REPUBLIC OF MACEDONIA MINISTRY OF FINANCE on FInancing Local... · republic of macedonia ministry...

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REPUBLIC OF MACEDONIA MINISTRY OF FINANCE PROPOSAL FOR PASSAGE OF THE LAW ON FINANCING OF THE UNITS OF LOCAL SELF-GOVERNMENT Skopje, December, 2003

Transcript of REPUBLIC OF MACEDONIA MINISTRY OF FINANCE on FInancing Local... · republic of macedonia ministry...

REPUBLIC OF MACEDONIA MINISTRY OF FINANCE

PROPOSAL FOR PASSAGE OF THE LAW ON FINANCING OF THE UNITS OF LOCAL SELF-GOVERNMENT

Skopje, December, 2003

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I. CONSTITUTIONAL BASES FOR PASSING OF THE LAW

The constitutional bases for the passage of the Law are contained in article 68 paragraph 1, line 2 from the Constitution of the Republic of Macedonia, in line with which the Parliament of the Republic of Macedonia adopts legislation.

II. REASONS FOR PASSING THE LAW

The units of local self-government within the frame of the Constitution of RM and law are entitled to local self-government and participation of the citizens in the management with the public affairs. The unit of local self-government is independent in the realization of the competencies determined with the Constitution and by law.

The units of local self-government, in line with article 114 from the Constitution, for

the realization of their competencies have the right to means from their own sources of revenues determined by law and to funds provided from the Budget of RM.

The European Charter on Local Self-Government, with its ratification by RM,

became part of the internal legislative order of the Republic of Macedonia, which can not be changed by law and must be applied and respected.

The Charter provides for legal guarantee of a high degree of local autonomy and

direct participation of the citizens in the management of the public affairs. In line with the provisions from article 9, paragraph 1 of the Charter for realization

of the competencies from article 22 from the Law on Local Self-Government, the units of local self-government are to be provided financial independency, i.e. own revenues with which the units would independently manage. Furthermore, in act 2 of this article the principle of adequacy of the means in line with the competencies is pointed out, i.e. the existence of proportional ratio between the sources of revenues and the expenditures for the competences which are to be realized with the Constitution and law. In line with paragraph 3 of this article, the units of local self-government are to be provided fiscal liberty within the frame of the legally determined limits of taxes, fees and charges for the provision of public services so that the revenues from the taxes and fees need to be a direct source of the unit of local self-government.

In order not to jeopardize the discretional right of the unit of local self-government

to lead their own policy within the legal authorization, paragraph 7 from article 9 from the Charter recommends, as much as possible, for the funds that are to be transferred to the units of local self-government not to be of categorical nature, i.e. to be as much as possible transferred as general grant, and that they would decide independently on their use.

Therefore, the need to pass a special law on local finance is indispensable in order

to create the legal basis for complete management of the financing of the units of local self-government.

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III. BASIC PRINCIPLES UPON WHICH THE LAW IS BASED

The proposed draft law is based on the following basic principles: - The local self-government units are entitled to own sources of financing; - The local self-government units are provided with fiscal independence within time

limits determined by law; - Adequacy of funds according to the competencies; - Financial assistance for performance of the local self-government units

competencies determined by law; - Transparency of the funds from the budget of Republic of Macedonia to the local

self-government units; - Responsibility on the part of the local self-government units regarding the use of

the grants from the budget of Republic of Macedonia for performance of the activities of the local self-government units determined by law;

- The responsibility of the local self-government units regarding the use of funds

from the Budget of Republic of Macedonia for performance of certain activities which are under competence of the bodies of the state administration, delegated by law; and

- Budget discipline, control and reporting. IV . CONTENTS OF THE LAW

The content of the draft law covers the basic relations regulated by law and the proposed manner of their regulation.

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CONTENT OF THE LAW ON

FINANCING THE LOCAL SELF-GOVERNMENT UNITS

I. GENERAL PROVISIONS

Article 1 Subject of the law

(1) This law shall regulate the financing of the local self-government units and the City of

Skopje (hereinafter: municipalities). (2) In accordance with this law, the financing of the City of Skopje shall be regulated by the

Law on the City of Skopje.

Article 2 Terminology

Certain terms used in this law shall have the following meaning: (1) Municipality is a local self-government unit. (2) The City of Skopje is a separate local self-government unit. The term municipality in

this law shall include the City of Skopje, except in cases where it is specifically prescribed otherwise.

