Chapter 2. Governing school funding1

Schools may raise their own revenues through sales of services, rental of facilities and parental fees

While public schools are financed mainly through funding allocations coming from the different levels of the educational administration, individual schools may also have the ability to raise their own revenues from private (and/or public) sources. This typically involves the sale of services (particularly in the vocational sector), the rental of facilities and funds raised from parents and/or the community through obligatory fees or voluntary donations.

Among the OECD review countries, parental contributions are not uncommon in public pre-primary education with 9 of 17 systems charging tuition fees for pre-primary education that tended to be determined by either local or central authorities. While mandatory tuition fees are typically prohibited in public primary and secondary schools (Table 2.A1.2), the majority of education systems with available data permit public schools to benefit from voluntary monetary and non-monetary parental contributions as well as donations (Table 2.A1.3).

Most countries also permit public schools to raise additional revenue by renting out their materials and facilities (e.g. sports facilities), by providing extracurricular activities for a fee or – particularly in the vocational sector – by selling non-teaching services (e.g. catering, hairdressing). In Estonia, for example, public vocational schools are largely funded by the state but permitted to supplement their resources through the sale of goods and services (Santiago et al., 2016b). The sale of teaching services, on the other hand, is significantly more restricted among the OECD review countries (Table 2.A1.3).

Employer contributions are significant in some countries’ vocational education and training (VET) sectors

Across the OECD, the average annual expenditure per upper secondary VET student in 2013 was 10% higher than that for students in general education (OECD, 2016a). There are often higher costs for the specialised equipment required to teach many technical and practical subjects. Unlike general education programmes, the funding of the VET sector in many countries involves contributions from employers. Given the larger set of actors engaged in the funding of VET, it is frequently based on agreements between public and private stakeholders determining their respective contributions to VET funding as well as their role in the provision of services like work-based learning and school-based learning. Employers tend to contribute to VET in the form of financial transfers (directly to VET providers or indirectly via training levies)2 as well as through the provision of equipment, staff and training places. Given the direct benefits that students’ acquisition of occupation-specific skills brings to the industry, employers sometimes bear the cost of work-based learning and contribute to covering costs for materials, trainers or the remuneration of trainees (for more information on the costs and benefits of apprenticeships see Kuczera, 2017). The school-based component of VET is more commonly publicly funded (Papalia, forthcoming).3

However, cost-sharing arrangements with significant private contributions are relatively rare in upper secondary VET programmes (see Figure 2.4). Private sector contributions tend to be significant in countries with a large apprenticeship system in which employers cover most of the costs of work placements (e.g. apprentice pay, instruction costs, tools and equipment). Among the 19 OECD and partner countries with available data for 2012, funding from private sources other than households typically accounted for less than 10% of total expenditure, with the notable exceptions of Germany and the Netherlands. The German VET system, as described in Box 2.1, provides an example of cost sharing arrangements involving contributions from all of the system’s major stakeholders. In several countries, however, students have very few opportunities to engage in work-based learning or apprenticeships and there is no legal requirement for firms or industries to make financial contributions to the state-run vocational system (Santiago et al., 2016b).

Figure 2.4. Private expenditure on upper secondary VET, 2012

Note: Expenditure that is not directly related to education (e.g. for culture, sports, youth activities, etc.) is not included unless it is for the provision of ancillary services. Private expenditure includes contributions from households (students and their families) and other private entities such as firms.

Source: OECD (2016a), Education at a Glance 2016: OECD Indicators, https://doi.org/10.1787/eag-2016-en.

Ensuring adequate involvement of companies in both the provision and funding of initial VET is a challenge shared by several OECD review countries. Evidence from across OECD countries indicates that labour market outcomes of vocational graduates improve if their programmes include substantial work-based learning, such as apprenticeships offered by companies (OECD, 2014a). In countries where practical training is primarily provided by schools, a number of efficiency challenges may arise. For schools, continuously updating their practical training offer to ensure its relevance to the requirements of the labour market involves significant investments into training, equipment and physical infrastructure, which may discourage innovation and experimentation. The failure to provide opportunities for work-based skills development can thereby reduce the efficiency of VET provision and diminish its labour market relevance (Shewbridge et al., 2016b).

Countries such as Switzerland, Germany and Denmark operate so called dual systems whose VET pathways combine periods of school-based learning with alternating periods of work-based training which companies support through the contribution of financial and human resources. Regardless of whether employers are directly involved in the provision of VET, training levies are the most common mechanism to collect earmarked VET resources from the private sector. While some levies primarily serve to raise revenue for the provision of VET, for example through a tax paid by every employer, other levy schemes provide employers with incentives to actively engage in work-based training. These types of training levies are typically linked to a disbursement or exemption mechanism that redistributes the funds raised by the levy to employers that engage in the training of apprentices (Dar et al., 2003).

Sub-central spending responsibilities have grown faster than revenue raising capacities

As explained in the previous section, sub-central jurisdictions have acquired increasing powers for the collection of their own revenue. But at the same time, sub-central spending responsibilities have also grown, and they have done so much faster than tax collection responsibilities. Figure 2.5 illustrates the relative shares of sub-central revenue and spending in total government revenue and spending. The gaps between the revenue and the expenditure of sub-central jurisdictions are referred to as “vertical fiscal imbalances”. Such imbalances are typically addressed through vertical fiscal transfers – or grants – from the central level to sub-central levels. They may also be addressed through horizontal transfers between sub-central entities. Fiscal transfers aim to offset gaps between revenue and expenditure, equalise fiscal disparities across regions and ensure similar ability to provide public services across all sub-central governments. Fiscal transfers represent an important share of overall central government spending and they have grown in recent years, from 6% to 7% of GDP between 2000 and 2010 (OECD/KIPF, 2016).

