Author: Manuela Söller-Winkler
Manuela Söller-Winkler was State Secretary in the Ministry of the Interior of the State of Schleswig-Holstein, Germany, until 2017. As a trained lawyer, she previously held various management positions in this ministry. For many years, her work focused on all legal and practical issues of local government. She is international expert of the U-LEAD with Europe Programme.
Financial autonomy is a decisive factor for strong local governments. Local government as envisioned by the European Charter of Local Self-Government is only possible if and to what extent financial autonomy is granted to local governments in a legally binding manner. Two aspects are crucial here: on one hand, the guarantee of adequate own financial resources and, on the other, the competence to decide autonomously on the application of these funds.
The issue of financial autonomy in the context of strong local government has apparently not yet acquired the necessary importance in the political debate in Ukraine. Although the financial resources specifically of municipalities are a much-discussed topic, in many cases, the focus is on financial volumes as such, but not on the competence of the municipal authorities to decide on allocations autonomously, that is, on their direct responsibility. With regards to the financing of tasks to be performed by local governments, one reason for this is the insufficient distinction between own tasks, governing tasks and delegated tasks.
The financial resources of local governments consist to a very large extent of earmarked funds. In addition, the amount of funds allocated to them for the fulfilment of certain tasks is frequently and unexpectedly changed, resulting in uncertainties for the municipalities regarding their financial leeway.
As a result, the financial autonomy of Ukraine’s local governments is still too limited, which restricts their capacity to manage local affairs on their own and hampers greater accountability before their citizenry.
The issue of adequate funding is a challenge at all levels of government. With regard to local governments, this is particularly important: the right to self-govern locally means that such governments must not only have adequately resources, but they should be entitled to such funds as their own resources to be used at their own responsibility.
Local governments are in the best position to decide how financial resources should be used in the interests of the local community. They are close to the residents of this community and they are directly accountable to these residents because of the democratic legitimacy of representatives who were voted for in local elections. Thus, the European Charter enshrines this guarantee of financial autonomy as a key element of the right to local self-government and lays down clear principles, defining both importance and scope.
In Ukraine, this topic is particularly important. In 1997, Ukraine ratified the Charter without adding any exception clauses. It has thus committed to a full legal and practical implementation of the principles of the Charter. Since 2014, the country has been making considerable efforts in its ambitious decentralisation reform. The strengthening of local government is playing a central role in this process. As the result of a comprehensive territorial-administrative reorganisation, municipalities were strengthened by amalgamation and by being allocated more competences and resources. In this sense, the issue of financial decentralisation and strengthening financial responsibility at the local level, the financial autonomy of local governments is high on the political agenda.
In this article, the importance and scope of the principle of financial autonomy of local governments enshrined in the Charter is first analysed by examining Art. 9 as one of the Charter’s key messages on local government. The Explanatory Report to the Charter will be used as a supplementary source for interpretation. Next, the current situation in Ukraine is described, primarily on the basis of the country’s current Constitution and applicable laws.
Finally, a comparison of the results shows which gaps need to be filled in Ukraine to achieve full compliance with the Charter on financial autonomy.
Art. 9 of the European Charter of Local Self-Government contains key principles specifying the importance and scope of financial autonomy for local governments. They should be understood in the light of the core principles on local government as a whole, which are enshrined in the preamble and in Arts. 3 and 4 of the Charter.
In the context of this article, certain statements are of particular significance:
On this basis, the Charter specifically describes in Art. 9 the importance and scope of financial autonomy for local governments. The main principles are:
The issue of adequate financial resources is reinforced in Art. 9.5 with regard to financially weaker municipalities:
The right to dispose of the necessary resources largely under their own responsibility is again emphasized in Art. 9.7:
Regarding the composition of financial resources, Art. 9.3 of the Charter further states:
These principles are complemented by the provision in Art. 9.6:
In its general key principles and the specific requirements of Art. 9, the Charter makes clear that financial autonomy is an integral part of local self-government as task autonomy cannot be achieved without financial autonomy.
Even the preamble stresses the importance of local governments possessing the necessary resources.
The Charter’s key general principles emphasize the importance of self-responsibility for local governments, especially task autonomy. At the same time, they make clear that task autonomy and financial autonomy are inextricably linked: without financial autonomy, task autonomy cannot be effective.
Art. 3 clarifies that self-government means not only the right but also the ability to carry out public policies. The Explanatory Report notes in this respect that the term “ability” “expresses the idea that the legal right to regulate and manage certain public affairs must be accompanied by the means of doing so effectively.” This of course also includes financial resources.
