Restructuring Intergovernmental Transfers and Educational Finance

in Bulgaria

James S. McCullough

CONTEXT: GDP/CAPITA

0

50

100

150

200

250

300

350

91 92 93 94 95 96 97 98 99 00 01 02 03 04

SITUATION IN 1998

MUNICIPAL BUDGETS DECREASED BY HALF

HIGHLY DEPENDENT ON SHARED TAXES AND SUBSIDIES

LARGE HORIZONTAL INEQUITIES IN MUNICIPAL REVENUES

COMPLEX AND UNSTABLE SUBSIDY FORMULA

SOCIAL SECTOR EXPENDITURES DOMINATE MUNICIPAL BUDGETS

NO LOCAL CONTROL OVER MUNICIPAL OWN SOURCE REVENUES

NO REAL POLICY ANALYSIS & DEBATE OVER MUNICIPAL FINANCE SYSTEM

MUNICIPAL TRANSFERS PER CAPITA 1998

0

20

40

60

80

100

120

140

160

180

200

1 2 3 4 5

SUBSIDY

SHARED TX

COMPOSITION OF MUNICIPAL REVENUES 1997

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

BULGARIA ALL EUROPE

LOANS

SUBSIDY

SHARED TX

OWN SOURCE

THE PRECIPITATING CRISIS 1999-2000

RAMPANT MUNICIPAL BUDGET DEFICITS

AD HOC BAILOUTS OF MUNICIPAL DEFICITS

COST FACTORS BEYOND MUNICIPAL CONTROL

PIECEMEAL REFORMS TO SUBSIDY SYSTEM

INEFFECTIVE EXPENDITURE CONTROLS BY MOF

ACCELERATED DECLINE IN MUNICIPAL CAPITAL INVESTMENT

BREAKDOWN IN CENTRAL-LOCAL MEDIATION ATTEMPTS

SETTING THE STAGE FOR REFORM 1999-2001

LOCAL GOVERNMENT INITIATIVE POLICY WORK

ANALYTICAL STUDIES & POLICY DEBATE

EMERGING CONSENSUS ON NATURE OF PROBLEM

POLITICAL CAMPAIGN & ELECTION OF 2001

KNOWLEDGEABLE ACTORS GAINING INFLUENCE

POLICY AGENDA IDENTIFIED

MUNICIPAL FINANCE REFORM 2001

NEW GOVERNMENT

HIGHLY PLACED CHAMPION IN NEW ADMINISTRATION

FORUM OF KEY STAKEHOLDERS SETS UP WORKING GROUP

FORMAL WORKING GROUP EMPOWERED BY COUNCIL OF MINISTERS

GUIDING DOCUMENTS:“CONCEPT”: COMPREHENSIVE REFORM STRATEGY“PROGRAM”: MULTIYEAR DETAILED PLAN

MATCHING FINANCING TO SERVICE ASSIGNMENT

CLEAR DEFINITION OF MANDATED SERVICES

REDUCTION OF HEALTH SERVICE ASSIGNMENT

ELIMINATION OF SOCIAL WELFARE ASSIGNMENT

ADOPTION OF COSTING STANDARDS FOR FUNDING ALL OPERATING COSTS OF MANDATED SERVICES

FULLY FUNDING ALL MANDATED SERVICES WITH TRANSFERSBLOCK SUBSIDY + SHARED TAXES = MANDATED

SERVICE FUNDING

PERSONAL INCOME TAX BECOMES 100% DEDICATED AS MUNICIPAL SHARED TAX

LOCAL OPTION SERVICES FUNDED BY OWN SOURCE REVENUES

LOCAL FEES AND CHARGES UNDER LOCAL CONTROL

LOCAL TAX AUTONOMY REQUIRES CONSTITUTIONAL AMENDMENT

FOR POOR MUNICIPALITIES, SPECIAL SUBSIDY POOL CREATED TO PROVIDE BASE LEVEL OF OWN SOURCE REVENUES

MUNICIPALITIES CAN USE OWN REVENUES TO “TOP UP” MANDATED SERVICE FUNDING

VERY BOUYANT LOCAL REVENUE GROWTH DUE TO AGGRESSIVE LOCAL RATE INCREASES

EDUCATION FUNDING

PRIMARY & SECONDARY SCHOOLS FUNDED THROUGH MUNICIPAL BUDGETS

USE AGGREGATE LEVEL OF EDUCATION FUNDING IN 2001 AS BENCHMARK

MUNICIPALITIES STILL DO NOT CONTROL TEACHER COSTS

HORIZONTAL INEQUALITY GREATLY REDUCED

COSTING STANDARDS HASTILY DESIGNED AND NEW STANDARDS FORMULATED BUT NOT APPROVED

COSTING STANDARDS COVER OPERATING COSTS ONLY

EDUCATION COSTING STANDARDS

PER STUDENT ALLOCATION =

1. TEACHER SALARY COSTS

(normed on actual average class size)

2. “MAINTENANCE” (NON-SALARY) COSTS

(biased adjustment for actual class size)

NOTE: DIFFERENT TYPES OF SCHOOLS HAVE DIFFERING SETS OF STANDARDS

DELEGATED BUDGETS EXPERIMENT

EXPERIMENTAL REFORM UNDER WORLD BANK LOAN

FORMULA-BASED ALLOCATION FROM MUNICIPALITY TO SCHOOLS

GIVES LOCAL SCHOOL ADMINISTRATORS PARTIAL CONTROL OVER BUDGETS

UNSPENT FUNDS CAN BE CARRIED OVER

SCHOOLS CAN ENGAGE IN REVENUE RAISING ACTIVITIES

SUCCESSFUL RESULTS SO FAR BUT LIMITED SPREAD EFFECT

LESSONS LEARNED

LENGTHY PERIOD OF FAMILIARIZATION, ANALYSIS, DEBATE AND EXPERIMENTATION REQUIRED TO GET FUNCTIONING FISCAL DECENTRALIZATION SYSTEM IN PLACE

CONTINUOUS MONITORING AND ADJUSTMENT REQUIRED TO MAKE FISCAL DECENTRALIZATION WORK

MINISTRY OF EDUCATION HAD LIMITED INVOLVEMENT IN OVERALL FISCAL DECENTRALIZATION DEBATE & CAPACITY BUILDING

AGGREGATE LEVEL OF PUBLIC EDUCATION FUNDING STILL UNRESOLVED IN BULGARIA

SHOULD EDUCATION TRANSFERS BE EARMARKED OR PART OF BLOCK GRANT?

COSTING STANDARDS INCREASE TRANSPARENCY & PREDICTABILITY BUT, ONCE ADOPTED, TEND TO PERSIST EVEN IF BADLY DESIGNED

EMPHASIS ON FISCAL DECENTRALIZATION HAS SO FAR IGNORED ISSUES OF SCHOOL GOVERNANCE