Local authorities shall be entitled, within national economic policy, to adequate financial resources of their own, of which they may dispose freely within the framework of their powers.
The principle of adequacy of local finances is rather explicitly mentioned in the Constitution. The Constitution (Article 142) states that “A municipality is financed from its own sources. Municipalities that are unable to completely provide for the performance of their duties due to insufficient economic development are assured additional funding by the state, in accordance with principles and criteria provided for by law”.
Regarding municipal incomes, the Constitution stipulates that: “The state and local communities raise funds for the performance of their duties by means of taxes and other compulsory charges as well as from revenue from their own assets”. As enshrined in the Constitution: “Local communities impose taxes and other charges under conditions provided for by the Constitution and Law”. However, during interviews, the delegation was told that in practice municipalities are facing increasing amount of tasks and decreasing revenues transferred from the state that poses problems to municipalities. During the consultation procedure the Ministry of Finance and the Ministry of Public Administration, however, did not share this point of view on decreasing revenues. They claimed that after reaching the bottom of financial crisis in 2015 and 2016 the revenues of municipalities were constantly growing from 2017 and afterward. According to the data of the Ministry of Finance concerning the lump sum expenditure per capita: 2012: 1st half 554.50€, 2nd half 543.00 € 2013: 536.00 € 2014: 536.00 € 2015: 1st half 525.00€, 2nd half 519.00 € 2016: 522.00 € 2017: 533.50 € 2018: 551.00 € 2019: 558.00 €
In general, the system of local government financing in Slovenia is based on: own resources, additional state funds distributed as financial equalisation for economic weaker municipalities and borrowing.
Local finance is regulated by several laws: the Local Self-government Act, the Financing of Municipalities Act and the Public Finance Act. According to a Local Self-government Act (Article 52), the exercise of local matters of public interest is to be financed by the municipality's own resources, state budget and loans.
Municipalities’ own resources include taxes and other contributions, and revenue from its assets, in accordance with Article 52 of the Local Self-Government Act. The principles of financing of municipalities are specified in Article 3 of the currently applicable Financing of Municipalities Act (ZFO1): “Municipality financing shall be based on the principles of local self-government, mainly on the principle of proportionality of sources of financing with the municipality tasks and on the principle of independence of municipalities in financing municipality tasks.”
Thus, the municipality’s own sources shall be: 1. taxes and other obligatory contributions; 2. revenue from the assets of the municipality.
Up to date, personal income tax revenue is the most important local government revenue source and municipalities receive 54% of this tax according to the criteria of adequate absorption of municipalities defined by the Financing of Municipalities Act. Meanwhile, local authorities’ income may also come from other taxes (e.g. property tax, corporate tax etc.).
Tax revenues are specified in Article 6 of the currently applicable ZFO-1: “(1) Sources of municipality financing shall consist of municipality budget revenues from: – property tax; – vessel tax; – tax on real property transactions; – inheritance and gift tax; – tax on winnings from conventional games of chance, and – any other tax where so provided by the Act governing taxes.
The total tax revenues in local government budgets amounted to 64% of total municipal revenues in 2009. In 2013 municipal tax revenues amounted to 69.45% of total municipal revenues. In 2015, municipal tax revenues amounted to 58.76% of total municipal revenues, coming in majority from personal income tax and property tax. Revenues from other taxes are very small, e.g. inheritance and gift taxes ensure only 0.36% of all tax revenues. Finally, in 2017, tax revenues accounted for 71% of total municipal revenues.
Municipalities are entitled to 70% of 54% of personal income tax collected by the government, while 30% are allocated as the solidarity compensation. In case 70% (of 54% of income tax) is less than calculated appropriate expenditure, the municipality receives the difference form the solidarity compensation. If 70% (of 54% income tax) represents more or the same amount as the amount of calculated appropriate compensation, the municipalities do not receive any additional funding from the solidarity compensation.
The tax on property is double-faced. On the one hand, the property tax is settled by the state while the tax rate can be changed by a municipal decision. On the other hand, the compensation for the use of building land is the only real municipal own tax source as all the tax base, the tax rate and possible exemptions are defined by municipality.