(3) Own sources of revenues shall be: local taxes, local fees and charges, revenues from

municipal assets, self-contribution, fines and donations. (4) Budget shall be an annual plan for financing the competencies of the municipality, and

it consists of the annual projection of revenues by sources and expenditures by purposes.

(5) Municipal budget users shall be the municipal organs and public services founded by

the municipality. (6) Local tax shall be a tax, the rate of which shall be determined by the municipality within

the frame set by law. (7) Local fee shall be a pecuniary charge for the services and rights rendered by the

municipal bodies to legal and physical persons, the amount of which shall be within frame determined by law.

(8) Local charge shall be a pecuniary charge, determined by the municipality in

accordance with a law, for covering the costs related to the services the municipal bodies render to legal and physical persons.

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(9) Grant shall be a transfer from the Budget of the Republic of Macedonia and the

budgets of the Funds, to the municipal budget. (10) General grant shall be a part of the revenues of the grant of the Republic of Macedonia

that shall be allocated to the municipalities. (11) Earmarked grant shall be used for financing a concrete activity. (12) Capital grant shall be used () for financing municipal projects for capital investments. (13) Block Grant shall be used for financing the competencies within a specific sector as

prescribed by law. (14) Grant for delegated competencies shall be a transfer from the Budget of a State

Administration body to the Municipal Budget used for financing a delegated competence.

(15) Revenues from municipal assets shall be revenues realized from the right to ownership

of property, financial assets and rights.

(16) Incurring debts of the municipalities shall be a way to ensure financial assets from domestic and foreign sources of capital within the frames and conditions determined by law.

II SOURCES OF REVENUES OF THE MUNICIPALITY

Article 3 Types of revenues

The municipality shall realize revenues from own sources, form revenues of taxes, from the Budget of the Republic of Macedonia and the Budgets of the Funds.

Article 4 Own sources of revenues

Own sources of revenues shall be: (1) Local taxes:

- Property tax; - Tax on inheritance and gift; - Tax on transfer of real-estate;

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- other local taxes prescribed by law.

(2) Local fees:

- communal fees, - administrative fees, and - other local fees prescribed by law.

(3) Local charges: - Charge for urbanization of construction land; - charges from of utility operations; - charges for spatial and urban plans, and - Other local charges prescribed by law;

(4) Revenues from ownership:

- Revenues from lease; - Revenues from interest; - Revenues from the sale of property that shall not damage the performance of

public functions and competencies of the municipality. (5) Part of the revenues of the personal income tax (6) Revenues from self-taxation; (7) Revenues from fines prescribed by law; (8) Revenues from donations; (9) Other revenues prescribed by law;

Article 5 Revenues from personal income tax

The revenues from the personal income tax collected in the current year shall be

allocated to the municipalities in the following way:

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- 3.1% of the personal income tax of the salaries of physical persons shall be collected in

the municipality where they are declared to live. - 100% of the personal income tax of physical persons who deal with craftsmanship

registered in accordance with the Law on Craftsmanship.

Article 6 Revenues from self-taxation

(1) In order to meet certain needs of the citizens the municipality can introduce self-taxation

by a referendum; (2) The Municipal Council by decision shall regulate the purpose, the field and the time limit

for which the self-taxation shall be introduced, the whole amount of assets to be collected, the persons under obligation of self-taxation, the persons who are exempted , the amount of self-taxation (the base and the rate), the method of calculation, the supervision of the citizens in the field of earmarked usage of the assets and other issues.

Article 7 Revenues from donations

(1) Donations in money shall be revenue to the municipal budget.

(2) Donations in goods shall be registered within the property of the municipality.

(3) The purpose and the manner of usage of donation shall be regulated by an agreement

between the donor and the mayor which is previously approved by the Municipal Council.

Article 8

Grants from the Budget of the Republic of Macedonia and the Budgets of the Funds

(1) Grants from the Budget of the Republic of Macedonia and budgets of the Funds shall

provide additional revenues to the Budget of the municipality for financing its competencies determined by law.

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(2) From the Budget of the Republic of Macedonia and budgets of the Funds the following types of grants shall be allocated:

- revenues from taxes, - earmarked grant, - capital grant, - block grant, and - grant for delegated competencies

(3) The type, the amount and allocation of the grants to the municipalities shall be a

constituent part of the Budget of the Republic of Macedonia and the budgets of the funds.

(4) The competent ministries and funds shall announce the determined criteria, procedures and time limits for allocation of earmark and capital grants by 30th June in the current year.

