PLANNING AND LOCAL GOVERNANCE PROJECT (PLGP) IN

POLICY BRIEF: FINANCING THE NEW OWN FUNCTIONS OF LOCAL GOVERNMENTS IN ALBANIA

June 2018 This publication was produced for review by the United States Agency for International Development. It was prepared by Tetra Tech ARD.

PLANNING AND LOCAL GOVERNANCE PROJECT (PLGP) IN ALBANIA DRAFT-POLICY BRIEF: FINANCING THE NEW OWN FUNCTIONS OF LOCAL GOVERNMENTS IN ALBANIA 1 ACKNOWLEDGEMENTS

Prepared for the United States Agency for International Development, USAID Contract Number AID-182-C-12-00001, Albania Planning and Local Governance Project (PLGP)

This draft-policy brief was prepared by: Tony Levitas and Elton Stafa

We would like to thank Fran Brahimi of the Ministry of Finance and Economy and Florian Nurçe of the Ministry of Education and Sport for critical support in the preparation of this policy brief.

Tetra Tech ARD Home Office Address: Tetra Tech ARD 159 Bank Street, Suite 300 Burlington, Vermont 05401 USA Telephone: (802) 658-3890 Fax: (802) 658-4247 www.ardinc.com

Tetra Tech ARD Contact: Adrienne Raphael, Senior Technical Advisor/Manager [email protected]

PLGP Contact: Kevin McLaughlin, PLGP Chief of Party [email protected]

DISCLAIMER The opinions and proposals contained in the publication do not necessarily reflect the views of either Ministry or those of the United States Agency for International Development or the United States Government.

PLANNING AND LOCAL GOVERNANCE PROJECT (PLGP) IN ALBANIA DRAFT-POLICY BRIEF: FINANCING THE NEW OWN FUNCTIONS OF LOCAL GOVERNMENTS IN ALBANIA 2 Contents

Executive Summary ...... 4 1. Purpose of this Brief ...... 6 2. The Origins of the Current Situation ...... 7 3. The Fundamental Problems ...... 8 Social Welfare Centers ...... 9 Recommendations for Social Welfare Centers ...... 10 Dormitories ...... 10 Recommendations for Dormitories ...... 12 Fire Protection, Agriculture and Irrigation, Forestry ...... 12 Recommendations for Fire Protection, Agriculture and Irrigation, Forestry ...... 13 4. Local Governments, Preschool Education, and Per Pupil Funding ...... 14 Overview Preschool Education in Albania ...... 14 The Specific Challenges of Developing a Per-Pupil Formula for Preschool Education in Albania Today ...... 18 Recommendations for Preschools Education ...... 24

PLANNING AND LOCAL GOVERNANCE PROJECT (PLGP) IN ALBANIA DRAFT-POLICY BRIEF: FINANCING THE NEW OWN FUNCTIONS OF LOCAL GOVERNMENTS IN ALBANIA 3 Executive Summary

The 2015 Law on Local Self-Government (LSGL) substantially increased the role of democratically-elected local governments in Albania by assigning to them a number of new own-functions. The most important of them is the responsibility for financing and managing preschools. Others include fire protection, irrigation and drainage, providing counselling services to farmers, and managing and maintaining forests, pastures, and rural roads. As “own functions” municipalities should have sufficient legal authority over these services to deliver them in ways that are aligned with the preferences and priorities of their electorates. They must also be able to finance them from their general revenues and not from conditional grants from the national government. When the LSGL was passed, however, it contained a provision that allowed these new own functions to be financed by conditional grants –Specific Transfers—for three years. This transitional period was put in place to give the national government time to both harmonize sectoral legislation and to introduce changes in the intergovernmental finance system that would allow municipalities to pay for these new responsibilities from their general revenues. This transition period expires at the end of this year, and in 2019, it is expected that municipalities will not only exercise greater managerial control over these functions, but that they will start financing from their general revenues –meaning out of some combination of the unconditional transfers that they receive from the national government and the revenues they derive from local fees, charges and taxes. Figuring out how local governments should get these general revenues is however a big challenge for at least three reasons. First, the national government is currently spending more than 8.5 billion Albanian Lekë (ALL) to finance these functions through Specific Transfers. This is equal to more than 20% of total local government revenues, and more than 50% of today’s Unconditional Transfer. As a result, municipalities will need to see a very substantial increase in their freely disposable revenues if they are to finance the existing costs of these functions –functions which to greater or less degree have been underfunded for years. Second, while there is room for Albanian municipalities to improve the collection of their own tax revenues, there is little chance that such improvements could significantly offset the costs of these new functions in the foreseeable future. As a result, and in the immediate future, the only viable way to provide local governments with the necessary funds to finance these functions, will be to substantially increase the size of the Unconditional Grant. Third, and most importantly, it will be necessary to increase the size of the Unconditional Grant by more than the 8.5 billion ALL that the national government is currently spending on these functions through Specific Transfers. The most fundamental reason for this is that the ways these functions are currently being provided and financed by the national government does not reflect any objective measure of the need for these services across the country as a whole. The clearest illustration of this is with fire protection because in many areas of the country the national government simply did not build or staff fire stations. But similar

PLANNING AND LOCAL GOVERNANCE PROJECT (PLGP) IN ALBANIA DRAFT-POLICY BRIEF: FINANCING THE NEW OWN FUNCTIONS OF LOCAL GOVERNMENTS IN ALBANIA 4 problems exist with all of the concerned functions. For example, while all local governments currently have preschools some have many more than others in relationship to the number of preschool children they have to educate. What this means is that if the same amount of money that is currently being spent on these functions (through Specific Transfers) is allocated to local governments on the basis of more objective measures of need --such as a municipality’s population, or the number of preschool children it serves-- then municipalities which currently have relatively more of these institutions than others, will receive less funding through the Unconditional Transfer than they did through conditional grants Indeed, in some cases so much less funding that they may not be able to provide the service at all, or will have to radically reorganize how they deliver it. As a result, moving from a system in which the national government provides conditional grants to individual local governments on the basis of the existing costs of the institutions located on their territories, to one in which the national government allocates Unconditional Transfers to all local governments based on objective measures of their relative needs requires increasing the size of the Unconditional Transfer by more than current level of conditional grants. In the following chapters, we discuss the dilemmas of moving from conditional grants to unconditional transfers for each of the new functions that have been assigned to local governments by the LGFL. But we pay particular attention, to preschool education because it is by far the costliest responsibility that the Government of Albania (GoA) assigned to municipalities, and arguably the most important for the country’s future. Here, we argue that while it would probably have been best to consider preschool education as a shared-function, it is possible to integrate a fair and equitable (weighted) per pupil formula into the Unconditional Transfer. But doing so will also require a) adding new funds into the system b) phasing in the introduction of the formula and c) providing municipalities with legal authority and technical support to reorganize their preschool networks –not least because demographic decline and internal migration will force at least some municipalities to close facilities and redeploy teachers in their preschool systems.

