Chapter 2. Misappropriation of parental contributions to schools and pre-schools in Ukraine

Sources and destination of school and pre-school funding

Public pre-schools and schools in Ukraine are budget organisations (бюджетні установи): non-profit entities that are funded by their founders and owners - state and local governments. In 2014/15, the majority of pre-schools and schools were owned and funded by local authorities (rayons and cities), which also provided most of the funding for these levels of education (Table 2.1). There were also 200 private pre-schools and 167 private schools.

The Budget Code stipulates that the education funding obligations state and local authorities are contingent on the availability of resources. In Ukraine, this conditionality is commonly introduced in periods of crisis (CEDOS, 2015) and at the time of this integrity review was still in force. To ensure that budget resources meet funding needs, the legislation sets a hierarchy of spending priorities that is binding on decisions about resource allocations for publicly funded (budget) organisations, irrespective of their origin (public or private). Salaries and salary-related expenses are protected expenditure items: they have the highest allocation priority and are guaranteed by the state. Next in priority are the communal and other operating expenses of schools and pre-schools such as water and electricity, followed by maintenance and other current expenditure items, and finally capital expenditure.

Local authorities can receive support from the central budget if local revenues, comprising of personal income tax, land payments, non-tax revenues, local taxes and levies, are insufficient to meet budget needs and ensure compliance with these allocation priorities. Central government support for education is provided through targeted transfers to the local budgets in the form of educational subventions. The subvention is earmarked primarily for salaries and the current (running) expenses of general education schools of all types. Its amount is calculated according to a formula that takes into account the number of students enrolled, the class size, and correction coefficients for factors such as location, type of school, and special categories of students. When introduced in 2015, the subvention accounted for 41% of total public spending on education (UAH 43.4 billion) and for 48% of all targeted transfers from the central to the local budgets (Annex 2.A1, ref. 1). For comparison, in 2014/15, local authorities spent a total of UAH 65 billion on education, 88% of which was spent on pre-school and school education (SSSU, 2016).

Schools and pre-schools are also allowed to accept support from private sources of funding. These include parental and other charitable contributions (allowed for both schools and pre-schools), money for meals (allowed for pre-schools only), revenues from fee-based education services (allowed to schools only), and renting of premises and leasing of equipment (allowed to schools only). In 2014/15, private sources accounted for 5.4% of total expenditure on public primary and secondary schools (UAH 2 419 million) and 3.5% of total expenditure on public pre-schools (UAH 547 million) (Table 2.2).

Parental contributions to schools and pre-schools are defined as charitable donations of natural or legal persons that can be provided in cash or in kind (services, goods), and are a widespread form of private support for education in Ukraine. According to surveys of 357 parents in 2014 and 1 001 parents in 2015, over 90% of respondents in each survey reported providing regular donations to the schools of their children (ERA, 2014; IED, 2015).

Funds may be solicited for the benefit of the school or of the student’s class. A survey from 2014 revealed that the family donations were used primarily for repair and maintenance of classrooms and school buildings, procurement of a wide range of equipment and materials, and other amenities, including gifts to teachers (Figure 2.1).

Data on private expenditure on education obtained through household surveys in the official statistics of Ukraine confirms that households invest predominantly in the operating expenses of education institutions. This suggests that public funding in this area is not sufficient to meet all needs. Table 2.3 presents spending on education by expenditure groups defined in the national statistical classification and shows that in 2014/15, over 71% of household expenditure on education was absorbed by the current (or operating) costs of education providers, including for materials and inventory (Table 2.3).

Budget process and management of extra-budgetary funds

The budget process in Ukraine follows four main stages: preparation of draft budgets; drafting and adoption of the Law on the State Budget and of the local budgets; execution and budget adjustments; and performance review.

As part of the annual process of the preparation of local budgets and the national budget, all budget organisations (including schools and pre-schools) are requested to prepare a draft budget estimate (кошторис) of their expenses and revenues ahead of the fiscal year, and send it to the financial department of the local authorities responsible for their funding. The estimates by the schools are then used to prepare a budget projection of local funding needs in education for further use by the Ministry of Education and Science (MoES) when negotiating the sector budget with the Ministry of Finance.

Figure 2.1. Services and items procured with parental contributions by share of parental survey responses

Source: ERA (2014), School Funds: Peculiarities of Establishment and Expenditure, European Research Association, Kyiv.

On the expenditure side of their budget estimates, education institutions declare their forecast of payroll expenses (тарифікаційні списки) by describing their teaching workforce: number of staff, professional categories, workload (teaching hours) and compensation payments. They also include cost estimates along the lines of expenditure groups presented in Table 2.3: for maintenance and repair works, purchase of equipment and materials, communal expenses and capital investment needs.

