The national government has for years buried its head in the sand as massive structural problems in the funding of local governments have mounted, according to the National Audit Office's annual report.
As residents flow out of rural areas, they leave local governments with increasingly smaller tax revenues while the poorly funded rural areas continue to degenerate.
After years of indecision, the municipal problem was recently addressed with plans to cut the number of local governments in Estonia from over 200 to as few as 30.
But the National Audit Office says in its report that the plan fails to address the contentious issues of state budget allocations for municipal funding and the division of responsibilities between the state and local governments. Indeed, the report says that there is no existing analysis of whether state allocations, which constitute the bulk of municipal resources, are sufficient.
Complicating matters are the vast variations in size and resources between one municipality to the next, while all fall under the same regulations and expectations. Wide regional discrepancies in salaries are also a problem, as personal income tax is used to calculate funding allocations.
The report also addresses the mega-municipalities such as Tallinn, whose quickly growing populations face their own list of unresolved funding and services problems.