"The autonomy local governments are entitled to shall only materialise if its financial prerequisites are met, i.e. if autonomous administration is coupled with autonomous finances."[2]
This paper describes the most important elements, issues and the economic basis of the financial management of local governments. To develop a complete and comprehensive picture, I will first overview the development and current system of the system of public finances in force; as for its general government subsector and local government subsector, in the light of my topic, I will focus on the local government subsector, more specifically, the local governments. In the first part of this paper, I will rely on the provisions of Act CXCV of 2011 on Public Finances, Act XC of 2016 on central budget of Hungary for the year 2017, and Act CLXXXIX of 2011 on Local Governments in Hungary.
In the second part of this paper, I will describe the financial management models of local governments, going into the details of models those local governments apply which cooperate closely with the state as well as the models those apply which have a broad autonomy in their financial management. That chapter provides a detailed overview of the legal status of the financial management of Hungarian local governments in terms of constitutional law and financial law. Closing my study, I will focus on the financial management of local governments in the light of current regulations; hence, I will touch upon their assets-related issues, their budget cycle, and the presentation of the internal and external audit of their financial management.
At the end, I will have some thoughts on the open issues regarding the financial management of local governments.
The current system of public finances was necessary to reform public finances itself, change the way public responsibilities are performed, establish an efficient and transparent institutional framework, and determine the macroeconomically necessary size of public finances.[3] In the past decades, reforms were prepared in multiple stages in the fiscal sector, to consolidate and stabilise the system of public finances, to ensure transparency, awareness of the utilisation of public funds and to make public services more efficient. To implement the reforms, the relevant acts of Parliament were modified in every year, which made it necessary to actually modernise and increase the transparency of the system. Act XXXVIII of 1992 on Public Finances (hereinafter referred to as the Former Public Finances Act) was a modern, well-structured act when it was adopted, its continuous amendments, however, made it unclear; hence, it was reasonable to regulate the rules of public finances in a new act of Parliament. Due to the foregoing, the new Public Finances Act, Act CXCV of 2011 (hereinafter referred to as Public Finances Act) entered into force on 1 January 2012.
This new act of Parliament was structured applying the system elaborated by the previous regulations, while it shows important differences as well. The Public Finances Act knows two subsystems of public finances (contrary to the previous four ones), namely the central and local government subsectors. The Public Finances Act strengthened the rules of midterm planning, commitment and coverage examination, ensuring that no commitments
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are made without an appropriation in the relevant chapter. In comparison with the previous regulations, the Public Finances Act lays greater emphasis on the planning of the budget. The primary objective of the novelties introduced by the new Act was to reduce unnecessary workload and bureaucracy (for instance, it delegated topics that were previously regulated by acts of Parliament to the level of government decrees).
The Fundamental Law, which entered into force on 1 January 2012, has a separate chapter on public finances, the core budget, the wealth of the nation and public finance bodies (the Chapter "Public Finances"), which also made the adoption of the new regulations necessary. The Fundamental Law required the adoption of cardinal laws in many topics related to public finances; hence, in the fields of equal tax treatment, the pension scheme, the Budget Council and the regulation of the national wealth.[4]
The basic principles of public finances are standards of behaviour that all organisations belonging to public finances must follow in the planning, implementation of their budget, enumeration of their incomes and expenses, and reporting.[5] The Public Finances Act does not specify the basic principles, but they are deductible from its provisions and the provisions of the Fundamental Law on public finances.
To ensure the functioning of this principle, the Fundamental Law provides for as follows: "Every organisation managing public funds shall be obliged to publicly account for its management of public funds. Public funds and national assets shall be managed according to the principles of transparency and the purity of public life. Data relating to public funds and national assets shall be data of public interest."[6] This principle is, therefore, to ensure some kind of social accountability of the management of public funds.
Among the rules of planning and accounting, the principles of budget-based management, programming and accuracy (i.e. every financial flow must be accounted for, all financial transactions must be shown), the principle of a true and fair view (i.e. appropriations are always appropriated and used for actually planned goals), the principle of unity (it is to ensure that all budget transactions of the state are included in a single piece of legislation; this requirement can function on the level of the central subsystem), and the principle of transparency, the principle of global coverage (i.e. government income covers government spending in total), the gross budget rule, and the principle of detail.
