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.
Adequate, commensurate and sufficiently diversified financial resources are analysed jointly, as they altogether shall guarantee financial means for local authorities appropriate for fulfilling their tasks.
Public finances in Bosnia and Herzegovina
There are four systems of public finances in Bosnia and Herzegovina, i.e. the budget of BiH institutions, the budget of Republika Srpska, the budget of the Federation of Bosnia and Herzegovina, and the budget of the Brčko District. Given the size of the country, the share of subnational government in overall government is unusually high: “the State institutions absorb just 15 percent of public revenue, while the Federation of Bosnia and Herzegovina and Republika Srpskaabsorb about 52 percent and 30 percent respectively (the District of Brčko makes up the rest)”. A Global Framework of fiscal balance and policies in BiH provides for co-ordination of fiscal policies in Bosnia and Herzegovina for the next three years; it is adopted in the form of an agreement between the governments of the Federation of Bosnia and Herzegovina, Republika Srpska and BiH and issued by the Fiscal Council of BiH composed of the respective heads of government and the three ministers of finance (the governor of the Central bank and the mayor of the Brčko District have observer status).
While direct taxation is exclusively in the competence of the Entities and raised at Entity level, indirect tax revenues are raised by the State (Indirect Tax Authority) and devolved to the two Entities which distribute to local self-government units according to different methodologies after the following steps: after the commitment of resources to the reserve account, for the return on indirect income, pre-determined resources are allocated for financing the institutions of BiH, followed by the amount of 3.55 % or at least 124 million BAM annually for financing the Brčko District. The residual resources are shared between the Entities. Municipalities receive the smallest share in resources compared to the other levels of government. Municipalities (and Cantons) rely heavily on indirect taxes: “VAT revenues make up: 30 percent of municipal budgets in the Federation of Bosnia and Herzegovina; almost 65 percent of cantonal revenues; and 50 percent of municipal budgets in Republika Srpska”.
Before the amount of indirect tax-resources within the Entities is divided between Entity-budget and municipalities (and Cantons, in the Federation of Bosnia and Herzegovina), each entity first pays its own external debts from the VAT revenues creating considerable variations in the revenues of municipalities (and Cantons, in the Federation of Bosnia and Herzegovina), due to the changing level of debt service every year.
In accordance with the Republika Srpska Law on Budgetary System, from the indirect tax-resources belonging to Republika Srpska, after the commitment of resources for serving external debt, 72% belong to the Republika Srpskabudget, 24 % to the budgets of local self-government units, and 4% to the Public Enterprise ‘Putevi Republike Srpske’ (road infrastructure).
The share of municipalities in indirect tax revenues is then distributed according to the following formula: 75% for population size, 15% for surface area, 10% for students in secondary schools. This formula (from 2005) does not differentiate between Banja Luka, the cities and municipalities, which has given rise to complaints by municipalities situated on borders or the Inter-Entity Boundary Line due to higher costs through commuters.
Their share in indirect taxes makes up for about 30 percent of the revenue of Republika Srpska municipalities. The Republika SrpskaLaw determines how local self-governmentunits’ own revenues are structured: real property tax, fines (contraventions), administrative fees, utility tax, water supply tax, fortune games. Free expenditure of own revenues is guaranteed. The ratio between indirect and own revenues is 70% to 30%. Among the shared taxes are business tax (70% Republika Srpska – 25% municipalities), indirect VAT (72% Republika Srpska – 24% municipalities), tax on transformation of land (70% municipalities); concessions (75% municipalities), income from rental of land owned by Republika Srpska (50% Republika Srpska – 50% municipalities), water (surface and under-surface, 30% municipalities), hydroenergy (30% municipalities).
In Republika Srpska, the overall financial situation of local communities is considered satisfactory by the relevant Ministries (Finance, Local Self-Government). In 2017, the 64 local communities in Republika Srpska (57 municipalities, and 7 towns) achieved a surplus of 40.43 million BAM (ca. 20 mio. Euro), and the unallocated surplus (i.e. unspent assigned funds) amounts to 16.96 million BAM (ca. 8 mio Euro). For 2018, as of 30 September 2018, a surplus of 53.7 million BAM has been achieved, and the unallocated surplus, that is, unspent assigned funds amount to 44.78 million BAM.
However, Mayors in Republika Srpska comment that despite some improvements the consequences of the enormous suffering for local budgets due to the economic and financial crisis are only gradually and slowly overcome and that budgets still have not returned to pre-crisis levels. In addition, the Mayor of Banja Luka specified that two changes in the electoral year 2018 have created major reductions in the City budget: changes of the accise-policy at State level and changes regarding the income tax at Entity-level. This significant reduction in the local budget (2018: -1.4 mio BAM, 2019: - 1 mio BAM expected) will have negative effects on projects and procurement. Reportedly, those changes have been pushed through via the urgency procedure, thus not allowing for any consultation. Within the next four years, the promised Republika Srpska Law on funding of local self-governmentshall provide certain and stable structures.
