The Local Authorities' Budget Crisis

Why have certain local authorities fallen into financial crisis while others have avoided a similar fate and even, in some cases, have enjoyed a budgetary surplus? This report by Prof. Avi Ben-Bassat and Dr. Momi Dahan (senior researchers at the Israel Democracy Institute), written in preparation for the Caesarea Forum, does not only cite defective administration as a cause of the crisis in local authorities, but points to the structural factors responsible for such flawed administration, whether built into the structure of the local authority or part of the rules set by the central government.
The study analyzes a number of basic factors that potentially increase the risk of crisis in local authorities: size of the locality’s population, socioeconomic level of residents, the balance of power between the political and professional actors within the local authority, and the dangers latent in the budgetary wars between the central and local governments. The study explores the basic causes of the crisis, and does not ascribe it entirely to defective administration.

• No correlation was found between the size of a locality’s population and the chances of finding itself in financial crisis; nor, surprisingly, was there any significant advantage to large local authorities in expenditures. Merger of local authorities whose populations exceeded 7,000 did not result in savings. In smaller authorities as well, it is doubtful whether merger would contribute to greater efficiency. For this reason, the size of the locality should no longer be factor in calculating the balancing grant and the weight of the locality’s socioeconomic level in the grant formula should be increased. The decision as to whether or not to merge local authorities should be left to the localities themselves and not imposed from the outside.
  
  
  
• The report presents a number of indicators that the government is channeling a portion of the budgetary deficit to the local authorities, thereby increasing the chances of weaker authorities’ falling victim to financial crisis. It is recommended that the balancing grant to weaker authorities be increased in keeping with the level proposed by the Gadish Committee, and that a portion of the increase be made contingent on a rise in their collection rate. The balancing grant per resident in 2006 was nominally some 30% lower than in 2000 — a drastic drop that increased the risk of financial crisis in weaker authorities. A further indication that transfer payments to local authorities are too low is the fact that the balancing grant is actually 20% lower than the level dictated by the Gadish Committee formula. The Ministry of Finance itself admits, by implication, that the level of transfers to weak authorities is too low, judging by its proposal to take a portion of the corporate property tax revenues in stronger authorities and transfer it to weaker authorities. The level of government financing of local authority activities in Israel is 9 percentage points lower than elsewhere in the world. It is proposed that the government present, in the State Budget and the accompanying explanations, the ramifications of its activities for the expenditures, revenues, and deficit of local authorities.
  
  
  
• Over NIS 200 million allocated in the 2006 State Budget to recovery plans for local authorities was not used, despite the crisis in many local authorities. The study reveals a noticeable drop in the proportion of the budget used as a result of the strict stipulation linking government assistance to the rate of property tax collection.
  
  
  
• It is proposed that the electoral system in local authorities be reexamined with an eye toward bolstering the head of the local authority and reducing party fragmentation on the local council. There is a clear connection between excessive division among factions on the local council and the prospects of a local authority falling into crisis. The smaller the party representation of the local council head, the greater the debt relative to income, apparently because he is obliged to “buy” the support of his partners through budgetary allocations to causes close to their hearts.
  
  
  
• The authors of the report found that residents of Arab local authorities choose their leaders largely along clan lines — a trend that increases the chances of a budgetary crisis in these localities. Election on the basis of clan loyalties is destructive for local residents, who suffer from recurring crises and a lower level of services. In the majority of Arab localities, the party of the local council head garners only a handful of votes, if any, leaving his party ostensibly without representation on the local council. It emerged, however, that in many cases, the local council head runs a “straw list” under his name, while a different list — identified with the council head — is running at the same time. This phenomenon is tied to clan structure. By law, the head of the local council, who leads the party list, is brought in as an additional council member if his list does not earn enough votes to be represented on the council.
  
  
  
• There are major disparities in the rate of property tax collection even among local councils in the same socioeconomic cluster and the same sector of the population. Thus for example, the collection rate in Lehavim (ranked in the ninth cluster) was close to 100% in 2006, compared with only 71% in Kfar Shemaryahu and 85% in Ramat Hasharon, which are in the same socioeconomic cluster. It appears that the problem of property tax collection is not exclusive to weak localities, and that on average, 10% of property taxes, after discounts, are not collected by local authorities in the top two clusters. In lower clusters, the average collection rate is much lower and the range is wider.
  
  
  
• Collection rates in Arab localities are lower than those in Jewish ones for all clusters. The gaps in collection rates, discounting the effect of socioeconomic level and sector of the population, point to faulty administration on the part of some local authority heads. Very low collection rates do not remain stable over time: the citizens who pay their taxes to the local authority feel taken advantage of by those who evade payment, and are liable to avoid paying their own taxes in future, thereby worsening the crisis.
  
  
  
• Requirements for the appointment of supervising accountants should be lowered, and their current responsibilities should be expanded to include an income forecast in the local authority budget. Such forecast can help deal with large gaps between the planned budget and the actual budget. The extent to which budget deficits deviate from the plan is greater among weak local authorities as compared with those in a high socioeconomic cluster. Responsibility for this falls on both the central government and the local authorities. The local council learns the size of the grant it will be receiving only several months after the start of the budgetary year — a timetable that impairs its ability to submit a proper budget. Moreover, there are indications that local authorities offer overly rosy estimates of revenues. This phenomenon points to a weak professional echelon, which finds it difficult to prevent a flawed presentation of the local authority’s budget to the Ministry of the Interior. 
  
  
  
• The localities that withheld employees’ salaries in 2006 significantly increased their per capita expenditures beyond the rate of inc