Relation between Long-term Liabilities and Selected Indicators in the Case of Municipalities with Extended Powers in the South Moravian Region

VIEŠOJI POLITIKA IR ADMINISTRAVIMAS PUBLIC POLICY AND ADMINISTRATION 2016, T. 15, Nr. 2 / 2016, Vol. 15, No 2, p. 334–346. ISSN 1648-2603 (print) ISSN 2029-2872 (online) Relation between Long-term Liabilities and Selected Indicators in the Case of Municipalities with Extended Powers in the South Moravian Region Eva Lajtkepová Brno University of Technology, Faculty of Business and Management Kolejní 2906/4, Brno, Czech Republic DOI:10.13165/VPA-16-15-2-11 Abstract. The purpose of this article is to summarise data on long-term liabilities in municipalities with extended powers in the South Moravian Region and to determine whether these long-term liabilities correspond to the number of subsidized organizations and the rate of transfers to the income in the budget of the municipality. It is assumed that long-term liabilities per capita will be higher in municipalities with a larger number of subsidized organisations and that they will be higher in the case of municipalities with a higher rate of transfers to their budget income (i.e. in the case of municipalities that are less financially self-sufficient). Data provided by the Ministry of Finance of the Czech Republic was used which was processed via statistical methods (descriptive statistics, correlation analysis and cluster analysis). Subject to the calculation of correlation coefficients, only the transfer ratio was usable for the cluster analysis because the value of the correlation coefficient between the long-term liabilities per capita and the number of subsidised organisations showed insignificant dependency. Therefore, we were unable to prove our assumption number one, that long-term liabilities if expressed on a per capita basis would be higher in the case of municipalities which operate a higher number of subsidized organisations. However, the outcomes of the cluster analysis did not confirm the second assumption. All we could declare was that extreme values appeared to have grouped up: municipalities with the highest (or lowest, as the case might have been) values of the long-term liabilities per capita showed the highest (or lowest, as the case might have been) transfer ratio. Key words: budget, municipality, cluster analysis. Reikšminiai žodžiai: biudžetas, savivaldybė, klasterinė analizė. Public Policy and Administration. 2016, Vol. 15, No 2, p. 334–346. 335 Introduction Even though one of the first post-1989 reforms was the reform of the public administration, it took a very long time to take the shape it has now. Municipalities, as the basic units of local self-government, were formed in 1990 but the form and hierarchy of higher territorial units were not decided until several years later (Průcha 2011). Even though Constitutional act number 347/1997 Coll., on the establishment of higher territorial self-government units and on the amendment of constitutional act of the Czech National Council number 1/1993 Coll. established (effective 1 January 2000) fourteen regions (one of them being the City of Prague), the real-life creation of regions and the commencement of their activities was associated with the adoption of act number 129/2000 Coll., on regions (establishment of regions). Following the dissolution of the so-called “county offices” as at 31 December 2002 three categories of municipalities were introduced for the purpose of the scope of their delegated authorities and the execution thereof: a) “ordinary“ municipalities, b) municipalities with an authorised municipal office, c) municipalities with extended powers. The former three-level system of public administration (municipality – county – region) was replaced with a more complex system. The effectiveness (operational as well as financial) of this decision is debatable to say the least. However, after a decade of experience and continuous adjustments we can at least admit that the system has “settled down”. 1. Status, competencies and financial management of municipalities Pursuant to the Constitution of the Czech Republic, municipalities are the basic units of local self-government. Each municipality is a part of a higher territorial self-government unit – i.e. region. The scopes of activity and authority of municipalities and regions are in fact similar (they are based on the so-called “mixed model”). It allows for the coordination of the respective activities. The status and role of municipalities and their institutions are governed by act number 128/2000 Coll., on municipalities (establishment of municipalities), as amended. The basic framework of the financial management of municipalities is governed, in addition to the aforementioned act, by act number 250/2000 Coll., on municipal budgetary rules, as amended. Municipalities are public corporations which own property and have their own income; they manage their financial affairs in accordance with the applicable legislation and their respective budgets. Municipalities establish legal relations on their own behalf and they bear responsibilities arising out of these relations. Municipalities manage their affairs on an independent basis. Authorities of the state may intervene in this self-governing authority only within the boundaries defined by the applicable legislation. Their institutions carry out state administration pursuant to the applicable law as the so-called “delegated authority”. Municipalities with an