Figure 2.5. Sub-national revenue and spending across OECD countries

Decentralisation ratios, 2014 or latest available year

Note: Sub-national expenditures include intergovernmental grants, while sub-national revenues do not. Latest available data for Korea are from 2012 and for Mexico from 2013.

Source: OECD/KIPF (2016): Fiscal Federalism 2016: Making Decentralisation Work, https://doi.org/10.1787/9789264254053-en.

Fiscal transfers can also serve central governments in steering sub-central levels of the administration towards spending on certain purposes. Where central government grants are earmarked for a particular purpose, they allow the central level to exert considerable control over sub-central educational policy and spending (see Chapter 3 for more information on the design aspects of earmarked grants). OECD/KIPF (2016) report that across different public sectors, a slight trend from earmarked grants towards more non-earmarked grants could be observed in recent years. At the same time, they noted a parallel increase in regulatory frameworks and output control, which is another way for central governments to steer the use of resources at the sub-central level towards particular standards and expected performance levels (see Chapter 5 on the evaluation of school funding at sub-central levels).

Fiscal transfers can equalise sub-central revenue levels but have a number of drawbacks

The extent of transfers of public funds from central to sub-central levels of government varies widely between countries. The length of the bars in Figure 2.6 indicates the share of sub-central (regional and local level) funding allocated to schools in each country. The different shadings indicate how this sub-central funding is composed of initial funds originating at the sub-central level (dark shading) and transfers from the central government (light shading). The difference of funding power before and after transfers from central to sub-central levels of government represents more than 30 percentage points in Austria, Chile, Estonia, Finland and Hungary, and more than 40 percentage points in Korea, Latvia, Mexico and the Slovak Republic (OECD, 2016a).

Figure 2.6. Share and composition of final public funds allocated to schools by sub-central government in primary, secondary and post-secondary non-tertiary education, 2013

1. Year of reference: 2012

2. In Belgium, 76% of initial funds and 75% of final funds originate at the sub-central level

3. Year of reference: 2014

Countries are ranked in descending order of the share of final funds allocated to schools by the sub-central level of government.

Source: OECD (2016a), Education at a Glance 2016: OECD Indicators, https://doi.org/10.1787/eag-2016-en, Table B4.3. See Annex 3 for notes (www.oecd.org/education/education-at-a-glance-19991487.htm).

The operation of fiscal transfer systems can help provide sub-central governments with revenues to support similar levels of educational service provision at similar tax rates. Less advantaged sub-central authorities in terms of private income and with a challenging socio-economic composition of the population typically receive higher grants from the central government. Box 2.3 provides examples from different countries that introduced equalisation schemes alongside decentralisation reforms which shifted responsibilities for school funding to the local level.

While fiscal transfers play an important role in providing sub-central revenue for service provision and equalising sub-central revenue levels, OECD/KIPF (2016) outline a number of disadvantages of strong reliance on inter-jurisdictional grants and equalisation transfers. First, while one might expect that grants help to stabilise sub-central revenue, empirical evidence indicates that the opposite is often the case. Indeed, central government grants may exacerbate fluctuations in the revenue of sub-central government tiers because such transfers are often pro-cyclical, i.e. in times of strong growth, they are likely to increase whereas the amount of central transfers often decreases in times of crisis. This can reinforce pre-existing resource challenges at sub-central levels of administration and make it difficult for them to engage in medium-term planning (Chapter 4).

Second, grants may reduce the sub-central tax effort. For example, if grants are adjusted on the basis of local revenue, sub-central authorities might be discouraged from raising their own tax revenue because otherwise they might see their central grants reduced. In Estonia, for example, local governments have very limited revenue raising powers. The OECD review of Estonia found that this appears to encourage both local officials and their citizens to see any local financial difficulties as the result of insufficient national government support. The resulting “fiscal illusion” may reduce the willingness of both local officials and citizens to use local taxes to improve local services (Santiago et al., 2016a). Disagreement about the adequacy of central resources to fulfil decentralised responsibilities sometimes decreases the level of effective accountability of sub-central governments (Sevilla, 2006; see also Chapter 5). This is related to the difficulties that school systems face in objectively assessing the adequacy of funding (see Chapter 3).

Third, research and experience from different countries indicates that a high reliance on central grants may encourage overspending and thereby increase deficits and debt. There is evidence that a central government’s commitment to a certain grant level is not always credible and that sub-central authorities may overspend in the hope that this overspending will then be compensated via additional grants (OECD/KIPF, 2016). Busemeyer (2008) finds that giving sub-central levels of government the power to spend without forcing them to raise their own revenues (by granting them autonomy in setting tax rates) sets strong incentives for overspending. A large misalignment between financing and spending responsibilities may lead to mistrust, lack of transparency and inefficiencies, as one actor – the central government – is responsible for most of the financing, whereas other actors – sub-central governments – are in charge of expenditures. This often creates worries at the central level about the misuse and waste of resources while sub-central authorities may see overspending as evidence that the grant level is insufficient or the transfer system unfair.

