education costs and enrollments, concerns over the efficiency of special education services, the strict categorical nature of special education services, and fiscal policies that work at cross purposes with inclusion policies. Part 2 of the report, "State and Federal Reform Initiatives" discusses different ways that governments are addressing the issues of special education funding, including census-based funding, adjusting special education funding based on student poverty, removing fiscal incentives for restrictive placements, changing the federal "incidental benefit" rule, and blended funding and service provisions. Criteria that states should consider when developing funding systems to foster effective special education programming, how states' fiscal policies can encourage integrated services, and ways states have been able to overcome difficulties in implementing fiscal reform policies are also reviewed. (Contains 18 references.) (CR)