1. www.pallai.huThe Hungarian LG System1 KATALIN PALLAI THE HUNGARIAN DECENTRALIZATION

2. www.pallai.huThe Hungarian LG System2 OUTLINE The basic framework Elements of the fiscal decentralization framework Expenditure assignment Revenue assignment Borrowing Design trade offs and problems in the system

3. www.pallai.huThe Hungarian LG System3 THE BASIC FRAMEWORK

4. www.pallai.huThe Hungarian LG System4 The system created on the model of the European Charter of Local Governments on the principles of Subsidiarity Independent self-government Local government decision can be attacked only at court or Constitutional Court on the basis of its legality Strong decentralization Two main frameworks of public administration (CG&LGs) Public expenditure 54 to 39 % of GDP (1994-97) Local expenditure 17,4 to 10,58 % of GDP (1990-2002) Accountability 1990. Act on Local Governments

5. www.pallai.huThe Hungarian LG System5 SYSTEM OF PUBLIC ADMINISTRATION CENTRAL GOVERNMENT and its organs at the local and terriotorial levels LOCAL GOVERNMENTS at two levels Municipalities as basic units organized by settlements GENERAL OBLIGATION GENERAL OBLIGATION county governments (not EU regions) RESIDUAL ROLE RESIDUAL ROLE: services that settlements are not capable to perform or have a regional character

6. www.pallai.huThe Hungarian LG System6 EXPENDITURE ASSIGNMENT WHO DOES WHAT?

7. www.pallai.huThe Hungarian LG System7 FUNCTIONS OF LOCAL GOVERNMENTS Physical Services Transport Public Works Social services Education and Culture Welfare and Health Care Public Administration and local management Urban regulation and planning Protection of the natural and built environment Citizens administration (birth, death, marriage) Local business and Tax administration Asset management

8. www.pallai.huThe Hungarian LG System8 SERVICE TASKS OF LOCAL GOVERNMENTS OBLIGATORY TASKS Drinking water Basic health and welfare services Kindergarten and primary school education Public roAds & lighting Cemeteries Protection of the rights of minorities OPTIONAL TASKS Depending on size and financial capacities Only on extent not endangering delivery of the mandatory tasks Fire brigades&rescue Welfare services Public transportation Secondary education

9. www.pallai.huThe Hungarian LG System9 LOCAL GOVERNMENT EXPENDITURES IN HUNGARY 19921997 Education3336 Health2022 Social security and welfare67 Housing and water56 Transportation and communication 62 Current expenditures7974 Capital expenditures191917 Total expenditures100

10. www.pallai.huThe Hungarian LG System10 PHYSICAL INFRASTRUCTURE SERVICES (own responsibilities) Gas, district heating, water, waste, local public transport, cemeteries, etc TRANSFER TO LGs: Responsibility as compulsory task to local governments 1991. Law on property transfer as core assets (actual transfer till 1993) 1994. Price setting authority transferred (except for gas, and veto right of CG on public transport charges) Revenue collection and receipt Investment grants and operation subsidy available Freedom how to organize the service delivery

11. www.pallai.huThe Hungarian LG System11 HUMAN SECTOR SERVICES, except health (shared responsibilities) PRIMARY AND SECONDARY EDUCATION TRANSFERRED TO LGs: Responsibility as compulsory task to local governments 1991. Law on property transfer of assets used by the institutions (actual transfer till 1993) Employer rights of staff involved Normative grants on the basis of tasks supplied Investment grants on request General revenues to supplement grants 1993-97 new sectoral laws regulating service delivery and universal quality standards (in education basically output regulation)

12. www.pallai.huThe Hungarian LG System12 HEALTH CARE – hospitals Mixed system (not shared !) National level - financing of operations Specification of financing rules for activities Operation contract as basis for transfers Specification of type and amount of services to be covered (and up-dated every year) Local level - capital investments Construction and renovation of buildings Purchase of equipment Competition for national grant system Producing dubious incentives

13. www.pallai.huThe Hungarian LG System13 REVENUE ASSIGNMENT WHO LEVIES WHAT TAXES AND COLLECTS LOCAL NON-TAX REVENUES?

14. www.pallai.huThe Hungarian LG System14 REAL VALUE OF REVENUES (on 1991 value)

15. www.pallai.huThe Hungarian LG System15 LOCAL REVENUES Annual revenue transfers Shared revenues Normative operational grants Addressed and targeted investment grants Deficit grant Own-source revenues: Local taxes Fees, charges, contributions Revenues on Property (Lease and sale) Borrowing (loan and bond)

16. www.pallai.huThe Hungarian LG System16 Role of local taxes

17. www.pallai.huThe Hungarian LG System17 Local business tax revenue (per capita in 1998, thousand HUF)

18. www.pallai.huThe Hungarian LG System18 Basically normative system Proportional to tasks Normative grants for operation Addressed and targeted investments grants Revenue localization Own revenue – tax, fee, privatization, property lease and sale Shared taxes Revenue capacity Different forms of operation and development subsidies Equalization grant, based on local tax and PIT capacity calculation

19. www.pallai.huThe Hungarian LG System19 LOCAL BORROWING Who and How can Generate Local Debt?

