4. Local Finance, Economic Development
4.2 Revenues
The local revenue structure can be classified by the following main categories:
• transfers of state grants;
• national shared revenues;
• independent revenues;
• other revenues.
Table 2.6
Revenue Structure by Type of Local Government in Albania [%]
1995 1996 1997
Munici- District Com- Muni- District Com- Muni- District
Com-pality mune cipality mune cipality mune
State Grants 97.80 98.50 99.80 92.80 93.40 99.50 94.70 96.70 99.80 Shared
Revenues 0.00 0.03 0.00 2.41 0.00 0.00 1.74 0.00 0.00
Independent
Revenues 2.13 1.41 0.17 4.71 6.57 0.44 3.49 3.82 0.18
4.2.1State Grants
Specific state grants include central budget funds allocated to the budgets of communes, muni-cipalities and districts to be administered for certain purposes. These grants thus represent both revenues and expenditures for functions delegated to the local government. Current legislation does not provide a formula to calculate state grants or specify criteria for their award. Such grants are determined annually in accordance with the Law on State Budgets and approval by Parliament.
Grants are identified in the budget report by the ministries responsible for the particular sector and are allocated for the following services:
• education—kindergartens, primary schools, high schools and orphanages;
• health—nurseries, health centers;
• culture—cultural centers, libraries, cinemas, theaters and museums;
• agriculture—subsidies, local irrigation networks, veterinary services, pastures;
• environment—solid waste, drainage and drinking water supply networks;
• transport—public urban transport, local and interdistrict roads.
Practice has shown that the line ministries enjoy great power over how these grants are allocated and distributed. They plan local budgets based on employment figures and according to norms that are very loosely based on local conditions or the need for specific services. Although the law nominally requires local government approval, a ministry may decide mid-year to suspend allocation of a grant to one local body and transfer it to another without consulting the original recipient of the grant.
Local governments prefer block grants. They also have requested more independence in determining the use of funding. However, notwithstanding recent improvements in the Law on Local Governments, they still do not have the right to affect the allocation of state funds.
A government decision dated March 1998 stipulates that operational expenditure grants and investments should be assigned to the local governments. However, the budgetary law, which is expected to be approved by Parliament soon, partially has suspended this right on the grounds that local governments are not in a position to administer those grants themselves.
4.2.2 National Shared Revenues
For some time now local authorities have called for an increase in local shares of national taxes and have proposed a number of new taxes. At present, however, national taxation is not shared between the central and local budgets.
Until May 1998, the property tax (consisting of an agricultural land tax and a building tax) was considered a national tax. Revenues from this tax were shared, with forty percent allocated to the central budget and sixty percent to the local budget. According to Law No. 8344 (May 1998), the property tax is now a local revenue, transferred entirely to the independent local budget, and the local government is charged with establishing its own structures for the collection of this tax. Because this particular revenue on average did not exceed one percent of local budgets when shared in the past, a substantial increase in local government revenue is unlikely. In addition, political interventions by the central government have reduced the value of this revenue: to date, the agricultural land tax has not been collected, according to presidential decree.
4.2.3 Independent Revenues
Independent revenues comprise a small share of the local independent budget. They include:
• local tax;
• property tax;
• service fees;
• revenues of local government enterprises;
• fines administered by the local government;
• aid and donations from local or foreign organizations.
Parliament determines the extent of local taxes and fees. According to law, districts may levy fees on hunting and fishing registration and taxes on new construction. Municipalities and communes may implement taxes and fees on the following:
• registration of various activities;
• cleaning and waste removal;
• hotel lodging for foreigners;
• concessions from markets;
• income from restaurants and entertainment establishments;
• advertisements and billboards;
• slaughtered animals;
• use of timber and communal forests;
• registration of lotteries;
• registration of new residences;
• parking.
