FISCAL DECENTRALIZATION REFORM IN UKRAINE Oleksandr SLOBOZHAN First Deputy Executive Director Association of Ukrainian Cities

Financial support for delegated functions, % DECENTRALIZATION REFORM: BACKGROUND Delegated functions of local self-government were not supported financially, which hindered delivery quality. In 2011-2014 the State underfunded 20% of delegated functions Financial support for delegated functions, %

DECENTRALIZATION REFORM: BACKGROUND Level of financing in 2014, %

Share of own local budgets revenues to perform delegated functions , % DECENTRALIZATION REFORM: BACKGROUND To ensure stable performance of state delegated functions, annually local governments had to divert more and more their own – even so scanty -resources from the performance of their own functions they had according to the legislation. Share of own local budgets revenues to perform delegated functions , %

DECENTRALIZATION REFORM: BACKGROUND LGs couldn’t use the funds as they were blocked by the State Treasury. As of 01.08.2014 the level of creditor debt of local budgets was 9,6 billion UAH. Amount of blocked funds for the period 01.10.2012 - 01.10.2013, billion UAH

DECENTRALIZATION REFORM: BACKGROUND Low quality of budget planning on central level which lead to forming a deficit in local budgets and hindering of public services quality provided by LGs. In 2013, out of 692 local budgets that had direct budget relations with the State Budget, 68% (472) didn’t meet the requirements of the Ministry of Finance. The amount of debt of LSG on correcting of budget planning errors was 9,7 billion UAH

DECENTRALIZATION REFORM: BACKGROUND Acting system of social standards and norms doesn’t have direct definition of price for public service according to social standard and doesn’t provide correlation between the price and funding given. Therefore: а) Size and conditions of payment in public sector are lower than in private sector, which leads to lack of qualified staff; b) Quality of service provided by public sector is lower than expectations which leads to bad image of authorities; c) Public bodies don’t have funds for proper maintenance and functioning.

DECENTRALIZATION REFORM: BACKGROUND LGs have no possibility to attract cheap financial recourses from international sources because of: а) Bureaucratic and complex mechanism for getting local loans and giving guarantees; b) Limited right to participate in such activity for settlements with population less than 300 000 inhabitants; c) The decision on approving conditions and amounts of local loans are made by Ministry of Finance based on own judgment.

DECENTRALIZATION: FIRST ACHIEVEMENTS Amendments to the budget and tax legislation substantially changed the financial situation of territorial communities: Local government discretionary resources almost tripled. Local governments received real resources to resolve issues of local importance (housing and municipal utilities, urban improvements, local social and economic programs, infrastructure upgrade); The responsibility of line ministries for the proper financial support for public education and health care sectors increased. The ministries have to reform the system of social standards and update financial standards for budget sufficiency. This is the first step towards the 100% financial support from the state for the implementation of the authority delegated to local governments;

DECENTRALIZATION: FIRST ACHIEVEMENTS Land fees have been rendered to the category of local taxes. This is the first step to promote the ubiquity of local self-governance; Taxation of commercial and non-residential property was introduced; 182 cities received the opportunity to engage in external local borrowings. There were only 16 such cities earlier; The principle of “quiet acquiescence” was introduced for local guarantees for local borrowings. The servicing of the local debt was rendered to the category of earmarked expenditures; Change of mechanism of property tax

Property tax No more tax benefits depending on the size of property, introduction of commercial property tax Fixed rates, up to 3% of minimum wage for 1 sq.m. Right for LGs to define the coefficients Tax benefits may be defined by LGs (no individual benefits) ZONE CATEGORY

DECENTRALIZATION: INCENTIVES FOR COMMUNITY CONSOLIDATION Consolidation = amalgamation = pooling resources and opportunities of consolidated communities   however, if the consolidation is done in line with the long-term plan A new community would get additional financial and property resources. The key resources include: 60% of income tax collection (now 0%) for the implementation of own authority. In addition, they will have direct relations with the National Budget National subventions (medical sector, public education) Right to administer land plots on the territory of the consolidated community Consolidated communities will enjoy the direct inter-budgetary relations with the National Budget (currently, only oblasts, rayons and oblast significance cities have such relations)

Income TAX distribution Revenues on local communities territories: regions (oblasts), cities, districts (rayons) and amalgamated communities 25% 15% 60% State budget Regional (oblast) budgets Budgets of cities, districts (rayons) and amalgamated communities Kyiv city budget 60% 40% Revenues on Kyiv city territory

HFE (horizontal fiscal equalization) mechanism Budget level Revenue equalization type Regional (oblast) budgets Corporate tax (10%) Income tax (60%) Budgets of cities and districts (rayons) Budgets of amalgamated communities Kyiv city budget No fiscal equalization Relative fiscal capacity index Reverse subsidy Basic subsidy

DECENTRALIZATION: FIRST ACHIEVEMENTS A new system of equalization provides opportunities to retain most of funds at the local level. Local governments have become less dependent on decisions made at the central level. Level of dependence of local budgets on subsidies in 2014-2015

How to ensure adequate funding for delegated functions 100% may be due to: Ensuring the compliance between the amount of financing and the price of a public service, which is delivered by the local government. 2. Clear definition of the price of a public service according to the social standard. 3. Redistribution of spending powers of central authorities and local governments under the principle of subsidiarity.

First Deputy Executive Director of the Association of Ukrainian Cities Thank you! First Deputy Executive Director of the Association of Ukrainian Cities Oleksandr Slobozhan +38 044 486 28 41 +38 096 587 40 80 slobozhan@auc.org.ua