RPT-Fitch: Pressure on Polish LRGs' Operating Performance to Continue

Wed Mar 12, 2014 4:04am EDT

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March 12 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings says that Polish local and regional governments (LRGs) are likely to continue to face pressure over the medium term on their operating performance and expenditure growth.

This is mainly because gradual decentralisation of responsibilities has affected the LRGs' budgets, as financial sources assigned to new responsibilities have often been insufficient, particularly in education and social care for municipalities and in health care for regions. Additional pressure on operating expenditure stems from growing maintenance costs on completed investments.

In its report, which updates Fitch's view on Polish LRGs' institutional framework, the agency highlights that a new debt limit, effective from 2014, should encourage LRGs to improve their operating results to increase their ability to debt-finance new investments. LRGs have to comply with a new debt limit calculated separately for each of them, under which debt service to total revenue planned in a LRG's budget must not exceed the last three years' average current balance plus the ratio of revenue from asset sales to total revenue.

Fitch believes that the institutional framework for Polish LRGs has a number of strengths, including the disclosure of the LRGs' accounts, as subnationals are obliged to publish budgets and execution reports along with multiyear financial projections on their websites. Aggregate data for the sector is also available on the Ministry of Finance's website.

Nevertheless, there are some weaknesses in the Polish subnational institutional framework, including limited revenue-raising flexibility. Main revenue sources such as income tax revenue, transfers and subsidies from the central government are centrally distributed according to a legally defined formula, which limits the central government's scope for discretion. Local tax rates such as real estate tax, which some LRGs are entitled to collect, are capped by the state. This makes LRGs, to some extent, reliant on decisions made by the central government.

In addition, the LRGs' budgets are based on cash accounting; however, the weakness of this form of reporting is mitigated by LRGs' obligation to treat overdue liabilities as debt and to disclose contingent liabilities. Fitch also questions the horizontal revenue-sharing equalisation formula that is based on revenue with a time lag of two years. It distorts the donor's financial capability to contribute to the system in any given year. Additionally the lack of caps on the donor's annual payments may lead to indebtedness during a weaker fiscal year, when tax revenue is insufficient for the equalisation transfer.

The report, entitled 'Institutional Framework for Polish Subnationals', covers Polish subnationals' legal frameworks, budget execution and control procedures, updated budgetary framework, including budget revenue sources and expenditure assignment, inter-governmental relations and debt issues. It is one of a series of Fitch reports examining the institutional frameworks for subnationals in various countries, all of which are available at www.fitchratings.com.

Link to Fitch Ratings' Report: Institutional Framework for Polish Subnationals

here