In Austria, for example, the vast majority of tax revenue is generated at the federal level (87% in 2014) rather than by the provinces and municipalities who are responsible for funding provincial schools. Through the Fiscal Adjustment Act, central funds are then partially redistributed among the provinces and municipalities based on quotas which are renegotiated among the different tiers of government every four years. This system creates a split of financing and spending responsibilities, typical for Austrian federalism (which is sometimes described as “distributional federalism”). While the federal government and the provinces agree on annual staff plans, the provinces are free to hire more teachers than foreseen in these staff plans and the additional expenditures are partly covered by the federal level. This system tends to encourage overspending on teaching staff by the provinces compared to agreed staff plan. Between 2006 and 2010, the number of teaching positions at general compulsory schools that were not included in the initial budget almost doubled from 1 039 to 2 063, leading to considerable additional costs (Nusche et al., 2016a).

Finally, the determination of grant levels and calculation methods themselves may also be problematic. In Kazakhstan, for example, the OECD review team found that one of the main concerns related to school funding was the importance of negotiations for the calculation of central transfers and the definition of education budgets at the sub-central level. The budget negotiations were found to lead to suboptimal allocations as objective indicators on potential revenues and expenditure needs were given little importance (OECD/The World Bank, 2015). Given the potential disincentives and risks inherent in central grants, it is very important that such grants are skilfully designed so as to facilitate adequate spending across all jurisdictions while reducing the risk of fiscal slippage across levels of government.

Variations in sub-central funding approaches may mitigate equalisation effects

Even if well-designed fiscal equalisation mechanisms are in place, decentralised systems may still be characterised by considerable differences in educational spending across jurisdictions. This might indicate a potential for efficiency savings in some jurisdictions and/or potential inequities in the educational services provided to students in different jurisdictions. Little internationally comparable information is available on variations in school spending between sub-central entities. However, in an online supplement to the OECD Education at a Glance 2016 sub-central data on annual expenditure per student is presented for three countries: Belgium, Canada and Germany.4 This data shows that while spending per student does not differ much between jurisdictions in Belgium (between USD 11 221 and USD 11 856), it ranges between USD 7 900 and USD 11 400 across jurisdictions in Germany and between USD 8 732 and USD 19 730 across jurisdictions in Canada.

In several of the OECD review countries, there is evidence of discrepancies in the level of school funding across countries’ different jurisdictions. In Israel, according to national data, more affluent local governments can provide up to 20 times higher funding per student for schools than less affluent local governments (OECD, 2016b). In Denmark, expenditure per student also varies strongly across municipalities despite existing equalisation mechanisms (Nusche et al., 2016b). Such differences might result from different levels of priority attributed by local authorities to education or different approaches to design local funding strategies. Where jurisdictions are autonomous in designing their own funding approaches, there may be only weak mechanisms to share and spread the related expertise and experience systematically across sub-central authorities so as to optimise funding mechanisms (for more information on the development of funding formulas at different levels of school systems, see Chapter 3).

In Denmark, more than half of the variation among municipalities can be explained by socio-economic conditions, with municipalities having more students from disadvantaged backgrounds spending higher amounts per student than other municipalities (Houlberg et al., 2016). However, there is still a large part of spending differences between municipalities that cannot be explained by socio-economic factors. This could indicate a situation where some municipalities prioritise spending on education more than others, but also a potential for efficiency savings in some municipalities. The spending differences across municipalities are also likely to result from differences in the approaches to school funding across jurisdictions. Each of the 98 municipalities designs its own formula to fund local schools. These formulas typically include parental background characteristics in addition to the number of students and the number of classes at the different year levels. However, the ways in which socio-economic differences are taken into account in the funding formulas vary greatly across municipalities. This suggests that the models vary not only as a result of deliberate decisions or different priorities (Nusche et al., 2016b).

In Kazakhstan, there is also evidence that regional and local differences in spending per students are not just related to objective cost factors. Expenditure per student varies greatly across regions – from 39% below the national average in the capital city to 50% above the national average in North Kazakhstan and marked differences in per student spending are also observed across school districts. The Ministry of Education and Science commissioned a report to UNICEF (United Nations Children’s Fund) on the financing of 175 schools across Kazakhstan. The final report revealed important differences in spending per student between districts of the same region and between schools of the same type and size within the same district (UNICEF, 2012). Some sub-central governments spend significantly more of their resources on education than others and the existing differences are not always associated with the variation in the costs of provision (OECD/The World Bank, 2015).

Fiscal decentralisation may raise capacity challenges, especially in small jurisdictions

While their knowledge of local conditions and needs may allow sub-central authorities to allocate resources more effectively in line with school contexts, smaller authorities are very likely to face capacity challenges. Decentralised governance arrangements place significant demands on local authorities for budget planning and financial management. For example, they may be required to develop a funding formula, administer financial transfers, make decisions about investments in school infrastructure and maintenance and/or apply for a pool of targeted funding. But not all local authorities have sufficient capacity to implement sound budget planning and to manage their resources well. Administering a funding scheme requires considerable technical skills and administrative capacity and many school systems find it challenging to ensure these are available at the level of each educational provider.

Capacity constraints at the local level can also exacerbate inequities between individual authorities, in particular in countries that have many municipalities with a small number of inhabitants, such as the Czech Republic, France, the Slovak Republic, Hungary, Switzerland and Austria (Figure 2.7). In some countries, school providers (sub-central authorities or other school owners) are very small and responsible for only one or a few schools, which does not allow them to achieve the same extent of economies of scale, management capacity and support that can be offered by larger providers. Small providers typically have a very limited number of staff managing school services, and these do not necessarily have expertise regarding the design of effective resource management strategies. Some of the OECD review countries, such as Austria, the Czech Republic and the Slovak Republic, literally have thousands of municipalities involved in managing and funding their own schools, many of them with weak administrative capacity, which makes it difficult for them to maintain efficient school services.