Table 2.7 Local Taxes in Albania
Type of Tax Tax Rate Administration Collection Sanctions
Buildings, Land Local discretion, Local Local Local
and Small within nationally tax authority tax authority or tax authority
Business determined authorized agent
limits
Inheritance Fixed nationally Either Either Local tax
and Donations national or local national or local authority based tax authority tax authority on information
provided by the national tax authority
Real Estate Local discretion Either Either Local tax
Transactions, above a national national or local national or local authority based Income from minimum tax authority tax authority on information
Gambling, provided by
Vehicles the national
tax authority
Tourism, Full local Local Local Local
Animals, discretion tax authority tax authority tax authority Communal
NOTE: Tax base determined by law.
In addition to the property tax (see section 4.2.2), councils also have the right to levy ad hoc taxes for public services. Many local governments have done so, accounting for fifteen to nineteen percent of municipal independent revenues for 1996 and 1997. The district council has the same right, but only upon approval of the commune or municipality offering the service.
Table 2.8 Local Tariffs in Albania
Type of Tariff Level of Authority Administration Collection Sanctions
Public Service Full Service provider Service provider Service provider Tariffs (water, local discretion or other agent or other agent with support sewage, solid authorized by the authorized by the of local waste, heating, local government local government tax authority
public transport, and police
public lighting)
Tariffs for the Full Local Local Local
Right to Use local discretion government government government a Public Good
(markets, cemeteries, parking, signs in public areas, use of public spaces for events)
Tariffs for Issuing Full Local Local Local
Licenses and local discretion government government government Registration
(construction, vehicles, land de-velopment, other certifications)
Fishing or Local discretion Local — — Hunting above a national government
Permits minimum
NOTE: Tariff rates determined by national basic standards.
Local governments collect some taxes directly; others are collected by entities such as the electric power company, which receives five percent of the billed amount. Local government councils have the right to delegate tax collection duties to other entities, private or state, physical or juridical. In such cases, the taxation agent may receive up to eleven percent of the taxed amount.
The latest legal measures assign heavy penalties in the case of nonpayment of local taxes, including suspension of activities. It is hoped that these measures will have a positive impact on ensuring local financial resources. These regulations also define very clearly the relationships among the local government bodies, the taxpayers and the taxation agents.
Although local taxes and tariffs offer the best opportunity for full local autonomy, elements of the current system greatly hinder this:
• because there is no automatic adjustment for inflation in the fixed tax basis, local governments suffer a loss in the real value of expected tax revenues;
• local governments may not determine the extent of local taxes calculated according to local fiscal conditions and capacities;
• local governments encounter difficulties in controlling tax and tariff collection, since this is performed by various institutions within the local government;
• local governments may not freely determine the spending of revenues from local taxes and tariffs.
The use of independent budget revenues is limited to operational expenditures and investments.
A specific amount is set aside for this purpose when the budget is approved by Parliament. If local revenues are higher than forecasted, the surplus funds cannot be used without the approval of both the Ministry of Finance and the line ministries. Furthermore, there have been precedents of sequestration of unspent funds by the Ministry of Finance at the end of the year. This system is highly unfavorable to local governments. Since they cannot guarantee the use of local tax or enterprise revenues, they are discouraged from improving their collection methods.
Independent revenues comprise five percent of total revenues in municipalities and districts and even less in communes. In general, the Municipality of Tirana has had the most success in collect-ing independent revenues; in 1996, they comprised thirty-nine percent of its budgetary revenue.
Other sources of profit include revenues from economic activities and local businesses financed by the local government. Rents and revenues from privatization are an important source of income, comprising seventeen percent of the independent budget for 1996. Due to a change in the privatization formula, according to which twenty percent of the sales price is allocated to the local government, privatization revenues have been reduced since 1996.
Assistance from donors and foreign local governmental bodies is another potential source of revenue, from which some local government divisions have profited.
4.2.4 Loans
Although local governments are legally entitled to receive loans to finance investments (Law No. 7776), they have not exercised this right. Due to the structure and functioning of municipal
finances, no creditor would consider it wise to offer such a loan. Another obstacle to the utilization of bank loans is the lack of local government property to be mortgaged as credit guarantees.