3 categories of municipalities in Republika Srpska can be distinguished according to their budgetary situation:
- Cities and large local self-governmentunits have stable budgets, but sometimes problems with over-investments;
- Smaller local self-governmentunits have much smaller budgets and often problems on the revenue side. Generally, these secondary towns and cities are in decline and “perform worse than rural areas on almost every economic indicator”;
- Smaller local self-governmentunits (5.000-20.000 inh.) are not necessarily poor, in particular, if they have the possibility to exploit natural resources (mining, water, forest), which permits budgetary stability, together with other resources. A high share of population still resides in these rural areas (around 60 percent).
Two examples illustrate the situation: Eastern Sarajevo as a – de facto – secondary city (despite being legally the capital of Republika Srpska) and the – de facto – the capital city of Republika Srpska, Banja Luka.
- Eastern Sarajevo's budget is composed of 26% direct and indirect taxes and of 74% own revenue, i.e. generated in or by local self-government, e.g. licensing, sale of land. Most money (2/3) comes from indirect taxation, while local taxes and fees (on real estate, utilities and tourism) make up for ca. one third. The municipal budget is stable, with a current debt level of 8% (the maximum possible is 18%). A limited budget surplus every year is used for services. In 2004, the budget amounted to the total of 15 Mio BAM (7.5 mio Euro), in 2012 to 50 Mio BAM (25 mio Euro). However, according to the Mayor, almost three times as much were needed to fulfil all tasks.
- The annual budget of Banja Luka amounts to 132 mio BAM (60 mio Euro), one third of which comes from indirect taxes (40 mio BAM / 20 mio Euro) and 50% from local taxes. Expenditure covers salaries (27%), the city administration, kindergardens, sport facilities, water supply and local enterprises; 1/3 (ca. 50 mio BAM) is spent for capital investments.
The structure of financial resources in the Federation of Bosnia and Herzegovina is complex, too. Revenue mainly comes from indirect taxation (around 60-70%), while direct taxes, most of them paid to Cantons and municipalities, only make up for a small portion of the Federation of Bosnia and Herzegovina budget. In addition, borrowing makes up for additional funds (see below). For municipalities in the Federation of Bosnia and Herzegovina, 30 percent of their budgets comes from indirect taxes, 9 percent (on average) from direct taxes, over 11 percent from property taxes, the rest are grants and transfers by the governments and other sources of income. A Federation of Bosnia and Herzegovina Law on financing of local self-governmentunits has been a demand by associations; in the meantime, a draft has already been prepared, but a working group needs to be established (after the Federation of Bosnia and Herzegovina government is formed).
The Brčko District raises local taxes (ca. 60 mio. Euro) and receives a share of VAT and indirect taxation (which is distributed on a monthly basis). It is considered a stable situation, in which 3,55% are guaranteed, for the first 5 years by legislation and an OHR decision, now through a gentlemen's agreement. Almost no credits or debts. 35 mio Euro (1/3 of budget) are spent on salaries, including judiciary and the education sector.
The competences of the Republika Srpska Ministry of Finance are prescribed by the Law on Republic Administration (Articles 18 and 34) and Article 7 of Republika Srpska Law on Tax Procedure. The process of drawing up the Republika Srpska budget shall be based on the Document of Framework Budget presented by the Republika Srpska Government for a three-year period, which defines policies and priorities (regulated by Republika Srpska Law on Budget System). It represents a preliminary draft budget for the following year and contains mandatory expenditure ceilings for any budget user.
In recent years, the Republika Srpska has conducted a series of budget reforms in co-operation with international institutions, with the purpose of strengthening administration and planning in the field of public finance. Budgeting in Republika Srpska moved from a traditional budget planning process towards the principles of program planning based on programs defined according to policy goals and intended results.
According to the Republika Srpska government, the Republika Srpska Minister of Finance does not provide local authorities with budgeting guidelines on prioritization, programs, policies etc. Instead, those guidelines are already determined by legislation: the Republika Srpska Law on Budget System (OG RS, numbers 121/12, 52/14, 103/15 and 15/16), the Document of Framework Budget, the Republika Srpska Law on Borrowing, Debt and Guarantees (OG RS, numbers 71/12, 52/14 and 114/17), the RS Law on Local Self-Government (OG RS, 97/16), the Law on Fiscal Responsibility (OG RS, numbers 94/15 and 62/18), and by the Decisions on Local Communities’ Budget Execution.