Figure 2.7. Municipal fragmentation in international comparison, 2014/15

Source: OECD (2015a), “Sub-National Governments in OECD Countries: Key Data” (brochure), OECD, Paris.

While school leaders are typically accountable to their providers, not all providers have the professional capacity to provide effective feedback and support to their leaders. It can, therefore, be difficult for local authorities to fulfil their responsibility for managing financial resources and to collaborate with their school leaders to make resource use decisions that improve learning. In contexts where responsibilities for resource management and the pedagogical organisation of schools are shared between local authorities and schools, education leaders and administrators must be able to establish good relationships and to align resource management decisions with pedagogical aspects and needs. One way for building the capacity of local authorities lies in the creation of networks and collaborative practices (Box 2.4 provides an example from Norway), but these are still underdeveloped in many contexts.

One of the specific challenges of educational decentralisation is that while key decisions (e.g. distribution of financial resources, quality assurance) are typically transferred to regional or local authorities, most of the information and knowledge management capacities are retained by the institutions of the national administration. Therefore, many of them might require active support from the relevant national institutions to take and implement decisions. Some countries have responded to size and capacity challenges at sub-central government level by merging several small education providers and thereby consolidating capacity for effective resource management (Box 2.4 provides an example from Denmark). Others are considering to move responsibilities to higher levels of the administration or to create new bodies to administer a larger number of schools (Box 2.4 provides an example from Chile).

Complexities in the governance of school funding risk leading to inefficiencies

Co-ordination is a very important and challenging aspect of governance in every system where sub-sectors of schooling operate under different political and administrative jurisdictions. The decentralisation processes developed in some countries have led to the emergence of increasingly autonomous and powerful local actors (e.g. regions, municipalities, schools) and raise the question of how to assure co-ordination in this new context of multi-level and multi-actor governance. The complexity of education governance might create inefficiencies in the use of resources due to duplication of roles, overlapping responsibilities, competition between different tiers of government and a lack of transparency obfuscating the flow of resources in the system (Chapter 5).

Efficiency challenges in using school resources may be linked with the potential isolation of sub-systems managed by different levels of administration and the rather rigid boundaries between them. The relative isolation of sub-systems might also be accompanied by a low intensity of communication between the administrative authorities responsible for these sub-systems. In Estonia, for example, while different levels of the administration offer competing services at most levels of education, the municipalities are the main provider of general secondary education while the state is the main provider of vocational secondary education. As a result, the general and the vocational sub-systems are relatively isolated from each other. This makes it difficult for sub-systems to share resources (for example teachers, special educational services or facilities) and to allow students to move easily between school types in line with their interests, talents and needs (Box 2.5). Challenges of isolated or competing sub-sectors are also faced by the Austrian school system where there is a parallel offer of federal and provincial schools at the lower secondary level, and in the Flemish Community of Belgium, where the school offer is organised within three different educational “networks” which each have their own legal and administrative structures (Box 2.5).

Challenges may also arise when several sub-central tiers of government are involved in distributing central funding thus establishing a hierarchy between the different levels. In the Czech Republic, for example, regions act as intermediaries in the funding between the central level and municipalities, which complicates the flow of resources from the central level to the end users (schools) (Box 2.5). Intermediary actors and additional layers of decision making can cause frictions and complicate monitoring and evaluation of resource use to the detriment of equity and efficiency. Such complex arrangements can also make it difficult to manage information on the use of school funding and how it translates into outcomes (Chapter 5). In decentralised school systems, the development of effective school funding mechanisms requires governance models that establish a clear division of responsibilities across different levels of the administration, build capacity at each of these levels and develop clear lines of accountability, using data and evidence effectively for policy making and reform (Chapter 5).

Finally, it is important to keep in mind that complexities may also arise in centralised governance settings if multiple actors or agencies are involved in school funding. In Uruguay, while the governance of education is highly centralised, it is also highly fragmented. The system operates with four education councils for distinct sub-systems (pre-primary and primary education; general secondary education; technical-professional secondary programmes; teacher training) that operate in a rather independent manner. As a result, school education is not governed as a system, but as a number of rather isolated sub-systems. Each area of policy (e.g. human resources, curriculum, budget, infrastructure, planning) is independently addressed within each education council – each council has independent units covering these policy areas while a central governing council replicates the same units but with no oversight upon the corresponding units of the councils. This institutional design does not ensure enough co-ordination across educational levels and types.

In many countries, schools have inequitable access to resources

While sub-central discretion over the distribution of funding allows sub-central actors to develop resource strategies in line with identified needs, in some countries it also raises concerns regarding the equity of resource distribution between their schools. In Chile, for example, it was noted that local autonomy regarding the allocation of basic grants to schools creates the opportunity for sharp differences in per student spending within municipalities, as well as a lack of transparency that may benefit schools with well-connected principals (Santiago et al., forthcoming). Also, in the Flemish Community of Belgium, where funding for operational costs is attributed to school boards and then further distributed among the schools, there is evidence that school boards responsible for several schools use their own weightings and strategies to allocate financial means to schools. As a result, there is no guarantee that central funding (which is weighted for socio-economic disadvantage of each school’s student body) will indeed benefit the schools with the most challenging socio-economic characteristics (Nusche et al., 2015).