Typically, the financial department can propose adjustments to certain expenditures to bring the draft estimate in line with the availability of funds, after which the education institution amends the draft and, upon approval of its board, submits the final estimate to the local financial department (Shukevich, 2012). This permits school and pre-school authorities to anticipate costs that will not be covered by the authorities to which they are subordinated.

Budget control and audit

The budget control and audit of schools and pre-schools is a shared responsibility between the education institutions themselves, the local financial authorities (in this case – the financial departments of the local education authorities) on behalf of the Ministry of Finance, the State Treasury, the State Financial Control, and the Accounting Chamber of Ukraine. The national audit and control arrangements also include an obligation for all executive authorities and their local subsidiaries (budget organisations, local authorities and line ministries), to establish units of internal audit and define procedures for their functioning.

The principals of education institutions vouch for the correctness of their school budget and use of school assets, which includes funds disbursed by the education authorities as well as donations. They are also responsible for the initial authorisation of expenditures from the special accounts with the State Treasury in case the school or pre-school has one, as well as for concluding and monitoring the execution of contracts with service providers.

The equivalent of internal audit in schools and pre-schools takes place in the form of meetings of school boards and boards of trustees, members of which are the school leadership, teachers, the local authorities, representatives of parents, civil society, supporters of the school and, in secondary education, also students. The mandate of a school board can vary depending on the statute that each institution adopts for itself, but among its main tasks (Shukevich, 2012) is to discuss, agree on, and monitor the funding and other material needs of the institution, including the annual budget estimate and requests for extra-budgetary support, that is, from parental contributions.

Local financial departments are responsible for ensuring that education institutions are in compliance with the budget regulations on behalf of the Ministry of Finance at all stages of the budget process. They are also in charge of assessing the functioning of internal control and audit in the budget organisations and local executive bodies.

The State Treasury is responsible for verifying the correctness of accounting records format used in the local budgets and whether spending is in line with the commitments in the budget. The State Treasury is also in charge of monitoring and evaluating the work of chief accountants of budgetary organisations. The State Financial Control on the other hand is tasked, among other things, with the control of effectiveness and purposefulness of spending, which includes the credibility of funding need estimates in the budget proposals, the purposefulness of long-term spending obligations, and the effectiveness and focus of internal audits. Finally, the Accounting Chamber exercises overall control of compliance with the budget legislation, including the use and effective management of budget resources on all levels of governance, which encompasses the targeted transfers to the local budgets, that is, the education subvention.

No proper documentation and management of parental contributions

An essential factor that facilitates the misappropriation schemes described in the preceding sections is the failure of schools to acknowledge and properly record the receipt of parental donations.

Parents typically contribute to school and class funds in cash, and the funds that they provide are not recorded in ways that conform to legal requirements and provide a basis for public accountability. Some 72% of parents reported that their contributions for the class were collected in cash during the parent-teacher meetings, and 25% of them gave the money to their children to transmit to their teachers (ERA, 2014). Around 51% of the 1 001 parents of school children surveyed in 2015 stated that their donations to the schools were not officially registered and countersigned, as the law requires them to be (IED, 2015).

These findings reflect reluctance by education providers to declare the extra income, which is confirmed through another, earlier survey on school autonomy in 542 schools across Ukraine. Only 5% of these schools reported to have opened an account for extra-budgetary funds with the State Treasury. According to the survey analysis, the low share suggests unwillingness of school authorities to raise and manage extra income in the way prescribed by the legislation (Barmatova et al., 2013).

Because schools do not register the parental contributions – and because regulations do not define parental rights and obligations – parents cannot compel the schools to provide them with information about the exact way funds they have donated have been used. The information they might be receiving at class meetings, or meetings of the school boards of which they are members, is not official.

Limited parental responsibility and involvement

The Law of Ukraine, On Charitable Activities and Donations, stipulates that benefactors and beneficiaries are the two key roles in the process of giving and accepting donations. Parents can fundraise and give donations to schools and pre-schools as individuals (benefactors) or through charitable organisations, and public education institutions can receive them as the beneficiaries.

Each of these roles comes with responsibilities concerning the management of donations. Many laws and bylaws define the responsibilities and obligations of education providers as recipients of donations, and those of authorities in charge of oversight. They put the burden of responsibility for the proper handling of charitable contributions on the education institutions, and do not define responsibilities and rights of parents as benefactors.

