1. Central government in the planning of municipal revenues and controlling financial sustainability in municipalities Audit department 3, Vilnius division, adviser, Olga Vitkauskienė 2015-10-06

2. Content Scope of municipality audits in Lithuania Structure and planning of municipal revenues Measures for controlling financial sustainability Examples from practice Questions and answers

3. Audit scope Since 2012 National Audit Office performs audit in all 60 municipalities of Lithuania

4. Audit scope Financial (regularity) audit 2014 Regularity of management and the use of state budget funds and state property managed by municipalities Planning of municipal budget revenue and its allocation among municipalities Municipal debt Municipal annual (consolidated) statements Audit of the implementation of municipal budgets and management, use and disposal of municipal property Municipal control and audit services

5. Sources of revenue of municipal budgets Total municipal revenue in 2014 – 2,23 billion EUR

6. The role of central government: special targeted grants Special targeted grants Performance of state (delegated by the State to municipalities) functions Financing organization of pre-school, general and non-formal education Implementing the programmes approved or decisions adopted by the Seimas, the Government Amounts of grants to municipalities approved each year by the law At the end of the year, the remaining unspent amount of targeted grants or used not for their purpose shall be repaid to the state budget.

7. The role of central government: compensation of the forecasted revenue Compensation Purpose – to compensate the forecasted decrease in revenue from the State budget, arising due to the decisions adopted by Seimas or the Government.

8. The role of central government: allocation of the Personal Income Tax Every year the Law on the Approval of Financial Indicators of the State Budget and Municipal Budgets establishes the share (percentage) of the collected Personal Income Tax transferred to all municipalities: 2014 – 67,78%, 2015 – 72,8%. The Law on Methodology of Determination of Municipal Budget Revenue – procedure of calculation and allocation of Personal Income Tax. Problem: the municipal share of Personal Income Tax revenue for the coming year is based on increase or decrease of nationally forecasted Personal Income Tax, regardless of economical and financial indicators of municipalities.

9. Structure of the Personal Income Tax revenue Municipal share of the Personal Income Tax Personal Income Tax transfered by local tax administrator For levelling municipal revenue from the Personal Income Tax For levelling of differences in municipal expenditure structure Vilnius m. – 48% Klaipeda m. – 86% Kaunas m. – 94% Vilnius m. – 48% Klaipeda m. – 86% Kaunas m. – 94% Other 57 municipalities – 100% State supports 57 municipalities by giving the additional part of Personal Income Tax (“taken” from Vilnius, Kaunas and Klaipeda)

10. Municipality receives the support (additional Personal Income Tax) from the state if: Actual revenue per one inhabitant of the municipality from the Personal Income Tax for the previous month is below the actual average revenue of all municipalities per one inhabitant from the Personal Income Tax for the previous month (levelling the Personal Income Tax), and (or) There are differences in the expenditure structure of municipality, affected by demographic, social and other indicators (levelling of differences in expenditure).

11. Structure of the Personal Income Tax revenue in 2014

12. Audit findings There are no clear criteria for calculating the share (percentage) of Personal Income Tax for donor- municipalities. –2015-06-11 Ruling of the Constitutional Court of the Republic of Lithuania: “provisions of the Law on the Methodology for Determining Municipal Budgetary Revenues that are governing the calculation and distribution of funds allocated from Personal Income Tax to municipal budgets are in conflict with the Constitution” The existing system of levelling municipalities’ revenue does not motivate municipalities to contribute towards the growth of regional economy.

13. Management of municipal debt – measure to control financial sustainability Municipalities may, within the borrowing limits, take out: a)Long term loans or grant guarantees for the loans used solely for the funding of investment projects (domestic or foreign creditors); b)Short term loans for covering of a temporary shortfall of revenue (creditors and the state budget). Borrowing limits and rules for reducing the liabilities Law on the Approval of Financial Indicators of the State Budget and Municipal Budgets for a specific year

14. Borrowing limits for 2015 70% Vilnius –135% (debt and accounts payable) Municipality debt limit* 15% Vilnius – 25% Annual net borrowing limit* 10% Guarantee limit* *Limits are based on the sum of forecasted revenue and compensation from the state budget

15. Other rules for the debt management Municipal debt > 40% Requirement to reduce overdue liabilities by not less than 10% during the year EU, international projects + repayment of taken loans

16. Thank you for your attention