LOCAL GOVERNMENT REFORMS IN BULGARIA: RECENT DEVELOPMENTSAND KEY CHALLENGES
Dr. Desislava Stoilova[1]
Abstract
Multi-level governanceis one of the most widely utilized government structures across the developedcountries, mainly due to theundoubted advantages of decentralization. This is the reason why, 17years after the beginning of the transitionprocess Bulgariahas made remarkable progress in reforming intergovernmental fiscal relations. The main goal of this paper is to critically examine the main achievements and basic challenges of the fiscal decentralizationreformin thecountry. Analysis is mainly focused on the local revenue sources, due to the assumption that the strong revenue raising capacity and the stable intergovernmental transfer system are basic preconditions for financial independence and stability of the local government.
1. Introduction
The purpose of this paper is to provide a critical analysis of the local government reforms in Bulgaria during the transition period. First of all the changes in government structure and intergovernmental financial relations arediscussed on the base of the legislation in force.Analysis is focused on the role of different governmental tiers within the public sector of the country. The rate of fiscal decentralization is assessed through the relative importance of the intergovernmental transfers both in the central government expenditure and the local budgets.Issue of considerable interest is the effectiveness of the adopted equalization mechanism, measured by the structure of local revenues.Special emphasis is placed upon the evolution of local budgets revenue structure over the transition period.The little relative share of local tax revenues both in the national tax system and local government revenues is analyzed as a base for further assessment of the local tax revenue raising capacity.Finally, some recommendations are outlined, intended to improve intergovernmental fiscal relationsin Bulgaria and promote financial independence of the local governments.
2. GovernmentStructure
The process of gradual political, administrative, and financial decentralization in Bulgaria started in 1991, when the new Constitution of the Republic of Bulgaria was adopted. It legally grounds and protects the local self-government principles.In addition, the Local Self-Government and Local Administration Act (1991)concretizes the guidelines provided by the Constitution,regulates the administrative-territorial structure of our country and prescribesthe organization and functions of local self-government in conformity with the formulations of the European Charter on Local Self-Government, ratified by the Republic of Bulgaria in 1995.Important component of the legal base of the local self-government is the Act on Administrative and Territorial Structure of the Republic of Bulgaria (1995), which determines the legal criteria and procedures for establishing, merging, splitting and liquidating administrative units. This law is based on a number of principles, the most important of which are the principle of territorial neighborhood; compliance between the size of the administrative units and their competencies and resources; the subsidiarity principle; the principle of succession and territorial stability of the administrative structure and democratic choice in decisions that effect the administrative and territorial changes.Although the five administrative reforms, which have been conducted in the last 50 years and consequential transformations in the administrative-territorial units at the different government levels, modern municipal system was initiated with the new Constitution and the first democratic elections. Since 1991, local self-government in Bulgariahas become constitutionally and legally regulated.
Table 1 Main Characteristics of Government Structure
Administrative TerritorialUnits
Year / Planning Regions / Districts / Municipalities
Number / Average Population / Number / Average Population / Number / Average Population
1947 - 1950 / - / - / 14 / 516 300 / 2 178 / 3 300
1959 - 1961 / - / - / 28 / 261 000 / 979 / 8 000
1979 / - / - / 28 / 315 900 / 291 / 30 400
1987 / - / - / 9 / 997 400 / 273 / 32 900
1999 / - / - / 28 / 284 800 / 262 / 30 300
2006 / 6 / 1280 000 / 28 / 280 000 / 264 / 30 000
Now, classifiedaccording to the European standards the administrative-territorial structure of our country includes 6 planning regions, defined as level NUTS II, 28 administrative districts corresponding to level NUTS III, and 264 municipalities, which represent the level LAU 1.[2] Createdaccording to the Regional Development Act and in compliance with the requirements of the European Union for allocation of regional development funds, the planning regions in Bulgaria are merely statistical units and do not perform administrative, nor financial functions. The districtsaredeconcentrated administrative unitsof the central government, which coordinate national and local interests.They do not enjoy financial autonomy, and do not provide public services to the population. Basically, districts are intended to manage the state property on its territory, to monitor the compliance of local decisions with the law, to implement the state policy at local level, to foster local development and unite municipalities to work together on large-scale projects.According to the Constitution, the municipality - a legal entity, is the only one tier of really autonomous subnational government in the country. It has the right of ownership and adopts independent municipal budget, which must be used in the interestsof the local population. The bodies of local government - Municipal Council and Mayor - are elected directly by the local population for a 4-year mandatewith the purpose to make and perform governmental decisions. Election procedure is determined by the Local Elections Act (1995).