PLANNING AND LOCAL GOVERNANCE PROJECT (PLGP) IN ALBANIA DRAFT-POLICY BRIEF: FINANCING THE NEW OWN FUNCTIONS OF LOCAL GOVERNMENTS IN ALBANIA 5 1. Purpose of this Brief

In 2015, the Government of Albania (GoA) consolidated 373 municipalities and communes into 61 larger municipalities. The creation of these larger municipalities was the first step in a broader plan to increase the role of democratically-elected local governments in the country’s system of public administration1. Once local governments were consolidated, the GoA passed a new framework law on Local Self-Government (LSGL)2. This law transferred important service responsibilities to municipalities as own-functions. In accordance with the basic definition of own functions, municipalities should have sufficient legal authority to deliver the services associated with own-functions in ways that are aligned with their preferences and priorities. Indeed, they should be free not to provide a service related to an own-function if they see fit, and so long as they are not violating other laws. Finally, own functions should be financed from general revenues and not from conditional grants whose terms and conditions are set by the national government. But despite defining municipalities’ new responsibilities as own-functions, the LSGL put in place a three-year transition period during which municipalities would receive conditional grants –Specific Transfers-- to finance them. This transition period ends this year, and the expectation is that beginning in 2019 municipalities will not only be given greater managerial control over these newly decentralized functions, but that they will start paying for them through some combination of local taxes and fees, and the Unconditional Grant that they receive from the national government. The purpose of this Brief is to explain the most important challenges that need to be addressed in order to move to the unconditional funding of these new services, and to recommend ways that this might best be done. First, we trace the origins of the current situation and briefly characterize the most important problems that need to be addressed. We illustrate these problems by discussing the non-educational functions that have recently been decentralized and outline some recommendations about how their financing might be treated going forward. Finally, we focus most of our attention on preschool education because as we shall see it is by far the costliest responsibility that the GoA has assigned to municipalities, and the most important for Albania’s future.

1 Government of Albania, National Crosscutting Strategy for Decentralization and Local Governance 2014-2020 December 2014, , pp 1-34 2 Law no. 139/2015, On Local Self-Government (LSGL)

PLANNING AND LOCAL GOVERNANCE PROJECT (PLGP) IN ALBANIA DRAFT-POLICY BRIEF: FINANCING THE NEW OWN FUNCTIONS OF LOCAL GOVERNMENTS IN ALBANIA 6 2. The Origins of the Current Situation

Before the passage of the LSGL, territorial agencies of the GoA financed and managed fire protection, agricultural services, irrigation, forestry and road maintenance. Line ministries set the budgets of these agencies, directly hired and fired their directors, and were --at least in theory— responsible for ensuring that services of a reasonably similar standard were provided across the country as a whole. In most cases, this was not achieved and the poor quality and uneven provision of many of the services that are now being decentralized is –as we shall see-- important for understanding the current situation. But for the moment, the main point is that prior to 2016, these were all pure national government functions. The situation in education, and in a few select social services, however, was different. The previous framework law on local self-government had defined education as a shared function, and local governments had been given ownership of all schools located in their jurisdictions. As owners, they were assigned responsibility for maintaining and improving school facilities and for paying the costs of all school utilities out of their general revenues. In the early 2000s, the GoA delegated the responsibility for paying the wages of all non- pedagogical staff to local governments. This was done by (non-transparently) tacking on to each local governments Unconditional Transfer, a conditional grant for the wages of school support staff. The value of these conditional grants was determined by adding up the number of support staff actually employed in a local government’s school system and then multiplying it by the average national wage of such workers. As a result, these conditional grants did not reflect the need for support staff as determined by some standard or formula. Instead, they were based on the number of workers the Ministry of Education, Sport and Youth (MoESY) had recently allowed schools to employ. In 2008, the GoA delegated responsibility for managing and financing 27 school dormitories, as well six social welfare centers to local governments. Again, this was done by tacking onto the Unconditional Transfer the total amount of money that the national government had recently spent on these institutions. Both in the case of school dormitories and in the case of social welfare centers –which included some orphanages and old age homes—these institutions largely served people who did not come from the local governments in which the institutions were located. As a result, there was little political incentive for the local governments to improve their operations. With the passage of the LSGL, fire protection, maintaining and improving irrigation and drainage systems, providing counsel services to farmers, and maintaining local roads were all made local government own-functions. Municipalities were also made fully responsible for preschool education, meaning now they had to finance not just the wages of support staff but those of teachers as well. LSGL, however, contained provisions that allowed the GoA to finance these new responsibilities through conditional grants –now called Specific Transfers-- because it was not clear how these functions could be financed through the Unconditional Transfer, a grant which was also being restructured at the time. As before, these conditional grants received

PLANNING AND LOCAL GOVERNANCE PROJECT (PLGP) IN ALBANIA DRAFT-POLICY BRIEF: FINANCING THE NEW OWN FUNCTIONS OF LOCAL GOVERNMENTS IN ALBANIA 7 were calculated by summing-up what the national government said it had previously spent on these institutions. Table I below, shows that in 2018 the total amount of Specific Transfers that municipalities will receive is greater than 8.5 billion ALL, a sum equal to almost 20% of total municipal revenue and more than half the value of the Unconditional Transfer. Cleary how these monies are allocated to local governments in the future is of critical importance to the financial well- being of Albania’s municipalities. Moreover, their most costly new function is their responsibility for paying the salaries of preschool teachers. These salaries, combined with those of non-pedagogical employees in all schools account for well over 60% all specific transfers. As such, the most significant problem facing policy makers is how monies intended for education should be allocated to local governments once the provisions for Specific Transfers expire.

Table 1 Specific Transfers Broken Down by Category in 2018

Wages: Wages: Irrigation, Wages: Support Staff Support Fire Drainage, & Rural Soc. Preschool Forestry Dorms Total Pre & Prim. Staff Sec. Prot. Agric. roads Centers Teachers Schools Schools Support million ALL 3,609 1,015 469 1,185 847 276 516 514 88 8,519 % of Total 42% 12% 6% 14% 10% 3% 6% 6% 1% 100% # employed 4,410 2,186 797 1,167 328 261 ? ? ? na # of LGs with instit. 61 61 57 (47) 61 61 58 58 27 6 na Source: MoFE and MoESY

3. The Fundamental Problems

Once the provisions for Specific Transfers expire at the end of the year, local governments will be expected to finance their new own functions from their general revenues, meaning through some combination of their own tax revenues and the monies they receive through the Unconditional Grant. In theory, a significant portion of the costs of these new functions could be covered by giving local governments some combination of new tax powers, new shares of national taxes as well as by expecting municipalities to do a better job collecting the taxes they already control. In practice, however, not much can be expected from any of these options in the immediate future: There is no high yielding tax that national government can reasonably give to local governments. The base of the Personal Income Tax is too unevenly distributed across the country as a whole to expect that it could finance functions as costly as teachers wages in most municipalities. And while, local governments can and should improve the collection of their own revenues, there is no chance that this can be done overnight or on anything like the scale that would be required to significantly offset the costs of the new functions. As a result, the only realistic way of providing local governments with the funds they will need to finance their new own functions is through the expansion of the Unconditional Transfer. And here there are three critical issues:

PLANNING AND LOCAL GOVERNANCE PROJECT (PLGP) IN ALBANIA DRAFT-POLICY BRIEF: FINANCING THE NEW OWN FUNCTIONS OF LOCAL GOVERNMENTS IN ALBANIA 8 • How much should the Unconditional Transfer be expanded in order to ensure that the total amount of funding local governments receive is adequate with respect to the costs of their new responsibilities? • On what objective measures of relative need should the Unconditional Transfer by allocated to local governments to ensure the overall equity of the system? • And how can the system be made stable and predictable over time as these needs change? In the following we examine these issues with respect to each of the new functions that have been assigned to local governments. Here, we argue that answering these questions is complicated by a problem that has thus far been little discussed by Albanian policy makers. In short, the functions that are now being decentralized to local governments have never been provided or financed by the national government in accordance with any objective measure of the need, or any clear set of service standards. As a result, the array of institutions that currently provide these services, as well as the number of people they employ and the quality of their buildings and equipment, differs significantly from place to place as do the quality of the services they provide. Before focusing on education, as the costliest of the new functions, it is worth briefly examining these issues in a few of the other, less weighty, sectors in which municipalities have been assigned own-functions. Here, what we are trying to illustrate is the tension between delegating to municipalities managerial control over particular institutions and decentralizing to them broader sectoral responsibilities as own-functions.

