252 | The Role of Intergovernmental Fiscal Transfers in Improving Education Outcomes
BOX 9.1
Evolution of the allocation mechanism in school finance When the delegated budget system was first introduced, the specific-purpose grants from central budgets to municipal budgets for the provision of basic education services were calculated by multiplying the UCS per student by the number of students. Municipalities were obliged to distribute 100 percent of the UCS-based transfers they received among their schools using their own local formula, but they were required to allocate a minimum of 80 percent of the funds according to the UCS per student and number of students, and had discretion over only 20 percent to be distributed according to local preferences and differences between schools (such as the type of heating system, the school location, the area, or the numbers of students from vulnerable backgrounds). Over the next decade, various modifications and adjustments were made to the funding mechanism,
but no significant change was made to the per student principle. The allocation mechanism was gradually becoming more complex, with the addition of more UCSs (increasing from 36 in 2010 to 49 in 2017) and the introduction of various supplementary components. In 2018, a significant change in the funding formula design was introduced, adding per class and per institution UCSs to the per student standard that had been in use since 2007. The mandatory distribution of 100 percent of the funds remained unchanged. The scope of municipalities’ discretion to reallocate funds has been slightly restricted, however, with the new distribution rule requiring at least 85 percent of the funding to be allocated on a per student, per class, and per institution basis and up to 15 percent of the funding to be allocated according to local needs and circumstances.
preparing monthly and quarterly reports on the implementation of municipal budgets. The Directorate also (1) coordinates all activities related to the preparation and implementation of municipal budgets; (2) develops the mechanisms for allocating subsidies; (3) negotiates with the National Association of Municipalities in the Republic of Bulgaria (NAMRB) on the allocation of subsidies; and (4) provides methodological support to the municipalities. NAMRB offers a wide range of information, methodological, and consultancy support to municipal governments, including training. It also maintains an online information system that contains data on municipal finances. Researchers interested in quantifying the intergovernmental funding flows in education face two main problems. First, the four funding pillars are not coded in Bulgaria’s budget classification system, which makes it difficult to quantify or track the amounts of funding provided under each pillar. Second, the main intergovernmental transfer covers municipalities’ expenditures on “state-mandated activities.” Although the transfer is functionally earmarked, the code for tracking the transfer is not.
Patterns and trends in the flow of funds through the transfer system Municipalities in Bulgaria have very limited fiscal autonomy. Their own-source revenue is tiny (except for a few municipalities that include resorts or strong economic centers), and most of the transfers they receive from the central government are for a specific purpose. The own-source revenues from the local tax base of the median Bulgarian municipality in 2018 accounted for only
