Strasbourg, 23 June 2011                                                                CDLR-Bu(2011)14

Item 8 of the agenda

                                                                                                                         

BUREAU OF THE

EUROPEAN COMMITTEE ON LOCAL AND REGIONAL DEMOCRACY

(CDLR)

IMPLEMENTATION OF THE UTRECHT AGENDA

Progress report on the adoption of the draft Recommendation

on good governance at local level and on the draft Recommendation on the funding by higher level authorities of new competences for local authorities

Secretariat Memorandum

prepared by the

Directorate General of Democracy and Political Affairs

Directorate of Democratic Institutions

This document is public. It will not be distributed at the meeting. Please bring this copy.

Ce document est public. Il ne sera pas distribué en réunion. Prière de vous munir de cet exemplaire.

Introduction

-      At the request of the Ministers’ Deputies, the Congress, at its Statutory Forum held on 17 June 2011, adopted opinions on the draft Recommendation on good governance at local level and on the draft Recommendation on the funding by higher level authorities of new competences for local authorities. These opinions appear at Appendix 1 and 2 respectively. The draft recommendations appear at Appendices 3 and 4 respectively.

-      The GR-DEM (Committee of Ministers Rapporteur Group on Democracy) is to consider the draft recommendations at its meeting on 5 July. A decision by the Ministers’ Deputies on the draft recommendations could be taken at their meeting the next day, 6 July 2011 (the last Deputies’ meeting before the summer break).

-      However, in view of the critical comments made by the Congress, it may be expected that the draft Recommendation on the funding by higher level authorities of new competences for local authorities is sent back to the CDLR for consideration of the Congress opinion. If that is the case, it would seem very difficult to maintain a timetable allowing for the adoption of the recommendation by the Ministers in Kyiv. The CDLR meets from 19-21 September 2011 and given the applicable delays for documents to the Deputies it is very doubtful that the Deputies could make a decision before 3-4 November 2011.

In order to try to avoid this situation arising, it is suggested that the Bureau could at its meeting on 29 June adopt a response to the to the Congress opinion. Even though this may not ensure the adoption by GR-DEM and the Deputies on 5 and 6 July 2011, it would make it possible for the GR-DEM to consider the matter at its first meeting after the holiday break (no date is fixed yet). 

As concerns the draft Recommendation on good governance at local level the Congress opinion raises no objection, but does not express support for doing so and proposes the elaboration of guidelines. Also in this case, the GR-DEM/Deputies’ might be tempted to sent the draft Recommendation back to the CDLR, with similar consequences. Thus, also in respect of the draft recommendation the Bureau might consider adopting a response on behalf of the CDLR.

Elements for consideration in such a draft response appear in Appendix 5.

Action required

The Bureau is invited to take stock of progress in the adoption of the two draft recommendations and to decide what, if any, action to take.

APPENDIX 1

STATUTORY FORUM

Strasbourg, 17 June 2011

Opinion on the draft recommendation of the Committee of Ministers to member States on the principles of good democratic governance at local level

Opinion 33 (2011)[1]

The Congress,

1. Notes that this recommendation concerns the adoption by the Committee of Ministers of the Principles of Good Democratic Governance at Local Level, hereafter referred to as "the twelve principles".

2. Recalls that these twelve principles were adopted verbatim in Valencia on 16 October 2007 by the Conference of Ministers responsible for local and regional government in the framework of the Strategy for Innovation and Good Governance at Local Level, and also by the Ministers' Deputies, at their 1022^nd meeting in March 2008.

3. Recalls that, during its 14^th Plenary session in June 2007, in Congress Resolution 239 (2007), the Congress itself marked its approval of these twelve principles, convinced that they are not only derived from and in accordance with the principles of the European Charter of Local Self-Government, but that they complement the Charter by focussing on the theme of good governance, a theme that the Congress has decided to follow in setting up the Congress Governance Committee.

4. Considers that it is not strictly necessary to invite the Ministers' Deputies to adopt the same text in the form of a recommendation since, in March 2008, the Deputies formally decided:

"The Deputies  … adopted the Strategy for Innovation and Good Governance at Local Level and set up the Stakeholders’ Platform with the task of … further developing it, including by drawing up guidelines, in the light of experience …" (decision 1022/2.4).

5. Proposes that the Committee of Ministers take inspiration from the twelve principles to draw up the above-mentioned guidelines, to enable the experience of member States and local and regional authorities in this area to be taken into account.

6. Confirms its readiness to contribute to the preparation of these guidelines.

APPENDIX 2

STATUTORY FORUM

Strasbourg, 17 June 2011

Opinion on the draft recommendation of the Committee of Ministers to member States on the funding by higher level authorities of new competences for local authorities

Opinion 34 (2011)[2]

The Congress,

1. Shares the conviction of the Committee of Ministers that a strengthening of local and regional democracy in Europe is essential for furthering the core values of the Council of Europe and improving the lives of European citizens.