Social Welfare Centers

As can be seen from Table 1, six municipalities receive Specific Transfers worth a total of 88 million ALL to support Social Welfare Centers for children with disabilities and old age homes. This constitutes 1% of all Specific Transfers and is thus a small part of the problem, but one that nonetheless expresses in miniature issues that reappear elsewhere. The central tension lies in the fact that only six municipalities currently have social welfare centers while the LSGL requires all local governments to provide services to disabled children and the elderly. If we assume, with the LSGL that all local governments should provide these services, than it is unfair to give special treatment to those municipalities that happen to have them now. Instead, the money currently being spent on these centers should be shared by all municipalities. This would argue for putting the 88 million ALL into the Unconditional Grant and allocating it by population or by the number of disabled or elderly people living in each municipality. Doing this, however, will give municipalities that don’t have Social Welfare Centers a little more money than they received before, but not enough to actually provide any significant social welfare services, to say nothing about building (and staffing) a new social welfare center. Meanwhile, the six municipalities that currently have centers will get significantly less

PLANNING AND LOCAL GOVERNANCE PROJECT (PLGP) IN ALBANIA DRAFT-POLICY BRIEF: FINANCING THE NEW OWN FUNCTIONS OF LOCAL GOVERNMENTS IN ALBANIA 9 money than before, and certainly not enough to keep their centers open without adding in additional funds. Faced with this dilemma, municipalities may well choose to close their existing centers and spend the monies they receive through the Unconditional Grant on other functions. Moreover, the incentive to close the centers will be particularly strong if the centers in fact serve large numbers of children and elderly who actually come from other municipalities. Worse, the national government will have weak legal grounds for preventing these closures, precisely because as an own-function financed through freely disposable monies, municipalities should be free not to provide a service if they think it doesn’t serve the best interests of their electorates. In this case, in other words, there two central problems: The first is the tension between the unequal distribution of the current institutions and finances associated with the function. And the second is whether in fact the current institution really shouldn’t be considered local government institutions at all because they were designed to serve citizens from all of the country. Recommendations for Social Welfare Centers

1. Determine which if any of the social service centers actually serve national populations. These centers should not be decentralized to local governments as “own- functions”. Instead they should continue to be considered delegated responsibilities and financed with conditional grants, or better, made into private, non-profit institutions financed through per client payments from the national budget. 2. The funds that currently go to centers that primarily serve the residents of the municipalities in which they are located should be placed into the Unconditional Grant allocated to all municipalities on a formula basis. 3. As with any Specific Transfers folded into the Unconditional Grant, the size of the grant has to be increased be an equivalent percentage of GDP to ensure that the services are accounted for in future years. 4. The national government should not object to the closing of centers that municipalities have been assigned responsibility for as an own-function.

Dormitories

A similar set of dilemmas exist with respect to school dormitories which exist in only 27 municipalities and which are currently being financed through Specific Transfers equal to about 514 million ALL (6% of total Specific Transfers). 3 These dormitories were initially delegated to municipalities before Albania consolidated its local governments. It is therefore likely that most of the pupils who initially used them came from the surrounding communes. This is problematic because the host municipality was

3 It is important to note that dormitories have been decentralized with Decision of the Council of Ministers in 2008 and are not included in the LSGL as an own local function

PLANNING AND LOCAL GOVERNANCE PROJECT (PLGP) IN ALBANIA DRAFT-POLICY BRIEF: FINANCING THE NEW OWN FUNCTIONS OF LOCAL GOVERNMENTS IN ALBANIA 10 essentially being asked to provide services to children whose parents voted and paid taxes in another local government. Thus, while municipalities were legally obligated to keep these dorms open and to spend their conditional grants on them, they had little incentive to improve conditions by contributing their own money. With territorial consolidation this particular problem may have been more or less resolved because it is now likely that most of the pupils using the dormitories come from the municipality that is responsible for financing and managing them. But there are still only 27 dorms in the country. As a result, putting the 514 million ALL of Specific Transfers that are currently earmarked for dormitories into the part of the Unconditional Grant that allocates funds to local governments on the basis of population and population density will cause the same sorts of problems that we encountered with social welfare institutions: Local governments that do not have dormitories will get money they never saw before, while those with dormitories will get much less than they need to keep their facilities open. But unlike with social welfare institutions, monies designed to support dormitories could be relatively easily targeted towards those municipalities that have them and at least in theory without discriminating against those that don’t. This is because the rules governing the Unconditional Grant already set aside a percentage of the total grant for educational purposes (5% of the grant or c. 1 billion ALL in 2018). This part of the grant is then allocated to municipalities on the basis of the number of primary and secondary school students in their schools. What could be done here is to add the 514 million ALL currently designated for dormitories into Unconditional Grant by increasing the value of the grant by an equivalent percentage of the GDP. This will ensure that financial support for this function stays in the unconditional grant going forward. Then share of the grant earmarked for educational purposes would be increased by a percentage of the total grant that yielded the same 500 million ALL. Finally, a new coefficient would be added to the formula that gave local governments a specific amount of money for every student housed in a dormitory, living outside of his home in order to attend another school. The base calculation for the per pupil amount would be made simply by dividing the 514 million ALL currently spent on dorms by the total number of pupils currently residing in them. Municipalities would then get this amount multiplied by the number of students living in their dorms. The resulting sum would inevitably differ from the amount of the Specific Transfers municipalities currently receive, with some getting more and some getting less. But the system would be reasonably fair. Moreover, legal provisions might be developed to allow similar per pupil amounts to be paid to municipalities which created possibilities for students to live with local families if they did not have dorms or if their dorms were overenrolled. As such, the system would not discriminate against those municipalities that did not have dorms already. But again, it should be noted that because the responsibility to provide student housing has been assigned to municipalities as an own function, local governments would remain (legally) free to spend whatever money they got through the grant as they saw fit. Indeed, they would

PLANNING AND LOCAL GOVERNANCE PROJECT (PLGP) IN ALBANIA DRAFT-POLICY BRIEF: FINANCING THE NEW OWN FUNCTIONS OF LOCAL GOVERNMENTS IN ALBANIA 11 remain free to close dormitories and indeed not to provide student housing at all --though if they did they would obviously lose their per pupil payments. Finally, if such a system is introduced, it would be incumbent on the Ministry of Finance to introduce a budget circular that clearly defined how the Unconditional Grant is being calculated, and in particular how much is been calculated to support functions related to education. Recommendations for Dormitories 1. Increase the share of the GDP used to define the Unconditional Grant by a percentage equal to the 514 million ALL currently being used to finance dormitories through Specific Transfers. 2. Increase the share of the Unconditional Grant calculated on the basis of the number of pupils attending schools in each municipality and add a coefficient for pupils residing in dormitories or otherwise being housed outside of their normal place of residence in order to attend school. 3. Calculate a base per pupil payment for students attending school outside of their place of residence by dividing the 514 million currently being spent on dormitories by the total number of pupils living in them. 4. Determine the student housing component of each local governments Unconditional Grant by multiplying the number of students residing in a municipality’s dormitories (and other forms of student housing) by the base per pupil payment.

