Indebtedness of local authorities in the Canton of Valais legal structure

Transcription

1 Presidency of the Cantonal Government EURORAI: International seminar in Rostov-on-Don on 7 th October 2011 Indebtedness of local authorities in the Canton of Valais legal structure Introduction The Swiss State is endowed with a federalist structure which consists of three levels: the country, the canton and the municipalities. The basic principle of federalism is that cantons delegate to the upper level - the federal State - only tasks they cannot carry out themselves. The same principle prevails between the municipalities and the cantons. At the end of 2010, Switzerland counted 7.9 million inhabitants distributed among 26 cantons and 2,551 municipalities. The number of inhabitants from one canton to another varies a lot. The smallest canton (Appenzell Rhodes-Interior) has only 16,000 inhabitants and the biggest, the canton of Zurich, reaches 1.3 million inhabitants. We live in the canton of Valais, which has 310,000 people. The biggest municipality (Sion) has 30,000 inhabitants and the smallest municipality 22 (Martisberg). In comparison, the biggest city in Switzerland, Zurich, has 370,000 inhabitants. The federal structure of our country is not a particularity of Switzerland. Also Germany, Austria and Russia are set up according to this principle. The opposite form of organisation is a central state, examples of which are France, Italy and Sweden. It is important to explain this general information again in order to understand the context of the management of municipalities in Switzerland. By the end of the nineties of the last century, debts of local authorities in the canton of Valais suddenly became a topical subject. The reason for this situation was that in 1998 it was announced that the municipality of Leukerbad was insolvent. The shock was striking as it was about a famous tourist resort. The municipality of Leukerbad had at that time 1,700 inhabitants and registered approximately one million overnight stays a year. Leukerbad was and still is an attractive tourist destination in the canton of Valais. Leukerbad owes its reputation to its thermal springs. Every day 3.9 million litres of water at 51º Celsius degrees spring from different sources. The Community has the biggest thermal offer in the European Alps and, in winter, guests can take advantage of different possibilities regarding winter sports. Before presenting to you the financial situation of the municipality of Leukerbad and its rehabilitation, it is necessary to inform you briefly about the legal regulations in force at that time and draw attention to the weaknesses they contained.

2 2/9 Law on the Local Government Code of November 13th, 1980 The provisions of the former law regarding the balance in the budget were not formulated in a restrictive manner. Article 71 determined that financial management should respect the principles of legality, urgency and an economic and suitable use of funds as well as the search for balance in the budget. Moreover, article 72 specified that the accounting should show a clear, complete and fair view of the financial management, the assets and the debts. This principle of budgetary balance, certainly praiseworthy, however did not represent a constraint to be respected by the local authorities. These could thus present annual deficits and overdrafts in the balance sheet. Due to a lack of specific legal requirements, the situations of overdraft tended to increase rather than to be reduced. The absence of rules establishing the obligation to reduce the overdrafts over a definite period made it possible to stay in such a situation. Besides, there was no obligation to apply the depreciation rates which had been recommended on the administrative assets. So, it was possible for a community to conceal its financial situation by applying insufficient depreciation rates. Even though the rates were applied and pulled surpluses of expenses, the cantonal audit body did not intervene ex officio. According to article 74 of the law on the local government code, the accounts of the local authorities were subjected to a fiduciary audit. In this respect, at the beginning of every administrative period the primary assembly had to appoint from amongst its members an auditor, who had to present a report on the accounts to the assembly. Given that there was no obligation to apply the recommended depreciation rates and as no legal measure had been prescribed in case of an overdraft in the balance sheet, these audits only had few effects as far as the objective of the budgetary balance and the debt situation of the municipality was concerned. The most relevant point at the level of the supervision of the cantonal state concerning the financial aspects was that the local authorities had to submit the following decisions, which were within the fields of competence of the primary assembly, to the cantonal government for approval (art. 123): Those loans taken out which exceeded 10% of the gross income of the previous financial year (without the consolidation of the existing loans); Those loans granted which were not sufficiently guaranteed and which exceeded 1% of the gross income of the previous financial year. To make this easier to understand, here are some explanations about the primary assembly. It is made up of those citizens authorized to vote in the municipality. During these assemblies, citizens can directly decide if a project is to be realized or if it is necessary to give it up. In the big municipalities, the possibility exists to delegate the powers of the primary assembly to a general council which is democratically elected. Article 17 of the Law on the Local Government Code also stipulated that the decisions of the primary assembly, which were subject to the approval of the cantonal government, could enter in force only from the day when they were approved by this authority. The consequences of the disregard of this legal requirement, which at first sight do not seem very important, are not to be underestimated as for their impact. If, for example, a bank granted a loan to a municipality without the approval of the cantonal government, the credit agreement was not valid. As a result, if a bank had to initiate a recovery procedure, it could not rely on a valid contract. The bank had to exploit its rights on the grounds of an illicit enrichment of the municipality. The Law on the Local Government Code provided for the possibility of placing a local authority under the compulsory administration of the cantonal state (art. 128). The

