ANALYTICAL WORK ON INDICATORS OF EFFECTIVENESS OF LOCAL GOVERNMENTS IN THE CONTEXT OF DECENTRALIZATION REFORM IN RUSSIA

Transcription

1 ANALYTICAL WORK ON INDICATORS OF EFFECTIVENESS OF LOCAL GOVERNMENTS IN THE CONTEXT OF DECENTRALIZATION REFORM IN RUSSIA 2008

2 Summary The goal of the study is to assess the results of the first years of implementation of the decentralization reform in Russia in terms of changes in the channels of funding and distribution of public resources at the local level as well as in terms of effects decentralization had on the outcomes of service provision (health, education, H&U, local roads). The report introduces a system of indicators to measure the quality of public services specified as local government issues and analyzes service provision in the pilot municipalities in the three regions of Perm krai, Penza oblast, and The Republic of Adygeya. Governance indicators can be used for monitoring and evaluation of governance programs and projects, and also for establishing benchmarks, objectives, targets, and goals in the development context. The importance of public service quality evaluation for the Russian federal government is confirmed by the Presidential Decree 607 dated April 28, 2008, that includes the official list of indicators of effectiveness of local governments of gorodskoi okrugs and municipal raions. The list incorporates some indicators proposed under this project. It is expected that in September 2008 an additional list of indicators will be adopted. Recommendations for this list will be submitted to the RF Ministry of Regional Development on the basis of this project results. The report consists of three parts. The first part, Local self government in Russia: brief overview, gives information on local selfgovernment formation before the 2006 reform and during several years after its implementation. The next part, Legal framework and fiscal implication in the sample regions, is devoted to the specifics of local governments functioning after the reform. Thus, various options for electing heads of local selfgovernments in the pilot regions are reviewed: election by direct vote of the population of a municipality and election from members of a representative body. Part 2 provides a list of responsibilities assigned to the local level by federal legislation and those delegated to municipal raions in each of the pilot regions together with additional tax shares assigned to municipal raions by regional laws. This part also includes information on the main types of intergovernmental transfers allocated to the local level. Part 3, Service provision in the sample regions: input, output and outcome, recommends a system of indicators by which the quality of public services rendered at the local (raion and settlement) level can be estimated. Then a public service quality analysis in the six pilot raions is carried out on the basis of these indicators. The analysis is based on statistical and budgetary data as well as a set of surveys of households. The part 3 also includes recommendations for using the indicators of public service qualities and common remarks on the indicators proposed by the President Decree 607. Additional materials include figures with illustrations of expenditure and revenue allocation in pilot regions (Annex 1), statistical tables with per capita expenditures and revenues in the pilot raions (Annex 2), the list with local government issues as of Federal Law 131-FZ (Annex 3), the tables with state responsibilities delegated to local governments in the pilot regions (Annex 4), the table with the input, output and outcome indicators reflecting the quality of services in the six pilot raions (Annex 5), and the list of indicators of effectiveness of gorodskoi okrug and municipal raion proposed by the President Decree 607 (Annex 6). The analytical work on indicators of effectiveness of local governments in the context of decentralization reform in Russia allowed to test the system of indicators of service provision at the local level and to prepare recommendations to the federal authorities responsible for the estimation of the effectiveness of local governments. The results of the project could be used by the government officials and by the academic community as well.

3 CONTENTS 1. Decentralization and Provision of Public Services Local self government in Russia: brief overview Local self government in Local self government as of Legal framework and fiscal implication in the sample regions Organization of local selfgovernment Expenditure assignment Revenue assignment Transfer system Indicators of service quality Service provision in the sample regions: input, output and outcome Pre-school education (kindergartens) General education (schools) Health care Housing & Utilities Transportation and roads Recommendations on the use of indicators Conclusion References Annex 1. Expenditure and revenue allocation in pilot regions, Annex 2. Local government budgets in the pilot regions Annex 3. Local government Issues as of Federal Law # 131-FZ On General Principles Underlying Organization of Local Self-Governments in the Russian Federation Annex 4. State responsibilities delegated to local governments in the pilot regions Annex 5. The quality of services measured for the pilot raions with the input, output and outcome indicators Annex 6. List of indicators of effectiveness of gorodskoi okrug and municipal raion local governments according to Presiden Decree