Art. 4 explains that the powers of local governments should be comprehensive and must not be restricted or undermined. This means that financial self-responsibility should also be far-reaching. Restrictions on adequate financial resources and the use of funds prevent local governments from exercising their powers with the necessary autonomy.
On this basis, Art. 9 defines in concrete terms the principles that derive from the guarantee of local self-government and its relationship to the financial resources of local governments. Art. 9.1 makes it clear that financial autonomy consists of two core elements: first, local governments should have adequate financial resources of their own and, second, they should be free to dispose of these resources. Art. 9.2 states that the amount of financial resources is only adequate if it is commensurate with the responsibilities of local governments.
Other paragraphs in Art. 9 explain the importance of these principles for certain aspects of the financial resources of local governments.
Very clear conclusions can be drawn from these provisions regarding the requirements for local finances and the obligations of central governments in this respect:
The Explanatory Report notes in its comments on Art. 9 and Art. 9.1, that “the legal authority to perform certain functions is meaningless if local governments are deprived of the financial resources to carry them out” and that “local governments shall not be deprived of their freedom to determine expenditure priorities.”
Whatever central government tasks are delegated to local governments, they must, of course, be accompanied by adequate financial resources.
The Explanatory Report notes about Art. 9.3 that “the exercise of a political choice in weighing the benefit of services provided against the cost to the local taxpayer or user is a fundamental duty of local elected representatives. It is accepted that central or regional statutes may set overall limits to local government powers of taxation; however, they must not prevent the effective functioning of the process of local accountability.”
However, an essential principle must apply to the participation in national revenues: local governments should receive such funds as far as possible as own resources that they can use on their own responsibility, without any instructions or restrictions from central authorities. Any central government requirement regarding the use of certain funds is a restriction on financial autonomy and, therefore, the functional autonomy of local governments.
By allocating funds for specific purposes, the central government has “golden reins” to steer local governments in line with its political priorities. However, in the spirit of the Charter, local governments should, where possible, set local priorities on their own responsibility.
The Explanatory Report adds in its commentary on Art. 9.7: “Block grants or even sector-specific grants are preferable, from the point of view of local authority freedom of action, to grants earmarked for specific projects. It would be unrealistic to expect all specific project grants to be replaced by general grants, particularly for major capital investments, but excessive recourse to such grants will severely restrict a local government’s freedom to exercise its discretion with regard to local expenditure priorities.”
In summary, the Charter treats financial autonomy as the right of local governments:
Financial autonomy must not be undermined, such as by extensive central supervision or the excessive use of earmarked funds, but must be guaranteed and protected by the central government.
Ukraine ratified the European Charter in 1997 and has been making great efforts ever since to strengthen local government, with considerable success. In April 2014, the Ukrainian government adopted a “Concept of the Reform of Local Government and Territorial Organization.”
Since then, territorial-administrative reorganisation, first at the local level and then at the county level, has been carried out and slated to be completed shortly. Territorial-administrative decentralisation has been accompanied by sector decentralisation, particularly in healthcare and education. As a result, the responsibilities of amalgamated municipalities have been strengthened and their resources expanded.
However, there is still no detailed legal framework for the implementation of supervision. For this reason, supervision is often carried out ad hoc by many different central agencies in an inconsistent manner, without making the necessary distinction between self-governing tasks and delegated ones. As a result, the expediency of decisions and actions taken by local governments often appears to be subject to supervision.
With regard to financial supervision, the current complex system disregards the necessary distinction between administrative financial supervision in the sense of Art. 8.1 of the Charter and other instruments of internal or external financial oversight, which, on one hand, could have more extensive control rights but no executive powers, on the other. As a result, all steps of local budget preparation and implementation seem to be subject to central supervision without clear limits on such supervisory powers.
The scope of financial autonomy of local governments
As far as local governments receive financial resources through transfers, these are predominantly earmarked grants.
Overall, the financial equalisation system appears very weak. This is particularly true for vertical equalisation. Only a small proportion of total government revenue is spent on this instrument. In short, financial equalisation is mainly achieved through horizontal equalisation, which is financed by local governments with revenues above the average. In addition, this horizontal equalisation system applies to municipalities and counties alike. Counties make hardly any financial contribution but benefit comparatively strongly from equalisation. As a result, the financial equalisation system weakens rather than strengthens municipalities.
There is apparently broad consensus in Ukraine that important steps still need to be taken. This concerns, for example, introducing a supervisory system that complies with the principles of the Charter, more clearly distinguishing between self-governing and delegated tasks, eliminating unclear and overlapping responsibilities, implementing appropriate consultation procedures regarding “all matters which concern [local governments] directly” as per Art. 4.6 of the Charter, that will govern all questions of funding and developing clearer internal local government structures.
