Challenges in Education Finance Reform

1. Challenges in Education Finance Reform Education as a Strategic Investment Conference Prepared by Tony Levitas and Marko Paunovic Belgrade, February 14th 2009

2. Before we begin… • Richard Riley, US Secretary of Education under President Clinton believes that 1o most demanded jobs in 2010 have not even existed in 2004 • If that is true, our education system needs to prepare our children for jobs that to not even exist! • To be able to do that, significant institutional changes are needed… • …but the only public debate on education policy in Serbia is about teacher wages. • Which does not leave to much room for optimism. Levitas February 09

3. Outline of Presentation • The Current System of Education Finance in Serbia • The major problems • Why introduce per capita financing? • Select Experiences of other Eastern Europe Countries • Concluding Thoughts

4. Basic Characteristics of the existing system • Responsibility for financing pre-university education is shared between the national government and local governments. (c. 80% - 20%) • Local governments are responsible for financing all the costs of non mandatory kindergartens and operating costs of primary and secondary schools. • The national government finances the wages in primary and secondary schools and mandatory kindergarten. • Investment costs are “shared”, but the way of selecting investment projects is unclear and not transparent

5. Basic Characteristics of the existing system • Spending on pre-university education as share of GDP in Serbia (above 3 %) is slightly below the OECD average (3,7%) in 2005.

6. Results do not match the expenditures • Primary problem is not in total spending, but in the way the money is spent • Bad separation of power and centralized system • There are no financial incentives • Good teachers and principals can not be rewarded… • And bad ones can not be punished • Largest share of budget is spent on wages • Which are maybe low • But the number of people is high

7. Problems – the system is unclear… • In theory, both the national government and local governments are supposed to allocate money to schools according to formulas based on objective criteria, such as number of classes taught, square meters of facility and type of heating fuel • But, in practice, these formula’s are not applied and school budgets are determined “historically” • This is a typical pattern for “post-communist” countries, due to the: • demographic decline; • fiscal stress; • and political weakness. • No clear rules on class sizes.

8. …inefficient… • Over 1000 satellite schools with less the 20 pupils, of which more than 90% in Central Serbia

9. …and inequitable. • There are large differences in spending per student across regions • These spending patterns cannot be fully explained by objective factors such as the additional costs of teaching ethnic minorities in their native language. • Also, large number of small “expensive” schools in Central Serbia makes this result even more interesting , because it would be expected that per student spending is higher in Central Serbia

10. Why is it so? • Because the system is set in such a way that no one knows who is responsible for the student’s knowledge (or lack of it)? Teacher, principal, superintendant, ministry? • Teachers are not motivated • It is very difficult to reward good teachers • It is difficult to retain good teachers in education • Which means that young people do not want to be teachers • Parents are marginalized • Other participants (such as principals) have no particular reason to work harder, nor do they have mechanisms to solve problems

11. How did other countries set up the responsibility system? • Per capita financing is a standard practice in most OECD countries • It creates a direct link between the purpose of the activity –teaching students– and the financial resources devoted to that activity. • Facilitates the decentralization of managerial and financial responsibilities which allows easier problem solving at the local level • Combined with open school districting it can facilitate competition between schools

12. Some other reasons • Can be used to facilitate private sector involvement in the education system, which is good both for teachers and students. • Can be used to correct the inefficiencies and inequities of systems • But the same reasons driving the move towards per capita funding in “post communist” Europe make it difficult to introduce. • Existing disparities in per pupil funding mean that the introduction of a per capita funding formula’s exerts financial pressure on “high” cost schools to reduce employment, or to close.

13. Important question – who gets the money? • One of the key decisions: • Should the formula allocate money from the national government to schools (decentralization to schools)? • Or should the formula allocate money to local governments, who then allocate it to schools (decentralization to local governments)? • It is a political decision because: • If decentralization to schools, than the national government must deal with the adjustment problem. • If to local governments, then adjustment is their problem.

14. Experiences in Eastern Europe – transfers to local level • Poland and Hungary have decentralized education finance and management to local governments. • Local Governments can supplement their weighted per pupil education grants with their own revenues and they allocate education funds to schools as they see fit. • Has not eliminated the small school problem, but has made it “manageable”. • In both, under the voter pressure, local governments now make considerable contributions to the education system from their own revenues; for investments, additional teaching hours, bonuses.

15. Experiences in Eastern Europe – transfers to local level • In both countries school districts are open, promoting competition and quality • In Poland, local government must give private schools the same amount in per pupil funding as they receive from the national government. • In Poland the national government is considering legislation that would require local governments to develop local formulas for allocating money across schools

16. Experiences in other similar countries • Georgia and Armenia moved directly to the per capita funding of schools. • Systems crashed and burned as urban schools overfunded, rural schools bankrupted. • Lithuania has introduced an interesting compromise • Local Governments receive a weighted per capita grant from the national government. • But they are required to allocate to 80% of the grant to schools according to same rules as the grant to them. • 20% they can allocate as they see fit.

17. Concluding Thoughts • Serbia has increasingly profound problems with equity and efficiency of its education and management system. • Per capita funding is part of the solution. • But per capita funding should be considered within the larger context of whether it will be the national government or local governments who will be held responsible for : • managing school networks; • allocating labor in the system; • making investment decisions; • and dealing with adjustment costs now, • and failed schools in the future.