Todays Date
June 20, 2019

MUNICIPALITIES SINK IN DEBTS, MAYORS REQUIRE FISCAL DECENTRALIZATION

The municipalities’ indebtedness results from their irrational performance and unrealistic planning of the budgets.

 

By Gjurgjica Bojchovska and Ljubica Ivanova

 

In the Republic of Macedonia many of the municipalities are sinking in debt and have blocked accounts. It is a huge problem for the municipalities because they are unable to successfully perform the legally entrusted competences and provide quality services to the citizens. About 20 municipalities have continuously blocked bank accounts, some of them for decades.

Among the reasons for this situation are the irrational performance and unrealistic planning of their budgets, as well as overstaffing in municipal administrations. Much of the budget funds are spent on the employees’ salaries and contributions.

 

THE MOST INDEBTED ARE OHRID, TETOVO, KARPOSH AND KUMANOVO

Ohrid, Tetovo, Karposh and Kumanovo are the most indebted of the larger municipalities.

Although, at first glance, the balance between revenues and expenses in some of the municipalities may not seem staggering, the figures, which directly indicate the amount of reported mature and unpaid liabilities of the municipalities, are staggering.

Each year the municipalities sank in debt. Many of them created huge budgets and assumed liabilities that they could not pay.

Hence the debts. The Government of the Republic of Macedonia adopted a new law on the budget rebalance from which it will provide 51% support for the unpaid liabilities of the municipalities. With the budget rebalance it will help the municipalities to improve the financial situation. By allowing them to establish settlement mechanisms, it will also provide space for new projects.

The Law on Financing Local Self-Government Units and the Law on Financial Support of the Local Self-Government Units was adopted in the Parliament on November 13, 2018.

The Ministry of Finance sent us the two laws, The Law on Financing Local Self-Government Units and the Law on Financial Support of the Local Self-Government Units. Their goal is to repay the municipal debts. And above all not to happen again.

The number of municipalities whose accounts are blocked changes on a daily basis. Thus, on 27 November this year 17 municipalities were with blocked accounts.

A graph according to published data on indebtedness of the municipalities in the Official Gazette of the Republic of Macedonia, No. 209 of 15.11.2018

From the graphic presentation it is seen that the most indebted municipality in the Republic of Macedonia is the municipality of Ohrid. Immediately behind it are the seemingly rich municipalities of Tetovo, Karposh, Bitola. The municipalities justify the debt with the unrealistic promising projects at the time of the pre-election. This was especially promised by the mayors and their party offices, not taking into account the actual municipal revenues.

INDEBTEDNESS AND ANNUAL ACCOUNTS      

Experts say that the indebtedness of a municipality is not proportionate to the outcome of the annual accounts of revenues and expenses, that is, if the municipality is in surplus, it does not necessarily mean that it is not indebted. And vice versa – if the municipality is in deficit, it does not necessarily mean that the municipality is in debt. Experts explain that the surplus shows us how much cash remains at the end of the year to be added to the next year’s budget as a surplus of revenue. Deficit is the negative difference – lack. Debts are not included in revenues/ expenses.

Ace Kocevski, mayor of the municipality of Veles, believes that the municipalities are not to blame for part of the debts because they were made in the previous system, and as obligations for land expropriation have been transferred to the current municipalities.

According to him, part of the debts is due to inadequate solutions for transporting students after secondary education became mandatory.

“Because of that municipalities create big debts. For the third and the largest part of the debts, the mayors are to blame for grossly violating the laws, in order to satisfy the voters, they built more than they had funds, thus enormously indebted their municipalities”, adds Kocevski.

He stresses that disobeying the laws and not taking punitive measures has created a harmful systemic practice to protect debtors in lieu of creditors and led to this situation. “With consistent respect of the laws and taking legal sanctions against irresponsible mayors, debts will not be created”, stresses Kocevski.

 

OVERSTAFFING – A DEBT GENERATOR 

Overstaffing in municipal administrations is another factor affecting municipal debts. Similar is the situation of public utility companies in the municipalities and the City of Skopje.

With overstaffed municipalities, they spend money on salaries of party staff, there are unnecessary employees in the municipal administration and public enterprises, instead of infrastructure projects for improving the quality of life in local communities.

The moment when the promises, especially the promises for capital objects such as building kindergartens for children, new streets, renovating schools and numerous expensive communal projects such as water and sanitation, for example, for which citizens gave their vote in elections, cannot be met, is the moment when municipalities lose.

However, if the mayors have obligated the municipalities in the name of future projects and have not realized them before the expiration of the mandate, then the logical question arises as to what municipal money was spent for if not for what was promised and planned.

The answer to this question is partially reflected in the annual accounts of the balance of revenues and expenses from the municipal budget. They clearly refer to the fact that most of the revenues are intended for the salaries of the employees in the administrations, which makes it a relatively small part of the funds to be allocated for everything else, and consequently the municipalities allow debts.

 

KUMANOVO PAYS LOANS FROM THE TIME OF SFRJ AND PEHCHEVO HAS BEEN BLOCKED SINCE 2009

The new mayors cannot significantly change the conditions in the Municipality. Some of them inherited blocked municipal accounts. Everyone repays old debts. In some municipalities that have overindebtedness there are blocked accounts. Some municipal debts are even from the former Yugoslavia. Some debts are about ten years old. Over the years, debt has grown due to interest and due to additional loans made by mayors for some new projects.