Fire Protection, Agriculture and Irrigation, Forestry

Taken together Fire Protection (14%, 1,185 million ALL), Agriculture and Irrigation (10%, 847 million ALL) and Forestry (3%, 276 million ALL) account for 2,308 million of all Specific Transfers (27%). As with Social Welfare Centers and Dormitories, the distribution of the institutions which provide the services associated with these functions is extremely uneven. In 2016, there were only 39 fire stations in the country, meaning that 22 of the newly consolidated municipalities lacked the basic infrastructure to provide the key services that had just been made a local government own-function. To its great credit, the national government used the three-year transition period to build 22 new fire stations in the municipalities that didn’t have them, increase the number of staff and make several municipalities comply with the legal standard on the number of firefighters.4 The situation in Agriculture, Irrigation, drainage and Forestry is much less clear. For these functions we have not been able to identify a specific set of institutions that provide similar services throughout the country. Nor have we been able to identify any inventory of the institutions that are currently being funded by Specific Transfers. As such, it is very hard to say what exactly these institutions do, or how unevenly the services they provide are distributed across the country as a whole.

4 The report accompanying the draft-Annual Budget Laws for 2016-2018

PLANNING AND LOCAL GOVERNANCE PROJECT (PLGP) IN ALBANIA DRAFT-POLICY BRIEF: FINANCING THE NEW OWN FUNCTIONS OF LOCAL GOVERNMENTS IN ALBANIA 12 This of course does not mean that municipalities have all the infrastructure they need to adequately serve their citizens. On the contrary, there has been underinvested in these sectors for many years and it is entirely likely that no municipality really has either the capital stock or the human resources to provide adequate services. Nor does it mean that municipalities have similar shortcoming or deficits. What can be said, however, is that in general, the human and capital endowments associated with these functions are inadequate, and that their current distribution across municipalities is very uneven and unfair. These disparities are important to understand because bringing all municipalities up to a similar and adequate level of service capacity represent a national challenge. And in some respects, the transfer of these responsibilities to municipalities as own functions — like many aspects of the decentralization process — expresses the national governments’ preference to off-load some of its own problems to the local level. This is unfair. But it is not unreasonable in as much as one believes that local knowledge and local priorities can produce better outcomes if they are combined with some real measure of local power and locally controlled resources. For these reasons, we think that it is desirable to fold the Specific Transfers currently used to fund these functions into the general component of the Unconditional Grant, and to allocate these funds more or less in accordance with the formula’s coefficients for population and population density because both are reasonable ways to measure local governments need for services in fire protection, irrigation, agricultural and forestry. That said it is difficult to determine how this will impact the budgets of individual municipalities without running simulations and adjusting coefficients to test different scenarios. Recommendations for Fire Protection, Agriculture and Irrigation, Forestry

1. Increase the share of the GDP used to define the Unconditional Grant by a percentage equal to the 2,308 million ALL currently being used to finance fire protection, irrigation, forestry and agricultural services through Specific Transfers. 2. Allocate these monies to municipalities on the basis of population and population density because these are reasonable measures of a municipalities need for the services. 3. Discuss with the line ministries whether there might be additional objective measures of need that might reasonable introduced into the formula 4. Run scenarios simulating the impact of different coefficients on individual budgets to determine whether the existing formula can be improved.

PLANNING AND LOCAL GOVERNANCE PROJECT (PLGP) IN ALBANIA DRAFT-POLICY BRIEF: FINANCING THE NEW OWN FUNCTIONS OF LOCAL GOVERNMENTS IN ALBANIA 13 4. Local Governments, Preschool Education, and Per Pupil Funding

Preschool Education is by far the costliest responsibility that the LSGL has decentralized to municipalities as an own-function. The wages of kindergarten teachers alone account for 42% of all Specific Transfers (3.6 billion ALL) and when combined with the wages of support staff working in pre-schools, primary schools, and secondary schools a total of 60% of all Specific Transfers (5.2 billion ALL). Because early childhood education is particularly important to Albania’s future, special attention and effort should be made to ensure that its transfer to municipalities as an own function, financed by freely disposable revenues works to improve the quality of the nation kindergartens. In many countries, financing and managing kindergartens is a local government own-function. The main reason for this is that kindergarten attendance is rarely --if ever-- compulsory, making the demand for kindergartens heavily subject to parental choice. As a result, national governments often leave it up to cities and towns to determine how many kindergartens they should run, and how they should be paid for. Over the last few decades, however, the way people see kindergartens has changed dramatically. Through the 1970s, nursey schools and kindergartens were seen less as educational institutions than as institutions designed to increase female rates of labor market participation. Indeed, in many countries, nursery schools and kindergartens were financed or run by social welfare and labor ministries, and not ministries of education. Since the 1980s, a huge body of scholarly literature has demonstrated that early childhood education is particularly important for improving the educational and life chances of children from poor or disadvantaged households. This has encouraged people to see nursery schools and kindergartens not as labor market institutions by as integral components of the larger educational system. Not surprisingly, national governments have become increasingly concerned with improving both the quality of preschools and kindergartens and access to them. As result, in most countries national governments now regulate the basic parameters of preschool education, including teacher qualifications, wages, and class sizes, while also promoting enrollment through increased financial support of the sector. Thus, even in countries where preschool education is legally considered a local government own-function, the practical realities that arise from conceptualizing early childhood education as an integral part of the larger educational system, make it de facto a shared function.

Overview Preschool Education in Albania

Albania inherited from its communist past a reasonably well developed national network of kindergartens. Over the last 20 years, the GoA has struggled to maintain spending on preschool education, which has fallen as a share of total education spending. Nonetheless, the government has not closed preschools, and this combined with demographic decline has actually made it possible for preschool enrollment rates to rise from about 40% in 1992 to above 60% in 2013. This is low by European standards (c.75%) but is close to double the rate

PLANNING AND LOCAL GOVERNANCE PROJECT (PLGP) IN ALBANIA DRAFT-POLICY BRIEF: FINANCING THE NEW OWN FUNCTIONS OF LOCAL GOVERNMENTS IN ALBANIA 14 in Macedonian (29%) and higher than the rate in Serbia and Croatia (45%), both significantly wealthier countries5. Table 1 below shows total public spending on all levels of education by all sources in 2017. As can be seen from the Table, about 59% (27.12 billion ALL) of all public education spending went to Basic Education, which includes both preschools and primary schools. Unfortunately, it is difficult to determine exactly how much of all Basic Education spending goes to primary education and how much to preschool education because the government has not introduced into the Chart of Accounts separate program codes for each level.

