Growth of municipal debt slows nationwide

The growth of debt in municipalities slowed significantly last year nationwide, with the smallest municipalities showing the greatest decline, according to an analysis by the Czech Credit Bureau (CCB), but small municipalities continued to suffer from low income because of “an unfair tax assignment system,“ the bureau said.
Analysts at the CCB said budgets improved significantly in 2010, with total municipal debt growth at only 4 percent and the overall deficit at 1.4 billion Kč compared with 14.1 billion Kč in 2009.

Income increased 9 percent overall but showed a “considerable imbalance,“ as the average income of the 10 smallest, poorest municipalities was 8,296 Kč per capita, compared with 231,788 Kč per capita for the 10 wealthiest municipalities.

The CCB’s findings touched on a highly sensitive battle between large and small municipalities over the shared tax assignment system where the national government puts all tax revenue into a pot and divvies it out to municipalities based on local tax revenues, especially personal income tax.

“The main downside of the current situation … is the gap between the levels of the largest and the smallest, the glaring inefficiency of funds expended for major centers and underfunding of basic infrastructure in small municipalities,“ said Eduard Kavala, chairman of the Association for Rural Reconstruction.
A reform bill proposed for next year seeks to make the ratio of money going to small municipalities more equitable and would reduce the maximum gap from a current 4.5 times more revenue for large municipalities to somewhere between 2.5 to three times more revenue.

To pay for the shift, which is expected to cost around 10 billion Kč, the government would cancel some grants, increase property taxes and reduce money flowing to the four biggest cities: Prague, Brno, Ostrava and Plzeň.
Smaller municipalities have said the reform would be an improvement, but analysts at the CCB said it would probably make little difference in closing the gap.

“Big municipalities usually have … facilities that not only residents benefit from but also people from surrounding municipalities,“ said CCB Statistical Analyses Manager Věra Kameníčková. “To say the proportion should be 3.5, or 2.0, you need some calculation of why the smaller one needs more and the bigger less. This calculation hasn’t been done.“

Part of the reform proposed urges that the number of schoolchildren in a municipality be considered as a criterion.
“A municipality, per one pupil in school or preschool, would get 7,000 or 8,000 Kč - but only those municipalities that have them,“ said Jaromír Jech, executive vice president of the Association of Towns and Municipalities of the Czech Republic.

Adding more money to small municipalities would likely have little impact on reducing their debt levels, either, Kameníčková said, as the data shows that even as revenues increased, so did debt.
“One answer would be to cancel the shared tax system and introduce local taxes,“ Kameníčková said.
While only 20 percent of small municipalities have any debt at all, compared with 95 percent of the largest, they are likely the most at risk, she said.

The CCB found the overall average iRaiting, a credit rating scale created by the CCB based on debt and budget balance as well as nonfinancial indicators like infrastructure, deteriorated. Out of the 6,238 municipalities surveyed, 380 got the worst C- rating, while only 334 achieved the top score.

“[Large municipalities] have property that can be used as collateral to borrow money. For small municipalities, not only is their budget smaller, but it fluctuates from year to year, so it’s difficult for them to borrow a certain amount that they will be able to repay in time,“ Kameníčková said.