Brasov-Review of the Financial, Budget and Performance Indicators

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					FINANCIAL, BUDGET AND PERFORMANCE INDICATORS
Prepared by: VICTOR GIOSAN                                                                             Page 1 of 8




   Brasov-Review of the Financial, Budget and
            Performance Indicators

                                                     1999-2000




          Executive Seminar on Urban Planning and Local Economic Development, Iasi, Romania, March 20-23, 2001
        Co-Organised by: The City Iasi and Harvard University Graduate School of Design, Center for Urban Development Studies
                     In Association with The Research Triangle Institute, USAID Local Government Assistance Program
FINANCIAL, BUDGET AND PERFORMANCE INDICATORS
Prepared by: VICTOR GIOSAN                                                                             Page 2 of 8




Definitions of the main indicators:

a) Total revenues – the total revenues of a local government.

b) Total current revenues – the revenues that local governments may use directly, currently and
repeatedly. According to the classification of the Ministry of Finances, it includes current revenues,
which are own current revenues, and the local share of global income tax, which in economic
literature is considered an intergovernmental transfer through the partition of a state tax. These two
revenues are used to establish the limit of the debt established by Law 189/1998; the annual debt
service should not exceed 20% of the current revenues.

c) Operating revenues – the revenues composed of the current revenues, as they are defined
above, to which is added the (1) balance funds for the local budget, both those with special
destination and those with general destination, (2) operating subsidies received from the state budget
or others central budget, and (3) special taxes as they are defined by Law 189/1998. The following
are not considered operating revenues: the capital revenues, revenues with special destination
received from the state budget or other central budgets for investments, and transfers from the state
budget for the investments financed through external credits secured by the Government.

d) Operating expenditures – any expense, with the exception of capital expenses.

e) Operating transfers (subsidies) with general destination – any intergovernmental transfer
that local governments may use for any purpose. Included in these transfers is the local share of the
Global Income Tax used to balance the local budgets, whether they are available for the County
Councils or they are allotted through the state budget.

f) Operating transfers (subsidies) with special destination – any intergovernmental transfer
that may be used only according to its destination established by the law. Included in this is the local
share for heating, subsidies from the state budget or others central budgets.

g) Transfers (subsidies) for capital expenditures – intergovernmental transfers received to
finance the approved investment projects or investments financed through external credits. Included
in this are revenues with special destination received from the State Budget or any other Central
Budget or special funds and transfers with special destination received from the State Budget for the
investments financed through external credits (for example, programs MUDP I and MUDP II)




          Executive Seminar on Urban Planning and Local Economic Development, Iasi, Romania, March 20-23, 2001
        Co-Organised by: The City Iasi and Harvard University Graduate School of Design, Center for Urban Development Studies
                     In Association with The Research Triangle Institute, USAID Local Government Assistance Program
FINANCIAL, BUDGET AND PERFORMANCE INDICATORS
Prepared by: VICTOR GIOSAN                                                                              Page 3 of 8




Table 1 (current lei)

                                                 Value in 1999 in         Value in 2000 in             Percent                   Difference
                Indicator
                                                   thousands lei            thousands lei             2000/1999                  2000/1999
1. Total revenues                                     278,959,990              411,144,039                147.38%                132,184,049
2. Current revenues, out of which:                    123,226,539              124,419,442                 100.97%                 1,192,903
  2.1 Fiscal revenues, out of which:                  116,090,981              113,929,995                   98.14%               - 2,160,986
    2.1.1.Tax revenues, paid by the                     81,753,678              40,986,543                   50,13%          - 40,767,135
    citizens
    2.1.2. The tax property paid by                     39,332,437              65,905,400                 167.56%                26,572,963
    legal and natural persons
2.2. Non-fiscal revenues                                  7,135,558             10,480,447                     147%                3,353,889
3. Capital revenues                                       6,631,523               2,885,997                  43.52%                - 3745526
4. Local share                                        111,943,997              202,945,594                 181.29%                91,001,597
5. Current revenues                                   236,296,942              329,024,033                 138.24%                92,727,091
6. Maximum annual debt service                          47,259,388              65,804,807                 139.24%               185,454,119
(20 % of the total current revenues)
7. Operating revenues                                 257,317,158              381,882,411                 148.41%               124,565,253
8. Amounts used during the year out                                  0            2,439,857                           -            2,439,857
of reserves (circulating fund)
9. Operating transfers (subsidies)                      14,388,693                3,790,882                  26.35%          - 10,597,811
with general destination
10. Operating transfers (subsidies)                     10,592,295              46,627,639                   440.2%               36,035,344
with special destination
11. Capital transfers (subsidies)                       10,992,129              26,375,631                 239.95%                15,383,502