Table 2: Public Spending on Education by Level and Source of Funding in 2017 (billion ALL) % of % of MoESY/ Local Spec. % of RDF Total Educ. Public MoFE Gov. Tran. GDP Expend. Expend. Basic Education 19.62 2.28 4.12 1.10 27.12 59% 5.8% 1.7% Secondary Education 6.06 0.72 0.36 0.36 7.49 16% 1.6% 0.5% Vocational Education (MoEF) Na Na Na Na Na Na Na Na University Education 9.81 9.81 21% 2.1% 0.6% Science & Sport 0.67 0.67 1% 0.1% 0.0% MoESY Budget 0.67 0.67 1% 0.1% 0.0% Total 36.81 3.00 4.48 1.46 45.76 100% 9.8% 2.9% % of Public Spending 7.8% 0.6% 1.0% 0.3% 9.8% % of GDP 2.4% 0.2% 0.3% 0.1% 2.9% Source: MoFE, MoESY, Annual Budget Laws Distinct codes for pre-school education should be introduced as soon possible because not only is it important to know how much money is being spent on preschool education per se, but because it will be impossible to really understand the role of local governments in the sector unless their spending on preschools can be distinguished from their spending on primary schools. Table 3 below presents the composition of local government education expenditure broken down by level of education and with the Specific Transfer separated from spending funded from the general revenues of municipal budgets. As can be seen from the Table municipalities increased spending from their general revenues on both Basic and Secondary education at the moment that they started receiving Specific Transfers. Why they did this is unclear. But the fact that they did suggests that the transfer to them of new payroll obligations increased their sense of responsibility for their schools: Approximately a third of all municipal spending on education is now funded from their general revenues and going forward, it will be important to monitor both the size of this contribution, and its distribution across municipalities.

5 See Mimoza Gjukotaj, “Albania: The Situation of PreUniversity Education,” (Tirana 2013), The Global Campaign for Education, pp. 1-78 and Saber Country Report “Albania: Early Childhood Development” World Bank, Tirana 2015, pp 1-25. Gjukotaj puts the enrollment rate at 55%, the Saber report at 69%.

PLANNING AND LOCAL GOVERNANCE PROJECT (PLGP) IN ALBANIA DRAFT-POLICY BRIEF: FINANCING THE NEW OWN FUNCTIONS OF LOCAL GOVERNMENTS IN ALBANIA 15 Table 3: The Composition of Local Government Education Spending 2015-17 (in thsd ALL) % of 2015 2016 2017 2017 Basic Education 1,888,876 5,959,684 6,402,598 100% Wages 448,692 313,332 792,344 12% Operating 1,090,806 1,008,479 856,954 13% Investment 349,378 686,622 628,861 10% Specific Transfer for Wages na 3,951,250 4,124,438 64% Secondary Education 80,440 1,067,223 1,081,428 100% Wages 44 274,238 268,935 25% Operating 39,030 380,188 348,607 32% Investment 41,367 61,355 107,140 10% Specific Transfer for Wages na 351,442 356,745 33% All Education 1,969,317 7,026,907 7,484,025 100% Wages 448,736 587,570 1,061,279 14% Operating 1,129,836 1,388,667 1,205,562 16% Investment 390,744 747,977 736,002 10% Specific Transfer for Wages na 4,302,692 4,481,184 60% Source: Data from MoFE More important, however, is what cannot be seen in the Table: From the accounts of municipalities we cannot see how much they spent on the wages of pre-school teachers as opposed to how much they spent on the wages of support staff in kindergartens and primary schools. This will become increasingly important as both preschool education, and full responsibility for maintaining primary and secondary are transformed into own-functions of local governments. In short, both national and local governments, as well as the citizens at large, will need to know how much is being spent on each expenditure category in order to monitor the education policies of municipalities. Thus, and as with the distinction between pre-school and primary education, new codes should be introduced into the Chart of Accounts so that the wages of pedagogical workers in the school system can be distinguished from those of support staff. For the moment, however, we can still determine this breakdown from the descriptions of the Specific Transfers contained in the annual budget resolution of the national government. These descriptions tell us that in 2016, 2.93 billion ALL of the Specific Transfer for Basic Education was earmarked for the wages of kindergarten teachers, while 1 billion went to the wages support staff working in kindergartens and primary schools (75% of 3.91 billion ALL)6. By 2018, however the share of the Specific Transfer for Basic Education that was earmarked for the wages of kindergarten teachers had risen to 3.6 billion ALL, or 78% of the Specific Transfer for Basic Education while the same 1 billion ALL was earmarked for the wages of support staff (4.63 billion ALL, see Table I). What this means is that between 2016 and 2018 the national government increased the pool of funds earmarked for kindergarten teachers by 700 million ALL or 22%. This was because the MoESY allowed schools to hire 252 new teachers between 2016 and 2018, and MoF agreed to fund the new position7. This increase in employment was not problematic under

6 2016 Annex on Specific Transfers of the 2016 Annual Budget Statement of the GoA

7 Date from the Ministry of Education, Sports and Youth.

PLANNING AND LOCAL GOVERNANCE PROJECT (PLGP) IN ALBANIA DRAFT-POLICY BRIEF: FINANCING THE NEW OWN FUNCTIONS OF LOCAL GOVERNMENTS IN ALBANIA 16 the current system of Specific Transfers, because MoESY continues to be fully responsible for determining the number of teachers employed in every school. As such, and at least for the moment, it is fair to say that municipalities are doing little; more running MoESY payroll system for kindergarten teachers. But this will have to change when the Specific Transfer is folded into the Unconditional Grant, and when --as an own-function-- local governments assume greater responsibility for managing preschools. These managerial rights can be defined in many ways, and constrained –for better and worse-- by all sorts of sectoral regulation. But local governments cannot be said to have been given responsibility for preschool education either as shared or own- function if MoESY remains fully responsible for the hiring and firing kindergarten teachers, or for the opening or closing preschools. Most importantly, there is a fundamental contradiction between national government control over preschool employment, and the financing of preschool education through the Unconditional Grant. This is because the basic definition of an unconditional grant requires that local governments be free to spend the monies they receive through them anyway they like, including on functions other than preschool education. To be sure, the behavior municipalities with respect to preschool education can –indeed, must-- be regulated, and the fact that the law specifies that preschool education is an own- function does not mean that local governments can do whatever they want in the sector. The national government should determine minimum standards of service provision by –for example-- defining teacher qualifications, maximum class sizes, curricula, and the physical conditions of preschools. Rules can also be put in place that require ministerial approval of municipal decisions to close schools, or which radically reduce the access of children to kindergartens. But the national government can neither require municipalities to maintain existing levels of teacher employment, nor hire new teachers, unless it is guaranteeing the funds to pay for these services through conditional grants. At the same time, however, and equally importantly, municipalities cannot expect the national government to take direct responsibility for paying the wages of teachers that are already employed in kindergartens, or for ones they would like to hire, at the moment when the conditional funding of preschool education ends. Instead, both levels of government must agree that to create a mechanism that ensures that the unconditional grant allocates sufficient funds to local governments for them to provide reasonably similar levels of preschool education to the children living in their municipalities. The first condition of such an agreement is that at least the full value of the current monies spent on the sector through Specific Transfers are added into the Unconditional Grant. This requires increasing the definition of the size of the Unconditional Grant by value of these monies expressed as their current share of the GDP. The second and more difficult condition requires the development of a funding formula that is not based on the number of teachers a municipality employs, but on the number of pupils attending its schools. Indeed, developing a per-pupil funding formula for preschool education is not only necessary to decentralize the function to local governments but part

