PART III. LOCAL CIVIL SOCIETY
2. AUTONOMOUS LOCAL GOVERNMENT
2.1 Legal Autonomy
Since 1991, the record of four consecutive mandates of local government has produced wide-ranging public consensus that independent and autonomous local government is of crucial importance for all public services provided to the society. At the same time, there is a general consensus that the existing legal framework is outdated and restrictive, limiting the effectiveness and efficiency of local government. The municipal authorities are empowered to make decisions and to act deliberately and autonomously on any issue of local importance, but there is no legal definition that distinguishes between issues of national, regional, and local importance. This is an impediment for the development and implementation of local strategies and the implementation of coherent policies in the various areas where the municipal governments have constitutionally and legally defined competencies.
Article 11 of the LSGLA Act broadly defines local self-government in a municipality as “the right of the citizens, or of their elected bodies with such terms of reference as conferred thereon, to resolve issues relating to:
1. municipal property, municipal enterprises, municipal finances, taxes and fees, and municipal administration;
2. the organization and development of the municipal territory and its component inhabited places;
3. education, including: pre-school, primary, basic, and secondary;
4. health, including: out-patient and hospital care, health prevention, community care, and sanitation;
T H E S T A T E O F L O C A L D E M O C R A C Y I N C E N T R A L E U R O P E
5. culture, including: community clubs, theaters, orchestras, libraries, museums and museum collections, amateur art, rituals, local traditions, and customs;
6. public works and utilities, including: water and sewer, electricity, heating, telephone, streets and squares, parks and gardens, street lighting, green spaces, adjustment of river courses and gullies, domestic waste disposal, local public transport, local bath-houses, laundries, hotels, garages, and cemeteries;
7. social assistance, including: social care and allowances, social housing, and other similar activities of local importance;
8. protection of the natural environment and rational use of the natural resources of local importance;
9. conservation of cultural, historic, and architectural monuments of local importance; and
10. sports, recreation, and tourism of local importance.”
The LSGLA Act makes no distinction between mandatory and optional tasks of local government; in fact, such notions are not applicable. Instead, there is a clear distinction between the following two groups of tasks. First, those that are specific to the local self-government and are defined in the constitution as belonging only to the municipal authorities, i.e., constituting the local government per se. The second group of tasks stems from the competencies of the central government, and they are managed by a hierarchical structure subordinated to the central government, but are executed by departments or individual servants within the municipal administration.
This group is subdivided into two: first, the tasks that are mandatory by instruction and, second, contracted tasks. The central government exercises tight control mostly on the contracted tasks. These include maintaining the civil register, conducting censuses, and administering elections. For each of those activities a detailed manual containing prescribed rules, regulations, and a timetable is provided by the central government and is strictly followed by the local administrators. The funds needed for these activities are allotted separately. Tasks that are “mandatory by instruction” are performed in accordance with special laws, such as the Traffic Law or the laws setting strict standards and technical prescriptions for such things as building construction standards. As a rule, when performing these tasks the local administrators provide paid services to citizens and local businesses. In some cases, these activities are partially funded by the republican budget.
The local authorities have exclusive competencies and are able to decide and act on their own discretion only in the provision of the following services:
• refuse collection and disposal;
• sewerage;
• street cleaning;
R E P O R T O N T H E S T A T E O F L O C A L D E M O C R A C Y I N B U L G A R I A
• maintenance of cemeteries;
• public transport; and
• the organization and maintenance kindergartens and nurseries.
Though the quality of the services is controlled by the state (on the basis of legally introduced standards), the municipality bears the political and administrative responsibility for their provision. In all of the spheres listed previously, the central government agencies have the power to use administrative mechanisms to block and sanction activities that do not meet the state standards.
In all other spheres of local government—education, social services, culture, sport, tourism, healthcare, economic development, environmental protection, provision of administrative services, and maintaining public order—the central and local governments have “shared responsibilities” that are vaguely defined and regulated.
Being the sole embodiment of executive power at the local level, the mayor represents the municipality in all legal and economic interactions and, in fact, is much more popular than the chair of the municipal council. In addition to the competencies of a local executive, the mayor has some competencies delegated by the central government.
The municipal council may also delegate some of its competencies to the mayor. During the first years after 1991, there was a tendency towards transfer of competencies to the mayors, but this substantially decreased the controlling powers of the council. These accumulated experiences led to the opposite tendency—the next two mandates are characterized by restriction of the powers and competencies delegated to the mayors.