Article 9 Revenues from taxes

(1) (1) The revenues from taxes shall provide a part of the grants for financing the

competencies of the municipality determined by the law. (2) The revenues from taxes shall be provided from:

- 1.0% of the total collected value added tax realized in the previous fiscal year. .

(3) The allocation of the revenues from taxes shall be realized according to the criterion

per inhabitant and other criteria determined by the Statutory regulations for Methodology passed by the Government of the Republic of Macedonia. The Government of the Republic of Macedonia passes the Statutory regulations on the Minister of Finance's proposal which have previously been brought into accord with the Committee that is responsible to overlook the development of the system for municipal financing by 30th June of the current year.

(4) The process of determining the methodology of allocation of the revenues from taxes

for the City of Skopje shall apply separate criteria to correct the important differences of the City of Skopje in relation to the other municipalities.

(5) The Municipality shall decide independently on the use of the revenues from taxes.

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Article 10 Earmarked grant

(1) Earmarked grant shall be used for financing concrete activity. (2) The line Ministries and the Funds shall propose to the Ministry of Finance to allocate

the earmarked grants per municipality, per project, institution and/or program with a Budget calculation for the following budget year.

(3) The line Ministries and the Funds shall monitor the usage of the earmarked grant of

this Article.

(4) The line ministries and the funds are liable to notify the Ministry of Finance regarding any stated irregularities.

Article 11

Capital Grant

(1) The Capital Grant shall be used to finance investment projects.

(2) The respective Ministries and Funds shall, in distributing the capital grants, give priorities to already initiated projects and ones with fully defined financial structure.

(3) The competent Ministries and the Funds shall monitor the earmarked usage of the

grant of this article.

(4) The line ministries and the funds are liable to notify the Ministry of Finance regarding any stated irregularities.

Article 1 12 Block grant

(1) A Block grant shall be used for financing the competencies prescribed in Article 22,

items 5, 7, 8 and 9 of the Law on Local Self-Government. The block grants shall be used for financing concrete programs in the frame of the competencies prescribed in this paragraph.

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(2) The line ministries and the funds shall adjust the methodology of the allocation of the block grants which shall be based on a formula by using appropriate indicators of the requirements for each program. The Government of the Republic of Macedonia shall pass Statutory Regulations for the methodology for determining of and the allocation of the block grants on the proposal of the competent ministry, which in turn shall have a prior agreement with the Ministry of Finance

(3) The amount of block grants shall not be lower than the amount of funds from the Budget

of the Republic of Macedonia that have been used for the same purpose in that field in the previous year from the year in which the appropriate competence is being transferred.

(4) The block grant shall be rendered to the appropriate positions for the budget

beneficiaries in the Budget of the Republic of Macedonia and the Budgets of the Funds.

Article 13 Grants for delegated competency

(1) The grant for delegated competency shall be used for financing the competence

delegated by an organ of the State Administration to the Mayor. (2) The funds for the delegated competencies shall be provided from the determined amount

for the respective organ of the State Administration in the Budget of the Republic of Macedonia.

(3) The grant for the delegated competencies to the municipality shall be transferred in a manner that shall provide timely realization of the delegated activity.

(4) The responsible person in the state administration organ and the mayor shall conclude an agreement regarding the regulation of the mutual relations for the grant for delegated competency.

(5) Should the mayor fail to execute the delegated competence, the funds received for financing such delegated competence shall be returned within 30 days to the Budget of the Republic of Macedonia.

Article 14Deadlines for notification of municipalities The Ministry of Finance shall, by 30 September of the current year the latest, by a budget circular inform each municipality on the type and amounts of the grants for the coming budget year.

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Article 15 Committee for monitoring the

development of the System of Municipal Financing

(1) The Government of the Republic of Macedonia shall establish a Committee for monitoring the development of the System of Municipal Financing.

(2) The Committee from paragraph 1 of this Article shall have the following competencies: - To monitor the application of the criteria for allocation of the grants; - To monitor the transparency of the procedures and their consistent realization when

distributing the funds from the grants. - To prepare half-year and annual reports for the development of the system for

financing the municipalities in which it provides recommendations for the improvement of the System;

- To monitor the earmarked usage of the grants.

(3) The Committee shall be comprised of representatives from: - Government of the Republic of Macedonia, 1 member

- Ministry of Local Self-government, 1 member; - Ministry of Finance, 1 member; and - Association of Local Self-government Units of the Republic of Macedonia, 4

members

(4) The Committee shall have access to the necessary data in accordance with law. (5) Reports prepared by the Committee in accordance to paragraph 2 of this article shall be

submitted to the Government of the Republic of Macedonia . The Government of the Republic of Macedonia notifies the public of the content of the reports.