Purpose-limited utilisation is an important principle in using public finances, i.e. certain funds may be used for purposes defined in advance. This appears in two cases; firstly, in case of EU funds; secondly, in case of targeted funds disbursed from the budget. In this context, we must mention the principle of public procurement, i.e. organisations belonging to the subsystems of public finances must (above the value threshold defined by the law) apply the procedures of public procurement for payments for purchasing goods, construction and other investment projects or services. The principle of limiting state aid also belongs to this group.
Public finances can have multiple definitions. In terms of economics, it means the management system that funds public functions and does the necessary centralisation. This definition is, however, not accurate, because it does not provide any definition of public functions or what organisations belong to the system of public finances. In the functional approach, the entirety of public finances is the management and financial side of the role the state plays in the society and the economy. In the organisa-
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tional approach, public finances mean the organisations that are belong to public finances and which are subject to the strict rules of public financial management. One the whole, we can say that the budget of the subsystems of public finances may be regarded as a statutory financial plan comprehensively detailing the incomes and expenses related to public functions for the budgetary exercise.[7] The current regulations of public finances are based on the organisational approach, but one can detect a significant shift towards the functional approach.[8]
In terms of the law, public finances consist of two subsystems (instead of the previous four ones), harmonising with the dual system of public administration consisting of state administration and the administration of local governments. The system of public finances defined in the Public Finances Act can be illustrated with the figure below:
a) Central subsystem
a. the state
b. central budgetary body
c. public corporation included in the central subsystem of public finances by law: social security, extra budgetary funds
b) Subsystem of local
a. local government
b. local government of ethnic minorities governing body of national ethnic
c. association with legal personality, multipurposed sub-regional association
d. regional development council
e. budgetary bodies of local governments local governments of ethnic minorities, country wide government of ethnic minorities - controlled by the foregoing
In this Chapter, I deal only with the local governments from the components of the subsystem of local governments indicated on the figure above.
Local governments have incomes from basically three sources: own revenues, incomes transferred from central budgetary incomes, state contributions and support.
Own revenues are the most typical incomes associated with the autonomy of local governments; the state may influence that in a normative way only, by setting the statutory framework; for instance, Act C of 1990 on Local Taxes (hereinafter referred to as Local Taxes Act) determines what taxes local governments may levy, and it lays down the major framework for that. Own revenues are enumerated by Paragraph (1) of Section 106 of Act CLXXXIX of 2011 (hereinafter referred to as the Local Governments Act), and these are the followings:
a) local taxes (Section 1 of the Local Taxes Act);
b) income, profit, dividend, interest or rent from own activities, business and the utilisation of the assets of the local government;
c) funds taken over;
d) stamp duty, fines, fees payable to the local government under the law;
e) other specific revenues of the local government and its institutions.
Parliament lays down the types and extent of assigned central revenues in an act (usually in the act on the budget). These revenues are therefore subject to the decision of the local government. Incomes transferred from the central budget includes the following titles:
a) 40% percent of the vehicle tax collected by the local government, 100% of any income from fines, surcharges related to the vehicle tax;
b) 100% of the personal income tax payable after incomes from letting arable land.
Previously, this group contained a portion of the personal income tax, always specified by the current budget, this transfer was, however, ended in 2013.[9]
The third group of revenues of local governments is state contributions and support, which take up a significant portion of the total revenues of local governments; they are, however, the least autonomous part of it. According to Paragraph (1) of Section 117 of the Local
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Governments Act, Parliament defines the legal title for the various forms of financial support in the act on the central budget for the budgetary exercise in question. In our case, it was determined in Schedule No. 2 to Act XC of 2016 on the Central budget of Hungary in the year 2017. General state aids that have and are subject to a specific purpose (purpose-bound aids) are the following:
a) aid for the general administration and sectoral tasks of local governments:
a. general support for the functioning of local governments,
b. support for the public education and child-feeding functions of municipal local governments,
c. support for the social and child-welfare functions of municipal local governments,
d. support for the cultural function of municipal local governments,
b) centralised revenues available for local governments;
c) supplementary support to local governments;
d) target-bound and purpose-bound support;
e) support for force majeure events.
The legislator intends to ensure the functioning of the principles of normativity, functional proportionality, solidarity, territorial balancing and performance of functions in associations.[10]
Expenses of local governments obviously show a heterogenous picture, because small villages and large cities, or an underprivileged an a developed local government have significantly different expenses. Typical elements of local government spending include operational expenses, allowances to the residents, transfers to organisations outside the scope of public finances and other expenses.
