General Regulations and Practices of Local Borrowing

Municipalities in Slovakia can use returnable fi nancial sources to fulfi ll their tasks.

Until 2001, regulations on the conditions, limitations and use of such sources did not exist. Th e increasing indebtedness of municipalities and the critical fi nancial situation of some big cities led to a legislative action to prevent further fi nancial troubles of local governments.

Th e basic provisions on local government borrowing are specifi ed in the Municipal Law, under which crucial power in the use of returnable funds is put into the hands of the municipal council. If the municipality wants to use such funds, any credit acceptance or bond issue must be approved by the councilors. Originally the Municipal Law included the obligation to publish an intention to use returnable funds for at least 15 days prior to its approval in the municipal council. Today, such a provision is not included in the law. More detailed regulations on local government borrowing can be found in the Law on Budgetary Rules (303/1995), which defi nes the rules for municipal budgeting, the proper behavior of municipalities when engaging in indebtedness as well as actions to be taken when a municipality cannot deal with its liabilities.

3.1.1 Basic Fiscal Environment

Th e fi scal year of municipalities is identical with the calendar year. Municipalities operate according to their budget which is approved in the municipal council. It is comprised of two parts, the operating (current) and the capital budgets. Th e current revenues include all revenues except those from the sale of the capital assets, real estate and intangible as-sets, revenues from the use of fi nancial assets of the municipality, revenues from capital grants and transfers and revenues from the sale of property shares. Th ese are revenues of the capital budget. Current expenditures are the costs related to salaries, services and

consumables, etc. Capital expenditures consist mainly of expenditures on procurement and appreciation of fi xed and intangible assets, and expenditures on the creation of tangible and emergency reserves.

Th e current budget must be balanced, but it can show a surplus if some revenues of the current budget in the given year are to cover the principal of received credits, loans, returnable fi nancial assistance and the nominal value of issued bonds, expenditures of the capital budget, or if they are to be used in the coming years.

Th e capital budget can be drawn up to show a defi cit only if the defi cit can be covered by funds from previous years or by returnable fi nancial sources covered by the current budget in the following years. In exceptional situations where the autonomy of a municipality is endangered, the municipality with council approval can use funds from the capital budget to cover current expenditures, except for wages and salaries, up to 25% of budgeted capital revenues for the given year.

Municipalities have an obligation to report to the Ministry of Finance on their economic performance, the budget and the fi nancial statement.

3.1.2 Limitations on Borrowing

Municipalities can use returnable fi nancial sources to cover capital expenditures only (Act on Budgetary Rules, No. 303/1996, art. 29a). Th ese sources can also be used to bridge the time diff erence between revenues and expenditures of the current budget within a fi scal year. Such a debt must be settled from the revenues of the current budget by the end of the budgetary year. Municipalities can only take on such credit obliga-tions when their fulfi llment does not negatively infl uence the balance of the current budget in the following years. A municipality cannot take over the guarantee for the credit provided to a physical entity (entrepreneur) or legal entity of which it is not a founder or establisher.

Municipalities (as well as regional self-governments) are allowed to receive credits totaling more than SKK 75 million in one budgetary year only upon written approval from the Ministry of Finance. Th is limit applies to all size categories of municipalities.

Th e total does not include credits that do not increase the overall debt, or returnable sources coming from state support programs such as the housing support program. Th e ministry is supposed to issue written approval or refusal not later than 30 days after receiving the request. Failure to issue the decision is considered approval of the credit.

Th e ministry must issue the written approval when the municipality fulfi lls the criteria regarding the ratio of debt versus current revenues. Municipalities as well as regional self-governments can use returnable sources of fi nancing only if:

a) overall debt by the end of the budgetary year does not exceed 60% of real cur-rent revenues for the previous budgetary year, and

b) total annual installments for returnable sources including interest do not exceed 25% of real current revenues for the previous budgetary year.

Total annual installments do not include one-shot premature repayment of return-able sources of fi nancing. A municipality is obliged to report the receipt of returnreturn-able sources of fi nancing in the given year to the Ministry of Finance by January 31 of the following year. Th e rules on ratio of debt versus current revenues will be used for the fi rst time in 2005. By then only the provisions on ministerial approval of the credits exceeding SKK 75 million will be eff ective.

If the government of the Slovak Republic approves a special program for debt regu-lation of public administration, the ministry should proceed in line with this program when approving the credits. It is expected that the ministry will discuss such a program with the representatives of the territorial self-government associations.

