Municipal debt set to double in five years

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Financially strapped municipalities will not be able to constantly keep borrowing more money to remain operational.
      At the present rate Finnish local authorities are expected to amass so much debt by 2015 that municipalities and joint authorities would have EUR 20 billion in debt, which is ten per cent of Finland’s GDP.
      Currently municipal debt amounts to EUR 10.8 billion, which means that local authorities hold 70 per cent of all public debt in Finland.
     
Contrary to claims by some politicians, municipal mergers will be necessary if local authorities become targeted for scrutiny by the Ministry of Finance.
      This stems from a reform enacted in municipal service structure - the so-called Paras project.
      As a result, many municipalities have been forced to merge with one or more of their neighbours.
     
The Municipal Guarantee Board and the Ministry of Finance are planning to examine the prospects for municipal finances in the coming years.
      The guarantee board gives guarantees to Municipality Finance Plc which provides financing to Finnish local authorities.
      If the finances of a local authority have been pushed permanently into the red, and no new taxpayers are moving into the area, and all saleable property has been sold, the loans of the problem municipalities could no longer be accepted into the system, which operates under the principle of common responsibility among all local authorities.
     
It would become increasingly difficult for an indebted municipality to get credit, and interest rates for credit would be higher.
      A project of the Municipal Guarantee Board and the Ministry of Finance is currently underway to see if such a scenario is likely.
      The interference in municipal autonomy has moved forward in the spirit of the Paras project without any serious grumbling. The European Union is also interested in possibly adopting a similar mechanism.
      Heikki Niemeläinen, CEO of the Municipal Guarantee Board, compares the mechanism to goals of the EU.
      “It is something like an expert going from Brussels to Greece and merging it with Germany.”
     
Calculations made by the Ministry of Finance indicate that municipalities are likely to face a crisis if no measures are taken to help them adapt, says ministry official Vesa Lappalainen.
      Excluding the loans of individual municipalities from the system of joint responsibility would be one way to reduce the indebtedness of problem municipalities, says Niemeläinen of the Municipal guarantee board.
      He says that Finland’s municipalities as a whole are not in a crisis, but emphasises that the activity cannot be continued without changes.
      “It should be emphasised that the Finnish municipal field has adapted its finances in an excellent manner. The most recent pay deal in the municipal sector is a reflection of this. However, more development is needed.”
     
If municipal finances are to be evaluated in a reliable manner, bookkeeping practices also need to be changed.
      Municipal balance sheets do not include information about the local authorities’ obligations for pension payments, which distorts the economic situation, making it look more positive than it really is.
      The portion of pension obligations that are not covered by pension funds should be reported to municipal decision-makers”, Niemeläinen says.
      The Local government Pensions Institution (KEVA) says that the total is EUR 87 billion.
     
More efficient use of labour is a key element. According to information gathered by the Municipal Guarantee Board, total productivity of Finland’s local authorities has declined throughout the past decade, with the exception of 2008.


Links:
  Municipality Finance Plc
  Municipal guarantee Board

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