In modelling, we can separate two main types of local governments, those that cooperate closely with the state in their financial management, and those that have widespread autonomy in their financial management.[11] It must, however, be emphasised that the two models have many similarities, despite their striking differences. Modelling is based on legal regulations, i.e. the extent and the manner the state can intervene into the management of local governments. We must, however, mention the system of local taxes - playing an important role in the local government financing system-, the so-called contributions provided by legal entities governed by private law, the revenues from charges billed for certain public services as these are present and important in both models; furthermore, both models include state aids, more specifically, the takeover of responsibilities and funding provided to supplement the economic power of municipalities and development purposes. In addition, all the different models are subject to central state control; moreover, provisions have been adopted concerning municipal debt brakes as due the increasing scope of responsibilities of local governments and the growing significance of their roles in the national economy.
This municipal management model is typical mainly in continental countries, and can be further broken down to three sub-types, the French, German and Nordic ones.
Local taxes, contributions, public service charges play an important role in this type as well; local taxes are, however, the most relevant. In
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France, the country of origin of this model, a significant portion of the revenues comes from property-related taxes, local business taxes, traffic taxes and different duties.[12] French regulations, however, do not operate with passed or shared taxes.
The local government can set the rate of local taxes, the maximum rate is, however, statutorily regulated, and the central government can also reduce the so-set local taxes.[13] It must also be mentioned that the state tax authority is responsible for local tax administration, it transfers the collected taxes to the relevant local governments.
Features of the French municipal management model appear in Belgium, Italy and Spain as well. In Spain, local governments must levy vehicle taxes, property-related taxes and business taxes; hence, they only can set the rate of the different taxes. It is a specificity of the Spanish regulations that-differing from the other states - they operate with passed taxes[14].
This is the local government financing system of Germany, Austria and partly Switzerland, operating with both local taxes and assigned and shared taxes. Revenues of local governments consist of local taxes (the most important one among them is the local business tax and property-related taxes), revenues from utilising their assets, other fees and incidents and funds from credits. In Germany and Austria, local taxes are not collected by the local governments, but the designated public authorities. It is typical of this model that lawful municipal management is ensured by legal supervision or control, while a financial control organisation examines the expediency. Hungarian regulations are basically in line with the German model, changes between 2011 and 2013 did, however, adopt several elements of the French model; as a result, assigned taxes became less relevant.
The regulation of Nordic countries is a specific mix of the German model (close cooperation with the state) and a considerable economic autonomy. The most important revenue of the local governments of the Nordic countries is income taxes (which are considered local taxes there), which are complemented with different state aids.
This system is typical mainly of the Anglo-sphere, its main feature is the considerable economic autonomy of local governments. Aids from the central budget are, however, becoming increasingly dominant in the countries of this model. The local governments applying this model have great liberty in levying taxes, they can levy and collect local taxes on their own; state-level taxation is, however, a hard limit, i.e. previous local taxes are becoming centralised.[15] The most important ones among local taxes are usually the property-related taxes. In addition to local taxes, however, contributions and public service charges are also an important source of income. These have to be paid for using certain public services. State-correction mechanisms are only complementarity in this model, and are often related to the funding of different functions. The local governments in the countries characterised by this model are also subject to external control mechanisms, usually via a designated public administration body.
The legal basis for the economic and management self-determination of local governments is laid down in the constitutions of the countries. In terms of constitutional legal status, in this Chapter I will study the aspects that are especially relevant for the topic given in the title of this paper. In addition to the details provided in the followings, many changes can be observed in terms of the rules provided by Act XX of 1949 on the Constitution of the Republic of Hungary (hereinafter referred to as the Constitution) and the Fundamental Law of Hungary[16]; I will, however, not deal with them, given the topic of this paper. The rules of the Fun-
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damental Law of Hungary are fundamentally different from the rules laid down in the Constitution.[17] While the Constitution defined the so-called fundamental rights of local governments[18], the Fundamental Law does not specify them precisely; hence, for instance, it does not define the right to local government; instead, it sets out in Paragraph (1) of Article 31 that "In Hungary local governments shall function to manage local public affairs and exercise local public power".[19] It can be seen that the previous regulations implied the determination of rights, while the current provisions focuses on functions, local public affairs, and the exercising of the local public power.[20]
The following rules of the Fundamental Law imply changes: it enables legal supervision over local governments, instead of the previous legal control[21]; it regulates the cases where local government decrees may be adopted by other bodies; it obliges local governments and public bodies to cooperate; it provides the opportunity to create associations of local governments by an act of Parliament.