20. www.pallai.huThe Hungarian LG System20 LOCAL BORROWING Borrowing is an independent decision of the local council, mayor, financial chief Macro-economic risks of local Borrowing is reduced by Laws and regulations Regulation of Municipal borrowing (debt service pegged to own current revenues 96) Municipal bankruptcy and Debt Settlement Procedure (96) Law: Central Government is not responsible for local borrowing (no bail-out)

21. www.pallai.huThe Hungarian LG System21 PROBLEMS AND CONFLICTS IN THE SYSTEM

22. www.pallai.huThe Hungarian LG System22 PROBLEMS AND CONFLICTS IN THE SYSTEM Lack of predictability: Annual decisions of central transfers within the State Budget flexibility for central Government vs. Insecurity for Local Governments and Overwhelming fiscal dependency Structural deficit of the national budget: Central government strategy can push down the deficit to the LG level

23. www.pallai.huThe Hungarian LG System23 GDP SHARE OF LG AND CG BUDGET 199119962000 CENTRAL GOVERNMENT 47%40%45% LOCAL GOVERNMENTS 15%14%12%

24. www.pallai.huThe Hungarian LG System24 Local and Central budgets compared to the change of GDP

25. www.pallai.huThe Hungarian LG System25 LOCAL REVENUES AS (%) SHARE OF GDP

26. www.pallai.huThe Hungarian LG System26 PROBLEMS AND CONFLICTS IN THE SYSTEM Decreasing local government revenues: The possible problems: Un-predictable process, insecurity for LG planning Inadequacy of LG funding Interest of local governments: Predictable system: to peg transfer pool to GDP or National Budget More own revenues and financial independence (CG must offer not only right, but make also room for local revenue collection) Better representation of the interests of LGs

27. www.pallai.huThe Hungarian LG System27 Regulation of PIT sharing

28. www.pallai.huThe Hungarian LG System28 Shared PIT and local taxes (in nominal HUF)

29. www.pallai.huThe Hungarian LG System29 OWN AND SHARED REVENUES (AS SHARE OF TOTAL REVENUES)

30. www.pallai.huThe Hungarian LG System30 TRANSFERS PROPORTIONAL TO TASKS (AS SHARE OF TOTAL REVENUES)

31. www.pallai.huThe Hungarian LG System31 PROBLEMS AND CONFLICTS IN THE SYSTEM Weaknesses of the normativity of the intergovernmental financing system Decreasing task related financing Shared tax revenue has decreased Inadequacy of the own revenue sources Revenue capacity calculation for equalization considerably decreased the incentive for own revenue production No calculation of revenue dynamics Increase of discretionary elements

32. www.pallai.huThe Hungarian LG System32 PROBLEMS AND CONFLICTS IN THE SYSTEM Difficulties caused by the Public Sector Reform Uniform quality standards: changing tasks for local governments Un-funded mandates ? Sector policies vs. Inter-sectoral bargains Central planning advantage vs. micro adjustments and synergies of local policies

33. www.pallai.huThe Hungarian LG System33 PROBLEMS AND CONFLICTS IN THE SYSTEM Fragmentation In 1990 it was logical to create a system based on the settlement level for reinforcement of communities and participation Differences in capabilities Externalities and economy of scale Certain functions shifted to weak middle level Incentives to cooperation of LGs Privatization and out sourcing encouraged

34. www.pallai.huThe Hungarian LG System34 IMPORTANCE OF LOCAL GOVERNMENTS Division of monolithic state New methods in governance Participation and local democracy POPULARITY OF LOCAL GOVERNMENTS

35. www.pallai.huThe Hungarian LG System35 Satisfaction with achievements

36. www.pallai.huThe Hungarian LG System36 Satisfaction with institutions

37. www.pallai.huThe Hungarian LG System37 Role in improving your life

38. www.pallai.huThe Hungarian LG System38 Katalin Pallai www.pallai.hu katalin@pallai.hu

39. www.pallai.huThe Hungarian LG System39 RIGHTS OF LOCAL GOVERNMENTS LGs autonomously act on public affairs in local interests Responsibility and authority exercised by elected body The office has strictly administrative and preparatory tasks Autonomously select the mix and forms of services delivered Autonomous decision on organization and rules of procedure

40. www.pallai.huThe Hungarian LG System40 INSTITUTIONAL FRAMEWORK OF FD Legislative Framework: Constitution, Local Government Act, Act on Local Budgets, State Budget Act, Sector Laws and Decrees, Act on Municipal Debt Resolution Organizational Framework for Conflict Resolution Surveillance: Parliament, State Audit Office, Local Administrative Notary, sector ministries (compliance with sector rules) Citizens control: transparency, public hearing, referendum, polls, NGOs & private sector representation Dispute resolution: regular Courts, Constitutional Court, No Administrative Court only departments of judges specialized on administrative cases

41. www.pallai.huThe Hungarian LG System41 OWN REVENUES (as % of local budgets)

42. www.pallai.huThe Hungarian LG System42 Revenues in Budapest as % of total revenues