4 1. Decentralization and Provision of Public Services Decentralization of powers and responsibilities has become one of the main public administration tendencies in European and Central Asian countries. The question that is basic for the theory of decentralization is as follows: Is the decentralized system of administration more effective than the centralized one? In case of state (municipal) administration, the question will be formulated differently: Does the decentralized system ensure a better satisfaction of needs in public services as compared with the centralized system, provided the amount of budget resources is fixed? The arguments in favor of decentralization rely, in the first place, on the efficiency criterion that in the given context means the maximum possible satisfaction of needs of the population using a fixed amount of resources. There is a number of theories arguing for greater efficiency and flexibility of the decentralized vs. centralized system (see Box 1). Box 1. Basic principles of the decentralization theory George Stigler (1957) formulated the following principles of effective government: a representative government works best when it is closer to people; people should have the right to vote for the kind and amount of public services they want. In his opinion, if such factors as scale economies and spillovers are left out of consideration, a decentralized system is always more efficient than a centralized system for the supply of local public goods (later this was called the principle of subsidiarity ). M. Olson (1969) argued that if a political jurisdiction and benefit area overlapped the problem of the so-called free riding would be overcome automatically, thus ensuring optimal provision of public services. This statement is related to the correspondence principle proposed by Wallace E. Oates (1972) according to which the jurisdiction determining the level of provision of each public good should include precisely the set of individuals that consume it. Oates also formulated the decentralization theorem, which stated that each public service should be provided by the jurisdiction having control over the minimum geographic area that would internalize benefits and costs from such provision. The decentralization theorem is based on the assumption that the central government can provide the same amount of services within the whole state while a local government chooses the amount of services in accordance with the needs of residents in its jurisdiction. In this case, decentralization can facilitate efficiency owing to better distribution of resources by local governments that know better about their residents concerns than the central government. In addition, spending decisions taken at the local level will be more consistent with voters preferences. According to Tiebout (1956) consumers of public services vote with feet in deciding where to live. They consider public services and their costs (in form of local taxes) when choosing a jurisdiction for residence. Thus, a competition takes place among jurisdictions that try to use public resources in the best way to attract residents. To summarize the above, one may conclude as follows: provided externalities are absent, population is mobile and residents of various jurisdictions have different preferences in terms of public goods, welfare of the society can be maximized if local communities are able to indicate their preferences through voting by ballot 1 and thus determine the necessary list and scope of public goods (services). As a result, the set of public goods will be consistent with local residents needs, they will pay for these goods more willingly by way of local taxes or fees and the accountability of local governments for the quality of services will increase. 1 It should be noted that voting by ballot will not always identify residents preferences. 1

5 Although the theory was formulated and proved under hard constraints (e.g., the assumption on mobility of population that cannot take place in a real state, or the absence of externalities), the arguments remain the same when the actual decentralization is discussed: decentralization of public functions can increase the efficiency of public spending because it enhances governments accountability, brings governments closer to voters whose concerns are better understood at the local level. When the efficiency of the centralized and decentralized systems is considered, the question of their administrative costs arises. It is rather difficult to decide whether the costs of the budgetary system as a whole increase or not when a state function is assigned to the local level. On the one hand, administrative costs of a ramified, multilevel hierarchic system can be extremely high and, in any case, not lower than in a flat, decentralized system. On the other hand, there is a danger of overlapping functions by governments of different levels in the decentralized system (Andreeva, Golovanova). Decentralization can have a positive effect on the revenue side of the budget if appropriate powers are also assigned to the subnational level. By taking into account local specifics and structure of the revenue base decentralization can increase tax collections due to the local budget. Some taxes (real estate tax, personal property tax, land tax) are collected more efficiently at the local level because their administration involves acquaintance with local economy and residents. For this reason many countries regard them as local taxes. Besides, local taxes and fees may, to a certain extend, be viewed as a payment for services supported by the local budget. Owing to administrative costs small businesses often constituting the core of local economy are not covered by the VAT and company profits tax (the full or the larger portion of which goes to the central budget). Instead, simple taxes on which local governments have an impact are imposed on them. Informal sector also often escapes taxation as a result of its invisibility to the administration. Thus, there is a certain revenue capacity at the local level inaccessible to the center that could be used by local authorities who are better acquainted with the local tax base. On the other hand, their better familiarity with the tax base promotes a custom-tailored treatment of taxpayers (in form of individual tax privileges or sanctions) and stimulates removal of tax burden with a view to compensations from higher level. It should be noted that local governments in developing and transition economies would not necessarily respond to residents preferences (they probably are not able to do so). As distinct from states with long-established decentralized governments, voters preferences in developing and transitional economies are not always transformed into fiscal estimates or fixed budgets since they have no mechanism to identify, range and turn such preferences into budget programs yet. In a situation when the delegation of revenue and expenditure responsibilities to the subnational and local levels is not accompanied by lesser control over budgetary decisionmaking from the center the benefits from decentralization will be weaker as compared with a situation when residents can participate in local government s efforts through working mechanisms. When a local governments is not accountable to residents, when resources are allocated only by way of budget approval or strict standards regulating provision of services, when tax administration is carried out by the center alone one cannot expect maximum benefits from decentralization processes. Research of decentralization efficiency (e.g., works by Shah 1998 and Faguet 2002) demonstrate that decentralization can realize its advantages when voters are aware not only of the kind of public goods they receive from local governments for their taxes but also of the scope of public service they can count on. We cannot estimate the scope of public services that residents of municipalities could have received since this involves many factors that determine the demand for services and their 2