The role of parents is mentioned in only a few of these laws and bylaws, and is limited to a description of options: benefactors can indicate the purpose of donations if they wish to (Annex 2.A1, ref. 2 and 3); parents are recommended to organise themselves in charitable organisations (Annex 2.A1, ref. 4) and as benefactors they have a legally guaranteed possibility to do so (Annex 2.A1, ref. 3); they could also conclude donation contracts for monetary donations that exceed a certain threshold (which is set higher than the average annual parental contribution reported in surveys (ERA, 2014).2 In 2013, only 14% of the schools participating in the school autonomy survey were receiving their donations through a parental charity organisation. The remaining ones were relying on individual parental donations (Barmatova et al., 2013), which are difficult to record and track.

The principal focus of regulations is the recipients of donations, not the donors. This limits the ability of authorities to hold parents accountable as benefactors - for instance, to require that they properly document their donations in a contract with schools and pre-schools and state a purpose for their donation. Furthermore, the legislation does not provide parents with any rights vis-à-vis the education providers they support – for example, the right to request information from schools about the use of contributions. The only right donors have is to redirect their donation to another beneficiary.

This situation may encourage a culture of ignorance and disengagement among parents. Many of them, for instance, are unaware of basic details concerning their contributions to schools. For instance, in the parental survey of 2015, some 65% of respondents did not know whether they as parents were organised in a charity or are contributed as individuals (IED, 2015). Some 42% stated that they had never heard of rules and regulations governing school funds and parental contributions. Additionally, 40% responded that they were not (or not really) interested in learning how to make school funds and parental donations more transparent and accountable (Figure 2.2).

Impunity and fragmentation of oversight

The responsibility for oversight of schools and pre-schools in Ukraine is shared between multiple institutions, which leads to a fragmentation of control and allows irregularities with parental contributions to remain undetected. The principal division is between the budget and educational aspects of school and pre-school oversight. Educational oversight centres on compliance of schools and pre-schools with the state educational standards and the norms of education provision. Budget oversight is about compliance with budget regulations, which schools as budget organisations are obliged to respect. Different institutions are responsible for these two oversight dimensions. The bodies in charge of overseeing the work of schools are not charged with the control of their budgets and have limited competence to exercise such control. In turn, the bodies mandated with budget oversight and competent to exercise it have limited exposure and access to the sector of education.

Educational oversight is in the competence of the MoES, which exercises control of the education process through the State Inspectorate (Державна інспекція навчальних закладів України - ДІНЗ) and local education authorities acting on its behalf. The main instrument of control is the attestation of education providers that takes place every ten years. Routine and extraordinary inspections are possible as well but have the same focus on compliance with educational norms and standards.

Figure 2.2. Parental awareness of charity regulations and interest in transparency

Source: ERA (2014), School Funds: Peculiarities of Establishment and Expenditure, European Research Association, Kyiv.

Theoretically, the direct involvement of oversight authorities in education is possible on a case-by-case basis through the State Inspectorate, which has the right to reach out to any state body in the course of its inspection activities. However, since its work is primarily focused on compliance with educational norms and standards, it does not typically look into the administrative and budgetary dimension of school and pre-school operations, and its staff might not have the training and/or experience required to perform such a task.

Ensuring compliance with budget regulations is a responsibility shared among the financial departments of local authorities, the State Treasury, the State Financial Control and the Accounting Chamber. Financial oversight bodies other than local financial departments, which are directly involved with the schools when they assess and approve the annual school budgets, have little or no exposure to the education sector. They perform their control functions on the basis of aggregate information on education spending on local level that is not meant to provide detail on daily budget-related activities in individual schools and pre-schools. This prevents financial oversight bodies from detecting whether schools are handling extra-budgetary resources in the way they should. In addition, as parental contributions rarely appear in the official accounts with which these bodies work – such as budgets, account statements, contracts for goods and services – misappropriation goes undetected.

Lack of transparency in decisions about allocating local budgets for education

Schools justify the collection of parental contributions with a narrative about shortage of public funding for education in general and for certain budget items in particular. When asked to identify the main obstacles to improving education, 71% of 311 school principals and 56% of 499 teachers stated that a decline in maintenance and maintenance supplies is among the biggest problems facing education in the country (IED, 2015). Representatives of schools and some pre-schools during the site visits also explained the need for school funds by pointing to a lack of public funding and an alleged tendency of education authorities to increasingly marginalise the sector by not investing in it.

National data from 2012 on education expenditure show that Ukraine spends a considerable proportion of its national wealth and government budget on education, above the average of OECD countries (MoF Ukraine, 2014; SSSU, 2016; OECD, 2015b). Primary, secondary, and post-secondary non-tertiary education in 2014, for instance, claimed the equivalent of 4.3% of GDP (SSSU, 2016), compared to 3.7% of GDP in the OECD on average (OECD, 2015b).