3.1.3 Reactions to Excessive Indebtedness

Th e amendment to the Law on Budgetary Rules of 2001 also elaborated the proce-dures to be followed when the debt of municipalities exceeds a bearable level. Th ese provisions were a reaction to cases where some municipalities basically defaulted and even had to auction off their own offi ce premises to address the claims of lenders. Th is amendment introduced such terms as “recovery regime” and “forced administration”

in local self-government.

3.1.3.1 Recovery Regime

A municipality is obliged to introduce a recovery regime if it did not pay a recognized liability by 60 days after the due date and if the total of overdue liabilities exceeds 15%

of real current revenues of the municipality in the previous budgetary year. Within seven days after such conditions are met the mayor of a given municipality must prepare measures leading to the introduction of a recovery regime, including a proposed recovery budget. Th e proposed measures and budget must be submitted to the municipal council meeting within 15 days.

During the recovery regime, a municipality can use its fi nancial funds only in compliance with the recovery budget. Every use of fi nancial funds of the municipality must have written approval in advance from the chief auditor of the municipality. Th e mayor must present monthly reports to the municipal council meeting on the fulfi ll-ment of the recovery regime, including fulfi llll-ment of the recovery budget. Th e chief

auditor is obliged to present to the municipal council a written report on the proposal of the recovery regime, the recovery budget and on every report on fulfi llment of the recovery regime and budget.

Th e municipality must immediately report its adoption of a recovery regime to the Ministry of Finance. Within seven days after the 90 days of recovery regime implemen-tation, the municipality must inform the ministry about its fulfi llment of the recovery regime including the recovery budget and the state of municipal liabilities, together with the statement of the chief auditor. If the municipality is able to demonstrate that by adopting a recovery regime its performance improved and its overdue liabilities decreased, the ministry can agree to extend the recovery regime for a specifi ed time.

3.1.3.2 Forced Administration

If the conditions for the introduction of a recovery regime were fulfi lled but the munici-pality did not introduce it, or if the recovery regime did not lead to improvement after 120 days of its implementation, the ministry has the authority to introduce a forced administration on the municipality. Th is decision can be based upon the report from the mayor, the creditor or the state institution.

Th e mayor must discuss the notice with the municipal council and send it to the ministry within 15 days of the end of the 120 days of recovery regime implementation.

Before the introduction of forced administration, the ministry verifi es the facts in the notice and the reasons for not paying the liability. Th e municipality must fully cooperate in this process of verifi cation. Th e decision on forced administration also includes the identifi cation of an administrator to oversee the forced administration. Th e Ministry of Finance appoints the administrator after agreement with the Ministry of the Interior.

Th e administrator is selected from the staff of the regional or district offi ce. He or she must have a university education and at least ten years of experience in fi nancing, can not be the mayor or member of the self-governing body of the municipality, and can not be personally close to the mayor, members of the municipal bodies or municipal employees. An appeal of this decision will not mean postponement of the forced ad-ministration.

Th e decision on forced administration will also be communicated to the local tax offi ce and relevant regional or district offi ce. Within seven days after the decision is delivered, the municipality is obliged to open a separate, forced-administration bank account and transfer to this account all funds left in all accounts of the municipality except for those that must be kept in separate accounts (state budget funds and funds coming from the European Union). During the forced administration all revenues com-ing to the municipality go to this forced-administration account except for the funds

to be kept separately. Th e municipality can use the funds in all its accounts only after the written approval of the administrator, who has an obligation to fi nd out about the economic situation of municipality. In doing so the administrator has full authorization to go through all necessary bills and books of the given municipality. Based upon his or her fi ndings, the administrator can request the municipality to adopt a special pro-gram of economic performance consolidation, including organizational and personnel measures. Th e administrator has the right to participate and have an advisory vote in the municipal council and its committee meetings, where the municipal budget, perform-ance and property are on agenda. Th e opinion of the administrator must complement any reports presented to the municipal council meeting regarding municipal budget, economic performance and property.

Within seven days after delivery of the decision to introduce a forced administration, the municipality must communicate the situation to all banks where it has accounts, to the regional self-government and to creditors.

Within thirty days of the decision, the municipality is obliged to prepare and ap-prove a crisis budget for the period until the end of budgetary year. Th e crisis budget must include necessary expenditures (e.g., liabilities stemming from the legal obliga-tions of municipalities, expenditures on delivery of services and the delegated state administration functions). If the forced administration is not over by the end of that budget year, the municipality must prepare and approve a crisis budget for the following budgetary year by December 31 of the regular year. When preparing the crisis budget the municipality is not obliged to divide the budget into current and capital budgets.

If the municipality does not approve a crisis budget by 30 days after the decision on forced administration, then the municipality will operate on the basis of a crisis budget prepared by the administrator.

Th e ministry can make a decision to cancel the forced administration based on the proposal of the administration or on a request from the municipality.