Local Self-Governments in Bad Debt Situation Case of Estonia Annika Jaansoo

Essential data Estonia has one tier local government with 241 LG units – 39 towns and 202 rural areas The LGs are governed by the same regulations in spite of the fact that their size and real capacity are rather different.

% of inhabi-tants in the LG Size of LGs Number of inhabitants No of LGs % of LGs % of inhabi-tants in the LG 999 22 11 1 1 000 – 1 999 93 40 10 2 000 – 4 999 82 30 16 5 000 – 9 999 12 15 10 000 – 49 999 4 18 50 000 – 99 999 5 > 100 000 2 35

In Estonia local borrowing started in 1993 In Estonia local borrowing started in 1993. The market was gradually expanding and currently there is no local government without a loan taken. The development of borrowing market was especially radical in the first half of 1990s, and stabilised in the second half of the decade.

Restrictions to the borrowing The total of repayment costs of repayable loans and loan interests and obligations may not exceed during any budget year 20 % of the planned budget revenue in case new loans and issuing the obligations are considered. The total of all unpaid loans, issued obligations and other liabilities arising from these loans and obligations together with loans to be taken and obligations to be issued may not exceed 60 % of the planned budgetary revenues in the current year (conditional grants from the central government are excluded).

Restrictions to the borrowing Municipalities can take short-term loans for covering their current costs. These above-mentioned restrictions do not apply to short-term loans. That kind of loans must be returned by the end of the budget year. These restrictions are not relevant for loans which have state guarantees. State guarantees are given to the foreign loans when creditors demand state guarantees or the requirement for a state guarantee derives from the law. The state may give a guarantee up to 15 % of the budgetary income of the current year.

Restrictions to the borrowing Loans will be taken or obligations issued for investments foreseen in the development plan of municipalities. Borrowing and taking other financial obligations is the exceptional right of the municipal council. The municipality or town government has to present a copy of the loan contract or obligation issue to the Ministry of Finance within 30 days after concluding the contract. The Ministry of Finance will check if the new loan fits into the range of the legally defined loan limit.

LGs can use the following as debt instruments: Ordinary loans pegged to EEK or a foreign currency, mostly EURO. Bonds issued and bought by both local banks and insurance companies and international financial institutions. Lease or capital lease, mostly from local companies specialised in leasing and being subsidiaries of local banks.

The law does not regulate what kind of measures can be taken to municipalities with payment difficulties. A LG cannot go bankrupt according to the Bankruptcy Law of the Republic of Estonia. The only law that considers the procedures according to which the LG debt must be handled is the State Budget Law. According to the law if the municipality has financial obligations in front of the state that the former cannot fulfil, then the CG has the right to reduce the state grants proportionally with the amount of the debt.

LG Planned revenues Total loans & interest Total loan from planned revenues Kehra c. 10 706,5 19 975,2 186,5% Võnnu 4 156,7 7 209,4 173,4% Võhma c. 6 247,6 8 690,0 139,0% Orava 3 201,9 3 717,1 116,0% Oru 3 093,9 3 213,4 103,8% Türi c. 21 116,5 20 427,9 96,9%

There are several LGs, which have problems with loan repayments There are several LGs, which have problems with loan repayments. The main problem is that the budget is not planned properly. In the main, it is overestimating the budgetary amounts in the following years. Also, mistakes can be made in the following: Inaccuracies in the estimation of the profitability of the investment; Inaccuracies in the estimation of the solvency of the consumers; Inaccuracies in the estimation of the economic situation.