(Repeat for additional subscribers)
March 12 (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
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