Financial capacity of territorial communities of Ukrainian oblast centers

Analytical overview 

The decentralization reform in Ukraine increased the financial autonomy of local government bodies (LGBs). After the amendments to budgetary and tax legislation, LGBs started to get more revenue from different sources and are now operating with much larger budgets than before the start of the reform.

With more funding, local authorities also got more responsibilities. LGBs were granted more powers to solve local problems and create a comfortable environment for their citizens. Today, it is up to LGBs to provide citizens with most administrative services via administrative service centers, take care of orphans in their communities, and support communal cultural establishments.

These new powers are exercised by local authorities in amalgamated territorial communities — new basic administrative territorial units. Oblast centers of Ukraine implemented the decentralization reform in quite different ways. Kharkiv, for example, has not absorbed any neighboring localities while Poltava has amalgamated 55 of its neighboring villages. At the same time, both cities are now centers of city territorial communities (CTCs).

The amalgamation of territorial communities made it possible to consolidate not only the budgets of different localities and create joint community budgets, but also to unite people and territories. An increase in total population and territory made governance harder: the authorities have to solve more problems while having still limited resources.

Under the new rules at a local level, a decisive factor for community development became its financial capacity. In particular, where and how much revenue an LGB can collect and how it spends this money. A financially capable LGB is an LGB that has sufficient funding from transparent revenue sources and uses this money effectively to fulfill its key goals. With enough financial capacity, a community can quickly proceed with social and economic development and become a comfortable place for its inhabitants.

If a community is financially incapable, it will not be able to develop in the nearest future. Without economic aid and incentives, such communities are helpless. There are two alternatives for such communities: either to develop financial capacity on their own and move their community forward or to remain dependent on state subventions and subsidies.

The goal of our analysis was to analyze the dynamics of the financial capacity of oblast center communities after the decentralization reform in Ukraine and evaluate whether local government bodies (LGBs) have enough financial resources to provide services to their citizens.

To this end, we measured and evaluated the financial capacity of territorial communities — oblast centers of Ukraine in 2018—2021 (the first three quarters of 2021) in accordance with a methodology designed for this purpose. The methodology covers 10 indicators to measure local budgets and scales to evaluate them. In accordance with this methodology, the Centre of United Actions prepared its rating of the financial capacity of territorial communities — oblast centers of Ukraine in 2018—2021 (first three quarters of 2021).

Oblast center territorial communities are definitely among the most financially capable communities in our country. There are many contributing factors here: better business environment, developed institutions, demographics, qualified workforce, and large financial resources that are as a rule concentrated in oblast centers.

That is, oblast center communities had the strongest financial capacity from the beginning. However, even the most capable communities significantly differ when it comes to calculating finances.

For example, the city territorial community (CTC) of Dnipro is the most financially capable among all oblast centers. This is the only CTC with the maximum scores each year (100 of 100). Each time it was number one in the financial capacity rating. The next best are Kyiv, Lviv, Zaporizhzhia, and Odesa CTCs. These communities year after year demonstrate the best financial results.

In the lowest part of the rating are Severodonetsk, Kherson, Kramatorsk, Chernivtsi, and Lutsk CTCs. Unfortunately, these communities have not managed to improve their financial situation during the years covered by this research.

Significantly changed the CTCs in the middle of the rating. Ternopil and Kharkiv CTCs, for example, have increased their financial potential in the last several years and steeply climbed up in the rating. Budget indicators of Ivano-Frankivsk and Chernihiv CTCs, on the other hand, became worse.

Key findings:

• The income of CTCs’ budgets increases annually. In comparison to 2018, the average income increased by 1.3 times last year. This trend continues: in the majority of CTCs, budget revenue in 2021 is larger than in the previous years. The same is true for budget funding per capita.

• The role of local taxes is steadily increasing in CTCs’ budget revenue. In comparison to 2018, revenue from local taxes increased by 25% last year. During the last three years, the average share of local taxes in the total budget revenue of CTCs was 29%. As of October 1, 2021, this share increased up to 30.5%. In other words, a third of CTCs’ budget revenue on average comes from local taxes.
• The taxable capacity of oblast center CTCs’ budgets is one of the strongest in the country. Since 2018, they have not received subsidies from the state. Instead, oblast center CTCs returned their surplus funding to the government budget. This surplus is used to provide subsidies to less capable communities. In 2020, though, Kherson and Kramatorsk CTCs did not send money to the government budget and did not receive any subsidies. In 2021, the same situation was with Kherson and Chernivtsi CTCs.
• Budget shares spent on the development (capital spending) are very significant in all oblast center CTCs throughout the country. Since 2018, the average share of capital spending in oblast center CTCs is 24.5%. Last year, it increased from 1% to 25.5%. In other words, a quarter of all CTCs’ money on average is spent on capital development of the communities.
• From 2018 to October 1, 2021, all oblast center CTCs increased their spending on management apparatus. On average, spending on bureaucrats from a community budget increased from ₴248.4 mln in 2018 by 1.5 times: to ₴360.7 mln in 2020. In 2021, the spending also increased since October 1: on average, a community spends on bureaucrats ₴293.8 mln. This is mostly the result of amalgamation and new responsibilities to provide administrative services. However, if the costs of services provided by local bureaucrats increase while their quality remains the same or even deteriorates, then local budgets are used inefficiently.
• We also made additional calculations in US dollars to check whether there is a difference in financial capacity indicators if calculations are made in foreign currency. All results about financial capacity in dollars absolutely confirm trends confirmed for oblast center CTCs in hryvnias.

The rating based on 10 indicators is the first step in the analysis of territorial communities’ financial capacity. There is space for a deeper analysis here. For example, subjects of further research should be the development of the business environment, demographics, soft assets, and resource potential of the territories in general. To conduct a complex analysis of communities and their capacity is a baseline target for the Centre of United Actions in 2022. We are convinced that this analysis and further research will not only help the managers to build their capacity for good governance but also level up the quality of political discussion in the regions.