An example concerning one of the main functions of local government, education, will provide an illustration of the limits of the legal autonomy currently imposed on municipal authorities in Bulgaria. A substantial part of the municipal budget (32.1%
for the 2001 fiscal year) is used for the primary and secondary schools, and it is worth examining the way education is managed. There are both municipal and state public schools (as well as private ones), but the municipalities are responsible for guaranteeing, providing, and controlling compulsory education (i.e., to the end of the eighth grade).
The municipalities are also responsible for the provision of healthcare at the schools, the repair and maintenance of school buildings and equipment, the remuneration of school personnel, and the provision of food and accommodation for students, transports, and sport facilities, etc. While the mayors control the spending of the allotted funding at all educational institutions, they only appoint and dismiss the personnel in nurseries and kindergartens. Personnel appointments in all municipal and state schools are made by the regional education inspectorate—namely, by the head of the inspectorate, a civil servant appointed by the minister of education. At least two types of tension are provoked by this model of shared competencies. First, while the municipalities are responsible for the financing of all schools, they can only fully control the expenses (including the remuneration of the teachers, which constitutes a major share) of the
T H E S T A T E O F L O C A L D E M O C R A C Y I N C E N T R A L E U R O P E
municipal schools, not the state ones. And second, although competent to control the budget in the municipal schools, the local authorities have no say on the appointment or dismissal of teachers and other personnel. These tensions are partially due to the lack of fiscal decentralization in Bulgaria; a majority of the municipalities depend on state subsidies and in reality have very limited revenues.
Local government in Bulgaria functions within the context of insufficient legal autonomy, which is the source of a complicated tangle of problems. As seen in Table 2.7, the unclear division of responsibilities between the central and local levels (due exclusively to the legislative vacuum and lack of efficient decentralization) goes hand in hand with the assignment of too many responsibilities, which is the perverse version of the dismantling of the totalitarian state. The decentralization of policies and services is in apparent contradiction with the lack of fiscal decentralization and the ensuing persistent budget deficits. In an attempt to maintain unified standards for the public services provided at local level, the central government blocks the industrious use of local resources and practices. This imposition of standards in how responsibilities are to be executed creates problems. Despite the lack of explicit and consistent legal regulations, there are no visible problems in the interaction between regional and local government, mostly because the regional level is still insufficiently developed and is, de facto, a branch of the central administration.
Table 2.7
Identified Problems in the Interaction of Central and Local Government
Type of Municipality by Population
Size
Problem of Too Many Responsibilities
Problem of Assigned Standards
in Responsibilities
Problem of Unclear Division of Responsibility
Problem of Interference from Regional Authorities
Less than 4,999 5.29 5.58 5.15 4.14
5,000–9,999 5.79 5.50 5.12 3.63
10,000–49,999 6.10 5.78 5.52 3.58
50,000–99,999 5.90 5.25 6.00 3.84
Over 100,000 5.90 5.50 5.50 4.40
Total 5.93 5.62 5.45 3.71
Source: CAO survey.
2.2 Fiscal Autonomy
The municipalities in Bulgaria have had their own autonomous budgets since 1991, but the introduction of a consistent legal framework for a coherent model of local finance was substantially delayed, being passed only in 1998. From 1991 to 1998, local finances
R E P O R T O N T H E S T A T E O F L O C A L D E M O C R A C Y I N B U L G A R I A
were regulated on the basis of articles in Chapter 7 of the LSGLA Act, “Property and Finance of the Municipality,” where the texts are formulated very generally and vaguely.
In addition, there have been permanent amendments and addenda to the normative bases of fiscal policy at the municipal level. According to these legislative texts, municipal budgets were completely dependent on the discretion of the central government (both legislative and executive), such that the constitutional principle of local self-government and the autonomy of local powers was not consistently and entirely followed. As a result, a severe problem faced by Bulgarian local governments is the discrepancy between their responsibilities and competencies and their actual capacity to implement them effectively.
The considerable dependence of municipalities on central government, their limited capacity to influence their total revenue base, insufficient incentives to increase their own revenues and to improve the cost-efficiency of services, “unfunded mandates,” and the problem of unsettled expenditures (a result of the municipalities’ unpaid bills for goods and services) formed a pool of issues that called for action by central government.
In addition, the reforms in a number of fields such as restitution, privatization, health insurance, and social security schemes also negatively affected the local finance system in a way that required comprehensive and long-term changes.
