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

Structure of presentationMotivationBackground on BrazilKey features of FUNDEFRelated literature & this paperData and descriptive statisticsFindingsConclusions & policy implications

MotivationFUNDEF: an education finance reform implemented in 1998Can provide useful evidence on the impact of education finance equalization strategies on access, quality, and equity of education

Background on Brazilmid-1990s: Brazil was characterized by enormous inequality across and within states in terms of education finance, access, and qualityhighly 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 1-4EF2= grades 5-8

Education finance in Brazil before 1998

By law, 25 percent of all state- and municipal-level taxes & transfers were mandated to be spent on educationStates & municipalities were (anecdotally) quite creative in their definition of education spendingThis led to enormous inequity in resources available for education within and across states (Soares 1998)

Regional disparities in education finance and access in the 1990s

Region Mean PPE1996 (R$)

GER1994

NER1994

North 742 106.9 81.5

Northeast 565 104.5 77.3

South 1,146 111.8 93.8

Southeast 1,045 113.0 94.4

Center-West

991 122.7 92.0

Sources: INEP and STN

FUNDEF: Key featuresMain feature is creation of a state fund to which state & municipal governments contribute 15 percent of specific taxes & transfersThese 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 floorThe law requires state & municipal governments to allocate 10% of FUNDEF-tapped and 25% of non-FUNDEF taxes & transfers to education

Previous research on FUNDEFFound 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)

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)

This paper1. explores further how FUNDEF affected education

expenditures by municipal & state governments, including the extent of crowd-out

2. examines the effect of the reform on state-level enrollment

3. analyzes how state & municipal governments allocated additional resources on inputs - teacher credentials and class size - and how these translate into student outcomes

4. evaluates the extent to which the reduction in spending inequality among states led to a decrease in inequality in student achievement

DataEducation 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 educationExpenditure 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 2001stratified sample of students, representative at the state level for state, municipal & private schools

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

1000000

2000000

3000000

4000000

5000000

6000000

1st -

4th

Gra

de E

nrol

lmen

t

1996 1998 2000 2002Year

North North EastSouth South EastCenter West

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

1000000

2000000

3000000

4000000

5000000

6000000

5th

- 8th

Gra

de E

nrol

lmen

t

1996 1998 2000 2002Year

North North EastSouth South EastCenter West

Enrollment changes in 1997-20021997-2002 % change

EF1 EF2North 2.95 32.38Northeast -5.15 61.66Southeast -5.93 -0.78South -7.03 3.39Central-West -7.25 17.25Total -4.91 18.98

Primary Net Enrollment Rates by Region, 1994-2000

75

80

85

90

95

100N

et P

rimar

y E

nrol

lmen

t

1994 1996 1998 2000Year

North North EastSouth South EastCenter West

Mean pupil:teacher ratiosEF1 EF2

1996 2000 2002 1996-2002 (%)

1996 2000 2002 1996-2002 (%)

N 31.2 31 30 -3.8 26.1 28 24.4 -6.5

NE 30 29.5 28.5 -5.0 24.7 27.7 26.7 8.1S 22.8 22.2 21.8 -4.4 17.8 16.9 16 -10.1SE 31.3 29.6 28.2 -9.9 26.9 22.3 20.8 -22.7CW 30.3 26.4 25.4 -16.2 23.1 22.5 21.8 -5.6Total 29.6 28.4 27.4 -7.4 24.6 23.8 22.5 -8.5

Share of teachers with more than primary education

EF11996 2000 2002 1996-

2002 (%)

N 0.8 0.9 0.96 20.0

NE 0.8 0.9 0.96 20.0S 0.96 0.98 0.99 3.1SE 0.98 0.99 1.0 2.0CW 0.92 0.96 0.99 7.6Total 0.9 0.95 0.98 8.9

Mean age-by-grade distortionEF1 EF2

1996 2000 2002 1996-2002 (%)

1996 2000 2002 1996-2002 (%)

N 2.46 2.14 1.86 -24.4 1.99 2.95 2.72 36.7

NE 2.86 2.87 2.36 -17.5 2.21 3.66 3.35 51.6S 0.83 0.70 0.62 -25.3 1.12 1.40 1.24 10.7SE 1.16 0.98 0.84 -27.6 1.42 1.74 1.48 4.2CW 1.73 1.50 1.38 -20.2 1.79 2.71 2.35 31.3Total 1.77 1.68 1.43 -19.2 1.68 2.51 2.25 33.9

Regional averages of state per pupil spending

1996 2000 2002 1996-2002 change (%)

N 614 777 880 43.4

NE 466 562 673 44.4S 978 1,226 1,277 30.6SE 890 1,354 1,513 70.0CW 844 1,005 1,055 25.0Total 751 1,010 1,120 49.1

(constant R$)

Regional averages of annual state FUNDEF per pupil allocations

1998 1999 2000 2001 2002

N 529 553 639 762 935NE 325 340 379 428 515S 485 542 651 752 893SE 523 587 673 778 879CW 296 358 407 452 562Legal minimum

315 315 EF1:333EF2:349.65

EF1:363EF2:381.15

EF1:418EF2:438.9

(current R$)

Means and standard deviations of SAEB 4th grade math scores

1995 2001Mean S.D. Mean S.D.