The municipal council comprises of municipal councilors elected on the basis of proportionate representation. It is the representative body for the local government that determines the policies for development of the municipality, adopts the budget, and ensures the management of municipal property. The mayor performs executive functions,directly manages the municipal administration,and ensures the performance of the municipal budget and the implementation of the municipal council’s decisions. The elections for mayor take place in two rounds, based on the majority system. The candidate, who gains the absolute majority of votes in the first round, becomes mayor. A second round is organized a week after the first round if none of the candidates has been elected. Only the first two candidates may participate and the candidate who gains the most votes becomes mayor. The last local elections held in the end of 2007, elected respectively 264mayors and 264 municipal councils with 5 234 municipal councilors. Men prevailed among the municipal councilor seat takers (75.1%). There are two years lag between the central and local elections in Bulgaria.
3. Intergovernmental Fiscal Relations
During the period 1990-2007Bulgaria has made remarkable progress in reforming the system ofintergovernmentalfiscal relations. In addition to the new Constitution and the Local Self-Government and Local Administration Act, which provide the basic regulation of the local self-government, a package of laws has been adopted in order toregulate: the citizens participation in the political process at local level with the Referendum Act (1996), the issues of acquiring and managing municipal property withthe Municipal Property Act (1996), the procedure and organization of the municipal budgeting process withthe Municipal Budgets Act (1998),to specify the type, base, and rate of local taxes and fees in accordance with the Local Taxes and Fees Act (1997), and to determine the procedure, conditions and limits of local debt service with the Municipal Debt Act (2005). Theadministrative reform carried out in the country and the necessity of qualitative perfection of the activities of the central and local government administrations defined the needs of additional regulation, particularly in the part concerning the development of municipal officers’ statute. This enforced the adoption of the Administration Act (1998) andthe State Officers Act (1999). Within the course of reformswere implemented several amendments of other acts directly related to the improvement of the functioning and organization of local self-government.
In response to the fast-changing legal and financial environment during the transition period, public sector expenditures have been very dynamic.Due to the economic stagnation, financial instability, and vertical imbalance in the last decade of 20th century the relative importance of local governments within the governmental system decreased. Moreover, regardless of the financial stabilization and economic growth, achieved during the first years of the new century, this downward tendency has been persistent.Although providing up to 30% of public sector services in the country, local budgets’ relative share in the GDP has been reduced to 7,5% in 2000and 6.1% in 2004 bycomparison with 12,3% in 1990.At the same time expenditures of the local governments, which formed21.5% of the total expenditures in the consolidated state budget in 1991, reached respectively 17,9% in 2000 and 15,7% in 2004. The downward tendency was reversed in 2005, due to the ongoing process of fiscal decentralization during the period 2003 – 2007, which has considerably influenced intergovernmentalfiscalrelations. As a result, financial autonomy of municipal level of government increased.Now, local governments are animportant part of the public sector in the country, accounting for about 19% of total governmentspending. In 2007 the consolidated public sector expenditure represents38,9% of GDP, while local government share is 7,4% of GDP.
Table 2Public Sector Expenditures in Bulgaria
a) 1990 - 1999
Indicators / 1990 / 1991 / 1992 / 1993 / 1994 / 1995 / 1996 / 1997 / 1998 / 1999GDP in current price / (mio BGN)[3] / 45.4 / 135.7 / 200.8 / 298.9 / 525.6 / 880.3 / 1761.2 / 17432.6 / 22421.1 / 23790.4
Consolidated Public Sector Expenditures / (mio BGN) / 30.6 / 69.4 / 107.7 / 167.7 / 286.0 / 432.1 / 768.8 / 5976.8 / 8620.3 / 9638.7
(% of GDP) / 67.48 / 51.11 / 53.66 / 56.09 / 54.41 / 49.09 / 43.65 / 34.29 / 38.45 / 40.52
Expenditure of CentralGovernment[4] / (mio BGN) / 18.0 / 31.9 / 46.0 / 81.9 / 150.0 / 235.0 / 514.0 / 3124.9 / 3072.7 / 4130.4
(% of GDP) / 39.65 / 23.58 / 22.91 / 27.43 / 28.54 / 26.81 / 29.18 / 17.93 / 21.15 / 21.46
Expenditure of Local Government / (mio BGN) / 5.6 / 14.9 / 26.2 / 33.8 / 48.6 / 67.9 / 111.7 / 990.2 / 1658.7 / 1864.1
(% of GDP) / 12.34 / 10.95 / 13.04 / 11.30 / 9.24 / 7.71 / 6.34 / 5.68 / 7.40 / 7.84
(% of CPS) / 18.30 / 21.47 / 24.33 / 20.16 / 16.99 / 15.71 / 14.53 / 16.57 / 19.24 / 19.34
b) 2000 - 2007
Indicators / 2000 / 2001 / 2002 / 2003 / 2004 / 2005 / 2006 / 2007GDP in current price / (mio BGN) / 26752.8 / 29709.2 / 32401.6 / 34627.5 / 38822.6 / 42797.4 / 49090.6 / 54864.0
Consolidated Public Sector Expenditures / (mio BGN) / 11233.8 / 12017.3 / 12732.5 / 14068.8 / 15198.9 / 16657.3 / 18 275.6 / 21356.4