1. Total expenditures                                 272,585,512              408,199,908                149.75%                135,614,396
2. Operating expenditures, out of                     233,327,480              364,418,301                 156.18%               131,090,821
which:
  2.1. Personnel expenditure                            14,302,067              28,279,820                 156.18%                13,977,753
    2.2. Material expenditures                        100,068,285              149,768,952                 149.67%                49,700,667
    2.3. Subsidies + transfers for                      99,457,259             145,776,600                 146.57%                46,319,341
    heating and local transportation
    (including the subsidies for poor
    households)
3. Capital expenditures                                 39,258,032              43,781,607                 111.52%                 4,523,575
4. Population                                               311,059                 309,671                  99.55%                   - 1,388




           Executive Seminar on Urban Planning and Local Economic Development, Iasi, Romania, March 20-23, 2001
         Co-Organised by: The City Iasi and Harvard University Graduate School of Design, Center for Urban Development Studies
                      In Association with The Research Triangle Institute, USAID Local Government Assistance Program
FINANCIAL, BUDGET AND PERFORMANCE INDICATORS
Prepared by: VICTOR GIOSAN                                                                             Page 4 of 8




Table 2 (value in constant lei 1999, inflation 2000/1999 = 140.6%)

                                                 Value in 1999 in         Value in 2000 in           Percent              Difference
                Indicator
                                                  thousands lei            thousands lei            2000/1999             2000-1999
1. Total revenues                                    278,959,990               292,421,080            104.83%                   13,461,090
2. Current revenues, out of which:                   123,226,539                88,491,780              71.81%             - 34,734,759
  2.1 Fiscal revenues, out of which:                 116,090,981                81,031,291                69.8%            - 35,059,690
    2.1.1.Tax revenues, paid by the                    81,753,678               29,151,169              35.66%             - 52,602,509
    citizens
    2.1.2. The tax property paid by                    39,332,437               46,874,395             119.17%                   7,541,958
    legal and natural persons
  2.2. Non-fiscal revenues                              7,135,558                 7,460,489            104.55%                      324,391
3. Capital revenues                                     6,631,523                 2,052,629             30.95%                  - 4,578,894
4. Local share                                         111,943,99              144,342,528             128.94%                  32,398,531
5. Current revenues                                  236,296,942               234,014,248              99.03%                  - 2,282,694
6. Maximum annual debt service (                       47,259,388               46,802,850              99.03%                   - 456,538
20 % of the total current revenues)
7. Operating revenues                                257,317,158               271,609,112             105.55%                  14,291,954
8. Amounts used during the year out                                 0             1,735,318                          -           1,735,318
of reserves (circulating fund)
9. Operating transfers (subsidies)                     14,388,693                 2,696,218             18.74%             - 11,692,475
with general destination
10. Operating transfers (subsidies)                    10,592,295               33,163,328             313.09%                  22,571,033
with special destination
11. Capital transfers (subsidies)                      10,992,129               18,759,339             170.66%                   7,767,210
1. Total expenditures                                272,585,512               290,327,104            106.51%                   17,741,592
2. Operating expenditures, out of                    233,327,480               259,187,981             111.08%                  25,860,501
which:
  2.1. Personnel expenditure                           14,302,067               20,113,670             140.63%                   5,811,603
  2.2. Material expenditures                         100,068,285               106,521,303             106.45%                   6,453,018
  2.3. Subsidies + transfers for                       99,457,259              103,681,792             104.25%                   4,224,533
  heating and local transportation
  (including the subsidies for poor
  households)
3. Capital expenditures                                39,258,032               31,391,123              79.96%                  - 7,866,909
4. Population                                              311,059                   309,671            99.55%                      - 1,388




          Executive Seminar on Urban Planning and Local Economic Development, Iasi, Romania, March 20-23, 2001
        Co-Organised by: The City Iasi and Harvard University Graduate School of Design, Center for Urban Development Studies
                     In Association with The Research Triangle Institute, USAID Local Government Assistance Program
FINANCIAL, BUDGET AND PERFORMANCE INDICATORS
Prepared by: VICTOR GIOSAN                                                                             Page 5 of 8




Table 3 (value of qualitative indicators considered in constant Lei 1999, in thousands lei)