N 176.24 31.96 172.63 42.72

NE 182.28 38.20 172.90 45.50

S 199.92 42.14 200.28 51.71

SE 193.91 38.94 201.53 46.09

CW 193.54 39.06 187.56 49.65

Total 187.85 39.18 182.85 48.37

A short note on methodologyWe use regular OLS, instrumental variable and reduced-form approaches to identify the effect of FUNDEF on the variables of interestOur instrumental variable is the amount of education spending mandated by the reform, calculated using FUNDEF’s formula

Findings1. To what extent did FUNDEF translate into

increased education expenditures by municipal & state governments, including the extent of crowd-out?

2. To what extent did FUNDEF lead to increases in state-level enrollment?

3. How did state & municipal governments allocate additional FUNDEF resources on inputs - teacher credentials and class size - and how did these translate into student outcomes?

4. To what extent did the reduction in spending inequality among states led to a decrease in inequality in student achievement?

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

(1)Educ.

exp.

(2)Educ.

Exp.

(3)Educ.

exp. per

pupil

(4)Educ.

exp. per

pupilMandated

spending1.020 1.027

(0.004) (0.005)Mandated

spending PP1.020 1.016

(0.009) (0.009)Enrollment -1.030 -0.000

(0.272) (0.000)Number of

observations22,879 22,879 17,957 17,957

R-squared 0.77 0.77 0.52 0.53

2. Effect of spending on state-level enrollment

EF1 (grades 1-4)

EF2 (grades 5-8)

OLS IV OLS IVEducation spending -0.004

(0.001)-0.005(0.001)

-0.002(0.001)

-0.001(0.001

)Education spending*State bound by FUNDEF floor

0.007(0.004)

0.004(0.004)

0.022(0.002)

0.025(0.003

)State-year observations 162 162 162 162Number of observations 27 27 27 27

3. Effect of spending on class size

EF1 (grades 1-4) EF2 (grades 5-8)OLS IV Reduce

d form

OLS IV Reducedform

Spending PP

-0.127 -0.184 -0.166 -0.208(0.004

)(0.007

)(0.031) (0.044)

Mandated exp PP

-0.185 -0.218(0.007) (0.047)

Obs. 23,460

17,954

18,002 16,445 12,873 12,903

R-squared

0.14 0.14 0.01 0.02

3. Effect of spending on teacher qualifications

EF1 (grades 1-4) EF2 (grades 5-8)OLS IV Reduce

dform

OLS IV Reducedform

Spending PP

0.0001 0.0018 -0.0002 -0.0000(0.0002

)(0.0003) (0.0001

)(0.0003)

Mandated exp PP

0.0018 -0.0000(0.0003

)(0.0003)

Observations 23,516 17,954 18,002 16,482 12,873 12,903R-squared 0.32 0.34 0.02 0.02

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

EF1 (grades 1-4) EF2 (grades 5-8)OLS IV Reduce

dform

OLS IV Reduced form

Spending PP

-0.003 -0.005 -0.009 -0.001

(0.001) (0.001) (0.001) (0.002)Mandatedexp PP

-0.005 -0.001

(0.001) (0.002)Observations 23,463 17,954 18,002 14,409 11,359 11,388R-squared 0.14 0.15 0.38 0.40

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

EF1 (grades 1-4) EF2 (grades 5-8)

OLS IV OLS IVClass size 0.002 0.023 0.000 0.005

(0.001) (0.005) (0.000)

(0.013)

Share teachers with at least primary education

-0.488 -0.551 -0.049 -0.107

(0.025) (0.031) (0.064)

(0.079)

Number of observations 23,516 18,002 14,388

11,343

R-squared 0.16 0.38

4. Effect of state-level mean per pupil spending on math achievement

q(.25) q(.50) q(.75)Actual mean per pupil spending -0.001 -0.001 -0.001

(0.000) (0.000) (0.000)Pseudo R-squared 0.787 0.784 0.797Number of observations 78 78 78

(quantile regression results)

4. Effect of state-level inequality in per pupil spending on math achievement

q(.25) q(.50) q(.75)Actual per pupil

expenditure inequality 75/25 -1.213 0.843 1.135

(0.000) (0.000) (0.000)

Pseudo R-squared 0.786 0.784 0.8Number of observations 78 78 78

(quantile regression results)

ConclusionsRevenue flows from FUNDEF fully translated into education spendingFUNDEF led to increases in enrollment in those states most affected by the reformAdditional resources from FUNDEF were used to reduce class sizeLegislation mandating that teachers have at least secondary education was successful

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