6 supply. However, using output and outcome indicators we can compare an individual municipality with other municipalities in the same Subject of Federation or in other Subjects of Federation. 2. Local self government in Russia: brief overview 2.1. Local self government in The history of local self-government in modern Russia could be started from the first Law on Local Self- Government (1991) that granted elections for the heads of local administrations. 2 It also dissolved local executive committees, which had been the lowest link in the hierarchy of the regional administration. A list of taxes assigned to municipal budgets was drawn up in 1991, but the federal government retained the power to regulate the base and rate of these taxes and also retained the power to collect local taxes. In 1995, the Law on General Principles of the Organization of Local Self-Government defined the status of local governments and their relations with regional authorities. The relations between regional and local governments were further altered by the 1997 Law on Financial Foundations of Local Self-Government, which established the average shares of federal taxes going to local governments. In addition, this law required a formula-based allocation of grants to localities, even though at that time hardly anyone grasped the legal interpretation of a formula and, as a result, the relevant provision of the law was simply ignored. During the 1990s, law makers efforts were aimed primarily at limiting the influence of regional authorities on local governments. Then in 2000, the Budget Code established local budgets as one of the three tiers of the fiscal system. Before 2006, different organizational forms of local self-government had emerged in different regions, and these differences extended to some crucial areas, such as revenue sources, spending responsibilities, and even how property was divided between regions and localities. Under the Constitution and the Law on General Principles of the Organization of Local Self-Government, local self-governments were established in large cities, towns, rural raions, townships, and rural settlements. As of September 1, 2005, before the local government reform, Russia had about 29,130 local administrations, of which 13,652 were officially registered as municipal entities (Federal State Statistics Service 2005). It should be mentioned here that only 86.3 percent of the municipal entities had elected representative bodies of government, 85.4 percent had municipal charters, 74.6 percent possessed municipal property, and 81.6 percent had local budgets in Box 1 Historically, the local government structure below the regional level was complex both in terms of is overlapping jurisdictions and its composition. Kurlandskaya, Nikolayenko, and Golovanova (2001) identify the following three categories of regions according to the local government systems that existed before The first category included single-tier local governments in large cities and raions. In this case, sub-raion towns and villages had neither the power to formulate and execute budgets nor elected bodies, while large cities and raions enjoyed the fiscal rights established by federal legislation, although their fiscal relations with the regional authorities, including the allocation of intergovernmental transfers and tax sharing, were unilaterally designed by regional authorities. The second category also included single-tier local bodies of self-government in the regions so that regional governments only had to deal with a single set of local governments, including large cities, towns, and villages or rural councils. In this category, regional governments dealt with towns and rural councils through the deconcentrated tier of regional governments located in the raions, which were not elected bodies. The authority to set local taxes was not vested in these raion-level territorial branches of regional administrations. The budgets of raions were part of the regional budgets presented in the form of expenditure plans, and thus raions did not have certain rights and powers established for municipalities by federal legislation. 2 Soviet law also guaranteed the autonomy and independence of localities, and local council members (though not heads of administrations) were elected by popular vote. The law also determined council members responsibilities and provided local councils with municipal property. Most important, the law assigned revenues to local governments that included shares of tax revenues from higher levels of government and local taxes, fees, and duties established by localities. 3

