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.
Municipal property contains land, facilities, financial resources (money) and rights. With the exception of possible delegated functions (in future), all municipalities have the same expenditure responsibilities; only the City of Skopje has special legal provisions for sharing the competencies with its 10 constituent municipalities.
Legislation determines how municipalities may dispose and manage their assets. The Law on Financing Units of Local Self-Government of 2004 (hereafter the “Finance Law”) has re-opened the process of fiscal decentralisation.
In 2005, in accordance with the above Law, municipalities received the authority to fully administer and collect property tax and the tax on sale of property as well as certain local fees. The level of taxes and fees is determined by a lower and upper limit allowed by laws and the Municipal Councils are responsible for determining the exact percentage of these charges. For example, the Law on property taxes determines that property taxes can range from 0.1 to 0.2% of the estimated value of the property of a citizen. Each Municipal Council can decide what the amount applied in the respective municipality will be. Only one municipality (GjorÄe Petrov) has actually determined the maximum amount of 0.2%, while all other municipalities apply the minimum amount.
Local resources and taxes
Municipal sources of revenues and their comparative size are (Article 4 of Finance Law): Local taxes established by law and administered by local bodies are the property tax, the inheritance and donation tax, the real estate transaction tax, and 100% of the personal income tax of individual craftsmen. Local fees which the local authorities determine and are entitled to collect are communal fees and administrative fees. Local charges, in particular construction land arrangement charge, charges for urban and spatial plans and communal services utilisation charges. Property revenues: revenues from property sale or rent and interest rate revenues. Penalty revenues which are determined and collected as sanctions for the violations of municipalities’ regulations. Donations (currently foreign donations are relevant). Loans (upon authorization by the central government). Subsidies from various funds, e.g. fund for economically underdeveloped areas, fund for communal activities and roads, fund for water pipes and sewages. Grants: purpose grants, non-purpose grants, block grants for expenditure, grants for capital investments, grants for delegated competencies.
Shared revenues, in particular share in national taxes
Shared revenues are coming from the personal income tax and the Value Added Tax (VAT): municipalities receive a share of 3% from both. By 2013, the VAT share is to be increased to 4.5% (in practice, by the end of 2011, the quota had already reached 3.7%).
VAT grants are general grants which are not subject to any conditions and which can be fully used in line with the needs of a municipality. Their distribution is in line with the criteria determined in the Decree on Methodology for Distribution of VAT Revenues by Municipality. Total VAT revenues, collected in the previous fiscal year, are to be distributed both by a fixed amount (3,000,000 Denars, approximately 48,580 Euros) to all municipalities (including Skopje and its municipalities), and as a variable portion (12% goes to Skopje and its municipalities and 88% to all the others). The latter portion is distributed according to the following criteria: 65% according to the number of inhabitants, 27% according to the area of the municipality and 8% according to the number of settlements.
The average share of tax revenues in the local authority budgets has been around 30%. In 2007, they participated with 37.8%; in 2008, they accounted for 21.2% of the total and, in 2010, they amounted to 24.6%, as a result of the increase of transfers from the central budget in the form of block grants to the municipalities which had moved to the second stage of fiscal decentralisation.
Provisions in special laws have further increased the revenue of municipalities, in particular by sharing the income from concessions for exploitation of mineral resources (22% State – 78% municipalities) and for the sale of construction land (20% State – 80% municipalities) which is transferred from the Ministry for Transportation and Communication to those municipalities which fulfil certain administrative criteria. Currently 14 municipalities are entitled to manage land.
Grants from the State budget and the budgets of various funds provide additional revenues. Capital grants are used to finance investment projects on the basis of a program determined by the Government and their use are monitored by line Ministries and the Agency for State Roads. Earmarked grants are used for financing specific activities of municipalities that are in the first stage of fiscal decentralisation for education, culture, social policy and child protection as well as fire-fighting. Line Ministries propose and monitor the distribution of earmarked grants by municipality, project, institution and/or program.
Municipalities argue that this financial instrument should be transferred to them so that they themselves can decide which investments will be financed (instead of a decision by central authorities). In fact, cases have been reported where central government decided to build a school in a municipality without prior consultation, although the municipality had other priorities.