Among the municipal tax revenues only taxes on immovable property can be treated as municipal own taxes in the meaning of Article 9.3. of the Charter. Other own sources of financing of municipalities are specified in Article 7 of the currently applicable ZFO-1: “Sources of financing shall also comprise revenues from self-imposed contributions, dues, fines, concession fees, payments for local public services, etc., if so provided by the Act governing individual fees or by a regulation issued on its basis”. For example, in 2015, municipal non-tax revenues amounted to 14.21% of total municipal revenues, where majority comes from rents and leases. For comparison, in 2013, municipal non-tax revenues amounted to 14.53% of total municipal revenues. During the consultation procedure, the Ministry of Finance informed the rapporteurs that this share increased to 16.83 % in 2016 and 17.15 % in 2017.
Municipalities also receive transfers. The main categories of transfers come from the state budget, from other institutions and the EU funds. In 2015, municipal transfers reached 24.59% out of total municipal revenues, the majority of which coming from the EU funds. The transfers comprised 13.79% out of total municipal revenues in 2013. According to the information of the Association of Municipalities and Towns of Slovenia provided during the consultation procedure, in 2016 the transfers form the State and EU dropped to 8,54% and in 2017 to 7,97%. This information slightly differs from the data provided by the Ministry of Finance during the consultation procedure about the share of 8.88 % and 8.25 % in 2016 and 2017 respectively.
The Government claims that personal income tax fulfils the conditions to be treated as “own resource” of municipalities in terms of the Charter. Such a position of the Government is based upon the decision of the Constitutional Court No. U-I-150/15 (10 November 2016). In that particular decision the Constitutional Court explained that own resources of municipalities are in direct relationship with the municipality. Thus, municipalities are to be recognised as direct beneficiaries of a personal income tax, even though the tax technically is collected by the state. In fact, similar situation with personal income tax is observed in Latvia where technically personal income tax is collected by the state, but this tax comprises substantial part of municipal income.
In its decision of 10 June 2015 (U-I-164/13), the Constitutional Court argued that the system of financing municipalities in the phase defining the lump sum allocation entails the determination of an aggregated amount of public funds intended for financing the tasks of municipalities determined by laws and of amount of funds for the appropriate expenditure of individual municipalities.
The revenue from the state or the lump sum (e.g. per capita amount required to finance the municipalities’ statutory functions) is calculated according to the formula where several indicators are taken into account: number of inhabitants (with permanent residence), size of municipality, length of municipal roads and public paths, ratio of inhabitants under 6 years, ratio of inhabitants between 6 to 15 years, ratio of inhabitants older than 65, as well as ratio of inhabitants older than 75 years. Although these criteria are rather broad, they separate the criteria relating to the number of children of kindergarten age (up to 6 years) and the number of children of school age (7 - 18) as well as they separate elderly inhabitants in two groups up to 65 and up to 75. Thus, the criteria for calculating the lump sum include demographic challenges and aging society.
Thus, in the opinion of the rapporteurs, so-called appropriate expenditure representing the sum of resources each municipality should be assured by law, and the provision of calculated revenues needed for funding reflect the global respect of the principle of commensurability. For calculating the appropriate expenditure (or lump sum), the average costs of the statutory tasks are estimated each year for all municipalities. The calculation is based on mathematical formula including real costs of municipalities for four previous years, and on objective criteria, set by law (e.g. number and age structure of the population etc. see para 159). The Ministry of Finance provides calculations and it is expected that calculations are submitted to municipalities before starting the preparation of the annual budget.
During the consultation procedure the Association of Municipalities and Towns of Slovenia argued that the formula on appropriate expenditure did not reflect the real cost from the municipalities, linked for instance to the provision of the winter service, or the social status of the inhabitants and that despite the mathematical formula of the appropriate expenditure the municipalities have to negotiate the final lump sum which makes their financial stability of municipalities dependant on the government. The SOS also underlined that local authorities face the situation of increasing expenses of the provision of services, for instance in pre-school education, without relevant increase in their incomes.
