Reform of Local Govenment

Committee Chair: Mr. Ya’akov Efrati, Director of the Israel Lands Administration
Committee members : Dr. Adi Brender, Supervisor for the Public Sector, Bank of Israel
Rabbi Mordechai Karlitz, former mayor of Bnei Brak
Ms. Anat Keinan, CEO, Discount Mortgage Bank
Prof. Eran Razin, Department of Geography, Hebrew University Jerusalem
Mr. Binyamin Ricardo, former Deputy-Director of the Local Authority Administration, Ministry of the Interior
Mr. Giora Rosenthal, former Director-General of the Center for Local Government
Mr. Uzi Zwebner, Adviser in the field of local authorities
Research Assistant: Adv. Inbal Kaneka

Among local authorities in Israel, there are considerable differences in the quality of budgetary management and the provision of services to residents. As a rule, the changes in the legal and budgetary environment in which local authorities have operated since the middle of the 1990s have meant that the debt owed by the local authorities to the banks has stopped growing, and its size relative to the authorities’ income, the GDP or the population has even decreased – despite the fact that the general grants from the government to the authorities have not increased relative to these variables. Thus, between the end of 1997 and the end of 2003, the overall debt of the local authorities to the banks (including overdrafts) remained almost unchanged, and, relative to the size of the population, the income and the expenses, it even decreased. Some 160 of the local authorities reduced their per capita debt in fixed prices during this period, compared with around 100 which increased their debt. As a result of this, significant stability was achieved in the operation of the local authorities until the crisis of 2003 - 2004, which reflected, to a considerable degree, the significant and sudden changes in the scale of budget transfers from the government. However, an examination of local government as a whole conceals the existence of severe budgetary and administrative problems in many local authorities, just as the media’s focus on the problematic authorities draws attention from the fact that most authorities are managed properly.
The changes in budgeting of the local authorities in 2003 and 2004 – including the attempt to make a further drastic cut in the general grant in 2004 – did not take into account the differences between the authorities. Generalized programs, which are not based on a detailed familiarity with the relevant local authorities, are problematic. This approach also resulted in erosion of the plan to merge local authorities (although even what was implemented is unprecedented), and in the need to abandon most of the additional cutbacks in local authority budgets planned for 2004, creating the potential for long-term damage to budgetary management. There was also a striking lack of symmetry in the plan to save the economy: wage cuts and increased municipal taxes mainly helped one group of local authorities, while the reduction in grants harmed another group of authorities. These ill-considered attempts to hastily carry out sweeping reforms without taking into account the differences between the authorities, led to considerable instability in the financial management of the authorities, and the subsequent struggle also led to an undermining of basic norms of government in many local authorities.

The attempts at a comprehensive method for dealing with the budgetary issue reflects a deeper problem: on the one hand, given the large number of local authorities in Israel, there are many reasons the government should become involved in supervising the way they are managed. On the other hand, the government is not capable of truly supervising the overheads of the authorities. Moreover, such an attempt to supervise so many local authorities requires the adoption of a uniform policy with regard to all the authorities – regardless of the quality of their management, the size of the authority and external influences, although such distinction that could lighten the supervisory burden of central government.
The current crisis in local government can lead to development in a number of directions:

1. Atrophy of local government and erosion of the level of municipal services, with residents, especially those who can afford it, purchasing more and more services privately while the weaker populations are forced to make do with a low level of services
2. Greater involvement by the central government in supplying local services, either directly or by means of privatization to “bypass” local government – a situation in which the central government has considerable influence in supervising and determining the rules of the game with regard to the local services provided by external contractors
3. Streamlining and improving local government services, either by increasing efficiency and savings in the existing system, or through a process whereby local government deals less with the direct supply of services and more with “guiding” and controlling services to be supplied by contractors and private companies operating on a franchise basis. The first result is undesirable, both for social reasons and for reasons of economic efficiency. Moreover, since in light of experience around the world, it can be expected that in the future there will be forces pressing for local government in Israel to have greater weight in providing public services, it is important to develop tools that will enable local government to continue enhancing in its efficiency, while strengthening the connection between the desires of the residents in the different localities and the composition of the “package” of services and payment for them in the community. Because of the complexity of the problems, it is highly desirable for the solutions to be formulated and operated with a long-term perspective, on the basis of clear goals, but with cautious and gradual implementation of all stages of the change.