We must also mention Paragraph (5) of Article 34 of the Fundamental Law, providing that, in order to preserve a balanced budget, an Act may provide that for any borrowing or for other undertaking of commitments by local governments to the extent determined in an Act, certain conditions and/or the consent of the Government shall be required. Article N of the Fundamental Law of Hungary reads "Hungary shall observe the principle of balanced, transparent and sustainable budget management", which local governments must also respect in performing their duties. The above-mentioned provision of the Fundamental Law is designed to ensure compliance with these conditions. Borrowing or the assumption of any other obligations by local governments may be limited with rules laid down in acts of Parliament adopted with simple majority; the relevant legislative framework is provided by Act CXCIV of 2011 on the Economic Stability of Hungary (hereinafter referred to as the Economic Stability Act). The purpose of such limitation is - in accordance with Article N of the Fundamental Law - to ensure a balanced budget, which is ensured if, in a given budgetary exercise, incomes and expenses are nearly at the same level. Paragraph (5) of Article 34, however, does not refer to the principle of sustainable budgetary management, which is realised if incomes and expenses are harmonised in the long run. The indicated limitation should, however, be interpreted in accordance with Point (f) of Paragraph (1) of Article 32 of the Fundamental Law, specifying the separate budget management of local governments, i.e. not all commitments of local governments may be limited.
Within the framework of the constitutional legal status relevant for this paper, we must touch upon the residues of the fundamental right to municipal revenues, declared by the Constitution and still traceable in the Fundamental Law. Within the meaning of Paragraph (1) of Article 34 of the Fundamental Law, for the performance of their mandatory functions and powers, local governments shall be entitled to proportionate budgetary and/or other financial support.[22]
The legal status of local governments in terms of financial law is separated from their legal status in terms of constitutional and administrative law. Agreeing with the interpretation of Gábor Kecső, we understand the legal status of local governments in terms of financial law as the set responsibilities and competences and the rights and obligations that integrate local governments in the financial system.[23] The meaning of the financial autonomy of local governments is different on the side of incomes from that on the side of expenses. Financial autonomy is ensured if the local government can determine the scale of its revenues with its own decisions. It also means that the local government can freely dispose over the expenditure appropriation of the budget.
The financial structure of local governments should ensure the funding for local public functions, which can be ensured through a number of channels.[24] The funding channel of local governments can basically be separated into two branches, allocated funds and own revenues. Both appear on the income side of the budget of the local government; they are, however,
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different in terms of the scale of the autonomy in disposing over them. Allocated funds are those whose scale is independent from the decision of the local government receiving such funding. The two groups of allocated funds are aids and shared or allocated public revenues. By contrast, the scale of own resources is determined by the relevant local government. One of the groups of own revenues is incomes based on transactions governed by private law, where the point is that the local government can determine the amount payable for the services by itself. The other side is revenues governed by public law, based on an unilateral decision of a public authority. The two main forms are fiscal revenues, such as local taxes, while the other type is sanctions, such as revenue from fines.
Within the meaning of Article 32 of the Fundamental Law, in the management of local public affairs and within the framework of an Act, local governments
a) shall exercise the rights of ownership with respect to local government property;
b) shall determine their budgets and autonomously manage their affairs on the basis thereof;
c) may engage in entrepreneurial activities with their assets and revenues available for this purpose, without jeopardising the performance of their mandatory duties;
d) shall decide on the types and rates of local taxes.
Pursuant to Paragraph (1) of Article 34 of the Fundamental Law, for the performance of their mandatory functions and powers, local governments shall be entitled to proportionate budgetary and/or other financial support.
The economic independence of local governments is subject to, amongst others, having the assets for performing their responsibilities; such asset is, by virtue of the provisions of the Fundamental Law, national property.[25] Paragraph (2) of Section 106 of the Local Governments Act defines the concept of local government asset, consisting of the property of the local governments and their valuable rights and interests serving the performance of the responsibilities and objectives of local governments. The concept of assets, therefore, covers movable, immovable property and valuable rights and interests. Requirements concerning the preservation, protection, responsible management of national assets, the exclusive ownership of the state and local governments, basic limitations and conditions of disposing over national assets and the exclusive economic activities of the state and the local government are regulated by Act CXCVI of 2011 on National Assets.
