Part at least of the financial resources of local authorities shall derive from local taxes and charges of which, within the limits of statute, they have the power to determine the rate.
With regards to paragraph 3 of Article 9, the rapporteurs could grasp during practically all consultations that the majority of municipalities are in a difficult financial situation, characterised by a high level of debt and unsettled liabilities, which causes numerous problems in their functioning and fulfilling of their duties under the law. Reasons that have led to the increase in unsettled liabilities and debt of local self-governments, particularly after the investment boom in Montenegro, are primarily: the economic and financial crisis; changes to legislation which regulate the local self-government financing system and a high level of public spending at local level.
The greatest negative effect on revenues of local self-governments has derived from abolishing fees for the use of construction land (as of 1 January 2009). The Union of Municipalities of Montenegro informed the delegation that overall revenues generated by this fee for all municipalities in 2008 amounted to € 29.013.631. Consequently, the calculated revenues on these grounds for the period 2009-2014, would be around € 174 million. Bearing in mind that the total debt of local self-governments at the end of 2014 amounted to €166.94 million EUR1, the negative effect of abolishing the said levy becomes evident, as well as its deleterious effect on the stability of local finances. 88. The Act on Local Utility Fees (which entered into force on 1st January 2008) abolished local utility fees for exploitation of facilities used for electricity transmission, use of telecommunication facilities, and installation of TV and radio transceivers, i.e. abolished local utility fees for the most profitable entities. The Union of Municipalities of Montenegro would like to draw attention to the fact that, prior to these changes, local self-governments generated the following revenue from these local utility fees: €9.309.775 (in 2007), €6.079.575 (in 2008), whereas the amount generated in 2009 from this fee was only €3.638.497, The legal changes have deprived municipalities of minimum 3 million per year since 2008, which amounted to the total of €21 million EUR for the seven-year period until 2014.
Furthermore, the Act on Local Self-Government Financing abolished taxes on: consumption; registration of company name and games of chance and entertainment games (lotteries), which generated around €5.5 million for municipalities in 2010, which amounts to the total of around €22 million not collected by municipalities over a four-year period. Furthermore in 2011, the fee for the use of road motor vehicles and trailers (eco fee), was abolished. This fee, which earned a value of €926.831,40 in 2011, defined in the Act on Local Self-Government Financing as one of transferred incomes of municipalities, was nevertheless abolished by the Decree on Changes and Amendments to the Decree on the amount, method of calculation and payment of the fee for pollution of the environment.
The changes to the Law on Roads also diminish local self-government revenues regarding municipal road tax, by obliging prior government approval for the amount of these fees. Such revenue generated €6.214.159 for local government in 2009 as compared to €2.765.753 in 2010 to 2014 with slight variations. The income lost for the period to 2014has been calculated at approximately €17,5 million. In any case the revenue generated by the municipalities from this fee is totally inadequate for the maintenance and protection of roads, which is its central purpose.
It is important to underline that the Law on Local Self-Government Financing, whose most recent changes entered into force on 1 January 2011, gives to municipalities a higher percentage of transferred income and a higher amount of funds from the Equalization Fund. Also, the Act on Immovable Property Tax, whose most recent changes entered into force also, on 1 January 2011, establishes a new, higher immovable property tax rate and provides for a wider range of tax payers. In the meantime, on 17 February 2015, the Parliament of Montenegro passed the Act on Changes and Amendments to the Act on Immovable Property Tax, which will enter into force on 1 January 2016.
Local governments have further increased revenues in the period 2011-2014, as compared to 2010, in the following areas (amounts are approximate: immovable property tax, €32.5 million; personal income tax ,€8.82 million (it should be noted that the Act on Personal Income Tax – the so-called “crisis tax” -,introduced in 2013, , has certainly affected the increase of the tax base for calculation of this tax); immovable property transfer tax, €8.5 million, concession fees – €12,72 million and the Equalization Fund – €24.38 million. This amounts to approximately €87 million in total, which is not even closely sufficient to compensate for the revenues lost in the previous period2.
These changes and their effect of on total revenue for local government are self-explanatory: €347.848.909 in 2008, €238.010.575 in 2010, €227.350.223 in 2013 and €230.256.314,61 in 20143
From this it is clear that municipalities did not have sufficient funds to implement initiated projects and perform their increased duties. They made up the shortfall by selling land and engaging in expensive credits, leading quickly to substantial debts and high, unsettled liabilities, which amounted to €119.19 million in total at the end of 2014, € 116.80 million in 2013, €109.81 million in 2012 and €98.53 million in 2011. The total debt of local self-governments also showed increasing tendency and amounted to €166.94 million in 2014 (with a peak in 2013 of €170.54 million).
The central authorities have recognized the problem of balancing municipal budgets and have taken a number of actions to address this issue. Such measures include amongst others, the reprogramming of tax debt and the provision of state guarantees for the refinancing of concerned areas. Furthermore, the Government informed the Congress delegation of its joint efforts with the Union of Municipalities in preparing an analysis of the sustainability of local public finances, by assessing in particular the adequacy of available financial resources in light of municipalities’ competences. Accordingly, the Union of Municipalities of Montenegro has initiated a number of activities aimed at a substantial improvement in local public finances. In this regard, the Executive Board of the Union of Municipalities adopted the “Proposed measures for overcoming the difficult financial situation in local self-governments”, sent to all competent state authorities, and the implementation of which has begun. Measures are proposed in three areas: rationalisation of operation costs, improvement of the legal framework and refinancing of debts and unsettled liabilities.