III. DETERMINING AND COLLECTION OF MUNICPAL REVENUES

Article 16 Determining and collection of own revenues

(1) The activities of determining and collection of municipal own revenues as prescribed by

law, shall be performed by the municipal administration; (2) For the performance of the activities referred to in paragraph 1 of this Article, the

municipalities may enter into agreement with another municipality or with the Tax Administrative Body.

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Article 17Transfers of grants from the Budget of

the Republic of Macedonia and the budgets of the Funds

(1) The grants from the Budget of the Republic of Macedonia and the budgets of the Funds shall be transferred in line with the regulations of treasury working.

(2) The transfer of general and block grants from the Budget of the Republic of Macedonia to the Municipal Budget shall be performed in at least 12 monthly installments;

(3) The grant referred to in paragraph 1 of this Article shall be transferred by the last working day in the month for the preceding month at the latest, except for the last installment, which is transferred by December 15 of the current budget year at the latest.

IV. INCURRING DEBTS/LOANS

Article 18

Incurring debts (1) The Municipality may take domestic and foreign loans in line with conditions prescribed by law. (2) The Government of the Republic of Macedonia shall not guarantee and take responsibilities that result from municipal debts, including debts made by municipal public services, except in cases when the responsibility is undertaken in line with the law. (3) The municipality shall take loans from abroad only with a previous consent by the Ministry of Finance. (4) The municipality shall take loans in domestic currency, except in cases when the loans come from abroad. (5) The municipality shall take loans only with a fixed interest rate. (6) All debts of the supplier/provider that exceed 90 days shall be considered loans. (7)The municipality shall not be allowed to mortgage municipal property that serves for realizing activities of public interest prescribed by law.

Article 19 Short-term loan

(1) The municipality shall take short-term loans with a credit that shall be paid by the end of the current fiscal year.

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(2) Short-term loans shall be used to cover a temporary lack of municipal funds and not for payment of fines, penal interests and extension/postponed payments of liabilities. (3) The total amount of short-term loans during the current fiscal year shall not exceed 20% of realized source income in the preceding fiscal year.

Article 20 Long-term loans

(1) The municipality shall take long-term loans to finance capital assets and investments. (2) The municipality shall take long-term loans only to realize the deferred payment in equal or declining annuity. (3) The Municipal Council shall approve the long-term loan after having a public hearing during which the project and its financing shall be explained. (4) The Municipal Council decision for long-term loans shall be legitimate only when the loan agreement shall be concluded in the fiscal year in which the decision is made. (5) The total amount of annual servicing of the debt for long-term loans shall not exceed 15% of the total revenues of the current operational municipal budget in the previous fiscal year. (6) The total amount of the long-term debt that has not matured shall not exceed the total amount of revenues of the budget in the preceding year … (7) The municipality shall submit the Loan Agreement and the Terms of Redemption to the Ministry of Finance within 10 days of the day the Agreement has been signed. (8) The Municipality shall inform the Ministry of Finance about every installment payment regarding the debt within 10 working days.

V. BUDGET OF THE MUNICIPALITY

Article 21 Budget of the municipality

(1) The Budget of the Municipality shall be prepared, adopted and executed in accordance

with the Law on Budgets, except if otherwise prescribed by this law. . (2) The expenditures are executed in accordance with the regulations for their execution

within the frameworks and purposes determined in the budget.

Article 22Contents of the budget

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(1) The Budget of the Municipality shall be comprised of a general and a specific part.

(2) The general part of the Budget shall include:

- Consolidated balance of revenues and expenditures; - Functional classification of expenditures; - Balance of current and operating revenues and expenditures; - Balance of capital revenues and expenditures;

(3) The specific part of the Budget shall express expenditures in accordance to the Book of Rules for classification of expenditures determined by the Minister of Finance, grouped by users and programs.

(4) The specific part of the Budget shall contain annexes which shall relate to:

- financial plans (balance of revenues and expenditures) of the public services established by the municipalities which are partially or fully financed by the budget of the municipality;

- Rationale of the budget. (5) With the adoption of the budget, the Council of the municipality passes a decision for execution of the budget.

Article 23Balance of current and operating revenues and expenditures

(1) Current and operating revenues shall be all revenues except the grants from the Budget of the Republic of Macedonia and budgets of the Funds intended for financing capital investments, funds from self-taxation, and from sale of municipal property.

