The responsibilities and prerogatives of state departments of education regarding the allocation of federal funds authorized under provisions of the draft version of the Education Consolidation and Improvement Act of 1981 are clarified in this report, and the resulting policy options available to state education agencies are examined. The law specifies that some of the available funds are to go to local districts and some are to be allocated directly by the state, but the state retains broad discretion concerning such matters as how it will distribute the funds to local districts, how it will regulate local district accountability, how it will set priorities, and what technical assistance it will provide. In evaluating the many possible policy choices it can make affecting each of these issues, the state agency must recognize that a new relationship exists between the state and the local district as a result of the shift in responsibility for fund allocation from the federal government to the state, and it must also recognize the need for considering the many different ways the policy choices can be prioritized. (Author/PGD)