The principles of the proposed change in the relationship between the government and the local authorities are as follows:

• The rights and obligations of the local authority towards its residents will be clearly defined, preferably by means of legislation. The general framework for the law can be based on the European charter for local self-government. On the basis of this law, the “rules of the game” will be set forth (rather like “apartment building regulations”), on the basis of which the local authority can manage its affairs concerning such issues as collecting municipal taxes, land use, municipal services etc.
• The demand for numerous individual permits for minor issues leads to considerable responsibility burdening the government clerks and the Minister of the Interior on issues relating to local authority, while they are unable to enforce the requirements of reporting and making decisions within a reasonable period of time, and with due attention. At the same time, the local authorities are forced to waste precious administrative resources and time in order to obtain permits from government bodies. It is therefore proposed, with regard to large towns from a certain threshold size to be determined after examination, to adopt a policy of “everything is permitted other than that which is expressly prohibited,” including considerably expanding their authority in fields such as education, infrastructures, transport (road signs, traffic lights etc), beaches and bylaws. Decisions will be subject to the requirement that they do not have a negative effect on the residents of adjoining communities. It is also proposed that larger cities play a greater role in determining the urban vision and planning principles for the area of their jurisdiction vis-a-vis the district planning boards and the National Planning Council, and that the local planning and construction board have greater authority. All this will be subject to there being no negative external influences, and to the norms of proper administration in the field of planning and construction.
• With regard to medium-sized local authorities (20,000 to 50,000 residents, or another range to be determined after examination), the proximity of the locality to other localities will be examined in order to check the extent of external influence expected to result from decentralization of authority to that locality. The smaller the extent of the external influence, the more authority will be devolved to the locality.
• Since there is presently a considerable lack of desire on the part of the local authorities to take in economically weak populations groups, government ministry grants – including the general grant – should be designed in such a way as to make the absorption of such populations more attractive (similar to budgeting according to “standardized numbers” in the health basket) in other words, emphasizing the variable of socio-economic level as a criterion in allocating grants.
• Costing for services provided by the local authorities to the government will be done on a contractual basis. The contracts will be signed for relatively long periods, to avoid abrupt changes each year.
• The accounting systems of state services supplied jointly by the government and the local authority will be separated, as far as possible, from the accounts of the local authorities.
• Rigid, uniform and transparent criteria will be determined for quality of management of the local authorities, in particular, the quality of their budgetary management. The possibility of reinforcing the professional management authority will be examined, while improving its quality relative to political management. This document proposes one possible alternative for such analysis.
• Localities meeting the criteria of quality management will enjoy gradual decentralization of authority for budgetary management, while creating a legal mechanism to ensure that the cost of budget deviations will be borne by the residents of the locality itself. Among other things, the authority to determine the level of municipal taxation will be decentralized to the localities, subject to certain restrictions of minimum and maximum rates, and to a maximum ratio between the residential rates and the rate for non-residential uses. Differential changes of municipal taxation rates in different parts of the localities will also require approval, so as to prevent discrimination against minority groups in the community.
• Heads of local authorities during whose tenure the authority’s deficit has deviated, after deducting debt repayment, from a certain threshold to be set forth in regulations, or during whose tenure the wages of municipal employees were unpaid for a period of time, or where other serious budgetary failures - to be determined in advance - have arisen, will be dismissed.
• Issuing bonds or undertaking large-scale loans to be invested in development projects will be permitted to localities that are no longer under supervision, but only on the basis of a plan requiring proof of ability to repay these loans by means of automatic increases in municipal taxes or cuts in specific expenses, to be itemized in advance, at certain points where the original repayment plan was not kept. Projects creating a loan burden beyond a certain scope, and the concomitant budgetary commitments, will require the approval of all the locality’s residents.
• In localities where the quality of budgetary management does not meet the standards that have been determined, all the tools currently available to the Ministry of the Interior will be applied in full. The decision with regard to the implementation of measures such as those approved in the latest Arrangements Law should be made by an independent professional body, which will make individual decisions on the basis of rigid criteria, and with greater determination than is the case today. The government and the Minister of the Interior will decide the general policy – for example, easing of the criteria in times of economic or security crisis – but they will not intervene in the individual decisions of whether one locality or another meets the criteria. In the first stage, administrative steps will be taken, such appointing an additional accountant and external tax collector, and only in the second stage will a committee be appointed or the head of the local authority and/or the council be dismissed.
• Applications requesting external intervention in management of the locality – as noted above – will be made by the government or by a certain percentage of members of the council or residents of the locality. A fee will be charged for applications that are rejected.
• No budgets will be given on the basis of disadvantages due to the small size of a locality, other than in cases where geographic distance or other objective difficulties prevent the effective merger of localities.
• As a rule, the streamlining of services, merging services between authorities, and in many cases also the merging of authorities are in the interests of the residents and their elected representatives. At the same time, there are cases where there are obstacles to the effective merger of local authorities. The government will be able to help in this process by providing loans – and in extreme cases, fixed-term grants – to help fund one-time expenses such as redundancy payments, or to equalize the burden of debt between merging localities.
• In authorities suffering from ongoing administrative failure, it is appropriate to consider operating the model of the professional town manager – elected council, which means maximum separation of the political echelon from the bureaucratic echelon, but without appointments made by the central government. This step would require appropriate legislation.