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.
These three indents of the Charter should be analysed jointly since they are interrelated and in summary they require the sufficiency of financial resources for local authorities. Before analysing these provisions, it is important to stress two important points. On the one hand, it should be underlined that the Moldovan Constitution, although it devotes several provisions to local government, does not include any paragraph or indent on the issue of the financing of local authorities. The only reference to local finances is to be found in Article 131.5, which states that “the district, town and village budgets shall be drafted, approved and carried out in accordance with law”, which is basically an empty provision. The same is true for Article 132.1, which provides that, “all taxes, duties, other revenues of the state budget and of the social insurance budget, as well as of the district, town, village budgets are established under the law by the competent representative bodies”. Therefore, the principles of sufficiency and commensurability of local finances, as well as the buoyancy and variation of those resources, are not recognised in the constitution. Moreover, the Constitutional Court has not issued any ruling on the issue of local financial autonomy.
Consequently, the regulation and structure of local financing is left totally in the hands of the legislature and of the government. In this field, the most important pieces of legislation on this matter are the Law No. 397-XV on Local Public Finance of 16 October 2003; the Tax Code of the Republic of Moldova No. 1163 of 24 April 1997, the Law No. 847-XIII on the Budget System and Budgetary Process and the Local Public Administration Act of 2006.
In the area of budgeting and expenditures, villages and towns are free to draft and to approve their own budgets, a process that is governed by the Public Finances Act. The local council is the competent authority to approve the budget. Local authorities are in theory autonomous in deciding their spending priorities (at least with their “own revenue”), and in principle the central government or other state authority cannot interfere with municipalities’ budgetary autonomy. In this sense, state institutions are not allowed to interfere with the drafting and execution of local budgets. As noted above, once the local annual budget is approved it must be forwarded to the Ministry of Finance, but this body does not carry out any formal approval or amendment of the budget.
The general situation of local finances in Moldova has recurrently been evaluated as poor by the Congress. Thus, in Recommendation 179 (2005) on local democracy in Moldova, the Congress introduced several recommendation and points in this field, and went on to note, among other things, “the very limited extent of local financial autonomy in Moldova and the almost total lack of freedom on the part of local authorities to decide on financial matters” (point 8.c.i). And in Recommendation 322 (2012), the Congress also observed several unsatisfactory aspects in this respect (point 5, c-e). The rapporteurs did not see any substantial improvement during their visit. Moreover, in a report made in 2017, the Court of Auditors of the Republic of Moldova concluded that local authorities are totally dependent on the central government.
In the Republic of Moldova, the main sources of local revenue are the following:
own revenue (local taxes and fees). Local taxes will be addressed in more detail below;
shared taxes and fees;
special means (special funds);
transfers (from the state budget). In the Republic of Moldova, most of the revenue of local authorities comes from transfers granted by the central government. These transfers will be analysed at point 4.8.7, below;
borrowing. This will be address in more detail below;
revenues from property sales, rent and privatisation; revenues from commercial activities.
According to figures provided for the Ministry of Finance for the last three years, the revenue structure of local authorities can be broken down as follows: in 2015, the total revenue for local budgets was 11 039 million lei, of which “own revenue” represented 981.7 million lei (8.9% of revenues); the share in state taxes was 1 901 million lei (17.2%) and the total transfers were 7 504 million lei (68% of total revenue), including “general purposes transfers” to the amount of 852.9 million lei (7.7%). In 2016, the total revenue for local budgets was 12 053 million lei, of which “own revenue” represented 1 022 million lei (8.5% of revenue); the share in state taxes was 2 272.1 million lei (18.9%) and total transfers were 8 263.7 million lei (68.6% of total revenue), including “general purposes transfers” to the amount of 1 082.6 million lei (9%). In 2017, the total revenue for local budgets was 13 461 million lei, of which “own revenue” represented 1 280.4 million lei (9.5% of revenues); the share in state taxes was 2 171.2 million lei (16.1%) and the total transfers were 9 552.5 million lei (71% of total revenue), including a “general purposes transfers” to the amount of 1 211.1 million lei (9%).
Two preliminary conclusions can be drawn from these figures. First, that the proportion of “own revenue” in the budgets of local authorities is very low. Second, that local authorities are primarily funded through transfers granted by the state. The major part of local revenue in Moldova is represented by intergovernmental transfers and shared taxes and none of these sources are under the control of local authorities. These preliminary findings clearly go against the requirements of Articles 9.1 and 9.3 of the Charter.