After preparation by the municipalities, the Republika Srpska Ministry of Finance (MoF) adopts recommendations on the draft budget, e.g. on the salary bill, on (shared) indirect revenues or on allocation of sufficient resources for debt-serving (if the ceiling for borrowing is exceeded). Municipalities are bound by these, but Councils adopt the budget and the accountability rests with the Mayor (who takes the final decision). Quarterly reports on the implementation of the budgets have to be submitted to the Ministry of Finance. Only 1% of the recommendations are not followed, according to the MoF; in those cases, the Ministry of Financeactivates the budgetary inspectorate to examine the reasons.
The budgetary procedure in the Federation of Bosnia and Herzegovina is similar: the Federation of Bosnia and Herzegovina Ministry of Finance has to give an opinion on the revenue-side of Cantons prior to the adoption of their respective budgets, the same is the procedure vis-à-vis local authorities. These opinions are not binding and comment on whether ministerial guidelines and projections have been respected by the local authority in adopting a draft-budget. A Fiscal Co-ordination Body, composed of the Federation of Bosnia and Herzegovina Ministries of Finance and of the Ministries of Finances from the 10 Cantons meets at least 2-3 times per year; it also includes a representative from the Association of local authorities of the Federation.
Each municipality has its own property. There have been problems with military property (formerly JNA) and surrounding territory, which was not registered in the land registry. Another problem is related to construction land, as urban planning is often a shared power between a local self-government unit, Canton and Entity, while in 2003, the High Representative has imposed a spatial plan on construction land at State level, for which the municipality is responsible. Cantons oppose this.
The land registry is an Entity institution; however, it is quite peculiar that a local self-government unit has to pay for information it needs for its own, public purposes (such as planning). A decentralisation of the registry might be considered.
Bosnia and Herzegovina is rich in natural resources, in particular water, forests, mining. In both Entities, property rights are vested with the Entities, whose ministries are tasked with the management of natural resources (in the Federation of Bosnia and Herzegovina also the cantonal ministries which are accused of strongly interfering and impeding the use of benefits). Municipalities benefit from a share of the revenues arising from the exploitation by public companies or concessions. The local self-government Associations argue that local self-governmentunits should be allowed to issue concessions in 14 areas.
In the opinion of the rapporteurs, natural resources should belong to municipalities. In 2002, the Federation of Bosnia and Herzegovina adopted a Law on Forestry transferring the managements of forests to the cantonal ministries (in Republika Srpska, there is a special Forestry Department within the Ministry of Agriculture, Forestry and Water Management). However, in 2009, the Federation of Bosnia and Herzegovina Constitutional Court annulled the law because of violation of the Charter and of the Federation of Bosnia and Herzegovina Law on Principles of Local Self-Government. So far, no new law has been adopted at the Federation of Bosnia and Herzegovina level; thus, 8 Cantons have adopted their own legislation. In view of the rapporteurs, the legislation regarding Forestry should be adopted in order to implement the Constitutional Court decision.
In Republika Srpska, Ministries consider the financial resources at disposal of local authorities to be in accordance with the responsibilities the latter are obliged to fulfil. In case financial resources are not sufficient, the local authorities conduct a due-diligence, which aims to identify ways for overcoming the lack of financial resources. However, 70% of property is held by 6 cities, which explains that the latter are not indebted. Controversies regarding property are quite frequent. Municipalities are in conflict with schools and other institutions as well as with cooperatives (who managed huge areas of farmland) regarding the ownership of formerly public property.
The rapporteurs consider that the requirements of Article 9, paragraphs 1 and 2, are not respected. They are concerned about the lack of adequate financial resources which are commensurate to the tasks local authorities have to fulfil.
The rapporteurs further suggest following up the legislative situation in both Entities: while a Republika Srpska Law on funding of local self-government shall be adopted within the next years providing certain and stable structures, in the Federation of Bosnia and Herzegovina, a working group needs to be established to discuss the draft Federation of Bosnia and Herzegovina Law on financing of local self-government units. The rapporteurs call upon the competent authorities to provide for this necessary legislation as soon as possible to improve the financial situation of local self-government in both Entities and ensure compliance with Articles 9.1 and 9.2 of the Charter.
Besides, more diversification in the sources of revenue of local authorities in Bosnia and Herzegovina, in particular for smaller municipalities, appears fundamental to bring the situation in line with Article 9.4.
 Numbers according to Local Government Initiative, Local Government in Bosnia and Herzegovina. Report on Consultations of a Joint Commission on Local Government, June 2018, p.18.
 Local Government Initiative, Local Government in Bosnia and Herzegovina. Report on Consultations of a Joint Commission on Local Government, June 2018, p.18.
 Local Government Initiative, Local Government in Bosnia and Herzegovina. Report on Consultations of a Joint Commission on Local Government, June 2018, p.18