(% of GDP) / 41.99 / 40.45 / 39.30 / 40.63 / 39.15 / 38.92 / 37.23 / 38.93
Expenditure of CentralGovernment / (mio BGN) / 4721.7 / 5214.9 / 5192.0 / 6073.9 / 6404.0 / 6869.6 / 6998.8 / 9206.3
(% of GDP) / 21.75 / 20.62 / 19.02 / 20.75 / 19.93 / 19.49 / 17.54 / 15.70
Expenditure of Local Government / (mio BGN) / 2005.3 / 1990.1 / 2391.6 / 2243.8 / 2382.5 / 2738.7 / 3332.9 / 4070.6
(% of GDP) / 7.50 / 6.69 / 7.38 / 6.48 / 6.14 / 6.40 / 6.79 / 7.42
(% of CPS) / 17.85 / 16.56 / 18.78 / 15.95 / 15.68 / 16.44 / 18.24 / 19.06
Source: Ministry of Finance of the Republic of Bulgaria, National Statistical Institute and own calculations
The fiscal decentralization process in Bulgariacomprises of several distinct periods. As a whole, the intergovernmental fiscal relations in the period 1991 – 2002can becharacterized by a lack of stability, fairness, and transparency. Typical for thebeginning of transition 1991 – 1993 were the perseverance of a highlycentralized system and the absence of a sensibledialogue between local and central authorities. In 1993, the independence of municipalbudgets within the consolidated state budget was acknowledged,meaningin essence, that the State abandoned thecentralization of local budget surplus and the financingof local deficit. Moreover, the new financial relationshipbetween the central government and municipalities manifestedwiththe introduction of a formula for the distribution of state subsidies for municipalbudgets. However, the reform of local budgetary process and municipal financial management was inevitable as areflection of broader social changes implemented throughoutthe country.
Typical for the period 1994–2002was the process of gradually building the capacities of local authorities. The National Association ofMunicipalities in Republic of Bulgaria (NAMRB)and regional associations of municipalities emergedin conjunction with instructive training, seminars,and discussion forums. In cooperation with foreign consultants, the efficacy of the existing legislation and the financial situation of municipalitieshave been analyzed,meanwhile developing common positions on majorproblems and moving toward reforms. This resultedin several changes in intergovernmental fiscal relations, mainly intended to graduallyeliminatethe mandatory priorities in the allocation of municipal budgetary expenditures.Since 2000 centralgovernment’s efforts have been increasingly focused on implementingstructural reforms in functional systems, whichconcern some of the main expenditure responsibilitiesof municipalities, such as education, social support, andhealthcare. As a result primary healthcare and integrated regionalhospitals were excluded from municipal financing andhalf of all welfare benefits were financed by a targetedsubsidy from the central government. However,to the end of this period, the financial systemremained centralized and municipalities were deprivedthe opportunity to plan even own-sourcerevenues.
The end of 2001marked the start ofintergovernmental cooperation geared towardimplementing fiscal decentralization principles byredefining the regulatory framework of intergovernmental financial relations. The Council of Ministersand the National Association of Municipalitiessigned a Cooperation Agreement, whereby bothparties agreed to decentralize local governmentand to increase the financial independence ofmunicipalities. Both the Fiscal DecentralizationConcept and the Program for its implementationwere adopted in 2002. As a result, thereform of local finances allowed for one of the main achievements in the scope of intergovernmental fiscal relations, namely the clear distinction between the local and central responsibilities for the public services. Provided for the first time by the annual State Budget Act for 2003 it was continued and improved during the following years. Basically, public services in Bulgaria are organized in nine major functions, each of them containing a number of activities. The central and the local governments provide services in each of these functions, as the ratio of their shares in the consolidated public expenditures varies for the different functions. Prevailing state functions are administration, defense, public order and security, social insurance and social care, and economic activities, prevailing municipal functions include housing and public utilities, while functions as education, healthcare, and culture are mixed. Consequently, municipalities provide services connected to state delegated activitiesand local activities. State delegated activities are entirely financed through the intergovernmental transfer system, mainly by proceeds from the personal income tax and a supplemental subsidy to the amount of expenditures calculatedaccording to standards, whichtake into accountquantitative indictors, such as the personnel number, the necessary salaries and insurance payments, the number of users, etc. Local activities are connected tothe provision of local services, with type, amount, quantity, and quality independently determined by the municipalities. These expenditures are only financed by ownrevenues and equalization subsidy. Additionally, the 2003 State BudgetAct provided a framework for regulating anew, simple and transparent model of assigninggovernment subsidies.
