ANALYTICAL REPORT

Review of the Municipal Finance Development in Russia in 1992 - 2002

By A. V. Chernyavsky, the Institute for Urban Economics

This report reviews Russian municipal fiscal autonomy reforms over the last decade.
It is based on statistics provided by the Russian Federation Finance Ministry for the performance of consolidated budgets in the Russian Federation from 1996-2001 as well as on budget reporting data covering the same period provided by selected Federation constituents and municipalities. In addition, data from budget-execution reports from 79 Russian cities[1] for the period from 1999 to 2001 were used.

 The report is structured into an introduction and five chapters. Chapter 1 describes general approaches to evaluation of decentralization and fiscal autonomy processes. Chapter 2 studies municipal revenues while spending responsibilities and expenditure budgets are analyzed in Chapter 3. Chapter 4 focuses on municipal borrowing and deficit practices. Chapter 5 presents the results of calculations for budgetary implications of the enactment of draft law “On the general principles of the organization of local self governance in the Russian federation”.

The main conclusions contained within this report are:

• The fiscal autonomy of municipalities steadily decreased during the study period.
• Over the five last years (1996-2001), revenues of Russian municipalities dropped by 26 percent. In the last three years, the proportion of local taxes in municipal revenue budgets shrank significantly.
• The post-crisis period was a period of deterioration of the vertical fiscal balance at the regional level. The proportion of regional transfers in the structure of local revenue budgets increased.
• Continuous revision to the federal tax law during the last decade was very destructive to local government revenue stability causing significant difficulties in financial management, long-term (more than 1 year) borrowing, and implementation of large investment projects.
• Expenditure budgets of municipalities continue to be almost fully regulated by federal laws limiting local autonomy in determining the volume and structure of public services to be provided.
• The upward trend in the housing sector costs of municipalities was reversed due to the housing sector reform progress.
• Regional governments continued to increasingly finance municipal educational and social costs because of the weakened fiscal autonomy of local governments.
• The strength of the budget determines the economic structure spending from the city budget.
• The example of the regions of the Volga Federal District shows that the improvement of the budget strength of subjects of the Russian Federation does not result in the shift in the financing of the consolidated budget's social sector spending items to regional budgets. On the contrary, there is a trend towards centralization of spending on the housing and utility sector in richer regions.
• Borrowing policies and practices of municipalities remain undeveloped. Budget loans and short-term bank loans to cover cash gaps remain the main forms of municipal borrowing. There is little evidence of the use of long-term debt to finance capital investment projects.

The municipal finance reform as well as the general process of reforming in Russia has a more than ten years history. For municipalities these reforms imply the need to review their revenue and expenditure policies, further develop their budget planning methods and form such financial departments in municipalities that will be capable to respond to challenges set by the federal and regional governments.

Review of the Municipal Finance Development in Russia in 1992 - 2002 (LOGIN Library)