(2) Current and operating expenditures shall be all expenditures except for the expenditures for capital investments.

Article 24 Balance of capital revenues and expenditures

(1) Capital revenues shall be the grants from the Budget of the Republic of Macedonia and

the budgets of the Funds for financing capital investments, funds from self-taxation, sale of municipal property, donations and other sources of revenues.

(2) Capital expenditures shall be expenditures for capital investments and capital transfers.

Article 25

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Principle of balanced budget

(1) The Budget must be balanced, i.e. the total revenues must be equal to the total expenditures.

Article 26

Earmarked usage

The funds from the Budget shall only be used for the purposes and in the amounts determined in the Budget.

Article 27

Budget process

(1) The Minister of Finance shall, by 30 September of the current year at the latest,

prepare a budget circular for the following year.

The budget circular shall notify the municipalities on the basic macroeconomic indicators, the main guidelines for development of the municipal budget, grants for the municipality transferred from the Budget of the Republic of Macedonia, from the budget of the funds, as well as the revenues from other sources. The budget circular shall contain the recommendations on the form of the municipal budget.

(2) The time-frames for planning the Municipal Budget shall be regulated with the Budget

Calendar adopted by the Council of the Municipality. (3) The Budget Calendar shall determine the time-frames within which:

- the Mayor shall submit the main directions for preparation of financial plans to the municipal budget users

- the municipal budget users shall submit their financial plans to the Mayor - the Mayor shall submit the Draft Budget to the Council of the Municipality;

Article 28 Adoption of the budget

(1) The Council of the municipality shall adopt the budget for the following year by 31

December of the current year at the latest.

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(2) If the Council of the municipality fails to adopt the Budget of the municipality by 31 December of the current year, it is obliged to adopt a Decision for Interim Financing and a Financial Plan for its implementation for the period from 1 January to 31 March of the current year.

(3) The Mayor shall approve payments of funds from the Budget by line items in the period

of interim financing, in the amount of one third of the actual expenditures in the last quarter of the previous fiscal year, for each month .

Article 29

Readjustment of the budget

(1) If in the course of the fiscal year the revenues and expenditures are not realized as planned by the Budget of the Municipality, the Mayor shall propose to the Council an amendment to the Budget (supplementary budget).

(2) The supplementary Budget shall be adopted in the same procedure as the one for the adoption of the Budget of the Municipality.

Article 30

Execution of the budget

(1) The Mayor of the municipality shall be responsible for execution of the Budget. (2) The Mayor of the municipality or two persons authorized by the Mayor, who are

employed in the municipal administration shall be the signatory of the account of the municipal budget.

(3) The municipality may not perform separate payments unless the authorized accountant

has not previously confirmed in written form that such expenditure has been authorized in the budget and that the required funds have been made available.

Article 31 Budget reserves

(1) Budget reserves may be planned in the municipal budget for financing of unplanned or

insufficiently planned expenditures in the amount up to 3% of the Budget. (2) The Budget reserve shall be used upon approval of the Mayor of the municipality.

Article 32

Periodical financial statements

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(1) The Municipal Budget beneficiaries within 15 days after the expiry of the respective month submit monthly reports to the Mayor with explanation about the execution of their financial plans.

(2) The Mayor shall submit quarterly reports to the Ministry of Finance and the Council of

the Municipality with explanation on the execution of the budget within one month after the expiry of the quarter. The Minister of Finance determines the form and content of the reports.

(3) After the adoption of the reports referred to in paragraph 2 of this Article, the Mayor shall notify the public about the content of the reports. If the reports are not adopted, the President of the Council shall announce the reasons for the non-adoption in the public.

VI. ANNUAL ACCOUNT OF THE BUDGET OF THE MUNICIPALITY

Article 33

Adoption of the Annual Account

(1) After the end of the fiscal year, the Council of the municipality shall adopt the Annual Account of the budget of the municipality.

(2) The Annual Account of the municipality shall contain all elements of the municipal

budget, expressed as planned and realized revenues and expenditures for all municipal budget beneficiaries.

(3) The Mayor shall submit the Annual Account to the Council of the Municipality for

adoption by 28 February in the following year, at the latest. (4) The Council shall adopt the Annual Account of the municipality for the previous year

by 15 March in the current year at the latest, and shall submit it to the Ministry of Finance by 31 March in the current year, at the latest.

(5) Upon the adoption of the annual account, the Mayor shall inform the public of its

contents.