PLANNING AND LOCAL GOVERNANCE PROJECT (PLGP) IN ALBANIA DRAFT-POLICY BRIEF: FINANCING THE NEW OWN FUNCTIONS OF LOCAL GOVERNMENTS IN ALBANIA 17 of a broader legal obligation: According to Albania’s Basic Law on Pre-University education the funding of all schools should be based on some sort of per pupil formula8. Unfortunately, however, this has never been done. So, one way to look at that current situation is to see the transfer of preschool education to local governments, and the legal requirement to eliminate Specific Transfers as an opportune moment to begin a process that probably should have started long ago. Secondly, developing a per-pupil funding formula for preschool education is also necessary: Falling birthrates, emigration, and rapid urbanization have radically changed the demand for schools and teachers across the country as whole and their current geographic distribution is now poorly aligned with where most people actually live and need to be served. Per pupil formulas are designed to prevent this sort of situation be ensuring that resources follow enrollment, and not where teachers are currently employed. The new per pupil formula, however must be weighted so that it takes into account the fact that in mountainous and sparsely populated areas preschool classes will be smaller than in urban centers, and that as a result the per pupil costs of providing the service will be higher. The use of a per pupil formula to allocate unconditional funds to local governments will necessarily result in municipalities receiving different levels of funding than they currently receive through Specific Transfers. It is thus extremely important that the formula be clear and transparent, and that the national government inform each municipality of the exact amount of money that has been calculated to support preschool education, and which they will receive as part of their Unconditional Grants. Finally, and perhaps most importantly, it must be understood that while per pupil formulas can be designed to mimic an existing allocation of funding, they cannot reproduce it entirely. In short, in some cases there will be quite significant differences between what a municipality received through Specific Transfers and what it should receive through the new formula. A number of different strategies, however, can be used to prevent adjustment shock. The simplest and most systemic is for the national government to increase the size of the pool of funds calculated to support preschool education. Other strategies include phasing in the formula over a number of years, and/or setting aside reserve funds for municipalities whose conditions are so exceptional that it is clear that they will not be able to provide reasonable levels of preschool service without exceptional national government support. The Specific Challenges of Developing a Per-Pupil Formula for Preschool Education in Albania Today

To better understand the challenges of developing and implementing a per pupil system of preschool finance in Albania today, it is necessary to look a little closer at the effects of the existing system of funding kindergartens. In particular, it is necessary to examine the disparities in both the access to, and the quality of preschool education across the country as

8 Article 37 of the 2012 Law on Pre-University Education reads: The financing from the state budget shall be scheduled based on the formula "per student", in accordance with the separate indicators of the educational levels and conditions of the public educational institutions.

PLANNING AND LOCAL GOVERNANCE PROJECT (PLGP) IN ALBANIA DRAFT-POLICY BRIEF: FINANCING THE NEW OWN FUNCTIONS OF LOCAL GOVERNMENTS IN ALBANIA 18 a whole because these disparities at once illustrate why moving to per pupil funding is both increasingly necessary and difficult. Pre-school enrollment rates in Albania range somewhere between 55 and 70 percent of all 3-5 year-olds depending on who is doing the estimate.9 This is well below the average for the European Union, but nonetheless surprisingly high for a poor country, and significantly higher than some of Albania’s immediate neighbors (e.g. Macedonia).10 Unfortunately, however, there are no official assessments of preschool enrollment rates by municipality. This situation should be corrected by MoESY and Instat because monitoring changes in the access to preschool education will become increasingly important as the function is decentralized to local governments. There is however, good data on the number of pupils attending all types of public schools in every municipality, as well as the number of teachers those schools employ. In the following we use pupils per teacher as a crude measure of school quality11, and preschool pupils as a percentage of total pupils as a proxy measure for enrollment rates and access. So, the higher percentage of preschool pupils to total pupils is, the better we consider the access to preschool education is. Table 4 below, presents both these measures for the 10 municipalities with the lowest levels of preschool access in the country (left hand side of the table) and the ten municipalities with highest levels of access (right hand side of the table).

Table 4: Municipalities with the Highest and Lowest Rates of Access to Preschools in 2015-16

Pupils Local Pupils Pupils in Preschoo Pupils Pupils in Preschoo Pupils Local Gov's in Gov's in Public l Pupils per Public l Pupils per with Least Public with Public Preschoo as % of Teache Preschoo as % of Teache Access School Most School l All Pupils r l All Pupils r s Access s Shkodër 19,876 2,140 10.8% 16.1 Vorë 3,604 737 20.4% 17.5 Durrës 30,892 3,432 11.1% 22.7 1,901 397 20.9% 11.0 3,371 403 12.0% 13.9 Gjirokastër 4,725 1,010 21.4% 12.3 FusheArrëz 1,396 171 12.2% 8.6 Himarë 1,201 258 21.5% 17.2 Kamëz 22,382 2,840 12.7% 27.3 4,510 976 21.6% 15.5 MalësiEMadhe 4,959 652 13.1% 12.3 922 200 21.7% 25.0 Krujë 11,763 1,550 13.2% 31.6 Libohovë 542 128 23.6% 25.6 Tirane 93,080 12,297 13.2% 25.4 Tepelenë 1,716 431 25.1% 11.6 4,427 593 13.4% 15.2 657 182 27.7% 18.2 Tropojë 4,482 619 13.8% 13.8 262 88 33.6% 12.6 Total Group 196,628 24,697 12.6% 22.3 Total Group 20,040 4,407 22.0% 14.4 Albania 491,601 76,627 15.6% 18.4 Albania 491,601 76,627 15.6% 18.4 Source MoESY data

9 See footnote 5 and for comparison with other European countries 10 EuroStat http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=educ_uoe_enrp07&lang=en 11 Measuring the quality of educational institutions is always difficult, and pupil teacher ratios (class sizes) alone obviously tell us nothing about other important factors like facilities, equipment and teacher qualifications. Nonetheless, it should be clear that municipalities with average class sizes two or three times than those of other similar local governments cannot be said to be providing preschool education at a similar standard to those of their peers.