Another source of inequity may arise from differences in schools’ ability to generate and use their own revenues. While the generation of own income can help complement school-level resources, it raises a number of equity concerns. First, in some countries not all types of schools have the same revenue generating powers. In Austria, for example, schools that are run and funded directly by the federal level have a certain degree of budgetary autonomy as they are able to rent out their school facilities and have control over their own accounts, even if the extent of revenues generated through such activities appears to be minor. By contrast, schools that are run and funded by the provinces and municipalities do not have such autonomy in financial matters, thus presenting an inequity in the system. They cannot generate additional income and depend entirely on their municipality for support in maintenance and operating costs (Nusche et al., 2016a).

Second, the capacity of schools to generate additional revenue is generally influenced by the socio-economic composition of community that they serve. To highlight socio-economic gaps in the ability of schools to raise funds, it is helpful to look at patterns in school systems which routinely collect the relevant income data, as is done in some school systems. In Western Australia, for example, it was shown that among schools of similar size, parental contributions rise in line with socio-economic status (SES) and are 16 times higher among the largest and highest SES schools than they are among the smallest and lowest SES schools. It is often small schools and those located in socio-economically disadvantaged areas that experience the greatest pressure of need, due to the concentration of multiple disadvantages in them. But these schools typically also have the least opportunity to generate additional revenue and thus the least flexibility in budget terms (Teese, 2011).

Third, in many countries the relevant school income data is not collected, thus leading to a lack of transparency regarding the real resource levels of individual schools. In the Slovak Republic, for example, financial contributions from parents in state schools are not sufficiently transparent with respect to the items they fund and how they are recorded. According to a study published in 2007 and cited in Santiago et al. (2016c), between 70% and 90% of parents pay for various services, such as school events, extracurricular activities or teaching materials. There is also some anecdotal evidence that suggests that some schools place pressure on parents to pay such contributions, which is inequitable. Households in the Slovak Republic contribute 15% of pre-primary education expenditure and 10% of primary and secondary expenditure. While private contributions to public services can have benefits, they require increased attention to integrity and equity considerations (Santiago et al., 2016c).

Limited resource autonomy may constrain strategic development at the school level

The relationship between school autonomy in managing own resources and performance outcomes is not clear cut. Evidence from PISA indicates that while student performance is higher where school leaders hold more responsibility for managing resources, this is only significant in countries where the level of educational leadership is above the OECD average (OECD, 2016c). The effect of delegating more autonomy for resource management to schools depends on schools’ ability to make use of this autonomy in a constructive way and thus requires a strengthening of school leadership and management structures (more on this below). Furthermore, autonomous schools need to be embedded in a comprehensive regulatory and institutional framework in order to prevent adverse effects of autonomy on equity across schools. The results from PISA suggest that when autonomy and accountability are intelligently combined, they tend to be associated with better student performance (OECD, 2016c).

Findings from the OECD country reviews indicate that an absence of resource autonomy at the school level risks constraining schools’ room for manoeuvre in developing and shaping their own profiles and may create inefficiencies in resource management. In Uruguay, for example, schools have very limited autonomy over the management or allocation of their budget. Not only do central authorities manage school budgets, the recruitment of teachers and the allocation of infrastructure and equipment but they also retain decision-making power over less fundamental aspects of school operation such as the acquisition of instructional materials, ad hoc repairs at schools and the approval of schools’ special activities. Little local and school autonomy hinders effectiveness in the use of resources as local authorities and schools are unable to match resources to their specific needs, and in consideration of their conditions and context. Also, responses from central educational authorities to an emerging school need can prove very slow. In addition, limited autonomy disempowers school and local actors and makes it more difficult to hold local players accountable, in particular school leaders, as they do not have the responsibility to take most of the decisions (Santiago et al., 2016b).

Devolution of resource management to schools requires adequate leadership capacity

As part of a general move towards greater school autonomy, many countries have attributed greater resource responsibilities to their school leadership teams. While offering potential for effective strategic management at the school level, such budgetary devolution creates new challenges for resource management in schools. School leaders in such contexts are increasingly asked to fulfil responsibilities that call for expertise they may not have through formal training. Where resource management responsibilities are sharply increasing without additional support for leadership teams, it will be difficult for schools to establish robust management processes where resources are directed to improvement priorities and support learning-centred leadership (Plecki et al., 2006; Pont et al., 2008).

Where schools have autonomy over their own budgets, they must be able to link the school’s education priorities with its spending decisions, for example by making connections between school development planning and budget planning (Chapter 4). In particular where targeted funding is available to provide disadvantaged schools with additional funding (Chapter 3), this is often tied to the requirement to develop a school improvement plan deciding how funds are used for the benefit of disadvantaged students and with accountability requirements (Chapter 5). Administrating and allocating such additional funding effectively requires time, administrative capacity and strategic leadership within schools. Evaluations of targeted programmes show mixed results and indicate that the success of these programmes depends on whether conditions for effective allocation and use of funding are in place at the school level (Scheerens, 2000).

If targeted funding is distributed to schools without further guidance and support, school staff may not know how to fit these special initiatives into their school development plans or they may use the additional money for measures that have not demonstrated to be effective (Kirby et al., 2003; Karsten, 2006; Nusche, 2009). In Chile, for example, school leaders often make limited use of school improvement planning which is required in return for additional funding through the preferential school subsidy (Subvención Escolar Preferencial, SEP). Resources from this subsidy can be used to contract external pedagogical-technical support, but schools and school providers do not always have the capacity to make an informed choice to select a service of high quality that meets actual needs and to monitor the implementation and the effects of the intervention (Santiago et al., forthcoming).

