PRESS RELEASE

14

th

October 2014

PUBLIC FINANCES AND ACCOUNTS

LOCAL GOVERNMENT FINANCES

For the second year running, the

Cour des comptes

issues a public report regarding local

government finances. A work of collaboration between the

Cour des comptes

and the regional

audit courts (based on 136 audits of local authorities), this report aims to analyse the financial

situation of local authorities and their groupings, and the issues associated with them.

Spending by local government accounts for 21% of public expenditure and 9.5% of debt. Local

authorities are thus intended to assume their part in the efforts towards the turnaround in public

accounts undertaken as part of France's European commitments. In 2013, they failed to produce

their expected contribution towards the reduction in public debt. The prospects for greater

control of local government spending, expected from the reduction in state grants from 2014, are

uncertain.

Local public finances have changed adversely in 2013

The financial situation of local authorities and their groupings has deteriorated in 2013. The budget

balance of local governments widened to 0.4% of GDP, thus contributing one third of the delay in public

deficit reduction.

Their operational expenses rose faster than their revenue. Despite this, overall they have

–

with the

exception of the

départements

–

increased investment spending at the cost of increasing their debt.

The modest decline (-0.6%) in financial assistance from the State in 2013 thus failed to slow the

evolution of local public sector expenditure, deficit and debt.

In 2014, State grants to loca

l authorities were reduced by €

1.5 billion, but its financial transfers have

increased overall by 0.3%, taking account in particular of the allocation of new tax resources.

The effect of larger cuts in State grants on control of local spending is uncertain

For the period 2015-2017, State grants to local govern

ments are expected to fall by €11 billion, €

3.67

billion per year, as part of the

local government share in the €

50 billion of savings in public expenditure

contemplated under the Stability Program. However, it is not certain that this reduction will reflect a

reduction of an equivalent amount in spending by local government. In fact, there is a risk that local

authorities may choose instead to raise local tax rates (municipalities and intermunicipal groupings, and

to a lesser extent the

départements

) or obtain new resources (regions or

départements

).

As already noted by the

Cour des comptes

last year, one of the major challenges for the control of local

finances lies in controlling operational expenses and in particular staff costs. But the wage bill continued

to increase in 2013 (3.1% after 3.5% in 2012). This increase stems in particular from the triple increase

in employment, index-based pay (due to salary and grade increments) and wage supplements. It is also

the result (although to a minor degree) of decisions by the State beyond the control of local authorities.

In any event, improved governance of local finances now seems necessary to ensure better control.

The

Cour des comptes

recommends the adoption by Parliament of a law on local government financing

to include in particular targets for local government revenue growth, spending and budget balance.

The development of equalization between local authorities of the same level is

desirable

The greater reduction in State grants as of 2015 makes it necessary to spread this among local

authorities not only on the basis of their total resources (as in 2014), but taking into account their

respective budgetary room for manoeuvre. A greater degree of equalization should be introduced in the

distribution of the reduction in the general operating grant (in French, DGF

–

dotation globale de

fonctionnement

) between categories of local authority and between local authorities in the same

category.

In particular, it should be kept in mind that the "communes" have much more dynamic budgetary

resources than the

départements

and the regions. They have greater possibilities of saving on

operational costs if pooling and integration measures arising from their structures are implemented.

Meanwhile, it would be appropriate to simplify the structure of "vertical" equalization grants, whose total

effectiveness is very limited, particularly because they involve an excessive number of resource criteria

and charges without overall consistency. It is also desirable to increase the amounts for "horizontal"

equalization funds (between authorities of the same level), while reducing their number.

The evolution of the financial structure of the regions calls for major adjustments

The financial structure of the regions has changed significantly since 2004. Their revenues have

become more rigid and quite inflexible due to the increased proportion of State grants (41%), to the

detriment of their fiscal resources, and the sharp decline in their ability to adjust rates after the local

taxation reform of 2010. Situations differ from one region to another, but their financial stability has

become structurally more difficult to achieve.

This requires an additional effort to control their spending, particularly by refocusing their efforts on their

priority areas of competence. Meanwhile, in the context of the reform of the territorial organisation of the

French Republic and the transfer of new powers to the regions, the structure of their resources should

be adapted by introducing a larger share of fiscal resources.

The municipalities and intermunicipal groupings need to be streamlined

The control of local finances calls for a major effort towards the administrative and financial streamlining

of the communes. The map of intermunicipal groupings now covers the entire national territory.

However, its gradual expansion since the early 1990s has resulted in the superposition and

entanglement of structures, an excessive increase in employees and a rapid increase in spending.

Small intermunicipal public institutions (referred to by their French abbreviation EPCI -

établissements

publics intercommunaux

) should be consolidated and the number of municipal or intermunicipal

associations and mixed federations greatly reduced. Moreover, the EPCI must be granted complete

areas of competence (all economic development activities, for example) rather than piecemeal

allocations shared with the municipalities.

Ultimately, the establishment of a single general operating grant, allocated by the State to intermunicipal

groupings who will divide it up among the municipalities belonging to them, would promote greater

integration of the communes and would improve the efficiency of public action for a lower cost.

Recommendations

The Court sets out 15 recommendations, amongst which:

regarding the uncertainty of increased control of local government finances

o

to distribute declining State grants between categories of local authorities (municipalities,

intermunicipal groupings,

départements

, regions) taking more account of their respective

financial circumstances, particularly the existence of greater flexibility in the municipal sector;

o

to adopt a law on local government financing, provisionally setting targets for growth in

revenues, spending, the budget balance and indebtedness for the different types of local

authorities;

regarding the necessary administrative and financial streamlining of the communes

o

to reduce the number of intermunicipal structures and transfer the powers of municipalities to

existing groupings (communities of municipalities and agglomeration communities, in particular)

by whole areas of competence rather than piecemeal;

o

to continue the pooling of municipality services and their intermunicipal groupings, and to

prevent the further rise in staff costs among the communes by downsizing, temporarily halting

adjustments of wage supplements, a closer control of career development and bringing working

hours into line with the legal limit;

regarding the conditions of the structural balance of the regions

o

to refocus the actions of the regions on their priority public policies;

o

to review the funding structure of the regions;

regarding the need to develop financial equalization

o

to simplify the equalization mechanisms in order to make them more effective;

o

to promote the growing importance of "horizontal" equalization mechanisms;

o

to create a single general operating grant for the communes.

Read the report

PRESS CONTACTS:

Ted Marx



Head of Communication



T

+33 1 42 98 55 62



tmarx@ccomptes.fr

Denis Gettliffe



Head of Press Relations



T

+33 1 42 98 55 77



dgettliffe@ccomptes.fr

@Courdescomptes