The associations of municipalities claimed that so called “lump-sum” in relation to 2011 has decreased. Thus, lump sum in amount of 554.50 EUR was calculated in 2011, 536.00 EUR – in 2013, 522.00 EUR – assigned in 2015 (in 2015 and 2016 there was no agreement reached), 533.50 EUR – in 2017. During the consultation procedure, the Ministry of Finances underlined that in 2018 the amount is 551.00 € and in 2019 – 558.00 €.
In the opinion of the Association of Municipalities and Towns of Slovenia expressed during the consultation procedure the lump-sum according to the Law on Local Self-Government should have amounted in 2011 to 570.70 EUR, 601.58 EUR in 2012, 645.98 EUR in 2013, 669.90 EUR in 2014, 662.68 EUR in 2015 and 652.60 EUR in 2016. Therefore, the Association expressed concerns in respect of the financial autonomy of Slovenian municipalities in view of rising calculated costs and decreasing lump sums.
Some interlocutors have claimed that in certain cases the Government does not grant specific, earmarked or any additional funding or other resources for performing the transferred tasks.
At the same time, the Ministry of Finance has also provided analysis of municipal tasks from the budgetary perspective by separating tasks that a municipality has to perform from the tasks that can be performed by a municipality, as well as by other stakeholders. After having heard the arguments from both sides, the rapporteurs conclude, that there is a room for debates between the government and municipalities to reach a common understanding of the notion 'tasks' and a mutually acceptable financing model.
The institutional dialogue on financial matters where associations of local municipalities and the government signs an agreement can be considered as an instrument for ensuring commensurability.
According to the Fiscal Rule Act (2015), local municipalities are a part of the general government sector. Each year the Ministry of Finance prepares fiscal framework for the coming three years as a part of European Semester in order to balance public expenditures.
To conclude, total revenues of local government budgets in Slovenia, in 2017, were EUR 1,975.13 million, and, in 2015 - EUR 2,226.37 million. In the period 2009-2015 the total revenues of local municipalities were above 2,000 million, while in 2016 and 2017 it fell below. In general, local governments across Europe faced decreasing revenues and expenditures as a direct consequence of the economic crisis already within few sequencing years after 2009. For Slovenia, revenues of local municipalities were rather stable even after the economic meltdown of 2009.
The situation regarding the expenditures can be described as rather stable. In 2008, the total expenditure amounted to EUR 2,047.95 million and in 2009, EUR 2,192.46 million, but in 2014 – EUR 2,285.68 million, while in 2016-EUR 1,851.87 million. The Ministry of finances further informed that the expenditure amounted to EUR 1,950.13 million in 2017. In the period of 2008-2014 (including) municipalities tended to spend more than received as revenues. Since 2015, total expenditures of municipalities are lower than revenues, thus having surplus instead of deficit.
In terms of GDP, the municipal expenditures are above 5% since 2013, achieving even 6.12% in 2014.
The financial data available to the rapporteurs point out that local authorities have been affected by the negative consequences of the economic crisis later than the central government. According to the data provided by the Ministry of Finance local authorities faced a decrease of actual revenues also affecting expenditures only in 2016.
Investment capacity of municipalities differs. So, in 2016, around 75% of municipalities invested over 20% of their budget, and half of these municipalities were capable to invest over 30%. In addition, 22 municipalities allocated between 40% and 60% of the municipal budget for investments. In general, subnational or municipal share of public investments was around 52% in 2014. During the consultation procedure the Association of Municipalities and Towns of Slovenia informed the delegation that in 2016 the investment capacity fell to 24%.
On 17 April 2018 the Local Self-Government Act was amended (the amending act ZLS-S). The amendments include the idea to introduce a participatory budgeting as a form of public participation in decision making on local expenditures. In Slovenia all new draft laws shall include impact assessment of the cost of their implementation for municipal budgets. This is also aimed at providing more understanding among stakeholders on financing of local self-government. However, the delegation has heard from several local interlocutors that some bills on new tasks have been passed without adequate assessment of the financial impact of their implementation on local authorities or the costs have been underestimated.
The rapporteurs conclude that article 9, paragraphs 1 to 4 and 7 of the Charter are globally respected in Slovenia. However, if the cost of the provision of services that local authorities have to provide continues to rise and their revenues will not increase respectively there will be a significant risk of non-compliance with paragraphs 1, 2 and 4 of Article 9 of the Charter.