Assets of local governments can be core assets and business assets.[26] Core assets serve the mandatory functions or competences, its elements are partially non-marketable or their marketability is limited. Non-marketable core assets are[27] which:
a) is qualified as assets in exclusive ownership of local governments by the Act on National Assets[28];
a. local roads and structures;
b. spaces, parks owned by the local government;
c. international commercial airport in the ownership of the local government, the related aeronautical telecommunication facilities with the radio navigation and lighting equipment and devices, and the facilities of the air traffic control service, and
d. waters, water facilities of public interest in the ownership of the local government, not including water utilities,
b) anything an act of Parliament or a local government decree declares national asset of special significance for the national economy.
Non-marketable items of the core assets are not alienable, may not be encumbered - except for asset management rights, right of use by operation of law or easement-, no right in rem or divided ownership may be established on them.
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Core assets with limited marketability:
a) whatever an act of Parliament or a decree of the relevant local government declares to be limited in terms of marketability, i.e. national assets not in the exclusive ownership of the local government and not belonging to the scope of national assets of special significance for the national economy, and
b) anything that may be disposed of in an act of Parliament or a local government decree, under specified conditions.
All asset items in the ownership of local governments and not belonging to the scope of the core assets of local governments are asset items (such as flats, business premises in the ownership of local governments). Local governments are free to do business within the limits set by the law, if such business does not jeopardise the performance of mandatory functions. The business asset is marketable, i.e. it may be freely alienated, encumbered or provided as an inkind contribution to a business. The business asset must, however, serve the performance of municipal functions and the goals and interests of the local government.
Within the meaning of Paragraphs (2) to (4) of Section 111 of the Local Governments Act, the annual budget is the basis for the financial management of local governments; they finance their mandatory[29] and voluntary tasks (where the latter is not to jeopardise the first item). Sources and expenses of these tasks are separated in the decree on the budget. No deficit may be foreseen in the decree on the budget of the local government.
The planning and preparation of the budget of local governments consists of multiple phases, such as the preparation of the budget concept, drafting the decree on the budget and adoption of the budget concept. Development of the budget concept must ensure the proper demonstration of the own resources on the income side and the known functional obligations on the side of expenses. The municipal clerk is responsible for developing the budget concept, which the mayor is to submit (together with the opinion of the relevant committee) to the local council of the local government until 30 November every year. For municipalities having a population larger than 2,000, the Local Governments Act requires the setting up of a financial committee, which is responsible for developing an opinion on the budget concept. The organisational and operational rules of the local government determines if other committees must be invited to give their opinion on the budget. The local council of the local government adopts an opinion on the concept of the decree on the budget in the form of a council decree determining the scope of the future work in preparing the budget.
The mayor submits the draft decree on the budget to the committees, where the financial committee also plays a special role. At local governments which are subject to the relevant provision of the Local Governments Act, an opinion of an independent auditor must also be acquired. The mayor shall submit the draft decree on the budget to the local council within 45 days following the promulgation of the act on the budget, together with the draft decrees underlying the proposed appropriations. The mayor shall also present the balance sheet of the budget of the local government, a quantified report on the decisions having a multiannual effect (split by year), and the statements on direct aids. The decree on the budget is adopted by the local council; the Government is to be informed of the adopted decree.
If the local council does not adopt the decree until the start of the budgetary exercise, then it may adopt a decree on provisional management, and it may authorise the local government and its budgetary bodies in it to continuously collect revenues and disburse expenses. Such a decree must, however, specify the duration of such provisional management. If no decree on the provisional management is made or it became ineffective, then the mayor shall have the right to collect the revenues of the local government and to disburse its expenses-within the framework of the expenditure appropriations of the previous year.
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Implementation of the budget of the local government means performance of planned tasks, realisation of the revenues in the budget and the utilisation of the expenditure appropriations. Appropriations may be modified during the year for unplanned, unexpected circumstances; such a modification shall lie with the local council, except for the two exceptions defined in the Public Finances Act:
a) Revenues and expenditure appropriations of a budgetary authority of the local governments may be changed within the scope of own competence in cases defined in the Government Decree, expenditure appropriations may be rearranged. The mayor shall notify the local council of the modification, regrouping of the appropriations-done within the scope of own competence of the budgetary authority-within 30 days.
b) if, during the budgetary exercise, the local government collets extra revenues that were not known at the time of drafting the decree on the budget, or its revenues are below the planned level, the mayor shall inform the local council thereof.