                                     Indicators                                           1999                       2000
        Budget excess                                                                     6,374,478                   2,093,976
        Operating revenues/Total revenues                                                    92.24%                     92.88%
        Current revenues/ Total revenues                                                     84.71%                     80.03%
        Operating revenues- Operating                    expenditures        =          23,989,678                   12,421,131
        Operating excess/ deficit
        Operating excess (deficit)/operating revenues                                         9.32%                      4.57%
        Total current revenues (fiscal and non-fiscal) as a %                                44.58%                     30.67%
        of total revenues
        Property tax revenue as a % of:
        - operating revenues                                                                 15.29%                     17.26%
        - total revenues                                                                      14.1%                     16.03%
        Local share of global income tax as a % of total                                     40.13%                     49.36%
        revenues
        Total transfers (subsidies) – operating and                                            12.9%                    26.26%
        investments – from the State budget as a % of total
        revenues
        Operating expenditure/total expenditure                                               85.6%                     89.27%
        Material expenditure/total expenditure                                               36,71%                     36.69%
        Personnel expenditure/total expenditure                                                5.25%                     6,93%
        Subsidies + transfers/ total expenditure                                             36.49%                     35.71%
        Compulsory expenditures/ total expenditures                                          41.74%                     42.64%
        Capital expenditures/total expenditures                                               14.4%                     10.81%
        Debt service/total current revenues                                                          0                          0
        Total debt/total current revenues                                                            0                          0
        Total expenditures/population (lei/inhabitant)                                      876,314                    937,534
        Operating revenues/population (lei/inhabitant)                                      827,229                    877,089
        Total current revenues/population (lei/inhabitant)                                  759,653                    755,687
        Own current revenues/population (lei/inhabitant)                                    396,152                    285,761
        Property tax revenue/population (lei/inhabitant)                                    126,447                    151,368




          Executive Seminar on Urban Planning and Local Economic Development, Iasi, Romania, March 20-23, 2001
        Co-Organised by: The City Iasi and Harvard University Graduate School of Design, Center for Urban Development Studies
                     In Association with The Research Triangle Institute, USAID Local Government Assistance Program
FINANCIAL, BUDGET AND PERFORMANCE INDICATORS
Prepared by: VICTOR GIOSAN                                                                             Page 6 of 8


Conclusions:

1. The increase in total revenues (index 104.83%) and of operating revenues (index 105.55%)
   between 1999 and 2000. This fact points to the recovery of the local economic activity,
   correlated to the recovery of the national economy through an important increase in (1) the local
   share of the global income tax (index 128.94%), (2) transfers with special destination, (3)
   operating transfers (index 313.09%) and (4) capital transfers (index 170.66%). It is important to
   carefully analyze the local share of the global income tax because it has three major
   consequences:

       •    The globalization of the income taxes, which in 1999 used to be collected 100% by the
            Local Government as fiscal revenues (e.g. the income tax for the unemployed persons);

       •    The change of the wage tax collection, only at the companies’ headquarters, a fact that
            favored the county’s residence compared to the others towns;

       •    The slight economic development during 2000, which was followed by an increase of the
            real wages.

   From all the three causes mentioned above, only the last one represents a positive trend, the
   others are legislative aspects, which can be changed (especially the second cause).

2. A slight decrease in total current revenues (index 99.03%) and a major decrease in own current
   revenues (index 71.81%), which was largely due to the evolution of fiscal revenues (index
   69.8%). There are two explanations for this:

       •    A decrease in tax revenues collected from the population because of the application of
            the global income tax;

       •    The low level of the local fiscal policy, which was at its minimum as allowed by law.

   These factors lead to the decrease by 64.34% in tax revenues between 1999 and 2000.

3. A major decrease in balance funds with general destination, which in 2000 represented only
   18.74% of the amount received in 1999.

4. The decrease in the share of own current revenues in relation to total revenues, from 44.58% in
   1999 to 30.67% in 2000. This fact, together with the increase in the percentage represented by
   subsidies with special destination (operating and capital transfers) from 12.9% to 26.26%,
   indicates a decrease in financial autonomy of the Local Government and a more vulnerable
   position of the Municipality vis-à-vis the State. This is particularly the case when on considers
   the political way in which transfers with special destination are allocated by the Government and
   County Council.

5. The level of the operating excess, which is a major indicator of credit worthiness for a local
   government, was and is still very low; additionally, the trend is negative: 9.32% in 1999 and
   4.57% in 2000. The operating excess in 2000 was half of what it had been in 1999. This fact


          Executive Seminar on Urban Planning and Local Economic Development, Iasi, Romania, March 20-23, 2001
        Co-Organised by: The City Iasi and Harvard University Graduate School of Design, Center for Urban Development Studies
                     In Association with The Research Triangle Institute, USAID Local Government Assistance Program
FINANCIAL, BUDGET AND PERFORMANCE INDICATORS
Prepared by: VICTOR GIOSAN                                                                              Page 7 of 8
     shows the narrow base the Local Government has available to contract credits or to extend the
     capital expenditures from of its own current revenues, regardless of the amount of transfers
     received from the State budget to finance investments.

6. The percent represented by compulsory expenditures (types of expenditures that are inflexible in
   the short-term and that the Local Government must pay, regardless of its financial situation) and
   social subsidies is quite high: 41.74% in 1999 (36.49% subsidies) and 42.64% in 2000 (35.71%
   subsidies). One may note that subsidies represented 31.46% of the total budget expenditures in
   1999. Compulsory expenditures include personnel expenditures, heating and public
   transportation subsidies, and financial expenditures (debt service) – not for Brasov. Compulsory
   expenditures as a percent of total expenditures show the rigidity of the latter. The situation of
   this town is quite poor.