The financial situation must be strengthened in various respects to ensure the financial autonomy of local governments. At this time, plans are to complete territorial-administrative reorganisation in financial terms by giving all approved amalgamated municipalities direct inter-budgetary links to the national budget while excluding county budgets from the horizontal equalisation system.
In principle, opinion is that these changes require constitutional amendments. However, sufficiently broad consensus on their nature and scope has not yet been reached. In parallel to these considerations, a fundamental revision of the Law on Local Self-Government and the Law on Local State Administrations is being discussed.
A comparison of the principles of the Charter and the current situation in Ukraine shows that in many aspects, local governments do not yet have the financial autonomy anticipated by the Charter:
The ability to generate their own revenues is not far-reaching enough because the local tax base is very small. Furthermore, the decision-making of individual local government to determine local tax rates is limited and local governments are not able to collect local taxes and fees themselves.
Objective, fair, transparent and consistent criteria for the allocation and distribution of state funds are lacking. In addition, both the legal framework and central government decisions regarding the financial resources of local governments are frequently and unpredictably changed without a sufficiently transparent process to balance convergent interests.
The existing financial equalisation system is not sustainable enough. Vertical equalisation is too weak in Ukraine and the central government needs to provide this fiscal equalisation system with considerable financial resources on a permanent and reliable basis. At the same time, horizontal equalisation is not properly designed. Excluding county budgets from the horizontal financial equalisation system would be a first important step towards improving the system. Furthermore, all financially strong municipalities should reliably make appropriate contributions to strengthening financially weaker ones.
Consultations on local financial matters, in particular about the allocation of redistributed resources, are often not timely, comprehensive or transparent. One reason seems to be that there is neither the legal obligation nor clear rules. Another reason could be that local governments are not recognised as legal entities. As a result, they are often treated only as “objects” and not as “subjects with their own rights” on an equal footing with the central government.
Last but not least, the principle that grants should, as far as possible, not be earmarked, is frequently violated.
Financial autonomy is a key principle and an integral part of local self-governing in the European Charter on Local Self-Government. It is composed of various building blocks that must be guaranteed in their entirety.
Without financial autonomy, there is no task autonomy, and local government cannot be guaranteed. Given this, Ukraine should enshrine the principles of financial autonomy in its Constitution and regulate their implementation in ordinary law in a comprehensive and binding manner.
The country still needs to take important steps to fully implement and secure the financial autonomy of local governments. Some important elements are already on the political agenda, but there are other aspects of financial autonomy that also need urgent debate and resolution, especially as regards:
Copy editor: Lidia Alexandra Wolanskyj
All terms in this article are meant to be used neutrally for men and women
Manuela Söller-Winkler has participated at the International Expert Exchange, "Empowering Municipalities. Building resilient and sustainable local self-government", organized by U-LEAD with Europe Programme in December 2019. Her speech delivered during one of the workshops is to a great extent depicted in this article. Despite its late publication, the article is still of significant relevance for the current discussion on decentralization reforms’ next steps in Ukraine.
In the name of the U-LEAD with Europe Programme, we would like to express our great appreciation and thanks for both inputs of Ms. Söller-Winkler. The article will be included in future online publication Compendium of Articles.
Compendium of Articles is a collection of papers prepared by policymakers, Ukrainian and international experts, and academia after International Expert Exchange 2019 and 2020, organized by U-LEAD with Europe Programme. The articles raise questions in the fields of decentralization reform and regional and local development, relevant for both the Ukrainian and the international audience. The Compendium will be published online in Ukrainian and English languages on the U-LEAD online recourses. Please, follow us on Facebook to stay informed about the project.
If you have any comments or questions about the Compendium of articles or this article in particular, please contact Yaryna Stepanyuk email@example.com.
 Council of Europe, Congress of Local and Regional Authorities: A contemporary commentary for a better understanding of the European Charter of Local Self-Government. Paragraph 141 Access: https://www.coe.int/en/web/congress/all-news-newsletter/-/asset_publisher/CR0prMtPOIKO/content/a-contemporary-commentary-for-a-better-understanding-of-the-european-charter-of-local-self-government?_101_INSTANCE_CR0prMtPOIKO_viewMode=view/
 Ibid., para. 147.
 Ibid., para. 149 et seq.
 Ibid., paras. 153, 154, 159.
 Ibid., para. 156.
 Ibid., para. 147.
 Ibid., para. 178.
 Ibid., para. 167.
 Ibid., para. 173.
 Verkhovna Rada of Ukraine, Cabinet of Ministers of Ukraine: Directive of April 1, 2014 #333-р, 2014. Access: https://zakon.rada.gov.ua/laws/show/333-2014-%D1%80
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