Fiscal Council calls for clarity and urgency in local government reform

Fiscal Council president Michalis Persianis on Monday issued a series of recommendations and suggestions to the Interior Minister, following an analysis of the fiscal impact expected from the local government reform, particularly concerning the new municipalities.

This analysis, which has been submitted to the House, indicates that the initial stages of the reform will likely encounter several but otherwise expected weaknesses. However, the analysis added that this initiative remains a significant, positive, and promising development for the medium to long term.

The Fiscal Council’s analysis highlighted the efforts made, primarily by the Interior Ministry and secondarily by the Finance Ministry, as commendable for a historic reform that could significantly improve the financial management of local authorities and, most importantly, enhance service delivery to citizens.

However, the analysis pointed out that there are substantial weaknesses that may lead to numerous problems during the implementation of the reform, which is considered entirely normal given its scale.

It has been noted that the stance of the Interior Ministry on the issue, including the recognition of legislative weaknesses that can be improved, “is reassuring”.

It suggests that the identified problems are not insurmountable and can be addressed. In this context, Persianis recommended accelerating the resolution of these issues and increasing the pressure on existing municipalities to approach this endeavour with a greater sense of urgency.

Based on data received from the Interior Ministry, with a deadline in mid-November 2023, Persianis presented specific recommendations to contribute to the successful completion of the reform.

Firstly, Persianis suggested that the technical and economic study, as well as the cost analysis, assigned according to Article 94 of the relevant legislation, should strictly adhere to best practices rather than existing ones.

Failing to do so, he explained, could jeopardise the entire reform project. Moreover, the cost estimate should serve as an incentive to rationalise costs, adopt new, modern practices, and improve the effectiveness of services provided to citizens at the lowest possible cost.

To achieve this goal, Persianis emphasised the need to pay special attention to the parameters, terms of reference, and specifications forming the basis of the technical and economic study.

Persianis also recommended clarifying or explicitly interpreting the wording of the last paragraph of subparagraph (3) of Article 94 at the political level to fully establish the state’s obligation to provide the necessary resources in a timely manner, as well as the municipality’s obligation to provide the services it has undertaken.

“There is a high political risk of municipalities halting work or refusing to provide services in case of disputes over the amount of resources the central government will provide,” he said.

Regarding the provisions of Article 92, Persianis proposed announcing a clear implementation formula from two ministries involved, including tangible and measurable criteria.

These criteria, it was noted, should ensure that any exemption from the restrictions on the percentage of each local authority’s budget allocated to payroll is automated and not dependent on the discretion of the respective Ministers of Finance and Interior.

This move would protect the ministers from political pressures and reduce the likelihood of the exemption becoming a permanent practice.

He also recommended publicly naming the seven municipalities that have yet to submit their organisational chart or monitoring form and applying strict pressure for immediate compliance.

Elsewhere, Persianis noted that certain issues need to be addressed before the completion of the reform to avoid potentially serious problems.

One such issue is the management of existing debts incurred by some municipalities, primarily during the 1990s and 2000s.

He highlighted that the financial and accounting consolidation will likely prove challenging, and there has been little progress on this front, warranting increased pressure on the current municipalities.

For example, it was noted that the existing municipalities that will form the new Nicosia municipality have significant disparities in debt, liquidity, obligations, and service pricing.

While consolidation is a means to address the financial health of some municipalities, he noted that the preparation for accounting consolidation and current expenditure consolidation shows little progress.

Furthermore, there is also uncertainty regarding how grants to municipalities will be calculated, particularly concerning expenses for so-called “initiative” projects for citizens, such as cultural services and services for the elderly.

This ambiguity extends to how these services will be consolidated, given that they constitute a significant portion of expenditures for some municipalities.

What is more, the council president explained that there is considerable delay and inadequate response from some municipalities in fully preparing for the transition to the new system.

Persianis stressed that consolidating operations and organisational charts could become a point of contention during the first 24 months of the reform.

Finally, he noted that it is unclear whether certain responsibilities transferred from the central government to municipalities, such as social welfare, will be funded from the state budget or the municipal budget.