Education finance equalization, spending, teacher quality and student outcomes: The case of Brazil ’ s FUNDEF

1. Education finance equalization, spending, teacher quality and student outcomes: The case of Brazil’s FUNDEF Nora Gordon Emiliana Vegas UC San Diego The World Bank January 14, 2005

2. Structure of presentation • Motivation • Background on Brazil • Key features of FUNDEF • Related literature & this paper • Data and descriptive statistics • Findings • Conclusions & policy implications

3. Motivation • FUNDEF: an education finance reform implemented in 1998 • Can provide useful evidence on the impact of education finance equalization strategies on access, quality, and equity of education

4. Background on Brazil • mid-1990s: Brazil was characterized by enormous inequality across and within states in terms of education finance, access, and quality • highly decentralized structure, with state and municipal education systems (26 states + DF, about 5,000 municipalities) • basic education (Ensino Fundamental) is comprised of 2 levels: • EF1 = grades 1-4 • EF2= grades 5-8

5. Education finance in Brazil before 1998 • By law, 25 percent of all state- and municipal-level taxes & transfers were mandated to be spent on education • States & municipalities were (anecdotally) quite creative in their definition of education spending • This led to enormous inequity in resources available for education within and across states (Soares 1998)

6. Regional disparities in education finance and access in the 1990s Sources: INEP and STN

7. FUNDEF: Key features • Main feature is creation of a state fund to which state & municipal governments contribute 15 percent of specific taxes & transfers • These contributions are then redistributed to the state & municipal governments on the basis of enrollment • at least 60 % of FUNDEF revenues must be allocated to teacher salaries • The federal government supplements the per student allocation in states where FUNDEF revenues per student are below a yearly established spending floor • The law requires state & municipal governments to allocate 10% of FUNDEF-tapped and 25% of non-FUNDEF taxes & transfers to education

8. Previous research on FUNDEF • Found that the reform: • led to substantial increases in enrollment in municipal basic education systems, especially in the poorest regions (World Bank 2002) • associated with positive effects on repetition, dropout and age-by-grade distortion (World Bank 2002, Abrahão de Castro 1998)

9. Previous research on education finance equalization reforms • In the U.S., found: • mixed evidence about the merits on reducing inequality in student achievement (Card & Payne 2002, Clark 2003) • important to assess the extent to which previously allocated revenues for education are redirected to other areas (Hoxby 2001, Gordon 2004)

10. This paper • explores further how FUNDEF affected education expenditures by municipal & state governments, including the extent of crowd-out • examines the effect of the reform on state-level enrollment • analyzes how state & municipal governments allocated additional resources on inputs - teacher credentials and class size - and how these translate into student outcomes • evaluates the extent to which the reduction in spending inequality among states led to a decrease in inequality in student achievement

11. Data • Education indicators from INEP’s annual school census for 1996-2002: • student enrollment, number of teachers, teachers’ educational attainment, age-by-grade distortion • Annual financial data from STN (Treasury) for 1996-2002: • State & municipal taxes & transfers, used to calculate FUNDEF (after 1998) and non-FUNDEF resources for education • Expenditure data, used to calculate education expenditures • Student achievement data (SAEB): • Math and language standardized tests administered to 4th graders in 2 years prior and 2 years post FUNDEF: 1995, 1997, 1999, and 2001 • stratified sample of students, representative at the state level for state, municipal & private schools

12. Evolution of Enrollment in EF1, by region, 1996-2002

13. Evolution of Enrollment in EF2, by region, 1996-2002

14. Enrollment changes in 1997-2002

15. Primary Net Enrollment Rates by Region, 1994-2000

16. Mean pupil:teacher ratios

17. Share of teachers with more than primary education

18. Mean age-by-grade distortion

19. Regional averages of state per pupil spending (constant R$)

20. Regional averages of annual state FUNDEF per pupil allocations (current R$)

21. Means and standard deviations of SAEB 4th grade math scores

22. A short note on methodology • We use regular OLS, instrumental variable and reduced-form approaches to identify the effect of FUNDEF on the variables of interest • Our instrumental variable is the amount of education spending mandated by the reform, calculated using FUNDEF’s formula

23. Findings • To what extent did FUNDEF translate into increased education expenditures by municipal & state governments, including the extent of crowd-out? • To what extent did FUNDEF lead to increases in state-level enrollment? • How did state & municipal governments allocate additional FUNDEF resources on inputs - teacher credentials and class size - and how did these translate into student outcomes? • To what extent did the reduction in spending inequality among states led to a decrease in inequality in student achievement?

24. 1. To what extent did FUNDEF resources translate into education spending?

25. 2. Effect of spending on state-level enrollment

26. 3. Effect of spending on class size

27. 3. Effect of spending on teacher qualifications

28. 3. Effect of spending on age-by-grade distortion

29. 3. Effect of inputs on age-by-grade distortion

30. 4. Effect of state-level mean per pupil spending on math achievement (quantile regression results)

31. 4. Effect of state-level inequality in per pupil spending on math achievement (quantile regression results)

32. Conclusions • Revenue flows from FUNDEF fully translated into education spending • FUNDEF led to increases in enrollment in those states most affected by the reform • Additional resources from FUNDEF were used to reduce class size • Legislation mandating that teachers have at least secondary education was successful

33. Conclusions (cont.) • Reductions in class size and in the share of untrained teachers are associated with slight decreases in age-by-grade distortion • Although changes in mean spending are not associated with higher student achievement, reductions in spending inequality may raise the achievement of students in the lower tail of the distribution