National Audit Office: State hampering local government's use of funding

National Audit Office logo.
National Audit Office logo. Source: National Audit Office

The administrative reforms of 2017 may have made local governments larger, but greater roles and responsibilities have not followed, the National Audit Office (Riigikontroll) finds.

The 2017 reforms slashed the number of municipalities in Estonia, from 213, to 79, just ahead of the local elections in October of that year. Local elections have been held once since then (in October 2021).

Of these 79 municipalities, there are two categories – urban municipalities (Estonian: linnad) and rural municipalities (vallad), the latter making up the majority. While this distinction is largely self-explanatory, there are some anomalies – for instance rural municipalities just outside Tallinn, such as Viimsi (population over 20,000), have considerably larger populations and are more urban or suburban in character than some of the 15 urban municipalities (such as Paide, population around 10,000).

The state continues to a large extent to restrict the freedom of choice for cities and rural municipalities in the use of funds, and agreements to increase freedom of action, foremost in the area of education and infrastructure, have not been implemented, the audit office adds.

In an audit published today, Tuesday, the National Audit Office finds also that there are no compelling arguments for continuing with restrictions on the use of funds, while if the state wants to provide a meaningful continuation of the 2017 administrative reform, more trust in local governments is needed when it comes to financial matters.

Commenting on the report, Auditor General Janar Holm said: "The Ministry of Finance, and various government administrations (of which there have been four since 2017 – ed.) have repeatedly said that we need not only larger, but also more capable and more responsibility-taking local self-governments."

"That cities and rural municipalities must be given a greater role and responsibility in the performance of public functions is something that has been heard from both experts and politicians," Holm continued.

"This also means greater freedom for local government in the use of funds, and a reduction of the allocation of so-called labelled funds taken from the state budget," the auditor general added.

Municipalities take aruond 20 percent on average of their revenue from state support funds along the lines of state-set regulations, which they cannot amend.

This funding covers teachers' pay, road maintenance in the localities, and some aspects of social services, among other provisions.

The 2017 reforms were supposed to lift restrictions on the use of these funds; however, the planned removal of the support fund nomenclature and its merger into municipalities' general revenues did not follow, in the event.

The policy has been discussed by most national administrations, and would have followed the Nordic states' model, the audit office says.

Janar Holm said that this all pointed to a lack of trust in local government, given that all possible destinations of the support funds concern life in provincial Estonia (or indeed in Tallinn, in the case of Tallinn City Government, the largest municipality – ed.).

The process started in 2017 has lost its focus, in the meantime, he said, and has been punted as far down the road as 2035 for completion, whereas the original deadline was for 2021.

National Audit Office finds that some ministries constantly postponing decisions on support funds

Communication with various government ministries suggests they seem to be mired in an endless process of analysis and opinion-forming, the audit office goes on, despite the five or more years which have elapsed since the reforms commenced.

The support funds issue has been on the government's table several times, sponsored by the Ministry of Finance, but has so far yielded nothing, since both the Ministry of Education and Research and the Ministry of Economic Affairs and Communications are hesitant on the matter, the audit office says.

The Ministry of Social Affairs, however, previously hesitant, recently made a decision to lift restrictions on the use of benefits for alternative and continued care service and funeral benefits by 2024, and to also amend the Social Welfare Act accordingly, the audit office notes, to its approval.

On the other hand, some area-specific ministries are afraid that lifting these restrictions will lead to a loss of funds between one area of local government and another (for example, funds towards teachers' wages (education ministry) will go to roads (economic affairs ministry) or vice versa).

Local governments in turn fear that the state will introduce additional requirements in these areas.

The National Audit Office states there are no compelling arguments in favour of continuing the use of support funds under the current restrictions, with no data showing that any positive developments in the supported areas of local life – eg. wage increases, a rise in the number of recipients of service – have arisen in the past exactly as the result of the restriction on the freedom of local governments to use the support funds.

Local governments also finance areas supported by the state to higher amounts than the state support itself, the audit office says, and this contribution has been growing in recent years.

For example, local governments' own share in covering teachers' pay has risen, in recent years, about 10 percent faster than the state support has, while the contribution of local governments towards financing local roads has risen by 95 percent, double the rate of growth of state support, the audit office says.

"The fear that the financing of areas in local governments would change drastically by lifting restrictions on the use of grants does not seem to be justified," Auditor General Holm concluded, adding that the benefits of lifting these restrictions would lead to more targeted and more efficient support.

Community discussion is also needed to ensure this, the audit office says.


The support fund for local governments has a total of eight grants for financing local government functions as flows: Running general education schools, maintenance grants for local roads, benefits for alternative and continued care service, grants towards the labour costs of preschool teachers, grants towards hobby education and hobby activities, funeral benefits, benefits for providing assistance to a child with a severe and profound disability, grants for transferred former national roads.

The state budget for 2022 provided €461 million to cover all of the above, the bulk of which went on running general education schools (€381 million). This support is in turn divided into eight sub-categories, including different wage categories for different types and levels of teachers.

The full text of the report is here.


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Editor: Andrew Whyte

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