In the second stage of the fiscal decentralisation process, municipalities finance the transferred competences with block grants which include expenditure related to salaries and costs pertaining to maintenance of buildings, goods and services. Line Ministries propose the methodology for determining the criteria for the distribution of block grants. Each year the central government adopts a Decree on Methodology and Criteria for Distribution of Block Grants, the total amount of which may not be less than the amount of funds from the central budget used for the same purpose in the year before the transfer of a certain competence.
Fiscal decentralisation is an important part of the whole decentralisation process as budget and fund transfers to municipalities must accompany the transfer of (new) competences.
The Finance Law provides for the implementation of fiscal decentralisation in two phases (starting on 1 July 2005). In the first phase the fulfilment of two conditions is required (Article 46) according to which, municipal administrations should have at least two employees qualified to work on financial management, budget preparation, budget execution, accounting and financial reporting, and three employees qualified to work on determination and collection of taxes.
In order to access the second phase (which was supposed to start in July 2007, but had been postponed to January 2008), municipalities have to meet the following criteria: a) fulfilment of the two conditions of the first phase; b) good financial results in the previous 24 months; c) adequate staff capacity for financial management; d) timely and regular notification to the Ministry of Finance regarding good results and verification by the same Ministry; e) no outstanding liabilities vis-à-vis suppliers or other creditors that overcome the usual payment condition.
For monitoring and assessing compliance with these conditions, a Commission has been established in January 2007 which meets four or five times a year. It consists of a President, nine members and a secretary. Among the members there are the President and Vice-President of ZELS, Mayors, representatives of line Ministries, academics and international experts. There is also an inter-ministerial working group meeting regularly, every two months.
According to the information provided to delegation during the visit, by the end of 2011, 79 out of 85 municipalities had entered the second phase of decentralisation, and only six (all from the Western part of the country) remained in the first phase. However, four of these six municipalities have sizeable debts, and two of them lack financial management capacity. Additional efforts are needed in order to prepare them for moving to the second phase.
Municipal debts, borrowing and financial equalisation
Before the adoption of the Finance Law, there was no instrument envisaged for the purposes of equalising the financial situation of local governments set in the legislation on local self-government. However, there were transfers and funds. Although not originally designed for this purpose, in practice they were used for equalisation purposes. Under the new law, the only defined equalisation instrument is the revenue that will be transferred from the yield of the value added tax. Although not explicitly mentioned, block grants are also considered as instruments the government can use to equalise the financial situation of local authorities. In the City of Skopje and its municipalities, a joint fund has been established for the purposes of equalisation (in accordance with a specific methodology for distribution of the funds).
In order to overcome the liquidity problems of the municipalities, a new instrument has been introduced in the form of short- and long-term loans (up to ten years) from the central budget. The Government has approved 23 such loans, 13 out of which are short-term and 10 are long-term (with a repayment period of up to five years). By approving long-term loans, a positive effect has been achieved, overcoming liquidity problems.
Pursuant to the Law on Local Government, municipalities cannot go bankrupt, but the Finance Law has provisions for declaring a state of financial distress. In the latter case, the Mayor adopts a decision to declare financial distress and informs the Municipal Council, the Ministry of Finance, the Ministry of Local Government and ZELS thereof within three days. A Coordinating Body consisting of five members monitors the coordination of the process to overcome financial distress. The Mayor then submits a draft plan of measures, which are implemented through the supplementary budget or the budget of the municipality for the respective fiscal year. The Mayor decides when to declare the situation of distress over.
In order to take loans, municipalities must consult with the Ministry of Finance, which controls the level of borrowings and loans, as well as deficits of local budgets. The criticism made of the restrictions created by a case-by-case authorisation system which goes contrary to the Charter’s Article 9 para. 8 has been met with the adoption of new Law on Public Debt and the Law on Local Financing. In June 2011, the Ministry of Finance adopted two Rulebooks (published in the Official Gazette, no. 83/2011) on the form and content of borrowing by the public institutions and public enterprises owned by public institutions, respectively.
The Parliament is also involved in this situation because indebted municipalities are considered to be part of the general public debt and therefore, all municipal borrowing has to be approved by the Parliament. The latest example is of a loan from the European Bank for Reconstruction and Development (EBRD) to the City of Skopje approved by the Parliament. In cases where municipalities are charged by commercial banks, only the opinion from the Ministry of Finance is required, i.e. the Parliament does not get involved.