Eva Lajtkepová. Relation between Long-term Liabilities and Selected Indicators in the Case… 336 authorised municipal office (383 in the Czech Republic) perform state administration within their respective local districts beyond the scope of delegated authority of municipalities with an “ordinary” municipal office, whereas municipalities with extended powers (205 in the Czech Republic) perform state administration within their respective local districts beyond the scope of the delegated authority of the municipalities with an authorised municipal office. Municipalities are managed on an independent basis by their respective assemblies. Other statutory bodies include the council, mayor and the municipal office. Financial management of a municipality is subject to its respective annual budgets, which in itself is based on a budget outlook. Typically, the budget of a municipality is drawn up to be balanced; a budget deficit is only acceptable if it can be compensated from past revenue, or via a contractual loan, via earnings from public bonds or a repayable financial assistance (section 4 of act number 250/2000 Coll.). Their income is represented by earnings from their own assets and rights to these assets, shares of joint taxes pursuant to act number 243/2000 Coll., on budgetary determination of revenues from taxes, transfers from the state budget and other funds within the framework of the budgetary system, revenues from their own moneymaking activities etc. Czech municipalities have a very limited authority in terms of taxation: within the limits of the applicable legislation, they can only impose the real estate tax and local fees (pursuant to the budgetary structure, they are treated as taxes); i.e. their income is based on transfers from the state budget and other funds within the framework of the budget systems. Their expenses contribute to the performance of the state administration and other acts within the scope of their authority etc. 2. Short overview of related literature Related literature focusing on the financial management and debts of municipalities is quite extensive and fairly differentiated. Publications can be generally divided by their main focus into three groups: a) publications focusing on the ratings of indebted entities, b) publications searching for limits of indebtedness of municipalities and regions, c) publications searching for and describing various factors that affect indebtedness. Here, a special subset consists of publications exploring the political business cycle at the local level. Various connections with fiscal federalism or fiscal decentralization are very often reflected in these texts. The theory of public economy generally recommends to central governments as well as governments at lower levels (municipalities and regions) to finance ordinary expenditure from ordinary income (naturally, mainly tax income), capital expenditure from capital income (Gruber 2011), (Stiglitz 2000). Even loans or income from bonds issued can be included in them. I. e. indebtedness (whether in the form of a received loan as well as bond issue) is permitted only in connection with the acquisition of Public Policy and Administration. 2016, Vol. 15, No 2, p. 334–346. 337 investments. Even Musgrave and Musgrave (1994, 513) recommend “financing of public investments from a loan that will be repaid over a longer period (when the loan is repaid along with the use of the investment) to ensure intergenerational equity”. A similar view, i.e. to use loans to finance local capital projects, is shared also by Holtz-Eakin (1991). Based on a data analysis from 49 U.S. states on a time series 1961-1990, Kiewiet and Szakaty (1996) concluded that the level of indebtedness was influenced by two factors: the amount of personal income per capita and left-oriented government. The effect of various socio-economic factors (e.g. population, share of immigrants in the population, transfers and tax revenues, etc.) at the level of debt per capita is admitted even by Guillamón et al. (2011). On the other hand, they point out an interesting fact that weaker governments had lower levels of debt (analysed data came from 3,253 municipalities with population over 1,000 in Spain). The same authors (Guillamón et al. 2013) again proved on a sample of Spanish municipalities with population over 20,000 (time series 2001-2008) the influence of population on the level of spending, and at the same time they suggested that the spending of these municipalities always increased the year before local elections. In their opinion, this supports the assumption of the political business cycle at the local level in Spain. Veiga and Veiga (2007) describe how municipal governments increase spending in the pre-election period. They also change the composition so that the spending is more visible to the voters, while local taxes tend to decrease one or two years before the elections (and the budget deficit grows). Even in the case of other authors, we encounter reference to the influence of population and income level per capita on the level of debt of local governments. For example, Rivers and Yates (1997) theoretically explain that population growth results in growth of requirements for the local public sector, and thus ultimately leads to higher debt. Empirical studies on sample of Czech municipalities are very modest, more attention is dedicated to the state budget (the financial management of Czech municipalities is generally perceived as prudent and stable). Several aspects of evaluation of public expenditure of local governments are described by Provazníková (1999). Some attention is paid to problematic aspects of the financing of municipalities (e.g. local taxes, local fees, transfers) (Kruntorádová 2013). But a lot of papers tend to be rather articles in newspapers than scientific reports (see Deník veřejné správy on line). 