Key policy directions to strengthen decentralized education financing

what is or is not achieved. Although the foundations have been formally established for the implementation of a results-based approach to education finance, they are unclear in scope and are still not being enforced.10 For example, the government has introduced a remuneration mechanism that enables school principals to reward good teaching. However, the financial incentives provided to teachers are not aligned with any credible measure of student performance.

Second, the system lacks an integrated and coherent evaluation and assessment framework to enable the credible verification and monitoring of what students are (or are not) learning. The current external evaluation results (available annually for students in grades 4, 7, 10 and 12) are not used to inform or evaluate education finance policies at either the national or subnational level. moreover, given the dismal outcomes produced by Bulgarian students in the PISA language and mathematics tests, the system could benefit from testing reading and numeracy skills in grades 1 and 2 to identify and rectify any weaknesses earlier in the education cycle. Third, despite the key role that municipalities play in providing education in Bulgaria, the system gives them hardly any role in addressing the big challenges related to poor learning and inequities. This is a missed opportunity to tap into their creativity and local knowledge. Currently, municipalities play a limited role in the management of their schools. They have no power to evaluate the performance of schools or school leadership and, hence, have no way to drive schools to improve. The benefit of decentralization lies in the assumption that local governments are best placed to identify local strengths and needs, but Bulgaria seems to have missed the opportunity to empower municipalities to do more than distribute predefined funding in education. municipalities have been given no incentive to take on a bigger role, and in any case, they lack the capacity to reward schools for good education outcomes11 or to hold principals accountable for dismal educational outcomes.12

Currently, municipalities’ responsibilities are largely fiduciary and administrative, and they are not focused on improving learning performance in their schools. moreover, the central government makes no effort to nudge municipalities to improve the learning performance of their students. For example, the central government does not prepare and publish comparisons of student performance on tests by municipality. Also, there is no warning system to identify municipalities that are underperforming in student achievement and to put those municipalities under further scrutiny and offer more support. The scope of local education policy making and service provision is mostly micromanaged by the central government and predefined by input-based financial instruments over which local governments have limited discretion or authority (NALAS 2018).

KEY POLICY DIRECTIONS TO STRENGTHEN DECENTRALIZED EDUCATION FINANCING

Simply tweaking the intergovernmental transfer system will not address the multiple underlying causes of Bulgaria’s poor educational performance. However, rethinking how funds are allocated and distributed could trigger exactly the types of broader reforms Bulgaria needs. The following questions are important: What role could municipalities play beyond the narrow

administrative roles they currently have? What information is needed to shift their focus to learning outcomes? How can all actors in the system be incentivized to focus on narrowing inequities in the system and on increasing what students know and can do at the end of each grade? Four proposals for how the system could be improved follow.

Introduce a results-based approach to the funding mechanism with features that incentivize the poorest performing schools and municipalities to improve their performance

The 2007 decentralization reforms jolted municipalities into taking aggressive action to make their spending more efficient. The central government changed to a per student funding formula and deliberately set the per student amount so low that several municipalities were unable to maintain their large number of schools. municipalities were prompted to take decisive action, and a record number of schools were merged or closed in 2008 and 2009. Bulgaria has done exceptionally well relative to other EU member states in downsizing its school network to match the declining student population.

Bulgaria’s education system needs a new jolt to give municipalities an incentive to desegregate their schools (so that disadvantaged students and high-achieving students are not concentrated in separate schools), reduce dropouts, and improve learning outcomes. The central government must take bold action through its intergovernmental fiscal transfer system to galvanize municipalities into action.

The experience of Ceará—a relatively poor state in Brazil with 9 million inhabitants and 184 municipalities—provides some lessons for how the Bulgarian government could reform its intergovernmental fiscal transfer system in a way that incentivizes municipalities and schools to achieve better results. In 2007, Ceará began linking part of its fiscal transfers to municipalities to their education performance. Since then, the state has had some of the country’s biggest improvements in the quality of education, with 9 of its municipalities having ranked among Brazil’s top 20 in 2017. The ministry of Education uses a simple funding formula that takes into account both improvements in test scores and reductions in dropout rates to incentivize municipalities to make progress on both fronts. municipalities cannot “game the system” by trying to improve their test score results by letting its weakest students drop out. This ensures that every municipality—not only the top performers—has an incentive to improve. moreover, it ensures that municipalities need to make improvements every year to maintain the previous year’s funding level.

It is important to recognize that Ceará did not achieve its impressive results simply by changing its funding system. Not only did it use the funding system to incentivize mayors and municipal councils to focus on improving learning outcomes and reducing dropout rates, but it also provided municipal education teams with technical assistance on how to make progress (see box 9.2).

In 2017, closer to Bulgaria, Denmark launched a Program for Lifting the Academically Weakest Students, combining technical assistance to schools with a pay-for-performance program. Under this program, a school can receive a prize of between €175,000 and €200,000 (depending on the size of the school). To get the prize, a school must reduce the proportion of students who perform poorly on Denmark’s standardized examination.