In response to a congressional request, GAO reported on financing special education services for handicapped children, specifically the concern that the Education for All Handicapped Children Act of 1975 resulted in state and local education agencies assuming responsibility for financing a wide variety of services to such children. GAO focused on two states and their use of interagency agreements to utilize state agencies' resources to serve handicapped children. GAO found that: (1) state agencies with various responsibilities for serving handicapped children can work together and share the cost of needed services; (2) in Connecticut, Medicaid reimbursements of approximately $5 million per year will be available to local school districts for school-based health services to handicapped children; (3) Maryland's interagency agreement resulted in health and social service agencies contributing over $11 million to a fiscal year 1986 state funding pool to cover the costs of placing handicapped children in residential facilities; and (4) proposed legislation would clarify financial responsibility for services required and encourage the use of interagency agreements through a revision to the act.