A further challenge concerns the potential tension between pedagogical and administrative/managerial leadership. On the one hand, school autonomy in resource management can be part of strategic learning-centred leadership as it allows aligning spending choices with the pedagogical necessities of schools. But on the other hand, school autonomy places an administrative, managerial and accounting burden on school leaders which may reduce their time available for pedagogical leadership (e.g. coaching of their teaching staff). This tension is also relevant for the training and evaluation of school leaders, which need to prepare school leaders for their financial and administrative responsibilities, but within a framework of pedagogical leadership (Pont et al., 2008; OECD, 2013b).

Regulatory frameworks for the public funding of private schools vary considerably across systems

Experience from different countries indicates that the impact on equity and educational quality of publicly funding private providers is influenced by the institutional arrangements in which they are embedded. Among the OECD review countries, these regulations vary considerably. In some countries, publicly funded private schools do not only enjoy greater pedagogical freedom than their publicly managed counterparts but also greater autonomy in their admission and tuition policies. Other systems impose strict eligibility criteria on private schools seeking to qualify for public funding, binding them to follow national curricula and assessment procedures, excluding for-profit providers, and restricting their ability to charge add-on fees or engage in selective admission (Boeskens, 2016). In the Flemish Community of Belgium, for example, subsidised private schools are not permitted to select students on the basis of their academic achievement as a means to guarantee parents the right to exercise free school choice (see Box 2.6). Other systems use targeted funding schemes designed to exclusively benefit or provide additional support for private school students from disadvantaged backgrounds (Musset, 2012).

While it is relatively common for oversubscribed public schools to take into account non-academic factors such as a student’s geographic proximity or the presence of their siblings, in some countries publicly funded private schools are permitted to select students on the basis of academic achievement, aptitude tests and parental interviews. These differential selection practices can restrict the exercise of school choice and risk increasing student segregation across providers. To address this challenge, Chile introduced a reform of its private school system in 2016 (presented in Box 2.7). Although its full effect remains to be seen, the 2016 reform of Chile’s private school system (presented in Box 2.7) serves as a good example to illustrate the implementation of a regulatory framework that seeks to harmonise the admission and tuition policies of public providers and subsidised private schools.

Since the early 1990s, Sweden has operated an extensive school choice system whereby funding follows the student and private providers are entitled to receive subsidies equivalent to the local municipality’s average spending per public school student. Publicly funded private schools have increased their share of the enrolment among 15-year-old students by almost 10 percentage points between 2003 and 2012 (OECD, 2013a). To receive the same funding as public schools, private providers need to be approved by the Schools Inspectorate and teach the same curriculum as municipal schools, although they can follow a special orientation or profile like Montessori and Waldorf Schools. While subsidised private schools in Sweden have been prohibited from charging mandatory fees since 1997 and cannot select students in compulsory education based on their ability, they are allowed to operate for profit (Swedish Ministry of Education and Research, 2016). Similarly, in Estonia, publicly funded private schools can also make profits (Santiago et al., 2016a). While there is little robust and consistent evidence concerning the performance of for-profit schools in advanced economies, subsidising commercial providers without ensuring that profits are reinvested to improve the delivery of educational services raises concerns over the efficient use of public funding for education.

Inadequate private school regulations and school choice designs can generate inequities

One of the most commonly raised concerns with respect to school choice programmes is that they are disproportionately used by families with higher socio-economic status. Even in the absence of explicit admission criteria, students from disadvantaged backgrounds are less likely to make use of school choice and less frequently use academic quality as a criterion when deciding which school to attend. To address the socio-economic inequities that arise from differential participation rates, it has been recommended to raise awareness of school choice options, improve disadvantaged families’ access to school information and to support them in making better-informed choices (Nusche, 2009; OECD, 2012). Progressive voucher schemes or weighted funding formulas have also been proposed as policy options to address the challenges of segregation along socio-economic and demographic lines (Musset, 2012). By channelling additional money to disadvantaged students, countries such as Chile and the Netherlands have used variants of these funding schemes to provide schools with the resources they need to adequately address their students’ needs and diminish incentives that could exacerbate segregation.

The conditions which private schools must fulfil in order to qualify for public funding are central to the successful governance of school choice systems. Among these eligibility criteria, private schools’ ability to select students and charge add-on tuition fees are particularly salient concerns for several OECD review countries. Allowing subsidised schools to select their students based on prior performance, aptitude tests or socio-economic background raises a number of concerns pertaining to both equity and educational quality. Selective admission permits private schools to “cream skim” high-ability students from the public sector, particularly where their public counterparts are required to operate on the basis of open enrolment or confine themselves to using non-academic criteria such as residential proximity to select students. Since parents often mistakenly evaluate a school’s quality based on its student composition, engaging in selective admission can allow schools to attain a competitive advantage without actually improving their educational provision. Selectivity threatens to exacerbate student segregation between the public and private sectors and can widen existing achievement gaps. This process threatens to deprive the public school system of high-ability students, which is likely to harm those who are left behind and deplete public schools of vital resources since disadvantaged students may have greater resource needs (Boeskens, 2016).