The local governments and their institutions shall prepare reports both during the year and at the end of the year to provide grounds for central decisions, year-end closings and the balance sheets of public finances; in such reports, they shall report on the functions performed, the results of their financial management, the issues, and the growth of their assets. The local council is to review the performance of functions during the year; at the end of the year, it is to discuss them in detail, adopt a decree on the closing accounts, by figures and text. The report by figures must show the revenues by category, the utilisation of expenditure appropriations by budgetary authority, the performance of the functions of the mayor's office by function, the investments and renovations by task. Functions performed from general reserves and provisions must also be reported. The text section must describe the factors having influenced the basic activities performed in the reference period and if the appropriations were utilised in a manner differing from the plan. The municipal clerk is to draft the decree on the closing accounts, and the mayor is to submit it to the local council until the last day of the fourth month following the relevant budgetary exercise.[30]
I do not deal with the general controlling system of public finances in this paper, I only study the controlling of the financial management of local governments.
The Local Governments Act considerably transformed the rules pertaining to the controlling system of local governments, because-contrary to Act LXV of 1990 on Local Governments - it deals with the rules of external control in Paragraphs (1)-(2) of Section 119 only; it otherwise deals with internal control through the bodies and mechanisms of local governments. The reason for this change is that external control is determined by separate legislation. In its Section 115, the Local Governments Act lays down that the local government shall be responsible for secure management, while the mayor shall be responsible for compliance in this regard; this provision is, however, not a rule of control, but a rule of management.[31]
Paragraphs (3) to (6) of Section 119 and Section 120 lay down the rules of internal control at local governments. Within the meaning of Paragraph (3) of Section 119, the municipal clerk shall operate an internal system of control ensuring the due, timely and efficient utilisation of the funds available to the local government. The concept of the system of internal control is defined by Section 69 of the Public Finances Act, providing that the system of internal control is a system of processes aimed at the management of risks and obtaining objective proof, the aim of which is that activities are performed in a due, efficient, economical manner
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during the operations and management, the obligations of accounting are fulfilled, and the resources are protected. This system, therefore, serves primarily a secure management. The system of internal control is basically a control process focusing on finances and management; however, it also deals with technical efficiency in examining operational efficiency. With the operation of the system of internal control, the main goal of the Local Governments Act is, therefore, the due, economical, efficient and effective utilisation of the available resources.
Paragraphs (4) provides for internal control, i.e. the municipal clerk is obliged to ensure the operation of internal controls through the system of internal control, including the control of budgetary authorities under the supervision of the relevant local government. The detailed rules of internal control are specified in Government Decree No. 370/2011. (XII. 31.) on the Internal System of Control and Internal Controlling of Budgetary Authorities. Within the meaning of Point (b) of Section 2 of this Government Decree, the internal audit is "an independent consultancy activity providing objective evidence, its purpose is to improve the operations and the effectiveness of the organisation audited, it assesses and improves the efficiency of the management and internal control system of the organisation audited with a system approach and systematically, to enable the organisation audited to achieve its goals". The Government Decree also provides for the person performing the internal audit, who may perform this either in an employment relationship or in a civil law relationship, typically an agency contract.[32]
Based on Section 120 of the Local Governments Act, the Financial Committee forms an opinion on the draft budget and the draft semi-annual and annual report on its implementation, monitors the development of revenues, investigates the reasons and economic justification for commitments implying debts, and may audit compliance with the cash management rules, the functioning of prudent documentation. It is to immediately communicate the findings of the Financial Committee with the Local Council, which-if it does not agree with it or fails to do the necessary measuressends the investigation protocol and its findings to the State Audit Office.
The rules described above mean considerable changes in comparison with the audit rules of the Previous Local Governments Act, because the Local Governments Act provides for that in major, strategic cases, the Financial Committee is to make the decision and not the municipal clerk, who does the operational control only.
It is the State Audit Office that has the broadest powers to audit the local level of public finances, the money and asset management of local governments. In its audits, it pays special attention to the utilisation, lawfulness and expediency of normative, state allowances from the central budget, targeted support and purpose-bound support.