The Bulgarian Government took a major step in extending local fiscal autonomy by adopting the Fiscal Decentralization Program in 2002, thus declaring a political will to implement fiscal decentralization and setting a more structured policy framework to further the fiscal decentralization process. Implementation of the fiscal decentralization program has brought a number of legislative changes. A new Municipal Budget Act was enacted in November 2003, to rearrange the expenditure responsibilities between the state and the municipalities. The new Local Taxes and Fees Act of December 2002 has added to the flexibility of local representatives to develop independent municipal policy with respect to fees and cost of services, ways of delivering the services, etc. The purpose of the Corporate Income Tax Act and the Natural Persons Income Tax Act of 2002 was to increase the predictability, regularity, and proportional allocation of the shared taxes. The State Budget Act of 2003 has restructured the fiscal relationship with municipalities by introducing two types of subsidies from the state budget: one to fill in the deficit for financing state activities, and another to secure the minimum resources for local activities. A draft Municipal Debt Act has been prepared to significantly extend the credit portfolio of Bulgarian municipalities. It is expected that this act will come into force in January 2005. The tasks performed by municipalities were conditionally divided into municipal tasks (to be provided by local revenues) and tasks delegated by the state to the municipalities (to be provided by shared taxes and state subsidies). Standards were adopted in 2003 for expenditure responsibilities for education, healthcare, social welfare and social services, and cultural activities. The main goals of the development of the standards were to unify the criteria for financing similar activities by the state and the municipalities; to financially provide for the tasks delegated by the state to the
T H E S T A T E O F L O C A L D E M O C R A C Y I N C E N T R A L E U R O P E
municipalities; and to ensure equality between municipalities in implementing the expenditure responsibilities assigned by the state.
Following the whole process of economic restructuring and the introduction of the Currency Board in 1997, local governments in Bulgaria went through a period of severe financial pressures with increasing budget deficits starting in 1998 and peaking in 2000 (see Table 2.8).
Table 2.8
Municipal Budget Deficits (1997–2001)
1997 1998 1999 2000 2001
Deficit/surplus of operating budget [millions of BG leva]
12.7 –16.3 –57 –62.4 0.7
Source: National statistical data, 2002.
At the moment, the financial picture across municipalities demonstrates wide ranging differences. Size and economic potential are among the key factors to influence the present situation. Table 2.9 shows the difference in budget deficits across municipalities for 2003. Out of all 263 municipalities, 120 have budget deficits and 76 of those have a level of deficit higher than the national average. The worst situation is that of large municipalities with more than 100,000 residents, as well as small ones with fewer than 10,000 people.
Table 2.9
Cross-differences among Municipalities
Type of Municipality by Population Size Level of Indebtedness [%]
Sofia 0.0
> 100,000 –4.8
50,000–100,000 –2.4
30,000–50,000 –1.8
10,000–30,000 –2.7
< 10,000 –2.8
Total –2.5
Source: Monitoring of the Reform towards Fiscal Decentralization, 2003, 2004.
The basic principles of the municipal budgeting model in Bulgaria since 1998 have been:
R E P O R T O N T H E S T A T E O F L O C A L D E M O C R A C Y I N B U L G A R I A
• the municipal budget is autonomous;
• the budget is open to public scrutiny and controlled by citizens and public authorities (municipal council, audit court, etc.);
• budget revenues include: own municipal revenues (local taxes and fees, concessions, profits and dividends, rental and lease of real-estate, etc.), state transfers to the municipalities, subsidies and subventions from the republican budget; and
• expenditures should meet the requirements of law, expediency and feasibility, effectiveness, efficiency, and the public interest.
However, because Bulgaria has a highly centralized financial system, some of these principles are hardly enacted. The municipal authorities have very limited autonomy in determining their own tax revenues. According to the constitution, it is the prerogative of the national parliament to determine the taxes by type and size. As stipulated in the Local Taxation and Fees Act, the central authorities strictly regulate even the local taxes.
The law gives autonomy to the municipalities only in determining the size of the local fees (levies).
Municipalities in Bulgaria have six types of own revenue:
• local taxes as defined by law;
• local fees;
• revenues from concessions;
• fines (both defined by law and decided by local administration);
• profits and dividends; and
• income from renting and leasing municipal real estate, and other revenues.
