I was not a special ed teacher, but I am dubious of this distinction. If someone can understand the speech of others (ie--can hear and understand the teacher), there's no apparent reason, IMO, that they couldn't "sound out" words.
Did you ever teach a child with articulation problems? Not phonics, I hope.
If you have a kid with a chronilogical age of 6 and mental age of 8 years, that child should be reading above grade-level. But some can't read. Just as some people see things backwards, some don't distinguish sounds nor are they able to remember the sequencing of sounds. They are going to have a problem learning to read with the phonics method. They may learn all the auditory/visual symbols but they can't remember sounds in an order.
Sorry not to respond to you sooner but I was out of town for the weekend.