7 The third category included a two-tier local government structure whereby large cities and raions formed the first tier and sub-raion towns and rural councils formed the second tier. Both levels were elected by local residents, but only local governments in the first tier were authorized to deal directly with regional governments on financial matters. As a result, no direct relationship existed between the regions and the second-tier local governments in relation to intergovernmental transfers and tax sharing. Local governments of the first tier were responsible for distributing grants to localities of the second tier and for splitting the sharing rates of regional and federal taxes assigned to the local levels by the regional administrations. In effect, the first-tier local bodies often carried out the functions assigned to the regional governments even though the first-tier local governments were not deconcentrated units of regional governments but were local bodies elected by local residents. Source: De Silva at al Before 2005, budget and tax legislation and laws on local self-government assumed that local governments were similar to each other. Consequently, they were assigned a common list of local taxes and spending items, ignoring the existence of different types of local jurisdictions and local budgets. Thus the various powers and revenue and expenditure autonomy that were assigned to one type of local government were rarely suitable for others. As the tax legislation provided for a single list of local taxes, all local budgets had those taxes as sources of revenue. As a result, the same tax became a revenue base for large regional centers, municipal raions, and sub-raion municipalities alike. This system was difficult to maintain, especially for regions with local self-governments that were organized along the sub-raion principle. Local budgets in such regions were either fully dependent on one large taxpayer or had no tax base whatsoever. Fragmentation of the territorial structure of local governments caused considerable disparity among local budgets in terms of tax bases, leading some localities to have excessive revenue bases while others were largely dependent on transfers from the region. However, if sub-raion municipalities were merged into a municipal raion, the disparities within the raion were likely to disappear without intervention by the region. Most of the tax-sharing rates for regional budgets were established for one fiscal year. Every region retained the same centrally established share of tax collections for its budget and was free to use it at its own discretion. A portion of collections was retained in regional budgets and some was transferred to localities at the regional administration s discretion. Generally, more than 30 percent of federal taxes accruing to regions were transferred to local budgets. In addition to federal taxes, regions could transfer any regional taxes to localities, and the federal government did not set rates at which federal taxes had to be shared with localities, except that 50 percent of regional enterprise property taxes had to be transferred to all local budgets. Before 2006, regional governments were free to assign different shares and rates of regulating taxes to different municipalities. Only a few regions had started to apply uniform sharing rates to all localities. Moreover, tax-sharing rates that changed from year to year turned localities tax revenues into tax transfers, that is, grants transferred in the form of tax revenues. At the same time, the distribution of regulating taxes among localities was not linked to localities actual needs and preceded the allocation of grants. The shares of regulating taxes to be assigned to a locality in a particular fiscal year were negotiated between local and regional officials, with each party striving to grab a bigger share of the taxes. Rich municipalities with a well-developed tax base were the most active in scrambling for their share of regulating taxes, while poor municipalities were assigned 100 percent of shared taxes each year. Even under this sharing arrangement, the tax revenues of poor municipalities were so small that transfers from the regional budget remained their main source of revenues. In the 1990s equalization grants were calculated as the difference between a so-called normative budget of a municipality and its expected revenues. In some regions, regional governments developed and legislatively fixed spending norms for municipalities. In some cases, those norms were used exclusively for calculating grants, while in others they were used as the compulsory minimum local spending levels. However, the final amount of grants was usually established through negotiations. These negotiations often took the form of regions complaining about municipalities low tax collections efforts and high expenditure and the municipalities complaining that their expenditure responsibilities far exceeded their revenues. In 2000, the federal Ministry of Finance approved recommendations on the regulation of intergovernmental fiscal relations. The recommendations included methodologies for formalizing the calculation of grants in a way that would not create perverse incentives for localities to underreport their revenues and overreport their expenditures. However, the regions took their time to apply transparent methods to intergovernmental fiscal relations, because those methods would inevitably have diminished the role of regional financial authorities in managing the grants approval process. The strong push to apply formula-based methods came from the federal government, which started to use such methods as 4