The distribution of the revenues of municipal budgets is shown in Tables 1.10 and 1.12, which also indicate the structural changes introduced by the Municipal Budget Law.
Table 2.10
Structure of Revenues in Municipal Budgets [%]
Types of revenues 1994 1995 1996 1997 1998
State subsidies 44.23 41.86 32.75 34.79 36.61
Shared taxes 33.96 37.21 46.05 55.65 46.58
Own source revenues 18.42 18.96 19.27 9.23 15.50
Attracted revenues 3.39 1.97 1.93 0.33 1.31
Source: S. Ivanov 2000.
T H E S T A T E O F L O C A L D E M O C R A C Y I N C E N T R A L E U R O P E
The structure of the revenues in the municipal budget and its changes during the period 1994-98 shows that the share of local/municipal revenues is relatively small. More than 80% of the revenues came from state subsidies and shared taxes, which meant that the central government was responsible for the predominant part of the municipal revenues—it determined their size and provided them to the municipalities. During that period, the municipal authorities had no incentives to design and implement their own fiscal policy. The existing budget regulations have also provoked a series of conflicts between central and local authorities. The budgeting prerogatives of the former, and especially its power to decide on the distribution of subsidies, were a useful tool for domination over local policy. This tendency becomes more distinctive when the structure of the so-called “own revenues” is examined (see Table 2.11).
Table 2.11
Structure of Own Revenues in Municipal Budgets [%]
Types of Revenue 1994 1995 1996 1997 1998 1999
Shared taxes 64.84 66.25 70.49 85.77 75.04 70.60
Income tax 45.69 47.57 48.11 52.28 48.83 46.66
Tax for municipalities 15.28 15.86 20.27 32.06 24.68 22.24
Local taxes 12.45 9.46 8.20 2.93 7.39 7.62
Local fees 8.66 8.96 7.43 4.88 10.00 10.50
Other local revenues 14.06 15.34 13.88 6.42 7.57 11.27 Source: S. Ivanov 2000.
From the data in Table 2.4 it is evident that the biggest share of own revenues come from the shared taxes—of which the income tax constitutes the most substantial share.
But the sharing of taxes both by type and proportion is defined by the central government.
In fact, the local governments cannot decide on the balance between stimulating local business or providing welfare benefits to the local residents.
In 2003, the own revenues have amounted to 32.2% of all municipal revenues.
The tendency in the last year is to increase the share of the own revenues. Following the amendment of the Local Taxes and Fees Act in 2002, local governments have now full competencies to determine the amount of local fees. The National Assembly is only competent to rule on the type of service for which fees may be charged. The opposite tendency is to decrease the share of the state budget transfers.
The structure of own revenues in the municipal budgets of 2002–2003 is presented in Table 2.12.
R E P O R T O N T H E S T A T E O F L O C A L D E M O C R A C Y I N B U L G A R I A
Table 2.12
Structure of Own Revenues in Municipal Budgets (2002–2003)
Structure of Own Revenues in Municipal Budgets 2002 [%]
Structure of Own Revenues in Municipal Budgets 2003 [%]
Local taxes 30.5 28.6
Local fees 41.0 37.3
Non-tax revenues 28.5 34.1
Total 100.0 100.0
Source: Monitoring of the Reform towards Fiscal Decentralization, 2003, 2004.
Table 2.13 shows the structure of municipal revenues after the passing of the Local Budget Law in 1998. The share of tax revenues is relatively high and stable. The share of non-tax revenues has steadily increased, while the state subsidies are fluctuating.
Table 2.13
Revenues in Local Budgets of Bulgarian Municipalities [%]
Type of Revenues 1998 1999 2000 2001
Tax revenues 52.27 47.09 44.50 51.25
Non-tax revenues 10.29 13.30 13.26 16.92
Aids 0.01 0.01 0.01 0.38
Transfers 37.43 39.60 42.23 31.45
Total 100.00 100.00 100.00 100.00
Source: Consolidated state budget of the Republic of Bulgaria, Ministry of Finance, 2002.
The municipal budget expenditures depend on the competencies and responsibilities of local government. The Local Budget Act clearly defines the expenditures in accordance with the specified competencies of the municipal government—both delegated and own (see article 11 of the LSGLA, cited previously).
Table 2.14
Local Expenditures by Type [%]
Type of Expenditures 1997 1998 1999 2000 2001
Current 92.1 87.4 90.8 92.2 90.0
Capital/investment 7.9 12.6 9.2 7.8 10.0
Total 100.0 100.0 100.0 100.0 100.0
Source: Bulgaria: Selected Issues and Statistical Appendix, IMF Country Report No 02/173, August 2002.