Article 34 Annual report

(1) The Council of the Municipality adopts the annual report. (2) The following shall be an integral part of the Annual Report:

- annual account

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- report on the funds, claims, liabilities and sources of the funds as well as their

value; - report on the realization of investment programs, earmarked, capital and block

grants and grants for delegated competences; - report by the responsible accountant that claims the accuracy and authenticity of

the annual account.

. VII ACCOUNTING RECORDS, CONTROL AND AUDIT

Article 35Accounting

(1) The Municipality and the Public Services established by the Municipality shall keep the accounting records in accordance with the Law on Accounting for the Budgets and Budget Beneficiaries, unless otherwise prescribed by this law.

(2) The Mayor and the responsible accountant shall be accountable for the

implementation of the provisions of the Law on Accounting for the Budgets and Budget Beneficiaries.

Article 36 Responsible accountant

(1) The Mayor of the municipality shall appoint one responsible accountant who has

graduated from the Faculty of Economics and has at least five years working experience in the area of Finance.

Article 37 Internal Audit

(1) Each Municipality shall establish internal auditing policies and procedures in accordance

with international standards for professional performance accepted by the Ministry of Finance.

(2) The Council of the municipality shall appoint internal auditors upon recommendation of

the Mayor.

(3) The Internal Auditor must have graduated from the Faculty of Economics, at least five years working experience in the area of Finance and be trained to implement international standards for internal auditing.

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(4) The Internal Auditor shall be independent and accountable to the Mayor and Council.

(5) The reports of the internal audit shall be submitted to the Mayor and the Council of the

Municipality.

(6) For the performance of the activities of internal auditing, the municipalities may establish joint administrative bodies.

Article 38External audit The State Audit Office shall perform regular annual audits of the municipal financial statements, in accordance with the Law on State Auditing.

VIII. MUNICIPAL FINANCIAL DISTRESS

Article 39Financial distress

(1) A Municipality shall be found in a situation of financial distress in any of the following cases:

- The Council fails to adopt the Budget by 31 March of the current year at the latest; - The Chief State Auditor finds substantial irregularities in the financial operations of

the municipality; - The Municipality has not paid a recognized debt within 90 days of the due date; - The Municipal Account has been continuously blocked in a period of 30 calendar

days or 45 days with interruption in a period of 60 calendar days.

- . (2) The Mayor or the Chairman of the Council of the municipality shall inform the Minister of

Finance about the incurred financial instability in paragraph 1 of this Article within 5 working days of its occurrence.

Article 40Committee for overcoming the financial instability of the municipality

(1) The Minister of Finance within 15 days from the receipt of the information referred to in paragraph 2 of Article 35 of this law, or from the date the he/she acknowledges by any

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other means of the existence of any of the conditions set forth in Article 35 exist, shall order the initiation of the special procedure to overcome the financial distress of the Municipality (in the further text “the special procedure”), and with a decision shall establish a Committee for overcoming the financial instability of the municipality (in the further text : Committee).

(2) If the Minister of finance does not identify the grounds for initiation of the special

procedure in accordance with Article 35, paragraph 1, s/he informs the Mayor and the Council of the above stated.

(3) The Committee shall comprise representatives from:

- Ministry of Finance; - Ministry of Local Self-government; - State Audit Office; - Council of the Municipality; and - the Mayor of the municipality.

(4) The representatives from the Ministries of Finance, Local Government and the State Audit

Office have decision rights. The decisions are made with a majority of votes. (5) The representative from the Ministry of Finance shall be the President of the Committee. (6) The Committee has the task to propose measures for its resolution and to monitor their

execution. (7) The Committee shall have access to all the required information, documentation and

reports needed to perform the tasks.

Article 41 Measures and Activities for Resolution of the financial instability of the municipality

(1) Starting from the date of initiation of the procedure to overcome the financial distress,

the Municipality cannot : - take any decision that may increase the financial obligations;

- establish public services (public enterprises and institutions); - effect payments on obligations incurred prior to the initiation of the special

procedure, except for the obligations expressly approved in the plan for resolution of the financial instability of the Municipality.

(2) (2) From the date the Committee is established, it shall monitor the finances of the

Municipality and its compliance with the obligations and responsibilities.

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(3) Within 15 business days from the establishment of the Committee, the Mayor shall prepare changes and amendments to the budget (in the further text: rebalance), for the purpose of resolving the financial instability of the Municipality, which upon approval by the Committee, shall be adopted by the Municipal Council.