8 of 2000 to calculate grants for the regions. In addition, during the second phase of the World Bank project on Reforming Regional Finances the formalization of fiscal relations was a criterion for participation in the project. As a result, by 2003, about one-third of all the regions had started to use a formula-based approach. Moreover, a few regions passed use of such methodology into law. Application of this methodology proved to be more difficult in regions where local self-governments were organized along the sub-raion or two-tier principle, as this approach cannot be introduced without obtaining information from every agent of intergovernmental fiscal relations. Before 2006 Local governments that sprang up largely because of political preferences on the part of regional administrations turned out to be so different that the same legislative rules could not be applied across the board. These entities had vastly different populations and patterns of population dispersal, geographies, ownership of social infrastructure, and so on. Unfortunately, instead of putting the existing system of local government on a firm legal basis, the legislation passed by the federal government instituted a uniform scheme of organization of local self-government, creating a two-tier model in all subjects of the federation Local self government as of 2006 The Law 131-FZ on General Principles of the Organization of Local Self-Government adopted in 2003 and in force since 2006, established that local self-government should be one of the tiers of subnational government across the whole country. Thus the country was divided into cities (gorodskoj okrugs) and municipal raions. Urban and rural settlements form the second tier of local government. Regional laws established the boundaries of municipal entities in compliance with the requirements set out in the federal legislation. The Law on General Principles of the Organization of Local Self-Government established three lists of issues of local importance: one for municipal settlements, one for municipal raions, and one for cities. At the same time, the Budget Code set up three lists of taxes for each type of local government. Municipal settlements are assigned such functions as organization of housing & utilities services (electricity, heating, water, gas and fuel supply, street lights, waste collection) and provision of lowincome individuals with social housing. They are also responsible for basic fire protection, public transportation within settlement, intra-settlement road construction and maintenance. Responsibilities also include parks and gardens, cemeteries and settlement libraries maintaining, providing recreation, cultural and sport events. The Law 131-FZ assigns to municipal raions a number of functions which should be performed free of charge under the Russian Constitution: pre-school, primary, secondary education, supplementary after classes education (financing includes subsidies from regional budget), healthcare in general hospitals, maternity care and ambulance, environment protection. The list of responsibilities includes municipal police function however for implementing this item reform of the law-enforcement system should be made so implementing of this particular item was postponed at least till the Raions also responsible for local issues of inter-settlement nature: inter-settlement electricity and gas supply, inter-settlement public transportation, construction and maintenance of inter-village roads, waste utilization. Recreation, organization of cultural and sport events and raion libraries maintaining also included into the raion list. A list of gorodskoj okrugs (cities) includes issues of both municipal settlements and municipal raions. Municipalities are free to add more functions to federal list of functions only if they have their own resources to support them. If the share of grants (including tax transfers) in total revenues of a local government is greater than 30% they are not entitled to perform any functions, other than those established by federal and regional laws. Currently Russia has 15 main taxes (many of which are just a grouping of smaller taxes based on certain characteristics) that include 10 federal taxes (including the special tax regimes for certain types of businesses), 3 regional taxes, and 2 local (settlement) taxes. So settlements have only 2 own taxes while municipal raions rely on the federal assigned taxes only and have no own taxes at all. The Budget Code regulates the allocation of transfers from regional and local budgets: it establishes the main kinds of transfers, the terms of their allocation, the principles underlying the provision of equalization transfers and compensation for delegated responsibilities, and the principles for budget credit arrangements. Transfers from regional budgets include equalization grants, gap-filling subsidies, compensation for regional and federal mandates, and grants for cofinancing expenditures. Budget Code sets the sharing 5

9 rates for federal taxes assignmed to local governments, and the regions may pass laws for establishing additional sharing rates with local governments. Before 2006, the federal government viewed the formula-based methodology for allocating equalization grants desirable, but did not mandate its use; however it has mandated its use since What is more, the Budget Code envisages the allocation of equalization transfers on the basis of tax capacity indicators and differences in the composition of the population by age group and socioeconomic, climatic, geographic, and other factors that affect per capita public service costs. The Law on General Principles of Local Self-Government permitted the regions to postpone the introduction of a transparent formula for transfer allocation to local governments until 2009 so that the regions could decide whether to introduce the new intergovernmental arrangements in 2006 or to introduce them gradually during The Budget Code provides for the collection of negative transfers from local governments to regional budgets. Thus if a municipality s estimated per capita tax revenues are more than double average local tax capacity, then the region may take up to 50 percent of the excess for reallocation among poorer municipalities. One should remember that local self-governments in Russia enjoy but limited autonomy. On the one hand, almost total absence of own revenue sources and administrative powers of tax collection prevent local governments from flexible management of the revenue part of their budgets. On the other, federal and regional regulations constitute obstacles on the way they want to fulfill their expenditure responsibilities. In addition, the Budget Code also imposes constraints on a municipality depending on its level of subsidizing (Table 1). Table 1. Restrictions to Local Government s Autonomy Share of grants (including tax transfers) in total revenues of a local government 0 10% None 3 > 10% for two consecutive reporting years > 30% for two consecutive reporting years > 70% for two consecutive reporting years Source: De Silva at al, base on the Budget Code Restrictions Salary of local officials shall not exceed the ceilings established by the regional council. Local spending is limited to matters explicitly listed as local expenditure responsibilities in federal and regional legislation. o o o The local government shall sign an agreement with the regional government to increase the efficiency of local spending and enhance collections. The local government s budget is submitted to the regional government for approval. The regional government audits end of year local budget execution reports at least every other year. 3 For the general limits on the size of debt and debt service set by the Budget Code. 6

