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in the part dealing with local budgets and inter-budgetary relations

The State Budget for 2012  (#4282-VI  of December 22, 2011) in the part dealing with local budgets and inter-budgetary relations is not qualitatively different from the State Budget for 2011, but contains some positive novelties. For the first time the law provides for:

1. State Budget subvention of almost UAH 2.4 billion to local budgets for the purposes of construction, reconstruction, repair and maintenance of municipally-owned streets and roadways in populated areas for all local budgets with direct inter-budgetary relations with the State Budget. The automatic transfer procedure has been approved.

2. State Budget subvention of 1.8 billion UAH to local budgets to procure medicines and medical goods under national targeted programs and comprehensive programmatic activities.

3. Introduction of the environmental factor to facilitate in higher quality of public services adjusted for environmental specifics (0.4 billion UAH).

4. Funds to procure medical vehicles and equipment –0.8 billion UAH.

5. Funds to purchase medicines for emergency medical assistance –0.3 billion UAH.

6. Funds on medical equipment (mammography units, X-ray and ultra-sound diagnostics equipment) of national production –0.2 billion UAH.

7. Expenditures under Part 2 of Article 29 of the Law of Ukraine “On Culture” to secure the transfer of the culture services employees to full tariff-based remuneration (0.2 billion UAH).

Among the negative aspects of the 2012 State Budget one should mention the following:

1. Significant deficit of financial resources to support realization of the authority delegated by the central government: minimal need amounts to 12 billion UAH (where 6 billion UAH – payroll; see item 2 for details). The maximum demand amounts up to 32.1 billion UAH. Unfortunately all areas are provided with only 40 to 80% of the actual demand depending on the specific case. The most crying underfunding is observed in “Public Administration” – 40%, and in “Physical Culture and Sports” – 45% of the requirement.

2. Projected indicators of expenditures on delegated authority do not provide for minimum wage increases, higher salaries and tariff rates in the first tariff scale (1,073 UAH and 773 UAH as of January 01, 2012). Gross payroll of public sector employees is to increase on average by 5.7%, however the 2012 Budget does not have funds to support the increase. In other words, the deficit of local budgets’ resources for payroll only amounts to UAH 6 billion.

3. Local budgets’ revenues indicators are overstated (special fund and Basket Two), which makes it impossible to implement the majority of local budgets. In particular:

- slated land tax revenues (11.8 billion UAH) and municipal enterprises’ profit tax (0.7 billion UAH) are unrealistic;

- no legal framework to regulate the land sale procedure (2.078 billion UAH);

- property to sell is not available (0.921 billion UAH);

- real estate tax revenues will be 90 million UAH less since the tax is introduced starting from July 01, 2012 and not from January 01, 2012;

- revenues from the single tax will reduce by 0.6 billion UAH because of almost threefold reduction in the number of small enterprises.

4. Financial standards of budget sufficiency have not been identified per each public sector and by every group of administrative and territorial units.

5. Gross volume of financial resources by each type of expenditure to be considered while defining the volume of intergovernmental transfers was determined with no regard for social standards and norms (as a matter of fact the pertinent ordinance of the President concerning the development and adoption of social standards and norms was not complied with).

6.  The volume of intergovernmental transfers was defined without regard to customized approach to the equalization “Alfa” factor per every budget individually varying from 0.6 to 1 thus omitting specific nature of revenues and expenditure aspects of local budgets.

7. Deficit of resources to finance municipal and housing economy reached 11.0 billion UAH.

8. No subventions to local budgets are envisioned to repay indebtedness incurred through difference between heating tariffs approved or endorsed by the relevant public organs and the actual cost of heating generation, transportation and supply to population. According to experts, the local budgets will need at least 7 billion UAH just to avoid the collapse of the municipal heating sector.

9. State-provided social benefits, among them preferential public transportation fare, will not be financed fully (the amount of the subvention is about 2 billion UAH, whereas the demand is of 3 billion UAH).

10. Expenditures on social and economic development of certain territories have been centralized. The volume of direct subventions for social and economic development of individual territories amounts to only 2.7 billion UAH, which is 1.5 billion UAH less than the corresponding amount in 2011. It is also suggested to channel 1.2 billion UAH through the State Regional Development Fund.

11. No financing is provided for the National Targeted Small City Social and Economic Development Program for 2011 – 2015 (Resolution of the Cabinet of Ministers of Ukraine of November 11, 2010, # 1090).

12. No 100% State Budget supported financing is provided for government welfare and social protection programs, government programs in support of housing construction (reconstruction), government program to reform housing and municipal economy, government programs of physical culture and sports whose implementation has been entrusted to local governments, and for full reimbursement for state-granted social and tax preferences.

13. No increase in spending to maintain local self-governance, in first place, in terms of higher salaries for officials.

14. No State Budget subvention sharing among local budgets is envisioned to support social and economic compensation for population running the risk of living on monitored territories.

It is worth mentioning that it is due to AUC efforts that in the process of the 2012 Budget drafting by the Government and its elaboration at the Verkhovna Rada it was possible to:

1. Increase the development part of local budgets by expanding the sources of its formation and secure a transparent mechanism of financing municipal road management (Law of Ukraine # 3614-VI of July 072011 “On Amending the Budget Code of Ukraine and Certain Other Laws of Ukraine (concerning the harmonization with the provisions of the current legislation)”.

2. Partially increase the amount of equalization transfer –  to 51.6 billion UAH for 2012 as opposed to 43.6 billion UAH in 2011.

3. Reduce the number of “donor budgets” (whose funds are transferred to the State Budget) as compared with the first reading indicators. On the whole the volume of similar funds was reduced by 2.4 billion UAH or by 67.7% nationwide (in the first reading there was 3.5 billion UAH of expropriation and only 1.1 billion UAH retained in the final wording).

4. Increase additional equalization transfer volume by 50% to 40.4 billion UAH (the Ministry of Finance suggested 0.6 billion UAH).

5. Increase social subventions by 1.6 billion UAH to 40.4 billion UAH (the Ministry of Finance suggested 38.8 billion UAH), among other, higher volume of subventions to support preferential public transportation services for certain categories of citizens – from 1.5 billion UAH to 2 billion UAH.

6. Secure additional increase of almost 0.6 billion UAH in subventions for social and economic development assigned to specific administrative and territorial units.

7. Adjust the planned revenue and expenditure figures in local budgets:

a) the revenue volumes projected by the Ministry of Finance were partially reduced, which makes the budgets more realistic;

b) Basket One expenditure indicators were partially increased and Basket Two revenue/expenses indicators were somewhat reduced thus enabling a more objective employment of financial equalization instruments.

8. Partially increase local budgets’ expenditures indicators in certain areas to implement the authority delegated by the central government; in particular, in the area of “Culture and Arts” almost 100% of actual requirements were sufficed.

Prepared by the Association of Ukrainian Cities

Analytical Center