T H E S T A T E O F L O C A L D E M O C R A C Y I N C E N T R A L E U R O P E
During the last several years, the share of current expenditures has been extremely high—about 90% of total expenditures. The limited capital expenditures indicate the restricted investments that have characterized local policy for more than a decade. This is also indicative of the high deficits and the shortage of own revenues—municipalities are forced by these circumstances to limit investment plans and to reallocate available finances to cover current expenditures. However, fiscal decentralization reform and the increased own municipal revenues have led in 2003 to investment expenditures that are 22.7% higher than the investment expenditures in 2002. This is the highest level of investment for the last five years.
Table 2.15
Current Municipal Expenditures [%]
Type of Expenditures 1998 1999 2000 2001 2002
Salaries and insurance 48.0 49.3 43.3 37.7 48.0
Maintenance of facilities 40.8 40.9 41.4 36.5 40.8
Subsidies 4.5 1.57 1.2 9.0 4.5
Interest 0.1 0.03 0.5 0.6 0.1
Social security and welfare 6.6 8.2 13.6 16.2 6.6
Total 100.0 100.0 100.0 100.0 100.0
Source: Consolidated state budget of the Republic of Bulgaria, Ministry of Finance, http://www.minfin.
government.bg\bg.
The most substantial share of current expenditures is spent on remuneration of municipal administration and public service personnel (in education and health care), i.e., salaries and respective social and health insurance fees. The other substantial share of expenditure goes for the maintenance of schools and hospitals. After the introduction of a health insurance system, the remuneration of doctors and medical personnel gradually was covered mostly by the National Health Insurance Fund (in 1999 the financing of pre-hospital healthcare and in 2001 health services in regional hospitals and orphanages). However, the maintenance of hospital buildings and equipment is still the responsibility of the municipal authorities and is to be covered by local budgets. With the social security system, changes have been in the opposite direction—
the share of expenses covered by the municipalities is gradually increasing. The dynamics of the expenditures for public service (health, education, and social security) may be seen in Table 2.16.
R E P O R T O N T H E S T A T E O F L O C A L D E M O C R A C Y I N B U L G A R I A
Table 2.16
Structure of Local Expenditures by Policy Area [%]
Type of Expenditure 1997 1998 1999 2000 2001
Education 32.8 29.3 30.5 31.0 32.1
Health care 28.3 25.8 25.6 20.5 9.0
Social security and welfare 9.0 9.2 12.8 15.5 19.2
Other 29.9 32.3 31.1 33.0 39.7
Total 100.0 100.0 100.0 100.0 100.0
Source: Bulgaria: Selected Issues and Statistical Appendix, IMF Country Report No. 02/173, August 2002.
The equalization mechanism envisaged by the law is provided by the debates on the annual state budget. Following a period of negotiation between representatives of the National Association of Bulgarian Municipalities and the Ministry of Finance, the cabinet proposes a formula for the redistribution of municipal revenues—the inputs from the “donor” municipalities are redistributed through state subsidies to the poorer municipalities. The state budget is voted on as a block by the parliament, although the section on the municipal budget is debated separately. When the municipalities submit their budget reports at the end of the fiscal year, the government may decide, in its discretion, to cover a share of the reported deficits. The overall annual deficit of all 263 municipalities is made public by the Ministry of Finance; for 2003, it is available in the Annual Report on the State Budget Implementation.
The 2003 overall annual deficit has been reported as minimal, at 625.825 million leva. However, the differences among municipalities are considerable: 56.7million surplus in some municipalities against 57.3 million leva deficit in others (see Table 2.17).
Table 2.17
Scale of Differences across Municipalities
Type of Municipality
Surplus/Deficit [Leva per Resident]
Surplus Deficit
1. Sofia 18.9 18.9 0.0
2. > 100,000 –8.7 4.3 –12.9
3. 50,000–100,000 –3.7 2.6 –6.3
4. 30,000–50,000 1.1 5.7 –4.6
5. 10,000–30,000 0.1 7.7 –7.6
6. < 10,000 –4.1 5.7 –9.8
Total (Bulgaria) –0.1 7.2 –7.3
Source: Monitoring of the Reform towards Fiscal Decentralization, 2003, 2004.