School choice systems that permit private schools to demand significant parental contributions above and beyond the amount covered by the public subsidy risk exacerbating socio-economic segregation across schools. Most countries that subsidise private providers place restrictions on their ability to charge “add-on” tuition fees. In Sweden, for example, tuition fees among subsidised private are entirely prohibited, whereas countries such as Denmark provide fee-charging private schools with a proportionately lower amount of public funding (Houlberg et al., 2016). Regulations of add-on tuition fees usually aim to reduce financial barriers for low-income families seeking to make use of school choice and serve to ensure that private schools do not gain an unfair competitive advantage over free public schools. However, among the education systems participating in the review’s qualitative survey, 9 of 17 reported not to have national regulations in place to restrict tuition fees among publicly funded private schools in general compulsory education (Table 2.A1.4). Evidence from Chile suggests that tuition fees among private schools were one of the reasons for the country’s high level of student segregation (Elacqua, 2012) and empirical studies have also called into doubt whether private schools’ revenue from parental contributions was effectively translated into higher educational quality. In the Chilean case, Mizala and Torche (2012) found no association between parental add-on fees and private schools’ scores in national standardised tests (Sistema de Medición de la Calidad de la Educación, SIMCE) controlling for their student composition, which suggests that tuition fees may have primarily served as a means to cream-skim studentsfrom the public sector without raising their educational quality.

Monitoring the implementation of regulatory frameworks is important. In Chile, for example, publicly-funded private providers are subject to evaluations by the central education authorities through the Education Superintendence, which audits the use of public resources and monitors compliance with legislation, standards and regulations. It also enforces compliance with the recently introduced Inclusion Law, which prohibits publicly-funded private providers from making a profit, selecting students, and charging add-on student fees (Santiago et al., forthcoming). In addition, private school providers typically have to provide information on their use of the public financial resources they receive. In the Czech Republic, for example, private schools are required to report on the settlement of their public operating grants by a set deadline, provide analysis of the way the grant was used, and submit an annual report on the operation of the school. If the school has a school council in place, it must also provide information about the discussions that took place at their meetings (MŠMT, 2016).

There are concerns in some countries about inadequate monitoring of regulations for publicly funded private schools. In Germany, the basic law establishes central principles for the public funding of private schools that prohibit the selection of students to prevent social segregation in the education system. The introduction of precise regulations for the implementation of these principles and the monitoring and controlling of compliance with these regulations is the responsibility of the individual states. States should thus control aspects, such as the admission procedures and the social composition of private schools compared to public schools; however, according to Wrase and Helbig (2016), this is only rarely the case (Wrase and Helbig, 2016).

Align sub-central revenue raising and spending powers

The distribution of responsibilities for spending on school education should be adequately aligned to the distribution of responsibilities for raising funds. In countries where sub-central authorities have large spending powers, consideration could be given to increasing, at the margin, their own revenue raising powers. As discussed above, reliance on own tax revenue brings jurisdictions autonomy in determining public service levels in line with local preferences; it makes sub-central governments accountable to their citizens who will be able to influence spending decisions through local elections; it may enhance overall resource mobilisation in a country as local/regional authorities may tap additional local resources; and it creates a hard budget constraint on sub-central entities which is likely to discourage overspending (OECD/KIPF, 2016).

In systems where sub-central decision making is a key principle of schooling, a case can be made for expanding the available choices for sub-central governments by increasing their fiscal autonomy. For example, the Nordic countries typically give local governments substantial control over personal income tax rates. Some Central and East European countries have also started to do this by giving local governments the right to impose a local surcharge – within limits set by law – on the national government’s rate, while others are considering it. It should also be considered to accompany such an extension of revenue generating powers of local governments by a degree of jurisdictional consolidation to decrease the incentive such taxation might create for people to move from one jurisdiction to another – particularly from urban to suburban ones (Santiago et al., 2016a). However, it is important to recognise that such fiscal reforms require adjustments that go beyond the education system and need to be embedded in broader reflections on fiscal relationships across tiers of government.

Develop adequate equalisation mechanisms

Despite the advantages of raising the proportion of own revenue in sub-central education budgets, such an emphasis on using local tax bases for schooling also entails risks to create inequities in the availability of funding for schools across different localities. Typically, wealthier jurisdictions will be in a better position to raise their own revenues and to be able to provide adequate funding per student than others. In such contexts, the operation of fiscal transfer systems can help ensure that all jurisdictions have the necessary revenue to provide equal opportunities for their students. Such mechanisms aim to ensure that sub-central authorities are able to provide similar services at similar tax levels.

While the design of inter-jurisdictional relationships goes beyond the school sector (see above), getting the system right is particularly important for schooling as it often accounts for the largest share of the local budgets. Chapter 3 discusses key design principles to be considered when establishing effective fiscal transfer systems. In terms of governance, it is important to strike a balance between the need to reflect stakeholder views in the design of the transfer system and the risks of rent-seeking approaches and political distortions. A number of OECD countries have developed measures to limit the influence of special interests, for example through the establishment of independent agencies and bodies. Also, a two-stage budget procedure by setting the overall budget for equalisation and then negotiating the distribution formula may help reduce rent-seeking pressures (OECD, 2014b).

But even where well-designed equalisation schemes are in place, there may be marked differences among sub-central authorities in the level of funding they provide to schools and in the methods used for allocating these funds. To ensure a basic level of funding for all schools, one option is to introduce a funding approach whereby a part of central funding is earmarked for schools based on assessed needs while another part can be used at the discretion of sub-central authorities. In systems where each educational jurisdiction creates its own funding approach, the sharing of experiences among sub-central authorities should be encouraged and facilitated to create synergies and avoid duplication of efforts in designing optimal funding formulas (Chapter 3).