10 3. Legal framework and fiscal implication in the sample regions 3.1. Organization of local selfgovernment Starting from 2006, local self-government in Russia has two levels: raion and settlement (see Figure 1). Figure 1. Structure of local self-government in Russia Subject of Federation Gorodskoj okrugs Municipal raions Rural and urban settlements Under Law 131-FZ, municipalities shall determine the structure and formation procedure of bodies of local self-government in their charters. First elections in new municipalities were carried out in accordance with relevant laws of Subjects of Federation. Republic of Adygeya Prior to the 2006 reform, the Republic of Adygeya had local self-governments at the level of raions and cities. As a result of the reform, new urban and rural settlements had been formed. During the October 2005 election, representative bodies and heads of newly formed municipalities (urban and rural settlements) were elected by direct vote for two years. Afterwards, the structure and formation procedure of bodies of local self-government were determined by the charter of a municipality though the wording of charters of municipalities of the same type within a Subject of Federation was in most cases identical. Thus, Maikopsky sky and Krasnogvardeisky municipal raions elect their heads by direct vote for 5 years. The municipalities Khatukaisky rural settlement and Krasnoulsky rural settlement elect their heads by direct vote for 2 years. The head of the rural settlement is also the leader the settlement s administration and carries out the duties of the chairman of the Council of People s Deputies of the rural settlement. In December 2007, the second election of representative bodies and heads of municipal rural settlements took place. Penza Oblast Even before the reform, Penza Oblast had two levels of local self-government: raions and settlements. Oblast has a law On Election of a Head of a Municipality in Penza Oblast by Population of the Municipality. However, as distinct from the Republic of Adygeya, heads of Penza Oblast pilot municipalities (Penzensky and Narovchatsky raions, Potodeevsky and Skanovsky village councils, for example) are elected from and by deputies of the representative body rather than through a direct vote of the population. The head of the municipality is also the chairman of the representative body (raion assembly of representatives, settlement committee of local self-government). The head of the village council is at the same time the leader of the administration of the municipality. The head of the raion administration is appointed on a contractual basis. Perm Krai Perm Krai was set up on December 1, 2005, by merging Perm Oblast and Komi-Perm AO. During the transitory period that lasted until January 31, 2007, the two Subjects of Federation existed as separate entities. Before the reform, Perm Oblast and Komi-Perm AO had local self-governments at the city and raion level. As a result of the reform, their urban and rural settlements had been turned into municipalities as elsewhere in Russia. According to the Perm Oblast law, On First-Term Election of Heads of Newly Set-Up Municipalities in Perm Oblast and the Status of Their Position in the Structure of Local Self-Government Bodies, various 1

11 models for forming bodies of local self-government were recommended to municipalities depending on the population size (Table 2 below). 4 Table 2. Models of local self-government organization in Perm Krai Head of a municipality Population of municipalities < 5,000 5,000 10,000 > 10,000 Elected from and by members of the representative body Elected from and by members of the representative body Exercises powers of the chairman of the representative body Exercises powers of the chairman of the representative body Elected at municipal election Exercises powers of the chairman of the representative body (with the right to vote) Functions on a permanent basis Functions on a permanent basis Functions on a permanent basis Head of the administration of a municipality The position is filled by the head of the municipality Is appointed on a contractual basis Is appointed on a contractual basis Source: The Perm Oblast law On First-Term Election of Heads of Newly Set-Up Municipalities in Perm Oblast and the Status of Their Position in the Structure of Local Self-Government Bodies 3.2. Expenditure assignment Own expenditure responsibilities (local government issues) of municipalities are established by the law On General Principles of Organization of Local Self-Government (see Box 2 and Annex 3). Box 2. Local Government Issues The main functions assigned to municipal raions are providing preschool, primary, and secondary education along with supplementary after class education using subsidies from the regional budget; providing health care in general hospitals, maternity care, and ambulance services; providing municipal police (having localities provide this service would require amending the existing law enforcement system, therefore implementation of this particular item has been postponed until 2010); protecting the environment; waste management; maintaining raion libraries; organizing recreational, cultural, and sport events; providing electricity and gas; constructing and maintaining intersettlement roads; providing intersettlement public transportation. The main functions assigned to municipal settlements are delivering housing and utilities (electricity, heating, water, gas, street lights) and providing waste collection); constructing and maintaining housing for low-income households; providing basic fire protection; maintaining cemeteries; maintaining parks and gardens; maintaining settlement libraries; organizing recreational, cultural, and sport events and recreational activities for teenagers; constructing and maintaining intrasettlement roads; providing intrasettlement public transportation. Source: De Silva at al Under the law On General Principles of Organization of Local Self-Government a municipality may assume other expenditure responsibilities outside the jurisdiction of the federal or regional government. However, the Budget Code allows only those municipalities to do so where the share of financial support 4 Unfortunately, by the time of the draft report we had not received municipalities charters and therefore were not able to make sure whether the above structure had been preserved. 2

