A nine-state survey determined fiscal policies regarding educating children with disabilities residing in state institutions of mental health or mental retardation. States included California, Colorado, Massachusetts, Michigan, Minnesota, South Carolina, Vermont, Virginia, and Wisconsin. It was found that predominantly state-appropriated dollars were used to pay for educating institutionalized children whose school was located at the institution. In some states, federal Chapter 1 monies were used to provide services supplemental to the state-operated special education programs. The states in the sample were about equally divided on the question of which state agency, Education, Mental Health, or Mental Retardation, pays the educational costs. Only in Minnesota and Colorado are the school districts directly involved in paying for some or all of the educational costs for children with disabilities residing in state mental retardation or mental health institutions. In Virginia, some State Department of Education monies that normally would flow to the home school district were diverted to the State Department of Mental Retardation. When special education took place off institutional grounds, there was a tendency for the State Education Agency and the local school districts to become involved in financial and programmatic areas. (SW)