Why Local Governments Need to Care About Municipal Finances | World Bank Institute (WBI)

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STORY HIGHLIGHTS

  • Today, more than 3.5 billion of the world’s people live in cities, making it crucial for cities to look for savings, prioritize their expenditures, and focus on the frontier issues facing them. 
  • The municipal agenda comes with a very high price tag, and municipalities have to find the resources needed to meet the challenging mandate. Getting finances right is crucial for the success of cities and national governments.
  • At the launch of their recently published book, Municipal Finances, A Handbook for Local Governments, Catherine Farvacque-Vitkovic and Mihaly Kopanyi emphasized the practical lessons for municipalities on managing their finances.

June 26, 2014―There is a huge gap in cities between the needs of citizens and the resources available to help them. Today, more than 3.5 billion of the world’s people live in cities. This is why it is very important for cities to look for savings, prioritize their expenditures, and focus on the frontier issues facing them. The task of getting municipal finances right is urgent and daunting, but eminently reachable.

Municipal officials are not only dealing with the day-to-day management of the city, but they also have to increasingly address issues of social inclusion, local economic development, job creation, crime and violence, climate change and natural and man-made disasters, to name a few. They are also expected to welcome increasing numbers of people moving into their cities and to deal with an increasing number of informal settlements. This municipal agenda comes with a very high price tag.

Municipalities have to find the resources needed to meet this challenging mandate, and there are no quick solutions, no one size fits all. Therefore, getting finances right is crucial for the success of cities and indeed national governments.
 

open-quotesIf you cannot trust government, you have no public realm. Thousands of governments balance short-term budget at the expense of the long-term budget, beggaring our children to intergenerational overspending…one way to get results is to give a little power away and create a counterweight to the normal course of decision making.close-quotesAnthony Williams, former Mayor and CFO of Washington DC

Citizens interface with government mostly at the local level, and are in fact, the face of government to a large part of the population. Therefore, if municipal services are effective, this builds the citizens’ trust in their government as a whole. Services affect the quality of life, which is important to citizens, and the efficiency and productivity of urban areas are important and key to national growth overall.

At the launch of their recently published book, Municipal Finances, A Handbook for Local Governments, Catherine Farvacque-Vitkovic and Mihaly Kopanyi emphasized the practical lessons for municipalities on managing their finances. They focused on eight areas and presented key takeaways for municipal officials and others working in this field:

Intergovernmental Finances. Many countries have embarked on a decentralization process, bringing local governments closer to their constituents and thereby more responsive to their needs. But in many ways, this process remains incomplete as devolution of functions has not been supported by adequate devolution of resources. Intergovernmental finance relations generate the playing field. Therefore, setting them right is of upper most importance and requires fine-tuning between transfers and incentives mechanisms to generate own revenues.

Metropolitan Governance and Finance. There are 27 megacities with more than 10 million people, and more than 500 metropolitan areas with over a million. Cities are growing rapidly worldwide and metropolitan areas are becoming the “new normal.” Cities will become more interdependent with their surrounding settlements and hinterlands, creating metropolitan areas with a single economy and labor market. Cooperation among local governments can be encouraged by providing clarity on the distribution of tasks and functions among the many actors and institutional structures.

Johannes Linn, Co-Editor of a recent book, Financing Metropolitan Cities and a panel discussant, noted, “Metropolitan areas and regions are increasingly becoming hubs of innovation and indeed hubs worldwide. A key constraint is financing, and there are intermediate cities that are facing the biggest growth, and improving the management of such cities often gets short shrift.”

Financial Management. Good financial management enables local governments to plan, mobilize, and use financial resources in an efficient and effective manner and allows them to fulfill their obligation to their citizens. Often budgeting weaknesses in developing countries include unrealistic plans and estimates, a shortage of timely information, politicized targets, and balloon revenue targets.

And there are many decisions that municipalities have to make and to weigh against the needs of citizens and the political economy. The Handbook covers several areas where good decision making and management practices are important: Managing Local Revenues, Expenditures, Local Assets, and External Resources. As Anthony Williams, former Mayor and CFO of Washington DC, noted at the launch, “If you cannot trust government, you have no public realm. Thousands of governments balance short-term budget at the expense of the long-term budget, beggaring our children to intergenerational overspending…one way to get results is to give a little power away and create a counterweight to the normal course of decision making.”

The 2008 financial crisis was a wake-up call for many local governments as it showed how ripples in the global economy can have major impact on local revenues. It has also been an opportunity for local governments to become cautiously creative by sorting out the “good” and the “bad” taxes and the “good” and the “bad” projects.  Expenditures management, local assets management, and access to external funding are not only technical processes but they are also very much influenced by local politics.

Achieving Greater Transparency and Accountability. This final chapter dives deeply into an underpinning quest: Are we doing the right things? Are we doing things right?  It reviews the experience of US, Canada and Europe on performance measurement as well as explores the impact of social accountability mechanisms on local governments (which create higher expectations on the demand side without offering a proper response on the supply side). It is essential that local governments be prepared to present and articulate their financial position and be accountable for the use of public funds. 

With these objectives in mind, the Municipal Finances Self-Assessment (MFSA) presents an opportunity to connect the theory to practice and provides a reliable way to monitor internal investment planning and budget processes and to convince external partners of the sustainability of a city’s finances and financial management.
 

Comments (1)

Municipal Finance

I fully agree with the need for greater transparency and accountability.Both are interconnected and lead to adhoc practices of Asset management ,receivables and budgeting.I found in one of our recent study in India that municipal assets particularly Land is not properly recorded in the municipal books of accounts and information.Ownership of such land does not technically exist with municipal govts but remain with states or other public sector stakeholders,although pracically municipal govt occupy the land for some use.Similarly,Taxes(Property tax for example)are collected against targets not against actual demand which is not calculated for specific reasons(interests).Thirdly cities as a whole capture only around one percent city GDP whereas given a chance it can be as high as 6 percent.This calls for a reform agenda carefully designed giving due cognizance to local issues.

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