The most important budget expenditures of local authorities in 2015 were as follows:
first-level local authorities: a. education: 37%; b. general purpose state services: 12%; c. environmental protection: 12%; d. transport, roads and streets: 12%; e. culture, arts and sports: 12%;
second-level local authorities (Districts-Raioane): a. education: 52%; b. general purpose state services: 16%; c. social assistance: 8%; d. communal households: 7%. A clear picture emerges from these figures: education is the greatest expense of local authorities, but they have no power over the salaries of their employees (including teachers), since they are determined by the central government. They have little over social policies, too. Consequently, public finances are still centralised to a large extent.
Several indicators make it possible to assess the degree of fiscal decentralisation in the country. To begin with, the weight and importance of local budgets. In this area, the budgets of Moldovan local authorities are very low in comparison with European standards, according to experts and international organisations, and even the Ministry of Finance. For instance, the delegation was told that the total budget for expenses in the City of ChiÈ™inÄƒu is roughly €50 million, which is a small amount for such a big and important capital city. Another indicator is the share of local government expenditure in the total public sector expenditure. According to the data provided by the Ministry of Finance, this percentage was 24.8% in 2015, 23.2% in 2016 and 24.3% in 2017. These data may seem to be positive in the European context, but it should be remembered that there are no regions in the country (except the ATU of Gagauzia), therefore, the roughly 75% of public expenditure is still made at central level.
The fact that the system of local financing is insufficient and unsatisfactory is not only a recurrent claim of the CALM and local representatives; but it was also admitted by government officials during the meetings that the delegation had in ChiÈ™inÄƒu. According to the Ministry of Finance, the sources of revenue are not sufficiently diverse. Local finances are hit by different structural problems, such as the lack of resources for capital investment and the low level of collection of own revenue. Most of the Moldovan local authorities are underfunded, and the vast majority does not collect own resources to cover even its operational costs.
Officials from the Ministry of Finance also informed the delegation that in the last couple of years the government has adopted several initiatives to improve the situation of local finances. For instance, Law No. 281 of 16 December 2016 increased the maximum tax rate for housing real estate from 0.3% to 0.4%. And Law No. 288 of 15 December 2017 granted local authorities the right to determine the degree of completion of the construction for tax purposes based on the method established by the central specialised body, and the right of local authorities to decide whether to exempt certain individuals from the tax on real estate. They added that local authorities do enjoy discretion in the use of their own resources. The prioritisation and use of the available financial resources rests exclusively with local public authorities. The existence of local entities with low financial potential is the consequence of the underdeveloped economic base (potential taxpayers), which is due mainly to the existence of too many local authorities with a small population.
During the visit, the Ministry of Finance conceded that the situation is unsatisfactory, but pointed out that the economic situation of the country is also bad; that there is a high rate of tax evasion and corruption, and that the taxable basis of many local authorities (especially the small and medium-sized ones, and those located in rural areas) is very limited because of the poor economic structure in the country. Consequently, changing the regulatory framework to reinforce the fiscal autonomy of local government would not make a real change, because there is not very much to be taxed at local level. Therefore, the economic situation of local authorities seems to be a vicious circle: it is closely linked with the overall economic situation of the country, and will not change until the economic situation of the country improves significantly.
During the consultation procedure, the government pointed out that in the context of the National Decentralization Strategy a new system of local public finances was introduced in the Republic of Moldova, which radically changed the way of financing local self-government, the budgetary relations between the national budget and local budgets of all levels. The government evaluates this new financial system as transparent, predictable and offering greater autonomy to local budgets and some incentives for local revenue growth.
Regarding local elected representatives’ position on the matter of finances, they unanimously stated that in general terms they were highly unsatisfied with the present arrangements. First, they complain that local authorities are clearly underfunded and they depend on transfers granted by the state. For instance, only 10 towns in Moldova collect enough resources to pay the salaries of their staff. All the rest have recourse to state transfers to pay its human resources and operational expenses. Second, they complained that the current system of transfers is also unsatisfactory, for the reasons that will be stated below. Finally, in too many cases, the law attributes new competences to local authorities without providing for new and adequate financial resources.
Finally, concerning municipal property, Moldovan local authorities have their own property, goods and assets. Their right to own land and real estate property is fully recognised, and they are free to manage their own assets and properties. For instance, they own the local streets, roads, parks, cemeteries, administrative buildings and facilities, schools, kindergartens, culture clubs, libraries, sport facilities, etc. One of the main problems in this regard, however, is that in many places the municipal land is not delimitated appropriately from private or state property. Consequently, the land units cannot be evaluated for tax purposes and the local authorities thus lose an important source of potential own resources.
In view of all these considerations, the rapporteurs conclude that Article 9, paragraphs 1, 2 and 4 of the Charter are violated in the Republic of Moldova.