(4) If the Council of the municipality does not adopt the rebalance from the previous

paragraph, the Mayor shall submit it to the Ministry of Finance for an opinion. (5) The Ministry of Finance shall prepare an opinion on the rebalance and if the Mayor

has remarks, he/she is obliged to incorporate them into the rebalance and submit it to the Council for additional review and adoption. If the Council fails to adopt the rebalance for the second time, the Mayor is authorized for its execution.

(6) If the fiscal instability is not resolved in the current fiscal year, the Mayor is obliged to

propose a budget for the following fiscal year which shall contain the basic elements for the resolution of fiscal instability determined by the rebalance from paragraphs 3,4 and 5 of this Article.

Article 42

Plan for implementation of the measures and activities for resolution of the financial distress of the Municipality

(1) Within 15 days of the adoption of the rebalance, the Committee shall prepare a Plan of

measures and activities for overcoming the financial distress of the Municipality which will be submitted to the Mayor (hereinafter: plan)

(2) The Mayor within 7 business days upon receiving the Plan, submits it to the Council

for its adoption,. The Council, in turn, is obliged to adopt it within 7 business days. (3) The Implementation of the Plan referred to in paragraph 1 of this Article shall be

mandatory for the Municipality.

Article 43 Informing on the implementation of the Plan

(1) The Mayor of the Municipality shall, at least once a month, or upon request by the

Committee, submit a detailed report on the realization of the measures and activities included in the Plan.

(2) The Committee shall prepare monthly reports of its operations and shall submit them

to the Minister of Finance.

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(3) When the Committee determines that the reasons leading to financial distress of the Municipality are overcome, it shall inform the Minister of Finance and shall propose to the Minister the passage of a decision declaring its dissolution.

IX IMPLEMENTING FISCAL DECENTRALIZATION

Article 44 General Provisions

(1) The fiscal decentralization of Municipalities as set forth in this law shall be

implemented in phases and in a manner consistent with the establishment of a financing mechanism for Municipalities that is transparent and based on objective criteria and measures;

(2) The transfer of financial resources from the Budget of Republic of Macedonia and Budgets of the Funds to Municipalities shall be linked to the phased transfer of competencies to the Municipalities as set forth in the Law on Local Self-Government and respective laws from the appropriate areas.

(3) The phased approach to financial decentralization in accordance with this Law is based on the following principles:

- gradual shifting of responsibilities in line with the capacity of Municipalities to

undertake those responsibilities , - fair and appropriate funds for efficient performance of the transferred

competencies and - reduction in spending in the Budget of the Republic of Macedonia and budgets

of the funds for the functions that shall be transferred to the municipalities.

Article 45 Transfer of financial resources in the First Phase of Decentralization

(1) The financial resources shall be transferred in the First Phase starting from 1 January

2005. (2) The transfer of the general grants from the Budget of the Republic of Macedonia shall

be done in the following manner:

- The Government of the Republic of Macedonia at the proposal of the Ministry of Finance by 15 September 2004 shall adopt a resolution prescribing clear and transparent criteria for the distribution of the general grant per municipality for 2005 and by a budget circular letter shall notify the municipalities of the amounts of the general grant planned in the Budget of the Republic of Macedonia.

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- The Government of the Republic of Macedonia, at the proposal of the competent Ministries by 15 September 2004 shall prescribe by decision, clear and transparent criteria for the distribution of capital, earmarked and block grants, (except employees’ salaries), and the Ministry of Finance, through a budget circular letter shall inform the municipalities of the planned amounts of the grants.

- By December 31, 2004, the Municipalities shall initiate the implementation plan

to resolve the arrears from debts towards the suppliers and other creditors which originated before December 31, 2001 The activities for the resolution of the outstanding arrears shall be regulated by the Ministry of Finance.

- At least 90 percent of the municipalities representing at least 90 percent of

country’s population have met the following:

- (a) They have established a financial department with a minimum of 4 employees qualified to work in the areas of financial management, budget preparation, its execution, accounting and financial reporting.

- (b) within the municipal administration they have at least 6 employees qualified to work on the establishment and collection of taxes..

(3) The Government of the Republic of Macedonia, establishes a Committee that assesses whether the conditions referred to in paragraph 1 of this article have been fulfilled. .

Article 46 Transfer of Resources in the Second Phase of Decentralization

(1) The Block grants in the public institutions that perform activities in accordance with

the competencies referred to in Article 22, items 5, 7, 8 and 9 of the Law on Local Self-Government shall be transferred from the budget of the Republic of Macedonia to a given Municipality, once it has met the following conditions:

(a) It has met the conditions of the First Phase (b) It possesses an adequate certified financial management capacity (c) It has a track record of at least 24 months of on-time and accurate fiscal

reporting as certified by the Ministry of Finance, (d) It has no arrears to suppliers or any other creditors exceeding those ordinary

terms of payments that are customary .

