Economic crisis could lead to reorganization for some local governments

Rõuge Municipality is facing tough times financially.
Rõuge Municipality is facing tough times financially. Source: Mana Kaasik

In more than ten years, not one local government in Estonia has applied for reorganization. For two municipalities in particular, however, the threat of having to do so has now returned.

Local governments cannot actually go bankrupt. They can, however, request reorganization by the state.

"In essence, this means that the state helps cover debts, but at the same time, the entire local government cost base is reviewed in order to make the municipality sustainable," explained Rait Pihelgas, deputy director of the Association of Estonian Cities and Municipalities (ELVL).

This is carried out by a Ministry of Finance committee that hasn't seen any work since more than ten years ago, during the previous economic crisis.

"At the time, there were three cases that went through the reorganization committee," recalled Sulev Liivik, director of the Ministry of Finance's Local Governments Financial Management Department.

"Currently, not one municipality has submitted a formal request; consultations are ongoing," he added. "Rõuge is one example."

During the last crisis, Pihelgas, who recently joined the committee himself, had been serving as deputy mayor of Imavere Municipality at the time it underwent reorganization.

"I have mixed memories of it," he acknowledged. "The committee was very, very active, and a lot of things that are vital at the cultural and sustainability levels at the local level — the committee can say quite rationally, looking at the numbers, that this is too expensive."

Primarily at risk for reorganization at the moment are Rõuge Municipality in Võru County and Põhja-Sakala Municipality in Viljandi County.

"There aren't many local governments who dare take that step, as people fear political burnout," Pihelgas said, explaining why municipalities aren't quick to apply for reorganization.

"In reality, it's a wise move for a local government leader," he continued. "To start resolving a difficult financial situation later — you're not going to be in better shape."

Once the committee intervenes, the first to be reviewed are loan repayment schedules, Liivak said, including "whether forebearance can be applied for or repayment schedules extended in order to generate free cash flow."

Then it moves on to reviewing revenues and expenditures, including considering whether it may be possible to increase kindergarten fees, for example, or make other changes in that area.

"The third stage is to look for where something could be cut; where costs could be optimized," Liivak explained. "We asks questions about this or that [budget] line — we discuss it like this line by line."

Municipalities don't typically run out of money due merely to poor management. Rather, it is an unexpected economic crisis that can finally push municipal governments just barely hanging on over the edge. And so it may happen that, after more than ten years, the Finance Ministry's reorganization committee may find work again.


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Editor: Aili Vahtla

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