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

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

2. CONTEXT: GDP/CAPITA

3. 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

4. MUNICIPAL TRANSFERS PER CAPITA 1998

5. COMPOSITION OF MUNICIPAL REVENUES 1997

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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