(3) Local educational agency risk pool.--
(A) In general.--
(i) Reservation of funds.--For the purpose of assisting local educational agencies (including a charter school that is a local educational agency or a consortium of local educational agencies) in addressing the needs of high need children with disabilities, each State shall have the option to reserve for each fiscal year 10 percent of the amount of funds the State reserves for State-level activities under paragraph (2)(A)--
(I) to establish and make disbursements from the high cost fund to local educational agencies in accordance with this paragraph during the first and succeeding fiscal years of the high cost fund; and
(II) to support innovative and effective ways of cost sharing by the State, by a local educational agency, or among a consortium of local educational agencies, as determined by the State in coordination with representatives from local educational agencies, subject to subparagraph (B)(ii).
(ii) Definition of local educational agency.--In this paragraph the term `local educational agency' includes a charter school that is a local educational agency, or a consortium of local educational agencies.
(B) Limitation on uses of funds.--
(i) Establishment of high cost fund.--A State shall not use any of the funds the State reserves pursuant to subparagraph (A)(i), but may use the funds the State reserves under paragraph (1), to establish and support the high cost fund.
(ii) Innovative and effective cost sharing.--A State shall not use more than 5 percent of the funds the State reserves pursuant to subparagraph (A)(i) for each fiscal year to support innovative and effective ways of cost sharing among consortia of local educational agencies.
(C) State plan for high cost fund.--
(i) Definition.--The State educational agency shall establish the State's definition of a high need child with a disability, which definition shall be developed in consultation with local educational agencies.
(ii) <<NOTE: Deadline.>> State plan.--The State educational agency shall develop, not later than 90 days after the State reserves funds under this paragraph, annually review, and amend as necessary, a State plan for the high cost fund. Such State plan shall--
(I) establish, in coordination with representatives from local educational agencies, a definition of a high need child with a disability that, at a minimum--
(aa) addresses the financial impact a high need child with a disability has on the budget of the child's local educational agency; and
(bb) ensures that the cost of the high need child with a disability is greater than 3 times the average per pupil expenditure (as defined in section 9101 of the Elementary and Secondary Education Act of 1965) in that State;
(II) establish eligibility criteria for the participation of a local educational agency that, at a minimum, takes into account the number and percentage of high need children with disabilities served by a local educational agency;
(III) develop a funding mechanism that provides distributions each fiscal year to local educational agencies that meet the criteria developed by the State under subclause (II); and
(IV) establish an annual schedule by which the State educational agency shall make its distributions from the high cost fund each fiscal year.
(iii) <<NOTE: Deadline.>> Public availability.--The State shall make its final State plan publicly available not less than 30 days before the beginning of the school year, including dissemination of such information on the State website.
(D) Disbursements from the high cost fund.--
(i) In general.--Each State educational agency shall make all annual disbursements from the high cost fund established under subparagraph (A)(i) in accordance with the State plan published pursuant to subparagraph (C).
(ii) Use of disbursements.--Each State educational agency shall make annual disbursements to eligible local educational agencies in accordance with its State plan under subparagraph (C)(ii).
(iii) Appropriate costs.--The costs associated with educating a high need child with a disability under subparagraph (C)(i) are only those costs associated with providing direct special education and related services to such child that are identified in such child's IEP.
(E) Legal fees.--The disbursements under subparagraph (D) shall not support legal fees, court costs, or other costs associated with a cause of action brought on behalf of a child with a disability to ensure a free appropriate public education for such child.
(F) Assurance of a free appropriate public education.--Nothing in this paragraph shall be construed--
(i) to limit or condition the right of a child with a disability who is assisted under this part to receive a free appropriate public education pursuant to section 612(a)(1) in the least restrictive environment pursuant to section 612(a)(5); or
(ii) to authorize a State educational agency or local educational agency to establish a limit on what may be spent on the education of a child with a disability.
(G) Special rule for risk pool and high need assistance programs in effect as of january 1, 2004.-- Notwithstanding the provisions of subparagraphs (A) through (F), a State may use funds reserved pursuant to this paragraph for implementing a placement neutral cost sharing and reimbursement program of high need, low incidence, catastrophic, or extraordinary aid to local educational agencies that provides services to high need students based on eligibility criteria for such programs that were created not later than January 1, 2004, and are currently in operation, if such program serves children that meet the requirement of the definition of a high need child with a disability as described in subparagraph (C)(ii)(I).
(H) Medicaid services not affected.--Disbursements provided under this paragraph shall not be used to pay costs that otherwise would be reimbursed as medical assistance for a child with a disability under the State medicaid program under title XIX of the Social Security Act.
(I) Remaining funds.--Funds reserved under subparagraph (A) in any fiscal year but not expended in that fiscal year pursuant to subparagraph (D) shall be allocated to local educational agencies for the succeeding fiscal year in the same manner as funds are allocated to local educational agencies under subsection (f) for the succeeding fiscal year.