The Mayor of the Municipality of Pehcevo, Dragan Trencevski, says that the Law on municipal financing will facilitate the manner of functioning of the municipality, so that it can realize new capital projects.

 

“The Ministry of Finance, after prior budgeting by the Municipality of Pehcevo, estimates the value that can be approved for that loan. After previously realized incomes. Thus, the need for municipalities to get loans is avoided and, above all, depending on the management, that is, the way the mayor predicts the funds themselves”, says Trencevski.

Trencevski still says that it is very important that the government of the Republic of Macedonia helps the announced settlement of the municipalities, amounting to 51% of their debts and that they are irreversible funds. This, he adds, will facilitate the work and functioning of the municipalities, and the municipality of Pehchevo will be able to realize capital projects.

 

DECENTRALIZATION ONLY ON LIABILITIES, AND NOT MONEY

The research of the journalist team of SCOOP Macedonia showed that the municipalities in the country have been sinking in debt since their formation. Some of them are inherited, most of them have been made since the first year of their formation and have stretched and increased to this day. The municipalities owe to several companies for the services they requested. They owe to construction companies, oil distributors, for electricity, water etc. A lot of local self-government units have been blocked for years and the accounts are financed with interim decisions of the Government of the Republic of Macedonia.

Under pressure from the demands of its money for the services rendered by companies, the executive power decided to propose to the assembly a law on repaying part of the debts of the municipalities. The law has been adopted and in this period municipal administrations expect to receive the promised money which, as the law requires, is strictly intended for the repayment of debts.

 

WHAT DOES THE LAW ON LSU FINANCIAL SUPPORT SAY?

                                                           Article 2
Financial support refers to financing reported matured and unpaid liabilities of municipalities and individual users in the Electronic System for reporting and recording liabilities as of September 2018.

                                                         Article 4

The total amount of funds provided as financial support for financing matured and unpaid liabilities for municipalities and individual users amounts to 3,032,383,086 MKD, i.e. 51% of the total reported amount of municipalities and individual users, as of September 2018. The funds referred to in paragraph 1 of this Article shall be provided from the Budget of the Republic of Macedonia for 2018, section 09002 – Ministry of Finance – functions of the state, program 2 – Functions, subprogram 20- Functions, item 464- Various transfers.

                                                         Article 5
The funds are allocated to the municipalities individually in the amount of 51% of the amounts determined in Article 3 of this Law.

                                                         Article 7
Municipalities and individual users have an obligation to use the allocated funds exclusively for the purpose set out in Article 2 of this Law.

According to the law, fines in the amount of 1,000 up to 5,000 Euros in MKD counter-value can be imposed on the mayors in the event of misdemeanors. Supervision of their work will be carried out by the Ministry of Finance through the financial inspection in the public sector.

 

New mayors have no choice. In order to receive state money for repayment of half of the debts, the requirement is that they spend money on repayment of their old debts, and not with this money to carry out election promises. Now they have to take care of the debts of the municipality and allocate funds for the salaries and contributions for the municipal administration.

The Mayor of the Municipality of Bitola, Natasa Petrovska, says that the main reasons for which the municipalities are indebted is because decentralization has been carried out for years in delegating obligations with inadequate fiscal decentralization, i.e. with insufficiently secured funds.

“In the Municipality of Bitola, 38.48% are allocated on salaries from the total budget, which includes the salaries of both local institutions and schools, which means that the municipality does not allocate much of the budget for salaries and does not face overstaffing. In the Municipality of Bitola there are 150 full-time employees and two fixed-term employees”, says Petrovska.

The mayor adds that one of the basic functions of the Municipality of Bitola is to serve the citizens of the municipality, so that through different forms of action (local urban communities, schools, settlements) it determines the priorities of its citizens. Hence, when planning the budget for the next year, their priority requirements are taken into account, and it is also allocated for the development component of the city, which will provide better living conditions for the citizens.

Ivica Dimitrov, Mayor of the Municipality of Vinica on this topic for SCOOP says:

”Due to budget constraints, i.e. small revenues that are collected from the basic budget, and in order to realize the basic capital projects that are in the interest of the municipality, many municipalities have to get loans. If the percentage of VAT that is returned to the municipalities or if the funds from the Government to the municipalities are increased, some of them do not have to get loans or get indebted on other basis“.

This time the Government of the Republic of Macedonia is helping the municipalities through the state budget. However, judging by the current practice, it will not be much help because of the real needs of the municipalities for the realization of the current liabilities, but also because of the excessive appetites of the mayors and their political parties in the struggle for power, making huge promises to the citizens. Appetites are always greater than opportunities, so the local government enters into projects that it cannot pay for itself. Thus, from elections to elections, Macedonian municipalities are constantly in debt, with blocked accounts and unfinished projects. There is no responsibility and municipal debts are a permanent problem for the state.

Has the time come for re-examining the position of the local self-government units, the rationalization of the number, and the economic criterion as the only valid for the survival of one municipality? The answers to these questions will have to be provided by the political parties and the Parliament of the Republic of Macedonia. Until then, with the municipal financial losses, the Republic of Macedonia is sinking into even greater debts.

 

(The story was supported by CIN SCOOP Macedonia within the NED project “Raising Awareness about Corruption through Investigative Reporting”)