KATALIN PALLAI

1. KATALIN PALLAI THE HUNGARIAN DECENTRALIZATION The Hungarian LG System

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

3. THE BASIC FRAMEWORK The Hungarian LG System

4. 1990. Act on Local Governments • 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 The Hungarian LG System

5. 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 • county governments (not EU regions) • RESIDUAL ROLE: services that settlements are not capable to perform or have a regional character The Hungarian LG System

6. EXPENDITURE ASSIGNMENT WHO DOES WHAT? The Hungarian LG System

7. 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 The Hungarian LG System

8. 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 SERVICE TASKS OF LOCAL GOVERNMENTS The Hungarian LG System

9. LOCAL GOVERNMENT EXPENDITURES IN HUNGARY The Hungarian LG System

10. 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 The Hungarian LG System

11. 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) The Hungarian LG System

12. HEALTH CARE – hospitalsMixed 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 The Hungarian LG System

13. WHO LEVIES WHAT TAXES AND COLLECTS LOCAL NON-TAX REVENUES? REVENUE ASSIGNMENT The Hungarian LG System

14. REAL VALUE OF REVENUES(on 1991 value) The Hungarian LG System

15. 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) The Hungarian LG System

16. Role of local taxes The Hungarian LG System

17. Local business tax revenue (per capita in 1998, thousand HUF) The Hungarian LG System

18. 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 The Hungarian LG System

19. LOCAL BORROWING Who and How can Generate Local Debt? The Hungarian LG System

20. 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) The Hungarian LG System

21. PROBLEMS AND CONFLICTS IN THE SYSTEM The Hungarian LG System

22. 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 The Hungarian LG System

23. GDP SHARE OF LG AND CG BUDGET The Hungarian LG System

24. Local and Central budgets compared to the change of GDP The Hungarian LG System

25. LOCAL REVENUES AS (%) SHARE OF GDP The Hungarian LG System

26. 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 The Hungarian LG System

27. Regulation of PIT sharing The Hungarian LG System

28. Shared PIT and local taxes(in nominal HUF) The Hungarian LG System

29. OWN AND SHARED REVENUES(AS SHARE OF TOTAL REVENUES) The Hungarian LG System

30. TRANSFERS PROPORTIONAL TO TASKS (AS SHARE OF TOTAL REVENUES) The Hungarian LG System

31. 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 The Hungarian LG System

32. PROBLEMS ANDCONFLICTS 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 The Hungarian LG System

33. PROBLEMS AND CONFLICTS IN THE SYSTEM • Fragmentation In 1990 it was logical to create a systembased 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 The Hungarian LG System

34. IMPORTANCE OF LOCAL GOVERNMENTS • Division of monolithic state • New methods in governance • Participation and local democracy • POPULARITY OF LOCAL GOVERNMENTS The Hungarian LG System

35. Satisfaction with achievements The Hungarian LG System

36. Satisfaction with institutions The Hungarian LG System

37. Role in improving your life The Hungarian LG System

38. Thank you ! Katalin Pallai www.pallai.hu katalin@pallai.hu The Hungarian LG System

39. 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 The Hungarian LG System

40. 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 The Hungarian LG System

41. OWN REVENUES(as % of local budgets) The Hungarian LG System

42. Revenues in Budapest as % of total revenues The Hungarian LG System