Rationalisation of operation costs: According to the conclusions of the Government, local self-government units must provide a strong contribution to stabilisation of local public finances by increasing the efficiency of their work and to rationalisation of operating costs. In those terms, the following is primarily needed at local level: Establish optimum and functional organisation of municipal authorities and public services for the purpose of rationalisation of costs; pass municipal regulations to introduce all legally defined own revenues of the local self-government unit; undertake all legally defined measures for the purpose of efficient collecting of local public revenues; prepare a plan for optimisation of the number of employees in local self-governments, in accordance with obligations under the Plan of internal reorganisation of the public sector adopted by the Government of Montenegro in July 2013, which envisages a reduction in the number of employees in municipalities by 10% by the end of 2016.
Improvement of the legal framework: According to the conclusions of the Executive Board of the Union of Municipalities, sustainability and stabilisation of public finances at local level requires improvement of the legal framework regulating the system of local self-government financing. In those terms, the Parliament of Montenegro passed the Act on Changes and Amendments to the Immovable Property Tax at the session held on 17 February 2015, which improved substantially the individual solutions regulating the system of establishing and collecting of immovable property tax as the main source of revenue of local self-government. The Act on Changes and Amendments to the Law on local Self-Government Financing is in drafting phase, as planned by the Work Programme of Government for the second quarter of 2015, which is an opportunity to improve and to strengthen municipal finances.
With regard to the Law on local self-government financing, the Union of Municipalities has submitted, through the competent Commission and members of the mixed Working Group, a number of proposals and suggestions aimed at the definition of a model to ensure compensation of revenues to local self-governments that have been abolished by numerous changes in the law. It is proposed to transfer a higher percentage of income to municipalities; to re-define individual provisions whose practical implementation have demonstrated certain deficiencies; to adopt the regulations necessary for introducing certain revenues of local self-governments (fee for the protection and improvement of the environment, tax on uncultivated agricultural land); to regulate matters relating to the inclusion in the Equalisation Fund of newly-formed municipalities which do not have sufficient fiscal capacity etc.
The Union of Municipalities also sent an urgent initiative to Parliament for its 2015 session proposing an Act on communal affairs, and an Act on legalisation of informal structures, emphasising their importance for the functional and financial aspects of local government.
Refinancing of debts and unsettled liabilities: in order to create a long-term sustainability of public finances at local level, it is particularly important to create a sustainable model of refinancing of debts and liabilities of local self-government units towards financial institutions, other suppliers, employees, etc., and to finance an awareness programme in order to optimise the number of employees at local level. According to information that local self-government units provided to the Ministry of Finance, the total unsettled liabilities of municipalities at the end of 2014 amounted to €119,19 million, while the consolidated debt of municipalities on the same day amounted to €166,94 million. Since these are the amounts that show increasing tendency compared to previous years, urgent measures are needed to ensure lower expenditures for servicing debts, i.e. ensure refinancing of existing debt due to high interest rates and short repayment periods. Therefore, addressing the settlement of these liabilities is possible only under more favourable credit arrangements with banks, with lower interest rate and more favourable maturity, of 10 to 15 years.
The Government of Montenegro adopted, at its session of 26 March 2015, the Report on the status of debt and unsettled liabilities of local self-governments dated 31th December 2014, and concluded that refinancing of debts and unsettled liabilities for capital expenditures in municipalities, which are beneficiaries of the Equalisation Fund, is to be managed, in such a way that a municipality - beneficiary will sign a Cession Agreement with the Ministry of Finance and the creditor, under which the funds will be used for repayment of refinanced liabilities and credits.
The Government also entrusted the Investment and Development Fund of Montenegro with ensuring funds, or a guarantee, to local self-government units for the purpose of ensuring a favourable credit arrangement for the refinancing of debts.
As the financial standing of most local self-government units is insufficient, the Government of Montenegro, on proposal of the Executive Board of the Union of Municipalities, at the session of 30 April 2015, proposed to local self-government units, who plan refinancing of debts and unsettled liabilities, that the competent municipality authority takes a decision to authorise the Ministry of Finance to dispose of their share of the Fund bearing in mind the nature of revenues ensured by the Fund so as to provide a stable and safe instrument for the financing of local self-governments.
The Government further authorised the Ministry of Finance to prepare Cession Agreements with local self-government units and the Investment and Development Fund of Montenegro or with other financial institutions, to allow the Ministry of Finance to dispose of the funds from the Equalisation Fund so as to ensure settlement of municipalities' liabilities arising from credits for refinancing of debts and unsettled liabilities.
Most of the local self-government units have already adopted appropriate decisions to that end and have undertaken activities towards contracting a credit arrangement with financial institutions which offered the most favourable conditions, under which debts to banks and liabilities towards other suppliers will be refinanced.
16 Information provided by the Union of Municipalities of Montenegro including through their document “Financing of Local Self-Government: Assessment of the Situation”
17 Data provided by the Union of Municipalities of Montenegro
18 Data provided by the Union of Municipalities of Montenegro