Build capacity for resource management at the sub-central level

In countries where sub-central authorities play a key role for providing education, the capacity building of sub-central actors should be a priority. Such capacity building should include a focus on resource management if this is a local responsibility. Competency frameworks for local leaders and administrators should reflect the related skills and be used to guide recruitment processes as well as training and professional development.

Part of the strategy involves professional development programmes to be made available to the staff employed by sub-central authorities and other school providers. These could emphasise, managing local school networks, engagement with community members, communication and consultation processes, school development, financial planning, human resources management and quality assurance in education (Chapter 5). But it is important to keep in mind that the professionalisation of local management does not depend only on the personal preparedness of local actors. In a wider professionalisation framework, the institutional settings within which local actors operate (e.g. co-ordination and co-operation among local authorities), the professional support provided, and the access of local actors to key information are important aspects to consider in improving capacity at the local level. For example, relevant training offers could be complemented by the establishment of a network of advisors to support the education work of local authorities. The central level and/or an association of local authorities could play a key role in this process.

Capacity for local education management can also be strengthened by encouraging local authorities to collaborate and share their administrative and managerial resources, e.g. jointly employing specialised staff for budgeting, financial control and the use of performance data, and working together to identify and disseminate effective practice. Associations of local authorities can take on a leading role in encouraging such collaborative practices and networks and in spreading good practices. Initiatives to develop and disseminate knowledge and tools for different levels of the school administration can support the implementation of effective processes for financial resource management. This could include support in areas such as planning resource use, budgeting and accounting, reporting on the use of financial resources, purchasing education materials and establishing contracts.

Finally, in countries where the high number and small size of providers limits their capacity for effective resource use, school funding could be rationalised by merging several small educational providers and thereby consolidating capacity for effective resource management. This would help ensure a more efficient and equitable administration of resources for a larger number of schools. Providers with adequate size and capacity will be better able to provide professional support for budgeting, accounting and other tasks to school leaders as well as offering regular leadership appraisal and feedback, thereby strengthening the strategic and pedagogical leadership at the school level.

Another option that has been considered by countries facing size and capacity challenges at sub-central levels is to re-centralise provision and funding of one or several sectors of schooling, either by moving responsibilities to higher levels of the administration or by creating new bodies to administer a larger number of schools. Re-centralisation of education services entails risks of weakening the links between education and local development planning. As a result, an important aspect to such re-centralisation processes is the establishment of mechanisms to ensure that local development objectives remain a relevant dimension in defining approaches to school funding. In countries where a decision for recentralisation has been made, it is important that schools remain responsive to local needs and that decision making involves consultation with the relevant local stakeholders. Systems that are re-centralising should also consider introducing flexible approaches to implementing such administration reform, which would recognise differences in capacity and performance between local providers. This could involve the possibility for willing municipalities or other providers to seek certification and continue to operate their local school system within a strengthened accountability framework.

Address the challenges of complexity in decentralised school funding approaches

Fragmented, overlapping and/or unclear governance and funding arrangements risk obfuscating resource flows, creating inefficiencies and reducing overall trust in the management of school systems. While governance arrangements have often been considered as a fixed feature of school systems, many countries are no longer willing or able to afford an inefficient distribution of responsibilities which may lead to costly duplication, overly complex funding formulas or waste of resources. Conclusions from the OECD country reviews clearly indicate that well-functioning governance arrangements are a key condition to allow for an effective and equitable distribution of resources across school systems.

One of the key ingredients of effective governance identified by OECD analysis on Governing Complex Education Systems is the need to align roles and responsibilities across the system as a way to address potential conflicts and overlap (Burns et al., 2016). In the context of school funding, this would require a clear division of labour between different levels of the school administration involved in the distribution of funding in order to increase the transparency and effectiveness of decentralised school funding. Where several tiers of government are funding schools at the same level of education and competing with each other for students, this may create conflicts of interests, barriers to collaboration and/or ineffective services for students who may not be able to transfer easily between sub-sectors run by different authorities. One option to address these challenges is to focus on developing a clear distribution of tasks, which assigns funding responsibilities for particular sub-sectors and/or particular types of resources to each tier of school administration.

Another option to address complexity challenges is to reduce the number of sub-tiers involved in channelling resources across a system. In countries where funding is channelled through several intermediary tiers of government before arriving at the school level, this might increase bureaucracy, reduce possibilities for central steering and dilute accountability for effective school funding. In such contexts, central governments could consider reducing the complexity of resource flows by introducing direct transfers for schooling to those levels of the administration which are directly responsible for managing and financing each education level. However, the precondition for such an approach is that the administrative units responsible for managing schools at have sufficient capacity to manage and distribute school funding.

While a whole-system approach that aligns roles and balances tensions is important for effective governance of school funding, Burns et al. (2016) caution against an excessive focus on governance structures rather than processes. For example, as systems seek to identify the most efficient number of governance levels, the focus on identifying an ideal structure may take a lot of time and energy without necessarily yielding lasting strategies to improve the effectiveness of the system. While an effective organisation of the different levels of the school administration is a crucial element of successful governance, thinking of structures in isolation without connecting them to supporting processes will not provide systemic and sustainable solutions to solve complexity challenges. Among the relevant processes that need to be considered alongside structural changes are: flexibility, adaptability, capacity building, open dialogue, stakeholder involvement and transparency (for more information, see Chapter 5). Changing governance structures without addressing the underlying processes may hinder effective implementation of the reforms (Burns et al., 2016).