3 3/9 compulsory administration could be ordered by the cantonal government if a municipality put at risk its assets and the balance of its finances. It was planned that the compulsory administration would be made by commissioners appointed by the cantonal government. In this context, it is still appropriate to highlight the federal law of 4 December 1947 which establishes the prosecution for debts against local authorities and other communities of public law. This law provides for placing a municipality under the care of a curator if it is foreseeable that it will not be capable of fulfilling its financial commitments during a long time. This legal measure is applied when the administrative management of a canton is considered insufficient. Until the "special case" of Leukerbad, a measure of placing a local authority under the care of a curator had never been necessary in Switzerland. After having explained the legal framework of financial management of municipalities governing at that time, it is now appropriate to approach the "special case" which represented the financial collapse of the municipality of Leukerbad. Financial situation of the municipality of Leukerbad by the end of 1997 In a few years, the municipality of Leukerbad had accumulated astronomic debts which amounted to CHF 178 million (148 million euros) at the end of With a population of 1,700 inhabitants, the gross debt per resident amounted to CHF 105,000 (87,500 euros). On average, the gross debt per resident of the local authorities in the canton Valais amounted to CHF 9,500 (7,900 euros). The reasons for these debts were the shares and loans which amounted to CHF 98 million (82 million euros) granted to joint stock companies in which, for the greater part, the municipality of Leukerbad held a majority stake. These companies were confronted with financial difficulties and therefore they were not able to pay the interests charged by the municipality for the loans which this latter had granted them. The local authority was thus obliged to take out new loans to pay the interests due to the lenders. The financial situation thus became more and more precarious. With the loss-making situation of the companies and the end of the bankruptcy of the debtor companies of the municipality, the shares and loans granted to these latter depreciated and became worthless. The balance sheet at showed in the assets the loans and interests owed without contingency provisions for risks. These posts were thus overestimated and made possible to mask the financial crisis the municipality was going to face up to. It has to be clarified that the municipality had not submitted for approval to the cantonal government neither the loans granted to the companies nor the loans acquired with third parties by the municipality. In this context at the beginning of 1998 the cantonal government charged the Audit Office (Financial Inspectorate) of the canton of Valais with the task of evaluating the financial situation of the commune. The reports issued by the Audit Office led the relevant authority to take measures. Submission of the local authority to compulsory management by the cantonal government Having been informed in spring 1998 of the financial situation, the canton, as authority of supervision, implemented article 128 of the Law on the Local Government Code and in October 1998 placed the municipality of Leukerbad under partial compulsory management. Commissioners considered that the local authority could assume debts for a maximum amount of CHF 40 million (33.3 million euros). In March 1999 they

