in Ceará

The results-based education financing framework in Ceará

The state of Ceará introduced an innovative method for splitting its ICmS revenue among its municipalities that makes the size of the transfers dependent on education outcomes. The ICmS is the largest source of revenue for state governments in Brazil; the national constitution mandates that states transfer 25 percent of these funds to their municipal governments (ICmS quota), which the municipal governments can use in any sector. The criteria of redistribution have one feature common to all states—75 percent of the ICmS quota distributed to municipalities must be proportional to their fiscal added value, an indicator of their economic activity. The remaining 25 percent (the discretionary quota) can be redistributed according to states’ own criteria, such as population size and income level (see figure 8.11). Ceará was the first state in Brazil to use performance-based criteria for education, health, and environmental indicators to redistribute the discretionary quota.14 Eighteen percent of the ICmS received by municipalities is linked to education outcomes, 5 percent to health outcomes, and 2 percent to environmental outcomes. Thus, when municipalities improve their education outcomes, they receive a higher share of ICmS revenue, and these resources can be allocated to any sector.

The development of results-based criteria for redistributing the ICmS quota was part of a wider education reform in Ceará that was aimed at increasing literacy rates. In 2007, the then–newly elected government of the state of Ceará set a clear goal for the state—to ensure that all students finish grade 2 with proper literacy skills. To achieve this goal, the state established three main policies that were aligned with global evidence on the effective use of RBF in education: (1) using RBF to provide municipalities with fiscal incentives to achieve established goals; (2) providing municipalities, especially those with limited technical capacity, with technical assistance, teacher training, and structured materials for improving the literacy process through the Literacy at the Right Age Program (PAIC)15; and (3) establishing a solid and reliable monitoring and evaluation system that continuously measures key education outcomes, including student learning. A key aspect of this strategy was the devolution of authority for managing primary and lower secondary schools to municipal governments with clear

FIGURE 8.11

Criteria for redistributing ICMS revenues among municipalities in Ceará

Fiscal added value, 75% Discre onary, 25% Educa on, 18% Health, 5%

Environment, 2%

roles and responsibilities assigned to each government level and a strong collaborative strategy in which the state government supported municipal governments in providing primary and lower secondary education.16 Last but not least, sustained political leadership and focus was a crucial element at the heart of this series of reforms.17

To operationalize the fiscal incentive mechanism, Ceará selected clear indicators and expanded the state’s monitoring and evaluation systems. For each category of the ICmS quota redistribution, an index was created to define the rules and the amount received by each municipality. The health index took into account mostly improvements in the child mortality rate, while the environmental index focused on appropriate waste disposal. Education accounts for the largest amount of resources, and the Education Quality Index (IQE) takes into account literacy in grade 2, achievements in reading and mathematics in grade 5, and passing rates from grades 1 to 5. The focus was clear: municipal governments should improve literacy, reading, and mathematics among all students and not only a few, since high repetition rates or increasing inequality would penalize the performance results. To allow the calculation of the index, the state strengthened its monitoring and evaluation systems. In education, it expanded its Permanent Basic Education Assessment System (SPAECE), which previously assessed students in grades 5, 9, and 12, to include students in grade 2. SPAECE also assesses student achievement in Portuguese language and mathematics based on the state’s curriculum. The state required the evaluation to take place every year and to evaluate all students in the relevant grades, including those in rural areas. To avoid municipal interference in the exam, the state covers all of the costs related to the evaluation and sends its own evaluators to schools. For the grade-to-grade progression rate indicator, less effort was needed because schools are already mandated to report progression rates annually to the ministry of Education.

The design of the IQE was decisive in engaging municipalities because it provided evidence of which dimensions needed to be improved. IQE captures both the level of achievement (test scores and progression rates between grades) and improvement (changes in the test scores). It also gives different weights to each of the three indicators (literacy in grade 2, achievements in reading and mathematics in grade 5, and progression rates from grades 1 to 5) but prioritizes literacy. When the incentive mechanism was first created, the formula gave most weight to improvements in literacy to stimulate municipalities with poor education outcomes (see figure 8.12). As the quality of education improved in the state, the formula was redesigned to give more weight to increasing levels of literacy at grade 2 and achievement in grade 5 (see figure 8.13). To prevent municipalities from improving outcomes by sending only the best students to take the learning assessments, IQE also considers the share of students taking the exam and the standard deviation of learning outcomes in each school.

The RBF mechanism needed to be transparent and consistent to be seen as legitimate. To generate incentives for municipalities to improve their results, the system needed to be trustworthy. It was key in Ceará to have clear rules and clear indicators that were collected by independent external evaluators. Additionally, the Ceará Institute of Economic Research (IPECE), which created and operates the RBF mechanism, employs skilled professionals, which confers technical legitimacy and political independence on the calculation of the indexes. Lastly, IPECE makes all of the calculations available to the public. For each indicator, it publishes a list with the scores of each municipality and the amount of funds to be transferred.18