Municipalities borrow on a long-term basis for financing capital projects and investments, for re-financing debts incurred to finance capital projects and investments, for liabilities incurred under “sovereign guarantees” or on the basis of loans from the central budget and protection and elimination of consequences caused by natural disasters or environmental disasters. Borrowing is limited: annual instalments must not be higher than one third of the budget of the previous year.
Municipalities have access to the capital market in order to realise capital projects for the improvement of infrastructure and utility services. They can also issue municipal bonds to be used for planned development projects. A “Guide for Issuance of Municipal Bonds” has been prepared for the purpose of informing the municipalities as regards the manner, procedure and the advantages of issuance of municipal bonds.
Evaluation of the financial situation
Although local self-government spending results in 17.2% of the total budget, municipal revenue does not seem sufficient for addressing the assigned tasks efficiently. Most municipalities, therefore, are still struggling to harvest their own income and the State still finances most of them.
This is illustrated by the example of the city of Zhelino: 25 Euros per capita (compared to 100 Euros in the City of Skopje) are simply not enough for fulfilling the municipality’s competences. The municipal administration does not employ an architect for urbanism, an internal inspector (or auditing unit), or an environmental inspector. Maintaining infrastructure for services is problematic: there are still private homes and settlements without electricity; only 2 out of 18 settlements have water-pipelines and the school building which was destroyed by a fire will only be replaced next year when the replacement is included in the budget of the Ministry of Education.
Among the main causes of the insufficiency of financial resources figure the – still – centralised management of State-owned land, the inadequately monitored or insufficiently implemented property tax collection and tax-payer databases which are not updated. The administrative capacity of some municipalities, in particular the smaller ones, remains low in the areas of financial management, tax administration and financial control. Transparency and accountability of local government administrations is still inadequate.
The Rapporteurs have noted that, in order to improve the situation of small and rural municipalities, the application of the new formula for a “guaranteed minimum-income” appears to be a promising step in the right direction: a minimum of 3 million Denars is guaranteed for each municipality. Further resources are added according to the VAT and income-tax quotas (criteria: 50% per capita, size of the area and the number of settlements). With this new method of calculation and allocation, no municipality should have an income of less than 4 million Denars.
ZELS position paper for 2011 requests an increasing share in VAT for municipalities from the current 3% to 6% (against the 4,5% actually envisaged as objective for 2013) as well as an increase in the amount of personal income tax-share from the current 3% to 15%.
Despite the achievement of some important results in the decentralisation process, several problems remain, such as the great disparities among the municipalities and in their capacity to perform specific functions. As a consequence of their budgetary problems it is difficult for local authorities to participate in EU funded projects which necessitate co-financing of resources. Consequently, rural municipalities in particular are dependent on grants, since they cannot rely on taxes from buildings or resources from land. Although criteria for grants for capital investment (infrastructure) are well-defined by international donors (IMF, World Bank), this does not always seem to be so in the case of State grants.
In the opinion of the Rapporteurs, more central coordination, support and supervision is necessary in the area of transferred competences. This is illustrated by the frequently mentioned example of education-related competences: once secondary education became mandatory, the problem of covering the additional costs for pupils’ transport has emerged everywhere, but the Ministry of Finance seems to ignore it, referring to block grants for these functions, which are not earmarked. The Ministry’s message seems to be: “Just organize procurement better and save!”.
The Rapporteurs are of the opinion that local authorities should be duly consulted in respect of Government investments in their localities whilst the grants afforded to them should not impinge on the fiscal autonomy as provided under the Charter.
The Rapporteurs also note that the planning of expenses regarding education seems to be inadequate and prone to coordination problems. While the Ministry of Finance transfers earmarked funds to municipalities for maintenance and heating expenses of school buildings, the salaries of employees and transportation of pupils and priorities of capital investment for schools are defined in the annual program prepared by the Ministry of Education which transfers funds directly to the schools, depriving municipalities of the financial means to invest in the schools.
To overcome these problems, ZELS has suggested the establishment of criteria for the allocation of funds for capital investments in schools as well as its own involvement in the planning process of the central authorities regarding these funds.