PLANNING AND LOCAL GOVERNANCE PROJECT (PLGP) IN ALBANIA DRAFT-POLICY BRIEF: FINANCING THE NEW OWN FUNCTIONS OF LOCAL GOVERNMENTS IN ALBANIA 19 As can be seen from the table, many of the ten municipalities with the lowest level of access to public preschools are among the largest municipalities in the country, and collectively they represent almost a third of all preschool students. Meanwhile, the ten municipalities with the highest levels of access are all relatively small, collectively representing just over 10% of all preschool pupils. Moreover, the difference in access between the two groups is very significant, with preschool pupils representing only 12.6% of all pupils in the low access municipalities compared to 22.0% in high access municipalities. Indeed, if we assume that the national enrollment rate is 55%, and that this is more or less equal to the national average of our proxy rate for access –that 15.6% of all public-school pupils attend preschool—then it seems that about 44% of 3-5 year olds who attend preschools in low access municipalities, while about 77% attend them in high access municipalities. And while not all the low access municipalities are large -indeed a few of them like Fushe Arrez and Belsh are quite small-- what is most striking about the table is that access to preschool education seems to be most problematic in some of Albania’s largest municipalities, including Tirana. This is unusual because in most countries access to preschool education is significantly higher in urban jurisdictions than it is in rural ones. In Poland, for example, the national enrollment rate for preschool education is about the same as in Albania (c. 60%). But enrolment rates in cities are much higher (c. 80%) than in more rural areas (c. 40%) --so more or less the opposite of what we see in Albania. The data on pupil teacher ratios –class sizes-- is less surprising but still revealing. As can be seen from the table, class sizes are higher than the national average in most but not all of the low access municipalities, while they are significantly lower than the national average in most of the high access municipalities. This is more or less what one would expect because it is hard to transport small children over large distances in sparsely populated or mountainous jurisdictions. Nonetheless, a few aspects of the class size data are curious. First, there are a number of small, high access local governments with average classes that are surprisingly large (Konispol, Libhove, Finiq). What is going on here is unclear. It could be that in these municipalities there are one or two preschools in the town center with extremely large classes, and then smaller facilities in a few rural areas. But the situation in these local governments is obviously very different than in the small, but very high access town of Pustec where classes are half the size, or from the small but very low access Fushe Arrez where classes average only 8.6 pupils per teacher –meaning that there are almost certainly classes in which there are 3 or 4 children. The other important aspect of this data is simply that in a number of large primarily urban municipalities the average class size is over 25 pupils. Such classes are probably already too large for kindergartens to really be preschools, and instead are really functioning as social welfare institutions that make it possible for both parents to work. And again, if the average is 25 or 30 pupils per teacher, this means that in these municipalities there must be a significant number of classes that have well over 35 pupils.

PLANNING AND LOCAL GOVERNANCE PROJECT (PLGP) IN ALBANIA DRAFT-POLICY BRIEF: FINANCING THE NEW OWN FUNCTIONS OF LOCAL GOVERNMENTS IN ALBANIA 20 In short, the data suggests two things. First, Albania has not been able to adjust the distribution of its preschools --or the teachers working in them-- to the growth of at least some of its most important urban centers. And second, a combination of migration, demographic decline, and the historically uneven distribution of schools and teachers has produced a complicated and unclear pattern of both access and quality that has left some municipalities with many preschools and teachers, but few students, while others have been less fortunate. Further research into the actual distribution of schools and teachers may yield evidence that these at least some of these apparently arbitrary patterns are being driven by underlying forces that need to be teased out of the data. But at the moment, much of what is seems to be going on here resembles a variation of the fire-station problem that we have discussed earlier. In short, the national government has been unable to provide many areas of the country with reasonably similar levels of preschool services, and these disparities are now going to be decentralized to local government. These disparities are clearly unfair and should be corrected over time. Indeed, in theory the national government might take it upon itself to equalize both access to preschool education and its quality before transferring the function to municipalities. This however is unlikely and probably undesirable: Unlikely because the national government doesn’t have the funds necessary for the task, and undesirable because local governments almost certainly have a better idea where underutilized facilities can be closed or consolidated, and where new ones ought to be built. Indeed, while difficult and painful, this precisely why a system of per pupil finance is necessary: Without money flowing to local governments on the basis of a more objective measure of need, municipalities with low access and large classes will have little chance to meet the growing needs of their citizens, while municipalities with high access and small classes will have little reason to adjust their school networks to meet falling demand. Table 5 below, presents the same measures of preschool access and class sizes for all municipalities, as well as the value of their Specific Grants for teachers’ wages expressed in both per teacher and per pupil amounts. The table illustrates in financial terms the general – but not universal trend—of under-providing preschool services in large more urban municipalities, as well as the harder to explain patterns of service provision elsewhere. Municipalities in the table are ranked by the amount of Specific Transfers they received expressed in per pupil terms in 2015-16, with those who received most appearing at the top of the table, and those who received least at the bottom. As can be seen from the table, all municipalities received the same amount of funding per teacher. This is exactly what we would expect, and at the same time precisely the phenomena that cannot be reproduced at the moment that Specific Transfers are folded into the Unconditional Grant. Or put another way, ending Specific Transfers for preschool education will necessarily change the existing allocation of funds in the sector. The question therefore is not whether some municipalities will receive more or less money than before, because this is inevitable. Instead, the question is on what basis they should receive this money, and whether the amounts they receive are sufficiently similar to what the currently get so that

PLANNING AND LOCAL GOVERNANCE PROJECT (PLGP) IN ALBANIA DRAFT-POLICY BRIEF: FINANCING THE NEW OWN FUNCTIONS OF LOCAL GOVERNMENTS IN ALBANIA 21 over time they can rationally adjust how they use teachers and facilities to best meet the needs of their citizens. Coming up with such a formula will not be easy. In part this is because in general smaller municipalities receive two to three times the amount of funding per pupil (60-80,000 ALL) than many more urban jurisdictions do (25-35,000 ALL. But if this was the only problem, a reasonable if not perfect solution could be found by providing significantly more money per pupil to all small and sparsely populated local governments, as most per pupil funding formulas do.

Table 5: The Specific Transfer for Preschool Teachers’ Wages in Per Pupil Terms: 2015-2016

Spec. Grant Pupils in Preschool Value of Value of Preschool Pupils per for Preschool Municipality Public Pupils as % Grant per Grant Per Teachers Teacher Teacher Preschools of All Pupils Teacher Pupil Wages Fushe Arrëz 171 12.2% 20 8.6 14,125 706,233 82,600 335 15.1% 39 8.6 27,543 706,233 82,218 Kolonjë 313 19.1% 35 8.9 24,718 706,233 78,972 Poliçan 269 17.8% 29 9.3 20,481 706,233 76,137 Mirditë 510 14.2% 52 9.8 36,724 706,233 72,008 Memaliaj 397 20.9% 36 11.0 25,424 706,233 64,041 Pukë 300 14.9% 27 11.1 19,068 706,233 63,561 34 14.1% 3 11.3 2,119 706,233 62,315 Përmet 273 16.4% 24 11.4 16,950 706,233 62,086 Tepelenë 431 25.1% 37 11.6 26,131 706,233 60,628 Gramsh 950 19.1% 80 11.9 56,499 706,233 59,472 Delvinë 266 18.6% 22 12.1 15,537 706,233 58,410 Malësi E Madhe 652 13.1% 53 12.3 37,430 706,233 57,409 Gjirokastër 1,010 21.4% 82 12.3 57,911 706,233 57,338 Pustec 88 33.6% 7 12.6 4,944 706,233 56,178 Korçë 2,212 19.4% 174 12.7 122,885 706,233 55,554 832 15.0% 63 13.2 44,493 706,233 53,477 Tropojë 619 13.8% 45 13.8 31,781 706,233 51,342 Belsh 403 12.0% 29 13.9 20,481 706,233 50,821 1,150 18.2% 81 14.2 57,205 706,233 49,743 Mallakastër 872 17.2% 58 15.0 40,962 706,233 46,974 696 16.7% 46 15.1 32,487 706,233 46,676 Peqin 593 13.4% 39 15.2 27,543 706,233 46,447 Kuçovë 939 17.0% 61 15.4 43,080 706,233 45,879 Devoll 976 21.6% 63 15.5 44,493 706,233 45,587 Kavajë 1,128 16.1% 71 15.9 50,143 706,233 44,453 Dibër 2,007 15.8% 125 16.1 88,279 706,233 43,986 Shkodër 2,140 10.8% 133 16.1 93,929 706,233 43,892 1,893 18.1% 114 16.6 80,511 706,233 42,531 Cërrik 791 17.2% 47 16.8 33,193 706,233 41,963 Bulqizë 955 14.5% 56 17.1 39,549 706,233 41,413 Himarë 258 21.5% 15 17.2 10,594 706,233 41,060 Lushnje 2,607 18.8% 150 17.4 105,935 706,233 40,635 3,216 16.8% 184 17.5 129,947 706,233 40,406 Vorë 737 20.4% 42 17.5 29,662 706,233 40,247 2,485 20.3% 141 17.6 99,579 706,233 40,072 Has 564 14.7% 32 17.6 22,599 706,233 40,070 Këlcyrë 160 15.5% 9 17.8 6,356 706,233 39,726 4,138 16.9% 228 18.1 161,021 706,233 38,913 Finiq 182 27.7% 10 18.2 7,062 706,233 38,804 713 17.8% 38 18.8 26,837 706,233 37,639 471 14.5% 25 18.8 17,656 706,233 37,486 1,490 15.6% 78 19.1 55,086 706,233 36,971 Sarandë 889 17.5% 43 20.7 30,368 706,233 34,160 1,410 19.9% 67 21.0 47,318 706,233 33,559 Vau-Dejes 653 14.7% 31 21.1 21,893 706,233 33,527 Kukës 1,651 14.9% 77 21.4 54,380 706,233 32,938 Rrogozhinë 644 16.4% 29 22.2 20,481 706,233 31,802 Durrës 3,432 11.1% 151 22.7 106,641 706,233 31,073 Përrenjas 825 15.8% 36 22.9 25,424 706,233 30,817 Selenicë 484 17.4% 21 23.0 14,831 706,233 30,642