Despite generous allocations on national level, at the local level there are perceptions of funding shortages for schools and pre-schools. The local financial departments can play an important role as providers of information in this respect, but their contribution is hampered by weaknesses in mechanisms (i.e. internal audit) that are meant to safeguard the reliability and independence of information they collect and provide (OECD, 2015a). Recent legislative amendments have kept the local budgets “off limits” for independent audit control (OECD, 2015a).

Schools and pre-schools do not seem to request information about the allocation decisions of local education authorities. In-depth discussions with principals of two elite schools from different parts of Ukraine suggest that, from a school leader’s point of view, it is quicker, easier and more promising to point to resource shortages and seek parental donations than to negotiate funding needs with the local authorities, inquire about their allocation decisions or improve their school’s efficiency (for instance by clearing up the payroll of obsolete or unnecessary compensation payments and bonuses).

Administrative burden and limits to school autonomy

Complying with budgeting requirements about parental funds poses administrative challenges for schools, and many schools have chosen to avoid declaring the parental contributions in the way prescribed by the laws.

For schools and pre-schools, the management of extra-budgetary income in conformity with the regulations means to declare the income by including it in their budget estimate as revenue, committing the revenue to expenditures, depositing the revenue on a special account with the State Treasury (directly or through the accounting office of the local education authorities) and spending it in accordance with that expenditure commitment. Introduced in 2011 as an important step towards more school autonomy in the management of resources, these requirements pose a considerable administrative challenge for the education providers and provide them with reasons to avoid declaring the parental contributions in the way prescribed by the laws.

Limited capacity for school autonomy

The first administrative challenge is that most schools lack the accounting capability needed to open a dedicated account with the Treasury. Two years after the introduction of the autonomy reform of 2011, 83% of the schools did not have an accountant, the accounting functions of 77% were still managed centrally, by their local education authorities rather than at the school level (Table 2.4), and on average, 71% of school principals have never participated in training or any introductory activities on school autonomy (Barmatova et al., 2013).

Rigidity of budget commitments

The second administrative challenge is the rigidity of commitments in the school and pre-school budgets. Whether a school or pre-school has a centralised or autonomous accounting, their budget estimates are prepared once a year, with the exception of payrolls costs, which are updated before each school term. Schools and pre-schools must declare budgetary and extra-budgetary amounts in the special funds of their budget estimates, and these estimates must be approved by their founders and primary funders, typically local authorities. Once approved, the commitments are supposed to hold throughout the school year and be spent “strictly in accordance with the commitments” (Annex 2.A1, ref. 5). For schools that have declared their income from parental donations, this arrangement restricts flexibility in using the resources for school needs that might emerge after the school budget has been approved. In addition, education providers with centralised accounting must have the accuracy of their spending certified before left-overs in the special funds can be carried over to the next fiscal year (Annex 2.A1, ref. 5).

Furthermore, the use of parental contributions is subject to the hierarchy of spending priorities that is binding also for the use of public resources. When planning their budget allocations and the use of extra-revenues from the special fund, schools and pre-schools are obliged to give priority to outstanding payments related to the core functions of their institutions – protected expenditure items (salaries) and other costs for which the resources in the general fund are insufficient. In practice, however, education providers have little incentive to comply. Failure to plan and use extra revenues in this way does not jeopardise the payment of core items such as salaries, because they are guaranteed by the state. By not disclosing their extra revenues, schools and pre-schools benefit in two ways: they have added flexibility in the use of resources, and an opportunity to have the public budget of the central government cover unmet payroll expenses.

Burdensome procurement approval procedures

Finally, education providers that wish to procure goods and services with money from their special funds must go through a public procurement procedure if the value of intended purchase is above a certain amount and is at least partially financed from public sources. As some principals during the site visits for this review admitted, the approval of procurement plans and the procurement itself can be a cumbersome and slow process with an unclear outcome. It is better to “arrange things” directly – thereby obtaining flexibility through informal procurement that comes with funds managed outside the stipulated school budget and accounting rules.

Closing of opportunities

Parental contributions dominate public discussions about irregularities in education, and there are conflicting interpretations of what the problem is and what should be done to address it. During the site visits, almost every interview counterpart with stakes in pre-school, primary and secondary education had strong views on the issue, as well as proposals for change. This integrity review adopts a practical approach to parental contributions: they are longstanding and widespread, and recommendations should focus on helping design regulations that are more successful at achieving transparency and preventing their misuse.

Eliminating incentives for malpractice