4 4/9 submitted to creditors a recovering plan which planned a waiver of debts of 80% (CHF 144,5 million or 120,4 million euros). The creditors refused this project. Submission of the local authority to the care of a curator At the request of the government of the canton as authority of supervision, in July 1999 the cantonal Court decided to place the municipality of Leukerbad under the care of a curator in accordance with the federal law establishing the debt collection of local authorities and other communities of cantonal public law. This is not a measure of supervision but a debt collection procedure. Its first objective is to protect the interests of creditors. The problem of placing a local authority under the care of a curator is that debts remain as far as they can not be paid off during the period of care. There are no certificates of unpaid debts. According to this legal requirement, there were in fact only two solutions to rectify the financial situation of the municipality: Assumption of debts by the canton or Waiver of claims by creditors. Liability claim against the canton of Valais The canton of Valais defended its position in the sense that it was not its responsibility to assume errors of third parties. The creditors did not share this point of view and so 4 creditors (Central bank of issue of the Swiss local authorities, the cantonal Bank of Basel, the municipalities of Rheinfelden and Oftringen) and the municipality of Leukerbad lodged a complaint with the federal Court blaming the canton for not having assumed the supervision of the local authorities in an appropriate way. By judgment of July 3rd, 2003, the federal Court rejected the liability claims made against the canton of Valais for the errors made by the local authorities and the banking institutions. On this subject, it can be taken as an example that a bank of another canton had lent CHF 9 million (7.5 million euros) following a simple telephone call and without any documentation. In the judicial procedure, it was noticed that from 9 requirements which a creditor had established to decide on the granting of a loan to the local authority, 8 requirements were not met, while only that of debt maturity was met. Restructuring The second solution, the waiver of claims, was rejected by the creditors. Although they were aware that there were no other solutions, they were not ready to waive the claims with regard to the local authority. Thus, the curator reached the conclusion that the municipality would be capable to bear debts up to CHF 40 million (33 million euros) with regard to the total of the debts of CHF 181 million (151 million euros). The bearable debts thus corresponded to a 22% dividend. At that time the available cash of the municipality amounted to CHF 15 million (12.5 million euros). There was thus a balance of CHF 25 million (20.8 million euros) to be financed by third parties. On the basis of these facts the curator elaborated the following restructuring plan: Creation of a joint stock company of private law, "Sanag Leukerbad AG", in order to settle the debt of the municipality Leukerbad respecting the principle of equal treatment of creditors. Granting of a guarantee of CHF 30 million (25 million euros) by the canton of Valais to secure a loan of CHF 25 million (20.8 million euros) to be signed by the mentioned company with several some banking institutions.

5 5/9 Repurchase of the creditors claims towards the municipality of Leukerbad by the joint stock company by means of the financing obtained. For those creditors who accept the restructuring plan, the repurchase is planned with a payable 22% dividend during the repurchase and not later than Additional provision in the contracts regulating the cession of receivables by the creditors: in the case of sale before of the low-voltage electrical network, the water source of St-Laurent and several buildings, half of the gross revenue will be used to improve the cession agreements. Moreover, creditors are granted a right of pre-emption concerning these assets until The municipality has to make a commitment to release through its operating account a minimum annual payment of CHF 900,000 (750,000 euros) to be divided proportionally between the receivables ceded (Sanag Leukerbad AG) and the other debts. After payment of the annuity of CHF 900,000 (750,000 euros), the municipality can use a maximum of CHF 900,000 (750, euros) per year of the cash flow for investments. If the cash flow is higher than CHF 1.8 million (1.5 million euros), the difference will be used to repay the debts. Successful restructuring On December 4th, 2003, the Parliament of the Canton of Valais agreed to grant a guarantee. The guarantee was granted provided on the condition that the Audit Office of the Canton of Valais were appointed auditor of Sanag Leukerbad AG. As already pointed out, the curator acknowledged debts up to CHF million (151 million euros) on The creditors waived debts amounting to 175,9 million Swiss francs (147 million euros), which represents 97,3%. At present, only a debt of CH 2.4 million (2 million euros) has not been ceded to Sanag Leukerbad AG due to legal proceedings. The restructuring of the financial situation of the municipality Leukerbad takes its course. At the end of 2003, the amount of debts guaranteed by the canton reached CHF 24 million (20 million euros). At the end of 2010, the amount was up to CHF 15.8 million (13 million euros). As statutory auditor of Sanag Leukerbad AG, the Audit Office of the Canton of Valais checks whether the restructuring agreement is complied with by the different parties. Within the framework of this activity, the audit body has regular contacts with the municipality and undertakes the follow-up and ensures the respect for the established rules. Through its audit report, the cantonal institution regularly informs both the cantonal government and parliament about the progress of restructuring as regards the budget and the accounting. Without the creditors waiving the debts, the recovery of the financial situation of the municipality would not have been possible. An extension of the duration of the loans or a reduction of interest rates would not have led to such a recovery. The volume of loans granted by lenders to the local authority of Leukerbad was disproportionate as regards its financial capacity. The risk analyses implemented by the creditors disregarded any economic logic. So lenders had to bear the consequences of their own errors of assessment. New Local Government Act of February 5th, 2004 The "special case" Leukerbad alarmed the lenders and as a result they became much more restrictive as regards financing the local authorities and they increased the interest