12 (transfers from above governments except subventions and including tax transfers) in municipal revenues does not exceed 30% (see Table 1). The responsibilities delegated by the federal center to the local level include state registration of instruments of civil status and organization of draft committees in jurisdictions where no appropriate federal agencies exist. All Subjects of Federation allocate to local governments subventions to support the educational process (implementation of the state general education standard) and compensate housing and utilities bills to some groups of population. In addition to the above, a Subject of Federation may delegate any of its responsibilities to municipalities. Thus, the responsibilities of providing social protection to some groups of population and of organizing administrative commission operation are delegated by all the pilot regions to the municipal level. Any responsibility must be delegated on the basis of a regional law and be supported with a formula-based subvention. A considerable advantage of the law On Local Self-Government is its streamlined expenditure responsibilities assigned to local governments of different types. The old version of the law applied the same list of local government issues to all types of municipalities. As a result, there was a strong imbalance in the responsibility assignment: they were assigned in accordance with property owned by governments of the regional or local level. Thus, if a school or a hospital was owned by a municipality its residents received health or educational services at the municipal level. If the relevant institutions in the territory of a municipality were owned by a region it was the region that rendered the appropriate services. If a municipal raion had no hospital of its own in its territory (e.g., the hospital was in the central city of the raion that was a separate municipality) it was not responsible for provision of health care services to its residents. Instead, they received the service for which the neighboring municipality paid for. 5 Under federal law # 131-FZ the government authority must provide for a service irrespective of the presence of an appropriate institution. If a service cannot be provided by a municipality in its own institution the municipality may pay for provision of the service at another institution of any form of ownership. The new law guaranteed service provision and determined the tier of government (raion or settlement) responsible for it. During the responsibility assignment reform the social protection responsibility had been assigned to the regional level but many Subjects of Federation, Perm Krai and Penza Oblast in particular, had delegated it to the local level. One may conclude that, as a result of the reform, the amount of own responsibilities of municipalities has decreased while the amount of delegated responsibilities funded by earmarked grants from regional budget have increased (see the share of subventions in total expenditures in Table A.1., Annex 2). Most delegated responsibilities are fulfilled by raions; at the settlements level the delegated responsibilities usually includes the registration of instruments of civil status and organization of draft committees in jurisdictions where no appropriate federal agencies exist (both are delegated from federal government). Sometimes raions delegate responsibilities further to the settlement level, for example, in Narovchatsky raion in Penza oblast and Osinsky raion in Perm krai (see Table A.1., Annex 2). Settlement governments could also delegate responsibilities to the raion governments if they understand that at the raion level the execution of responsibilities would be more effective. In that case raion budget receives earmarked grants from the settlement budget for execution of the delegated responsibilities and settlement expenditures are reflected as intergovernmental transfers (subventions) to raion budget (see Table A.2., Annex 2). At the raion level, the list of main expenditure responsibilities (health care, education, culture, social policy in case the responsibility for it has been delegated from the regional level) is the same (see Table A.1., Annex 2) while at the settlement level many local government issues have not been attended to in the budgets (see Table A.2., Annex 2). Not all settlements spend money on culture and organization of leisure-time activities (social centers, libraries, sport events) and creation of living environment. Municipal government accounts for the large share of settlement budgets. Settlement administrations represent the level of government that is closer to population than any other. People can come to a settlement administration with their problems and proposals but the settlement budget provides for no vitally important function except for housing and utilities. As a rule, the share of H&U expenditures in a settlement budget is not large. Thus, in spite of the fact that it is the settlement that has own taxes (that bring no great revenues, one should admit) raions are the really functioning level of local government in terms of the responsibilities fulfillment. 5 In this case, as a rule, the regional government took into account additional expenditure responsibilities associated with the appropriate service when it calculated the amount of transfers. There were almost no instances of cofinancing of the same institution by municipalities. 3

