Central government in the planning of
municipal revenues and controlling
financial sustainability in municipalities
Audit department 3, Vilnius division, adviser,
Olga Vitkauskienė
2015-10-06
Content
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Scope of municipality audits in Lithuania
Structure and planning of municipal revenues
Measures for controlling financial sustainability
Examples from practice
Questions and answers
Audit scope
Since 2012 National
Audit Office performs
audit in all 60
municipalities of
Lithuania
Audit scope
Financial (regularity) audit 2014
Regularity of
management and
the use of state
budget funds and
state property
managed by
municipalities
Planning of
municipal budget
revenue and its
allocation among
municipalities
Audit of the implementation of
municipal budgets and management, use
and disposal of municipal property
Municipal debt
Municipal
annual
(consolidated)
statements
Municipal control and
audit services
Sources of revenue of municipal
budgets
7% 5%
Borrowed funds
Personal Income Tax
35%
41%
4%
8%
Total municipal revenue in 2014 – 2,23 billion EUR
Other taxes (property,
services etc.)
Compensation from
state budget
Special targeted
grants
Other revenue
The role of central government:
special targeted grants
Performance of state
(delegated by the State to
municipalities) functions
Special
targeted grants
Financing organization of
pre-school, general and
non-formal education
Implementing the
programmes approved or
decisions adopted by the
Seimas, the Government
• Amounts of grants to
municipalities
approved each year by
the law
• At the end of the year,
the remaining unspent
amount of targeted
grants or used not for
their purpose shall be
repaid to the state
budget.
The role of central government:
compensation of the forecasted
revenue
Forecasted revenue of
municipality X
210
200
Thousands of EUR
200
190
190
180
Compensation
Purpose – to compensate the
forecasted decrease in revenue from
the State budget, arising due to the
decisions adopted by Seimas or the
Government.
170
160
150
140
130
120
2014
2015
The role of central government:
allocation of the Personal Income Tax
• Every year the Law on the Approval of Financial Indicators of the
State Budget and Municipal Budgets establishes the share
(percentage) of the collected Personal Income Tax transferred to all
municipalities: 2014 – 67,78%, 2015 – 72,8%.
• The Law on Methodology of Determination of Municipal Budget
Revenue – procedure of calculation and allocation of Personal Income
Tax.
• Problem: the municipal share of Personal Income Tax revenue for the
coming year is based on increase or decrease of nationally forecasted
Personal Income Tax, regardless of economical and financial
indicators of municipalities.
Structure of the Personal Income
Tax revenue
Personal Income Tax
transfered by local
tax administrator
Municipal share
of the Personal
Income Tax
For levelling of
differences in
municipal
expenditure structure
For levelling
municipal revenue
from the Personal
Income Tax
Vilnius m. – 48%
Klaipeda m. – 86%
Kaunas m. – 94%
Other 57
municipalities –
100%
State supports 57
municipalities by
giving the additional
part of Personal
Income Tax
(“taken” from
Vilnius, Kaunas and
Klaipeda)
Municipality receives the support (additional Personal
Income Tax) from the state if:
• Actual revenue per one inhabitant of the municipality
from the Personal Income Tax for the previous month is
below the actual average revenue of all municipalities per
one inhabitant from the Personal Income Tax for the
previous month (levelling the Personal Income Tax), and
(or)
• There are differences in the expenditure structure of
municipality, affected by demographic, social and other
indicators (levelling of differences in expenditure).
Structure of the Personal Income
Tax revenue in 2014
33%
59%
41%
5%
3%
Transfered by tax administrator
For levelling of differences in expenditure
For levelling of the personal income tax
Audit findings
• There are no clear criteria for calculating the share
(percentage) of Personal Income Tax for donormunicipalities.
– 2015-06-11 Ruling of the Constitutional Court of the Republic of
Lithuania: “provisions of the Law on the Methodology for
Determining Municipal Budgetary Revenues that are governing
the calculation and distribution of funds allocated from Personal
Income Tax to municipal budgets are in conflict with the
Constitution”
• The existing system of levelling municipalities’ revenue
does not motivate municipalities to contribute towards the
growth of regional economy.
Management of municipal debt –
measure to control financial
sustainability
Municipalities may, within the borrowing limits, take out:
a) Long term loans or grant guarantees for the loans used
solely for the funding of investment projects (domestic or
foreign creditors);
b) Short term loans for covering of a temporary shortfall of
revenue (creditors and the state budget).
Borrowing limits and rules for
reducing the liabilities
Law on the Approval of
Financial Indicators of the State
Budget and Municipal Budgets
for a specific year
Borrowing limits for 2015
Municipality debt
limit*
• 70%
• Vilnius –135% (debt and accounts payable)
Annual net
borrowing limit*
• 15%
• Vilnius – 25%
Guarantee limit*
• 10%
*Limits are based on the sum of forecasted revenue and compensation
from the state budget
Other rules for the debt
management
• Municipal debt > 40%
EU, international
projects + repayment of
taken loans
• Requirement to reduce overdue liabilities by not less than
10% during the year
Thank you for your attention 