Furthermore, potential financing sources inevitably depend on the country’s capital market structure; the banking and financial sectors in Albania are underdeveloped, and the stock exchange is immature and cannot meet local needs for vouchers.
4.3 Expenditures
The local budget is divided into four core categories of expenditures:
• salaries—gross payment of employee compensation;
• social insurance—payments for social and health insurance for local government employees;
• operational expenditures—funds planned for materials, services and per diems;
• investments.
The current budget includes all expenditures for the performance of administrative functions and local public services. The share of current expenditures in the local budget has increased consistently, from eighty-two percent in 1995 to ninety-four percent in 1999. Previously, these expenditures were determined by state grants, but in the future they will be covered by block grants that will allow local governments to decide on their use according to their own priorities.
Table 2.9
Distribution of Local Government Expenditures in Albania [%]
1995 1996 1997
Current Budget 82.0 87.8 94.3
Capital Expenditure 18.0 12.2 5.7
Loan Repayment 0.0 0.0 0.0
Capital expenditures include all investments to maintain local institutions such as roads, water companies, sewer systems, public buildings, cemeteries and educational and health institutions.
Such expenditures have been reduced substantially to six or seven percent of the total local budget. Given the low level of investment from the state and minimal local revenues, local governments have very little opportunity to improve their financial situation.
Local governments are charged by the line ministries to administer parts of their budgets. Even though local budgets include funds for specific services, local governments do not enjoy budgetary rights, since they may not make any changes once the budget is approved by Parliament, such as the transfer of funds from one line item to another, even if justified by local needs.
Table 2.10
Proportion of Total Expenditures by Type of Service in Albania [%]
1995 1996 1997
Muni- District Com- Muni- District Com- Muni- District
Com-cipality mune cipality mune cipality mune
Education 13.9 7.3 19.0 16.2 6.0 22.3 19.8 4.8 20.5
Health Care 1.2 3.3 4.2 1.3 3.6 4.2 1.8 3.9 3.6
Social Welfare 11.9 0.1 9.5 11.0 0.0 9.1 13.6 0.0 8.1
Sport, Culture 2.5 0.0 0.1 2.4 0.1 0.1 25.0 0.1 0.1
Administration 2.8 1.1 3.2 2.6 1.4 3.9 3.9 1.7 4.4
Public Works 11.2 8.1 0.0 9.8 5.4 0.0 8.8 1.6 0.0
The Treasury Office strictly controls local expenditures, limiting local financial autonomy further.
When local bodies generate less than seventy percent of their planned expenditures for a period of two months, the treasury department blocks these funds. The Ministry of Finance decides on the disbursement of these funds only after it has received a request from the Ministry of Local Government.
Local governments have the right to establish a reserve fund of not more than three percent of their total budget expenditures. This fund is used to meet expenses for unforeseen circumstances and may only be used by the local council.
Table 2.11
Distribution of Expenditures by Type of Local Government in Albania [%]
1995 1996 1997
Muni- District Com- Muni- District Com- Muni- District
Com-cipality mune cipality mune cipality mune
Education 32.0 36.7 52.5 37.3 36.2 56.1 39.1 39.4 55.6
Health Care 2.9 16.8 11.6 3.1 21.7 10.6 3.7 32.2 9.9
Social Welfare 27.0 0.3 26.3 25.3 0.2 22.9 26.9 0.2 22.0
Sport, Culture 5.8 0.0 0.4 5.5 0.5 0.4 5.0 0.8 0.4
Administration 6.5 5.6 9.1 6.1 8.5 9.8 7.7 14.2 12.0
Public Works 25.7 40.5 0.0 22.6 32.7 0.0 17.5 12.9 0.0
Total 43.0 20.2 36.6 43.5 16.6 39.8 50.6 12.3 36.9