3. Aim, sources of data and methodology The text has two aims: a) to summarise data on long-term liabilities of municipalities with extended powers in the South Moravian Region, b) to determine whether these long-term liabilities reflect the selected indicators (number of Eva Lajtkepová. Relation between Long-term Liabilities and Selected Indicators in the Case… 338 subsidized organisations and the ratio of transfers to the budget of the municipality). The initial assumptions for the analysis are as follows: – long-term liabilities per capita are higher in the case of municipalities which operate a higher number of subsidized organisations (as they receive funds for the operation and investments from the municipality), – long-term liabilities per capita are higher in the case of municipalities which also have a higher ratio of transfers to the budget income (i.e. they are not as self-sufficient in terms of financial management). The South Moravian Region was selected on purpose: it is one of the largest, most populous and most significant regions in the Czech Republic in terms of economy. Its number of municipalities with extended powers is above average, compared with other regions of the Czech Republic (there are twenty-one of them in the South Moravian Region, whereas the national average is fourteen). Considering the subject matter of the analysis we could only use secondary data from official statistics. The data on the municipalities with extended powers in the South Moravian Region was obtained from the Monitor of state administration and autonomy of the Ministry of Finance of the Czech Republic. The data set used applies to the last year available (2014). This secondary data was processed via descriptive statistics methods and via the correlation and cluster analysis. We used STATISTICA 12 software for calculations as well as the cluster analysis. 4. Long-term liabilities of municipalities with extended powers in the South Moravian Region There are 672 municipalities in the South Moravian Region, which makes it one of the largest regions in the Czech Republic. It is also a significant region in terms of the national economy, science and public life (it is home to some of the highest judicial institutions or many colleges and universities; it is a centre of science and research etc.). Pursuant to the provisions of act number 314/2002 Coll., of the total number of municipalities, thirty-four of them are municipalities with an authorised municipal office and twenty-one of them are municipalities with extended powers (which, in both cases, includes Brno as the seat of the region). Due to the special status of the City of Brno (seat of the region, second largest city in the Czech Republic whose size and significance are incomparable with those of other municipalities in the region) the city was not included in the further analysis, as it could significantly compromise the results. Therefore, only the remaining twenty municipalities with extended powers are included (as Brno is not). Basic data for these municipalities for the year 2014 will be listed first. This data includes: long-term liabilities (liabilities due in more than 12 months), number of inhabitants (population), number of subsidized organisations operated by the municipality and the ratio of transfers to the budget income. Public Policy and Administration. 2016, Vol. 15, No 2, p. 334–346. 339 Table 1. Selected indicators of municipalities with extended powers in the South Moravian Region in 2014 Municipality Long-term liabilities (CZK) Population Number of subsidized organizations Transfer ratio (%) Long-term liabilities per capita (CZK) Blansko 165,562,190 20,845 13 24.8 7,943 Boskovice 36,429,600 11,470 525.6 3,176 Břeclav 71,814,486 24,956 18 19 2,878 Bučovice 98,172,319 6,564 744.3 15,187 Hodonín 193,017,547 25,049 14 26.6 7,706 Hustopeče 64,121,127 5,862 735.1 10,938 Ivančice 133,926,915 9,580 11 19.4 13,979 Kuřim 86,528,907 10,900 414 7,938 Kyjov 70,031,668 11,448 13 21.1 6,117 Mikulov 6,969,921 7,416 612.7 940 Mor. Krumlov 56,270,550 5,846 623.3 9,625 Pohořelice 82,138,861 4,711 233.3 1,436 Rosice 18,091,465 5,856 827.5 3,089 Slavkov 53,681,457 6,299 731.5 8,522 Šlapanice 162,600,403 7,171 347.3 22,675 Tišnov 76,650,098 8,921 820.1 8,592 Veselí n./Mor. 37,067,279 11,357 421.8 3,262 Vyškov 2,936,359 21,341 20 13.2 137 Znojmo 382,809,686 33,805 18 14.5 11,324 Židlochovice 31,626,910 3,659 232.9 8,644 Source: Monitor of state administration and autonomy, Ministry of Finance of the Czech Republic, own calculation. Based on the data provided above we can say that the towns of Znojmo, Hodonín, Blansko, Šlapanice and Ivančice recognize the highest amount of longterm liabilities. Of particular interest is the comparison of the number of subsidized organisations operated by the municipalities; it would be inaccurate to say that similarly sized municipalities have a similar number of subsidized organisations (for example, Kuřim and Kyjov are similar in size but the numbers of their respective subsidized organisations are not). The most typical subsidized organisations operated by municipalities