PLANNING AND LOCAL GOVERNANCE PROJECT (PLGP) IN ALBANIA DRAFT-POLICY BRIEF: FINANCING THE NEW OWN FUNCTIONS OF LOCAL GOVERNMENTS IN ALBANIA 22 Vlorë 3,299 19.4% 141 23.4 99,579 706,233 30,185 Divjakë 1,111 16.9% 47 23.6 33,193 706,233 29,877 Lezhë 2,410 19.6% 99 24.3 69,917 706,233 29,011 564 14.6% 23 24.5 16,243 706,233 28,800 Konispol 200 21.7% 8 25.0 5,650 706,233 28,249 Tirane 12,297 13.2% 485 25.4 342,523 706,233 27,854 Libohovë 128 23.6% 5 25.6 3,531 706,233 27,587 Ura Vajgurore 1,014 18.4% 39 26.0 27,543 706,233 27,163 Kamëz 2,840 12.7% 104 27.3 73,448 706,233 25,862 Krujë 1,550 13.2% 49 31.6 34,605 706,233 22,326 Total Republic 76,627 15.6% 4,158 18.4 2,936,519 706,233 38,322 Source: Specific Transfer data MoFE, enrollment and teacher data MoESY But this is not the only or most difficult problem that needs to be resolved. Instead, the real difficulties lie in the fact that there seem to be many jurisdictions that at least on the face of it seem to be structurally similar, but yet receive very different levels of per pupil funding. For example, it is hard to explain why Korce should receive 55,500 ALL per pupil –and have both significantly smaller classes and greater access—than Shkoder which receives only 43,000 ALL per pupil. Or why Libohove receives only 27,000 ALL per pupil and has huge class while Pustec get 57,000 ALL per pupil and has classes half the size. To be sure, further research and analysis may reveal differences across apparently similar municipalities that could reasonably be integrated into the coefficients used to weight a per pupil formula. For example, it may be that Korce as a municipality has a smaller urban core, and more far flung villages than Skhoder does, making it possible to refine the formula to take into account the settlement structure within municipalities. But it is impossible that even an extremely sophisticated formula will be able to account for the kinds of disparities that can be seen in the data because most of these disparities are not driven by any objective measure of need, but by a combination of once more or less rational decisions made by different ministries of education Albania’s rapidly changing demographics. Indeed, in this situation it may well be better, to develop a rather simple and transparent per pupil formula, and to phase it in over a period of five to seven years. Technically, this is relatively easy to do. But it must be done openly and transparently and most importantly in ways that allow municipalities to reasonably plan for the loss or increase in revenues that system will entail for them. Such planning will require MoFE and MoESY to prepare, disseminate and discuss better information about both the finances of the sector over time, as well as the analysis of demographic trends at work in municipalities across the country. At the same time, municipalities must be given the managerial powers necessary for them to slowly adjust both their school networks and the number of teachers they employ. This will require giving them the power to set school budgets, to have some control over the closure of underutilized facilities, and perhaps the right to experiment with fees for households that can afford them. It will also require support from the national government, both in terms of training and access to at least some of the capital that will be needed to adjust school networks to the needs of the country’s families.

PLANNING AND LOCAL GOVERNANCE PROJECT (PLGP) IN ALBANIA DRAFT-POLICY BRIEF: FINANCING THE NEW OWN FUNCTIONS OF LOCAL GOVERNMENTS IN ALBANIA 23 Recommendations for Preschools Education

1. Increase the share of the GDP used to define the Unconditional Grant by a percentage equal to at least the full value of all Specific Transfers for education, meaning not only those currently earmarked for the wages preschool teachers but the wages of support staff in primary and secondary schools. 2. Agree with local governments that this share will be periodically reviewed and adjusted upward as preschool enrollment increases. 3. Increase the percentage of the Unconditional Transfer calculated to support local government education responsibilities allocated on a per pupil basis by at least the value of the amount of new money put into the Unconditional Grant for education. 4. Conduct further research on the demographic and settlement patterns that might be used to adjust the coefficients used to allocate money on a per pupil basis, and develop a simple, more equitable formula for allocating education monies through the Unconditional Transfer. 5. Develop procedures to phase in the formula over a period of 5 to 7 years so that local government have time to adjust to the new system of allocation. 6. Develop a budget circular for the Unconditional Grant that informs all municipalities of how (the education components of) their grants have been calculated –including enrolment numbers and explanations of coefficients and phase in provision—and which also includes reasonable projections of what they will receive per pupil in future years. 7. Have MoF and INSTAT calculate preschool enrollment rates for all municipalities as well as projections of the number of 3-5 year olds that will be entering the school system over the next three to five years. Discuss the implications of this data with local governments. 8. Carefully review the Draft Law on Preschool Education, paying particular attention to the rights and obligations it gives local governments to set school budgets, hire, fire, and pay teachers bonuses, open and close facilities, transport students, provide meals and set fees for kindergartens. 9. Discuss these rights and obligations with local governments and ensure that they have enough managerial and financial power to actually adjust preschool networks and teacher employment to meet the changing needs of their citizens.

PLANNING AND LOCAL GOVERNANCE PROJECT (PLGP) IN ALBANIA DRAFT-POLICY BRIEF: FINANCING THE NEW OWN FUNCTIONS OF LOCAL GOVERNMENTS IN ALBANIA 24