The Previous Local Governments Act defined a specific group of local governments who had to hire an auditor to audit their financial management; such audits could, however, not produce the right picture; thus, financial management of local governments became incomprehensible and unclear. As a result, the State Audit Office launched a comprehensive investigation with the purpose to check compliance of the financial management of local governments within a period of four years.[33] Due to the shortcomings detected, rules of the Local Governments Act do not require local governments to hire auditors for the audit of their report and checking of their financial management since 2013. At the same time, however, we must mention that the modified laws have ensured efficient and due management of public monies even without an audit, i.e. the state vindicated its own audit powers.
Within the meaning of Paragraphs (1) of Section 119 of the Local Governments Act, utilisation of EU and related budget support for local governments may be audited by the European Court of Auditors and the competent bodies of the European Commission, a central audit body (State Audit Office), central control body (Government Control Office)[34], control bodies of each chapter (typically the ministries), the treasury (Hungarian State Treasury)[35], and
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the management authorities of EU assistance (Directorate General for Audit of European Funds) and its intermediary bodies. Local governments are obliged to cooperate when these bodies perform their audit activities.
The topic of this study is extraordinarily multifaceted, which (as we could see) could be approached from a point of view different from that of constitutional law, the comprehensive picture sometimes requires the inclusion of the aspects of financial law and economics as well. The purpose of my paper was to highlight and give a detailed overview of the main elements of the financial management of local governments, to which end I dealt with the current system and history of public finances, focusing on the subsystem of central governments.
As regards the second part of the my paper, I was on the opinion that it would be worth studying the management models of different countries before reviewing the financial management of local governments, so that the financial management of Hungarian local governments can be determined in terms of this system a well, still before discussing the detailed rules.
In conclusion, the main part of my paper studied the legal status of the financial management of local governments in terms of constitutional law and financial law, and I studied the assets, budgetary cycles and the external and internal audits of local governments as well. ■
NOTES
[1] This paper has been made within the framework of the programmes initiated by the Hungarian Ministry of Justice to raise the standard of legal education.
[2] Decision No. 67/1991. (XII. 21.) of the Constitutional Court
[3] Prof. Dr. Csaba Lentner: Public finances. National University of Public Finance, Budapest, 2013, p. 89.
[4] See: Articles 36-44 of the Fundamental Law of Hungary
[5] Lentner: cited work, p 97.
[6] Paragraph (2) of Article 39 of the Fundamental Law
[7] National Public Administration Institute: Specialist examination in public administration: Financial and budgetary administration, Budapest, 2012, p. 15. http://archiv.uni-nke.hu/downloads/egyetem/vtki/penzugytk.pdf (downloaded on: 5 November 2017)
[8] Lentner: cited work, pp. 94-95
[9] Dr. Éva Erdős: Önkormányzati pénzügyek, az önkormányzatok gazdálkodási rendszere. [Finances and management of local governments.] National University of Public Finance, Budapest 2014. p. 13.
[10] Lentner: cited work, P. 154.
[11] István Hoffman: Gondolatok a 21. századi önkormányzati jog fontosabb intézményeiről és modelljeiről - A nyugati demokráciák és Magyarország szabályozásainak, valamint azok változásainak tükrében. [Thoughts on the major institutions and model of municipal law in the 21st century-in the light of the regulations in Western democracies and Hungary, and their changes] ELTE Eötvös Kiadó, Budapest 2015. pp. 202-203.
[12] Hoffman: cited work pp. 208-209
[13] Hoffman: cited work p. 209
[14] The point is that these are centrally levied taxes that are collected by the state tax authorities or the local governments, and the collected amount belongs to the local governments, or the local governments get a portion of the so-collected revenues.
[15] Hoffman: cited work pp. 204-205
[16] See: István Balázs: Az önkormányzatokra vonatkozó szabályozás átalakulása. [Evolution of regulations concerning local governments.] http://jog.tk.mta.hu/uploads/files/mtalwp/2014_03_Balazs_Istvan.pdf (downloaded on 10 November 2017); see also: Dr. László Kónya - Dr. Zoltán Farkas - Dr. Adél Pusztai - Dr. István Tózsa - Dr. Barbara Simon - Ferenc Tóth: Legal status and decision-making competency of local governments. Nemzeti Közszolgálati Egyetem [National University of Public Service], Budapest 2015. pp. 11-47 http://osz.uni-nke.hu/uploads/media_items/az-onkormanyzat-jogallasa.original.pdf (downloaded on. 10 November 2017)
[17] Balázs: Az önkormányzatokra vonatkozó szabályozás átalakulása. [Evolution of regulations concerning local governments.] http://jog.tk.mta.hu/uploads/files/mtalwp/2014_03_Balazs_Istvan.pdf (downloaded on 10 November 2017)
[18] Fundamental rights in the Constitution, relevant for my topic: the fundamental right of having local government revenues; the fundamental right of tax assessment; the fundamental right of local governments to get state aids; the fundamental right to get complementary aids; the fundamental right of local governments to take credit; right to legal remedy in case of infringing the funding obligation.