include kindergartens and elementary schools. There are also some less usual organisations, such as Lázně Hodonín (Hodonín Spa) in Hodonín and the Slavkov (Austerlitz) Chateau in Slavkov. If a subsidized organisation is Eva Lajtkepová. Relation between Long-term Liabilities and Selected Indicators in the Case… 340 founded by a municipality, it receives from the municipality’ budget a contribution for its operation and investments or a levy (the latter is very rare). The range of the ratio of transfers to public budgets of the municipalities is also interesting, being between 12.7 % (Mikulov) and 47.3 % (Šlapanice). These transfers are of investment and non-investment nature; they are granted from the state budget, the budget of the region, state funds and other entities within the public budget system. In a way, these transfers can be interpreted as a certain degree of the lack of financial self-sufficiency of the municipal budgets. Therefore, from this point of view Šlapanice (and, to a lesser extent, also Bučovice – 44.3 %) is the least financially self-sufficient municipality. A different perspective is achieved once the long-term liabilities are expressed per capita (see Table 1, last column). We can clearly see that Šlapanice shows the highest value of the long-term liabilities per capita, followed by (a much lower value in the case of) Bučovice, Ivančice and Znojmo. Vyškov and Mikulov are at the opposite end of the table (less than CZK 1,000 per capita). 5. Results and discussion Correlation between long-term liabilities of municipalities and selected variables The dependency of the amount of long-term liabilities per capita for municipalities with extended powers in the South Moravian Region and selected indicators was measured using the correlation coefficient rxy. The calculation was based on the long-term liabilities of the municipality per capita which, in our opinion, better reflects the financial management of municipalities, compared with a simple sum of long-term liabilities (in which case the size of the municipality would not be taken into consideration). In the calculation, the variable x was the sum of long-term liabilities per capita of the municipality, whereas the variable y is represented by the respective quantity. The results are as follows: – the value of the resulting correlation coefficient between long-term liabilities per capita and the number of subsidised organisation operated by the municipality is rxy = –0.35779852, – the value of the resulting correlation coefficient between long-term liabilities per capita and the transfer ratio is rxy = 0.684266389. Based on the aforementioned results we can declare medium linear dependency between the long-term liabilities per capita and the ratio of transfers to the municipal budget income. On the other hand, the value of the correlation coefficient between the long-term liabilities per capita and the number of subsidised organisations was a surprise. This value (negative and close to zero) only suggests weak indirect linear dependency (it was a surprise because the founder – municipality – grants subsidies Public Policy and Administration. 2016, Vol. 15, No 2, p. 334–346. 341 to these organisations, which is why expected at least medium linear dependency, which was not confirmed). Results of cluster analysis The cluster analysis may only take into account any variables that show at least medium dependence. Therefore, we can only use two variables: long-term liabilities per capita (Variable 1) and transfer ratio (Variable 2). The results of descriptive statistics are as follows: Table 2. Results of descriptive statistics Descriptive statistics Variable 1 Variable 2 Average 8,505.45 25.4 Minimum 137 12.7 Maximum 22.675 47.3 Median 8,232.5 24.05 Standard deviation 5,574.124 9.467946 Source: own calculation based on Table 1. Since the data is expressed in different units of measure (CZK, %) and since it shows significantly different levels and variability, it will have to be standardised prior to the cluster analysis. If this standardisation is not carried out, the final result of clustering would be determined solely by the first variable and it would be substantially different from the potential result which would have been determined by both variables equally. The standardised values are as follows. Table 3. Standardised data for cluster analysis Municipality Variable 1 Variable 2 BL: Blansko 0.856102711 1.03559693 BO: Boskovice -0.637023371 -0.0813494377 BR: Břeclav -0.227877266 1.52538536 BU: Bučovice 0.0768914053 -0.665854917 HO: Hodonín 1.17356176 1.53646546 HU: Hustopeče -0.316833548 -0.749491861 IV: Ivančice 0.490312369 -0.306525825 KU: Kuřim -0.0577382969 -0.149259777 KY: Kyjov -0.248491521 -0.0839705385 MI: Mikulov -0.97765787 -0.564346831 Eva Lajtkepová. Relation between Long-term Liabilities and Selected Indicators in the Case… 342 Municipality Variable 1 Variable 2 MK: Mor. Krumlov -0.407607699 -0.751398116 PO: Pohořelice -0.108499241 -0.886623089 RO: Rosice -0.84906239 -0.750206707 SL: Šlapanice 0.821856349 -0.593536363 SV: Slavkov -0.437544699 -0.697427268 TI: Tišnov -0.17196436 -0.385039708 VN: Veselí nad Mor. -0.629650057 -0.0948123645 VY: Vyškov -1.02429688 1.09469084 ZN: Znojmo 3.36807821 2.57966358 ZI: Židlochovice -0.692555609 -1.01195936 Source: own calculation based on Table 1. To assess distance the Euclidean distance square was chosen; the clusters were formed using the Ward’s method. Fig. 1. Clustering dendrogram (Source: Table 3)