(2) The Government of the Republic of Macedonia establishes a Committee that assesses whether all conditions from paragraph 1 of this Article are met;

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(3) The block grants of paragraph 1 of this Article shall be allocated to the municipalities which have met the conditions upon a written request of the municipality to the competent Ministry and the Ministry of Finance.

X. PENALTY PROVISIONS

Article 47 Misdemeanors

The person in charge i.e. the managing person of the municipality, shall be fined from 30.000 – 50.000 MKD for misdemeanor if he/she: (1) acts contrary to Article 18, paragraphs 3,4,5 and 7 (2) acts contrary to Article 19, paragraphs 2 and 3 (3) acts contrary to Article 20, paragraphs 2, 5, 6, 7 and 8 (4) inaccurately presents the total expenditures and fails to use them for the purposes determined in the budget (Article 21, paragraph 2); (5).acts contrary to Article 26; (6)fails to comply with the deadlines for preparation and proposal of the budget (Article 27); (7) fails to comply with the deadline for adoption of the budget (Article 28); (8) acts contrary to Article 29 (9) acts contrary to Article 31, paragraph 2 (10) acts contrary to Article 32 and fails to comply with the deadlines determined in paragraphs 1 and 3 of this Article ; (11) Fails to comply with the deadlines from article 33, paragraphs 3 and 4. (12) acts contrary to Article 36 (13) acts contrary to Article 37, paragraphs 2 and 3 (14) acts contrary to Article 39, paragraph 2 (15) acts contrary to Article 41, paragraphs 3,4,5 and 6; (16) acts contrary to Article 42, paragraph 2 (17) acts contrary to Article 43, paragraph 1.

XI. TRANSITIONAL PROVISIONS

Article 48 Taking over the Regional Units of the Ministry of Finance

(1) Starting from 01.01.2005, the Municipality shall take over the employees from the Ministry of Finance – employees from the sector for financial and joint activities that perform activities of its competence.

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(2) The premises, equipment, and instruments of labour of the sector for financial and joint activities shall be taken over by the Municipality in line with the number of employees. (3).The archives and the documentation from the sector for financial and joint activities of the Ministry of Finance shall be taken over in line with the effective regulations.

Article 49

Taking over the activities of the Ministry of Finance - Public Revenue Office

(1) Starting from 01.01.2005, the Municipality shall take over the employees from the Ministry of Finance – employees of the Public Revenue Office from the regional head offices and the tax sectors. (2) The premises, equipment and the instruments of labour of the regional head offices and tax sectors of the Ministry of Finance – Public Revenue Office shall be taken over by the municipality in line with the effective regulations,

(4) The archives, and the documentation from the Regional head offices and tax sectors of the Ministry of Finance – Public Revenue Office shall be taken over by the municipality in line with the effective regulations.

Article 50Interim Financing If the Municipal Council fails to adopt the Budget of the Municipality for the year 2005 until December 31, 2004, the expenditures financed by the transfers from the budget of the Republic of Macedonia for the general grant are exempted from the limitations determined in Article 28, paragraph 3 of this law.

Article 51 Incurring debts by the municipality

(1) The municipality may take domestic long-term loans in line with the provisions prescribed by this law after the Ministry of Finance is ensured that the municipality:

- regularly submits positively assessed financial reports during a period of at least 24 months

- has no arrears to suppliers in the last 2 years

Article 52 Urban and local communities

Once Articles 82, 83, 84 and 85 from the Law for Local Self-government come into force, the urban, i.e. the local communities shall be obliged to close their accounts in the commercial banks.

XII. FINAL PROVISION Article 53

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(1) When this law comes into force, Articles 4-f, 4-g, 4-h, 5, 6, 6-a, 8, 19 and 46 of the

Law for Budgets shall cease to be in effect (" Official Gazette of Republic of Macedonia No. 79/93, 3/94, 71/96, 46/00, 11/01, 93/01, 46/02 and 24/03")

(2) The provisions of the Articles 8, 9, 22, 27, 44, 45 and 46 of this law shall come into

force on the day of the passage of this law.

The provisions of Article 37 shall be applied one year after the passage of this law. (3) This law shall come into force on the eighth day of its publishing in the " Official

Gazette of Republic of Macedonia", and shall be applied from 1 January, 2005. (4)