[19] Though this provision is less of a guarantee, but complies with the principles, expectations laid down in the European Charter of Local Self-Government: "Local self-government denotes the right and the ability of local authorities, within the limits of the law, to regulate and manage a substantial share of public affairs under their own responsibility and in the interests of the local population. This right shall be exercised by councils or assemblies composed of members freely elected by secret ballot on the basis of direct, equal, universal suffrage, and which may possess executive organs responsible to them."
[20] See: Gábor Kecső: A helyi önkormányzatok pénzügyi jogi jogállása. [Legal status of local governments in terms of financial law] A jogállást meghatározó jogintézmények modelljei a bevételi oldalon. [Models of legal institutions determining the legal status on the side of revenues.] England - USA - Hungary. ELTE Eötvös Kiadó, Budapest 2016. pp. 214-216.
[21] Gábor Balogh - Ágnes Szögi: A helyi önkormányzatok törvényességi szempontú vizsgálatának múltja, jelene és jövője -20 év után ismét törvényességi felügyelet (Első Rész és Második Rész) [The past, present and future of legal review of local governments - The legal review returns after 20 years (First Part and Second Part)] Kodifikáció és Közigazgatás [Codification and
- 303/304 -
Public Administration], 2012/1, pp. 52-66, and Kodifikáció és Közigazgatás 2012. 2. pp. 53-71.
[22] Compare: András Jakab: Az új Alaptörvény keletkezése és gyakorlati következményei. [Creation and practical consequences of the new Fundamental Law.] Complex, Budapest 2011. p. 274. In the opinion of the author, no meaningful changes have been made in comparison with the Constitution, because own revenues are ensured by Point (h) of Paragraph (1) of Article 32, while state aid is ensured by Paragraph 1 of Article 34 of the Fundamental Law.
[23] See: Kecső: p. 223.
[24] This categorisation is based on the commentary to the Local Governments Act), Mariann Nagy - István Hoffman (editors): A Magyarország helyi önkormányzatairól szóló törvény magyarázata. [Explanation of the Act on the Local Governments of Hungary.] HVG-ORAC Lap- és Könyvkiadó Kft., Budapest, 2016, pp. 391-393
[25] Nemzeti Közigazgatási Intézet [National Institute of Public Administration] - Közigazgatási szakvizsga [Specialised Examination in Public Administration]: Általános közigazgatási ismeretek. [General Information on Public Administration] Budapest 2012. p. 327 http://archiv.uni-nke.hu/downloads/egyetem/vtki/altalanoskozigismtk.pdf (downloaded on 12 November 2017); also see: dr. Ákos Hamvas - Ildikó Keményné Koncz - Győrgy Molnár - dr. Magdolna Schneider - dr. Hajnalka Szabó: Az önkormányzati rendszert érintő változások és az adósságrendezés gyakorlata. [Changes in the System of Local Governments and the Practice of Debt Settlement.] Wolters Kluwer Complex Kiadó, Budapest 2013. pp. 28-29.
[26] Pursuant to Section 5 of Act CXCVI of 2011 on National Assets
[27] Paragraph (2) of Section 5 of Act CXCVI of 2011 on National Assets
[28] Point 6 of Paragraph (1) of Section 3 of Act CXCVI of 2011 on National Assets
[29] Paragraph (1) of Section 13 of the Local Governments Act
[30] Hamvas - Keményné - Molnár - Schneider - Szabó: cited work, pp. 43-44.
[31] Nagy - Hoffman: cited work, pp. 492
[32] Paragraph (7) of Section 15 of Government Decree No. 370/2011. (XII. 31.) on the Internal Controlling System and Internal Audit of Budgetary Authorities.
[33] Lentner: cited work, pp. 282-283.
[34] Government Decree No. 355/2011. (XII. 30.) on the Government Control Office
[35] Government Decree No. 311/2006. (XII. 23.) on the Hungarian State Treasury
Lábjegyzetek:
[1] The author is doctoral student, Doctoral School of the Faculty of Law at the University of Pécs.
Visszaugrás