6 6/9 rates offered to the municipalities of Valais. These latter also became more cautious and postponed several investments. The framework conditions were thus favourable for an improvement in the communal finances. However, the creation of new legal bases became necessary to fill the gaps of the current legislation. It would have been simple to choose an increasing centralization of the decision-making power at cantonal level along with a weakened autonomy at municipal level. It is however the opposite that was made by giving responsibilities to the local authorities under adequate rules. Through the new Local Government Act, the autonomy of local authorities was strengthened and at the same time legal requirements to be respected at the level of financial management were clarified, in particular, by means of stricter regulations including compulsory measures to be taken in case of a deficit situation. Here below are some essential points of the new legislation: Harmonized chart of accounts The local authorities have an obligation to keep their accounts on the basis of the harmonized chart of accounts (art. 75 of the new Local Government Act). This accounting model had already been applied by most of the municipalities. The principles of financial management are explained in the Regulation on the financial management of local authorities. The former law did not contain such a regulation. A particularity of the harmonized chart of accounts is the distinction between the operating account and the investment account. The operating account includes consumer spending (salaries, interests, rents, subsidies to third parties, depreciation, etc.) and income as taxes, compensations, properties income etc At the level of assets, a distinction is made between financial assets and administrative assets. Administrative assets include those assets essential to fulfil public tasks which therefore are not marketable. These investments are recorded in the investment account. In this accounting model, the booking of transactions is made according to accrual basis and no longer on a cash basis. Valuation of the financial assets The financial assets must be depreciated if losses or depreciations occurred (art. 47 of the Regulation on the financial management of local authorities). The valuation of the financial assets thus follows the commercial principles. Valuation of the administrative assets Both loans and participations of the administrative assets are valuated according to the commercial principles. The remaining value of the administrative assets (schools, roads, sports facilities, sewage, drinking water supply system, wastewater treatment facilities, etc.) is to be depreciated at the rate of 10% at least on the residual value (art. 51 Regulation). It is also specified there that the total or partial suspension of amortization is forbidden (art. 55 Regulation). Balance of the municipal finances An overspend resulting from the operating account after consideration of the depreciations is allowed only if, as a consequence, there is no balance sheet deficit (art. 80 Act). In case of a balance sheet deficit, the local authority has to elaborate a financial plan with financial consolidation measures which must be brought to the attention of the primary assembly and the canton. During the elaboration of the budget, an overexpenditure can be budgeted only if it is covered by the net fortune of the municipality. Should the short term balance of the municipal finances not be assured, the cantonal government would appoint, at the expense of the local authority and after consultation of it, an expert who has to draw up a financial plan and bring forward some financial consolidation measures (art. 82 Act).

7 7/9 Final observation By fixing a depreciation rate on the administrative assets and imposing respect for the financial balance, a brake in the indebtedness was thus introduced in this form at the level of local authorities in the canton of Valais. Financial indicators For statistical purposes, the canton requires from the municipalities the data obtained from their accounts (art. 61 Regulation). To assess the situation of every municipality, the canton determined the following 5 indicators: Cash Flow / Margin of self-financing Self-financing capacity Rate for ordinary depreciations Net debt per capita Gross debt ratio For every indicator an assessment scale was established. The local authorities have the obligation to integrate the financial indicators into the annual accounts submitted to the primary assembly and forwarded to the canton. The canton uses these data for intercommunity comparisons and to monitor the application of the 10% depreciation rate on the administrative assets as well as the respect for budgetary balance. Audit Office Through the new law, the requirements demanded from the Audit Office were increased in order to deepen the professionalization of the audit function. Generally speaking, at present auditors are accepted as expert-auditors or auditors declared as such by the federal supervision body as regards auditing. The audit office has to establish and submit to the municipal council a detailed report containing the work programme of the audits implemented, the audit findings concerning the accounts, the internal control system as well as the audit implementation and the audit results. Besides, the audit office has to set up a brief report for the primary assembly. In this report auditors must in particular: confirm that both the accounting and the annual accounts have been established according to the legal and regulatory provisions; recommend to approve the annual accounts with an unqualified or a qualified audit opinion or reject it; give their opinion on the debt levels of the municipality and on its capacity to face commitments. This brief report is an integral part of the annual accounts. The law also provides that auditors are accountable before the municipality for the damages resulting from intentional violation or neglect of their duty (art. 83 Act). Transparency Through the new Local Government Act, transparency in financial management has been strongly reinforced. In this context, the following points should be highlighted: uniform chart of accounts for all local authorities approval of budgets and accounts by the primary assembly (previously, no approval of the budget) publication of a brief report prepared by auditors in the annual accounts; publication of 5 financial indicators in the annual accounts.