4. Role of the Intergovernmental Transfer System
Reflecting the whole organization of the intergovernmental fiscal relations, the transfer system in the period 1991-2002 hadinherent the outlined problems. Severalbasic shortcomings of the intergovernmental transfer system can be summarized. Firstly, the overall amount of the transferswas not stable. The share of the subsidies for the periodvarieswidely between 5.2% and 11.0% of the gross domestic product and represents from 10.6% to 29.4% of the central government expenditures in different years. Secondly, the formula for the state subsidies allocation among the municipalities was exceptionally complicated and difficult to predict. Since its introduction in 1993, it has been changed each year, becoming more and more complex with each change. Moreover, the original legislative rationale for the general state subsidy, namely to meet differing expenditure needs based on “objective criteria”, has been converted into a redistributive mandate based largely on ad hoc decisions of the Ministry of Finance. Whereas the general subsidy has come to operate more and more as a “safety net” for municipalities with low revenues per capita, analyses of its actual allocations indicated numerous instances of unexplained variations across municipalities.[5]As regards the targeted subsidy for capital investment it was allocated strictly on an ad hoc basis and seemed to bear no relationship to the general subsidy criteria or other rationale.Finally, thecontinual redistribution of subsidies in the course of fiscal year as well as the end-of-year special subsidy allocations ignored the objective criteria adopted with the annual State Budget Acts. Theseadditional transfersallocated on a regular basisthroughout the year established a model of completecontrol over the municipal budgets.Because the relative share of additionally allocated funds during theperiodrepresented from 20.2% to 47.0% of the total governmental subsidy (about 35% on an average), this approach caused unfairness, unpredictability, and unstability of local financeand undermined effective budgetary process at the local level, while fostering a strongly political orientation to the intergovernmental resource allocation.
Chart 1Role of the Intergovernmental Transfer System
Source: Ministry of Finance of the Republic of Bulgaria, National Statistical Institute and own calculations
Presently, the intergovernmental transfers in Bulgaria are not competitive and comprise shared taxes and state subsidies. The most important shared tax is the personal income tax. It was divided among the central and local governments in 50:50 ratios, but since the beginning of 2003 the personal income tax has been defined as entirely municipal revenue, intended to cover delegated state activities at the local level. However, significant inter-municipal disparities are inescapable, because the personal income tax is a progressive tax, collected by withholding at source, and the tax base is unevenly distributed, favoring the richest local governments. For this reason, the normative expenditure standards for the delegated state activities have been developed and shared tax proceeds for any particular municipality have been limited to the amount of these standards.In addition to the shared personal income tax,Bulgarian municipalities can count on three types of state subsidies: general, targeted, and extraordinary. According to the legislation in force, generalsubsidyis provided to the municipalities without restrictions. It is unconditional, so no strings are attached to the use of money. Targetsubsidyisconditional. It is provided for preliminary set of purposes, usually for social assistance, healthcare, ecologic recovery,and capital investment projects. Extraordinary subsidy is an unconditional, unplanned financial flow, granted to municipalities in the course of the fiscal year, based on vague criteria and is generally aimed at supporting the municipalities in difficult financial situation.
Total intergovernmental subsidies are allocated based on a formula, which is stated in the State Budget Act. Basically, the formula takes into account the expenditure needs and revenue capacity of the local governments. In 2007 it comprises three components. The first element is the general supplemental subsidy, which is calculated by a “gap-filling” method, as a comparison between the full cost of all state mandates imposed on municipal budget, and the amount of shared tax revenues. Actually, the general supplemental subsidy plays an equalization role as well, and compensates for the uneven distribution of the personal income tax base. The second element is the general equalization subsidy, which consists of two ingredients. The rights of receiving the first component have only municipalities, whose proceeds from local taxes in the fiscal year before previous have been under the average local tax proceeds at the national level. Actually, this governmental transfer brings the revenue capacity of the below-average municipalities up to the national average level. Eligible to receive the second component of the equalization subsidy are the municipalities with per capita expenditures for local activities lower than 110% of the country’s average. In addition, the annual equalization transfer pool must be equal to at least 10% of the total municipal own-source revenues in the fiscal year before previous. The last element of the allocation formula is the capital investment subsidy.It is very important targetedfinancial flow, because a wide range of infrastructure capital investments and ecologic recovery projects is assigned to the local governments. For the present this grant is allocated on an ad hoc basis and seems to bear no relationship to the general subsidy criteria.