7. The level of capital expenditures is very low (14,4% in 1999 and 10.81% in 2000), due to the
   rigidity of total expenditures. It is important to note that in 1999, capital expenditures
   represented 22.03%. Additionally, capital expenditures are in an inverse ratio to subsidies, a fact
   which often occurs in larger towns. Paradoxically, the biggest investments are required for
   public transportation and heating. The subsidies for transportation and heating do not allow an
   increase in capital expenditures. As a result, modernization, which would encourage a decrease
   in the long-term operating costs, cannot be achieved. In effect, the subsidies for these two
   domains actually increase the long-term costs of these services and the deterioration of services.

     The municipality cannot afford to sustain a major public utility subsidy policy for long periods
     of time. The following may help to increase total current revenues:

        •    Increasing local fiscal revenues in the following two years, by increasing the property tax
             from the minimum to mid level according to the present law.

        •    Increasing non-fiscal revenues, by collecting more of the amounts from leasing, licenses
             and transfers from the profit of the commercial businesses of the municipality.

     On the other hand, the level of the subsidies for public transportation specifically may be
     decreased according to the Government decrees 97/1999 and 48/2000. In developing such a
     policy, the amounts saved should be reinvested in the same domain. This fact implies an increase
     in tariffs for public transportation.

     Regardless, the amounts obtained by increasing own current revenues or by decreasing subsidies
     should be reinvested, such that within the following 2 – 3 years (2001-2003), the share of the
     capital expenditures should exceed 20% and the operating excess should increase to more than
     15%.

8.   The Romanian legislation allows a maximum annual debt service of 20% of the total current
     revenues; this level decreased in 2000 to 45,802,850 thousands lei, compared to 47,259,388
     thousands lei in 1999. Expressed in USD. At an exchange rate of 1 USD = 16000 ROL in 1999,
     it represents 2,925,178 USD in 2000 compared to 2,953,712 USD in 1999. Given this, the
     maximum level of the loans Brasov may contract are 15, 20 or 25 years, at the following
     interest rates, respectively: 6%, 8%, 10%, in USD interest rates in 2000. These interest rates are

           Executive Seminar on Urban Planning and Local Economic Development, Iasi, Romania, March 20-23, 2001
         Co-Organised by: The City Iasi and Harvard University Graduate School of Design, Center for Urban Development Studies
                      In Association with The Research Triangle Institute, USAID Local Government Assistance Program
FINANCIAL, BUDGET AND PERFORMANCE INDICATORS
Prepared by: VICTOR GIOSAN                                                                             Page 8 of 8
    quite possible for loans received from international financial institutions, such as EBRD, which
    has a special program for municipalities without governmental guarantees that are only
    guaranteed through future revenues. The values are presented in the following table:


     Reimbursement                   The maximum loan                 The maximum loan                 The maximum loan
                                     for a 6% interest                for a 8% interest                for a 10% interest
                                     loan (USD)                       loan (USD)                       loan (USD)
     15 years                        23,093,511                       19,944,395                       17,551,068
     20 years                        26,592,527                       22,501,369                       19,501,187
     25 years                        29,251,780                       24,376,483                       20,894,129

     Of course, the above is true only if total current revenues increase by at least the same rate that
    the Romanian currency (compared to the USD) decreases by, such that increased index
    balances out the currency depreciation risk. The data presented above represent the maximum
    and theoretical levels, because for developing countries such as Poland and Czech Republic, an
    annual debt service of 15% of total current revenues is considered an alarming level. This fact
    is true for Romania as well when one takes into consideration the higher currency risk, the
    economic and legislative instability (referring to the local authorities’ responsibilities).

    Financial institutions credit locals governments for the capital projects that generate revenues,
    and therefore have primary and secondary repayment. The preferred areas:
       • Water and sewerage network;
       • Heating;
       • Collection and delivery of solid waste materials;
       • Local public transportation.
    Municipalities do not receive credits for road infrastructure because these projects do not have
    primary and secondary repayment.

9. The high level of the budget excess in 1999 and 2000. Although the budget excess decreased
significantly (by more than three times) last year, it still remained quite high. This fact may seem
unusual, considering the “hunger” for credits. This reflects a need for better planning and improved
expenditures records.




          Executive Seminar on Urban Planning and Local Economic Development, Iasi, Romania, March 20-23, 2001
        Co-Organised by: The City Iasi and Harvard University Graduate School of Design, Center for Urban Development Studies
                     In Association with The Research Triangle Institute, USAID Local Government Assistance Program

				
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