8 8/9 As a result of the transparency in the publication of the accounts and the information on the financial situation, renewed interest of the citizen in the financial management of his municipality has been noted. Supervision by the canton By Article 3 of the Regulation on the financial management of local authorities, the financial supervision of local authorities was entrusted to the Department in charge of the cantonal finances, which takes this role by its Office of Internal and Municipal Affairs. In practice, this supervision is organized as follows. The local authorities have the obligation to provide, within the set deadlines, both budgets and accounts to the section of the municipalities within the Office of Internal and Municipal Affairs. By means of a checklist, this section carries out several controls and communicates its findings to the local authorities. Through the checklist, it is in particular checked if the municipalities respect the legal requirements concerning the financial balance and depreciations. If a municipality does not respect these requirements, it has to take a position on the controversial points. As regards the accounts, the municipality also has to provide the brief report prepared by the audit office. Within the framework of the supervision work, it is also checked if this brief report contains the information established in the law and in the regulation. If the audit body issues a qualified audit opinion concerning the annual accounts, additional checks are carried out. On the basis of the findings, the department in charge of the cantonal finances or the cantonal government can decide on the measures to be taken. According to Article 77 of the Regulation on the financial management of local authorities, the control and follow-up of these measures falls to the Audit Office of the Canton of Valais. Article 78 stipulates that the Audit Office visits the local authorities as often as necessary to verify if the required measures have been applied and if they have been regularly managed in accordance with the law. When the new Local Government Act of July 1st, 2004 came into force, the balance sheet of several municipalities showed deficits. The transitional provisions of the new law envisaged the revaluation of the administrative assets up to the amount of the deficit under certain conditions. Despite this, there remained a deficit in the balance sheets of 15 municipalities. According to Article 80 of the Regulation on the financial management of local authorities, the cantonal government thus decided on the amount of the annual depreciation of the deficit these 15 local authorities had to apply. Within the framework of these decisions, the cantonal government entrusted the Audit Office of the Canton of Valais with the task of verifying if the local authorities recorded the depreciations in accordance with the decision of the cantonal government. At present, 4 municipalities are still affected by this measure. As with the municipality of Leukerbad, a contract of restructuring the financial situation was also concluded between the cantonal government and the Citizen s Community (Burgergemeinde, bourgeoisie) of Leukerbad, which was also in a debt situation it could no longer face. The Audit Office of the Canton of Valais is now in charge of verifying whether the contract has been implemented or not, in particular because of the granted guarantee and the strict rules fixed by the canton. On the other hand, the Audit Office of the Canton of Valais checks every four years whether taxes have been notified and collected by the local authorities, since this task falls within their competence. These controls aim particularly at making sure that taxes have been duly collected and citizens have been given equal treatment.

9 9/9 Conclusion The new local government law has been in force for the last seven years. It can be seen that the specific legal provisions concerning depreciations and the financial balance have been successfully implemented. The minimum 10% depreciation rate on administrative assets can be considered as relatively high but it strongly contributed to restore the financial position of the local authorities. By introducing 5 financial indicators, the local authorities and the citizens were made aware of public finances. These indicators also allowed to make comparisons among communities. The procedures implemented by means of the new law in order to ensure the financial supervision of the municipalities are effective, in particular because the local authorities are directly informed through the checklist about potential problems. Further to the experiences gained from the special case of the municipality of Leukerbad, the lenders became aware that losses cannot be excluded if loans are granted to the local authorities without performing a risk analysis beforehand. With the introduction of clear measures concerning the financial balance in the local government law, municipalities are again considered as low risks and thus can easily refinance themselves with very low interest rates. On the other hand, banks became aware of the need to carry out objective analyses on both capacity and solvency of a municipality. The "special case" Leukerbad made banks vulnerable in their task to assess each case objectively. So at the time, even financially healthy municipalities had problems to refinance themselves. Today, the financial situation of the local authorities in our canton can be considered as very good. Above all, this is the result of the legal provisions which require financial balance and awareness of political leaders at local level. The local authorities are thus obliged to budget their expenses based on the total revenue available. Thus, policy makers have to set priorities depending on the available funds and as a result not every project can be implemented or considered primary. To conclude, we can assume that the political decisions taken in 2004 were the right ones and for the benefit of an effective and responsible governance of our first level within the Swiss federal system, which are the municipalities /mro