13 Partly, the situation can be explained by the fact that prior to the reform local self-government was formed at the raion level in most Subjects of Federation. Also, the computerization level and staff professional skills 6 are lower in settlements than in raions (greater raion budgets can attract more professional specialists). Raion authorities that fulfill a great amount of delegated responsibilities also act as an agent of the regional government. Delegated responsibilities take 30%-40% of the pilot raion spending (see Table A.1., Annex 2). One cannot be perfectly sure about where in the pilot regions the assignment of expenditure responsibilities between the regional and local governments is more effective (see figure A A.3.2., Annex 1). The amount of delegated responsibilities depends on the preferences of regional authorities and the assignment traditions that, in their turn, depend on density of population, its dissemination, the territory size of a Subject of Federation, staff capacity of local governments. Also, the assignment of expenditure responsibilities changes from time to time. For example, the amount responsibilities delegated to raions has been increased in 2007 in Penza oblast. Republic of Adygea In addition to own responsibilities, the following state responsibilities have been delegated to the raions of the Republic of Adygeya (see Annex 4): social support to orphan children and children without parental care; compensations of housing and utilities bills to some groups of population; regarding organization and operation of commissions on juvenile affairs and rights; regarding organization of administrative commissions and drawing up protocols on administrative violations. The responsibility for fiscal capacity equalization among settlements has also been delegated to municipal raions. Like everywhere in the Russian Federation, subventions to support the educational process (implementation of the state general education standard) are allocated to the municipal raions of the Republic. The largest expenditures of municipal raion budgets in the Republic of Adygeya are on education (the educational process is supported by earmarked subventions from the Republic s budget), health care 7, general public services and culture (see Table A.1., Annex 2). The share of road expenditures is very low in Adygea, because the road sector is mostly funded from the Republic s budget. The settlements spend most of their money on the municipal government (see Table A.2., Annex 2). But the share of general public services in the settlement expenditures of Maykopsky raion had been reduced in 2007 as compared with the Penza Oblast In addition to own responsibilities, the municipalities of Penza Oblast were assigned the following responsibilities in the social sector (see Annex 4): social support and provision of social services to elderly people and invalids, people in hard circumstances and low-income citizens; social support and provision of social services to orphans, uncared for children and those without parental care, children in socially dangerous situations, families with children in hard circumstances; assessment and payment of allowances to families with children; social support to large families; social support to labor veterans, those who worked in the rear during the Great Patriotic War of , victims of political repressions; social support to individual groups of qualified employees working and residing in rural areas; acceptance of documents necessary for assessment and payment of retirement pensions to public employees and those holding public offices in Penza Oblast; 6 The training sessions for municipal specialists carried out under the World Bank project has somewhat improved the staffing situation in the pilot municipalities though further training is still needed. 7 One should keep in mind that the health care sector is funded not only from the budget but also from the Obligatory Medical Insurance Fund, which means that the budgetary support to the sector is more than the figure in the above table 4

14 provision of soft loans to large families for complete repairs, reconstruction or purchase of housing and buildings; provision of housing, under social lease contracts, to orphans, children without parental care, children placed under guardianship (care) and persons belonging to the category of orphans and children without parental care. Bodies of local self-government were also assigned the following responsibilities: organization of administrative commissions and drawing up protocols on administrative violations; labor protection management; preventive measures with regard to child negligence and juvenile violations. In 2006, the responsibility of creating an agricultural inventory was also assigned to the municipalities. Prior to 2007, state responsibilities were assigned by individual laws. In 2007, a new law came into force, On Assignment of Individual Penza Oblast State Responsibilities and Individual State Responsibilities Regarding State Registration of Instruments of Civil Status to Bodies of Local Self-Government of Penza Oblast, that provided for all the above state responsibilities. In addition to the state responsibilities delegated to municipalities before 2007, the new law delegates the following: subsidies for paying housing and utilities bills; social support to teachers working and residing in rural areas; individual responsibilities associated with formation, maintenance and use of Penza Oblast archives; Penza Oblast budget execution in terms of cash payments on customer accounts of Penza Oblast spending units located in municipalities of Penza Oblast provided payment documents have been approved as part of the implementation of the Oblast budget process automated management; Lump sum payments to young teachers of Penza Oblast, lump sum payments to winners of the Oblast competition, The Best Leader of a General Education Establishment of Penza Oblast; of guardianship and patronage. Similarly to the Republic of Adygeya, Penza Oblast delegates the settlement fiscal capacity equalization responsibility to municipal raions. As in the Republic of Adygeya, education is the important part of the municipal raions budget in Penza Oblast is but in contrast to Adygeya social policy expenditures (delegated responsibilities financed trough subventions) and intergovernmental transfers to the settlement budgets also take a large amount of the raions budget (see Table A.1., Annex 2). Settlements spend a lot of money on the H&U and government. Besides Penzensky raion received from the oblast budget large subsidy for the road construction in the new apartment blocs which was transferred to the settlements budget (see Table A.1., Annex 2). Perm Krai The following responsibilities have been delegated to the local level by regional legislation (see Annex 4): social support, social assistance and provision of social services to individual groups of population; setting up administrative commissions and organization of their operation; coordination of gambling business locations and control over gambling business places and activities; organization of commissions on juvenile affairs and rights protection and organization of juvenile activities; preserving, gathering, taking inventory of and using archive documents in the state subdivision of the Perm Krai archives. The following responsibilities were delegated to the local level only in 2007: organization of special medical aid; payments to medical staff of feldsher-midwife stations (heads of feldsher-midwife stations, paramedics, midwives, nurses and visiting nurses) and doctors, paramedics (midwives), nurses of ambulance stations of the municipal health care system in Krai. Besides the above, some additional responsibilities in the education sector have been delegated since As in other subjects of the federation, in Perm krai education is the largest part of the budget expenditures (see Table A.1., Annex 2). The per capita intergovernmental transfers to the settlements are not as high as in the Penza oblast because settlements receive equalization grants from the krai s budget directly. 5