Restructuring Intergovernmental Transfers and Educational Finance in Bulgaria James S. McCullough

CONTEXT: GDP/CAPITA

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

COMPOSITION OF MUNICIPAL REVENUES 1997

THE PRECIPITATING CRISIS  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  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 TRANSFERS  BLOCK 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