2. Welcomes the attention of the Committee of Ministers to the question of the financial resources of local and regional authorities and the publication of the 2008 Lotz report on "Member states' practices for the funding of new competences for local authorities", which provided the basis for the current recommendation.

3. Notes that the afore mentioned report, which examines the increasing use in Europe of earmarked grants, in possible contradiction with Article 9.7 of the European Charter of Local Self-Government (ECLSG), itself specifies that it did not take into account the perspective of local and regional authorities.

4. Underlines that consultation of local and regional authorities by national authorities on financial matters is an important principle in this respect, as enshrined in Article 4.6 and 9.6 of the ECLSG.

5. Observes that several points concerning this principle of consultation were deleted from earlier versions, contrary to the requests of associations of local and regional authorities which were supported by the Congress.

6. Recalls that the practice of earmarking as opposed to block grants should be the exception to the rule, and that this principle of the ECLSG has been affirmed by the Conference of Ministers responsible for Local and Regional Government in its Resolution on Local Government Finance, adopted in Lisbon in 1996.

7. Notes that, in times of economic hardship, local and regional authorities are experiencing particular difficulties in maintaining public services to citizens and that, in the course of its monitoring of the ECLSG, the Congress is informed of numerous complaints related to the financing of competences that are delegated to local and regional authorities.

8. Reaffirms its conviction that local and regional financial autonomy is a key for the development of democracy at local and regional level.

9. Believes that paragraph 6.iv of the draft recommendation with regard to raising local taxes, contradicts Article 9.3 of the ECLSG which stipulates that at least part of the financial resources of local authorities shall derive from local taxes and charges, the rate of which they have the power to determine within the limit of the statute.

10. Believes that in its present form the draft recommendation, by giving an unduly restrictive interpretation of Article 9 of the ECLSG, represents a step backwards as regards to development of local and regional democracy in Europe.

11. Consequently, invites the Committee of Ministers to re-examine this issue and suggests that it entrust the Congress with the preparation of a report on this subject which would take into account the needs and perspectives of local and regional authorities and citizens and serve to strengthen local and regional democracy in the European area.

APPENDIX 3

Draft Recommendation CM/Rec(2011)… of the Committee of Ministers to member states

on the principles of good democratic governance at local level

(Adopted by the Committee of Ministers on....... 2011

at the ..... meeting of the Ministers' Deputies)

The Council of Europe Conference of Ministers responsible for Local and Regional Government, by delegation from the Committee of Ministers of the Council of Europe, in conformity with paragraph 17.c of Resolution (89) 40 on the future role of the Council of Europe in European construction of 5 May 1989 and under the terms of Article 15.b of the Statute of the Council of Europe;

Meeting in Kyiv on 3 and 4 November 2011 for its 17th Session;

Considering that the aim of the Council of Europe is to achieve greater unity between its members for the purpose of safeguarding and realising the ideals and principles which are their common heritage and to foster their economic and social progress;

Seeking to take a further step towards the objective of delivering good local and regional governance to all, which was adopted by the ministers responsible for local and regional government and endorsed by the 3rd Summit of Heads of State and Government of the Council of Europe (Warsaw, 2005);

Convinced that achieving this objective requires each member state to have a system of local, and where established, regional government consisting of a framework that respects the principles of autonomy and democracy, and of individual local and regional authorities which enjoy the right of local/regional self-government and provide good democratic governance to all citizens;

Aware that the European Charter of Local Self-Government (ETS No. 122) is the common European legal basis that sets out the principles of democracy and autonomy for this framework;

Considering that the time has come to establish common ground between member states on the principles that govern the relationship between local authorities and citizens;

Considering that the Strategy for Innovation and Good Governance at Local Level, as endorsed by the Council of Europe Conference of Ministers responsible for Local and Regional Government, the Parliamentary Assembly, the Congress of Local and Regional Authorities of the Council of Europe and the Committee of Ministers, is based on the concept of good democratic governance that is articulated in 12 principles;

[Considering that this Recommendation meets with the approval of the Congress of Local and Regional Authorities of the Council of Europe]^*

^*           The Committee of Ministers may seek the opinion of the Congress prior to deciding on its adoption.

Recommends that the governments of member states:

A. in their legislation, policy and practice in the field of local governance base themselves on, promote and give full effect to the following 12 principles, hereinafter to be referred to as the “Principles of good democratic governance at local level”:

1)         Fair conduct of elections, representation and participation

-           Local elections are conducted freely and fairly, according to international standards and national legislation, and without any fraud.

-           Citizens are at the centre of public activity and they are involved, in clearly defined ways, in public life at local level.

-           All men and women can have a voice in decision making, either directly or through legitimate intermediate bodies that represent their interests. This broad conception of participation, which includes all citizens, is built on the freedoms of expression, assembly and association.

-           All voices, including those of the less privileged and most vulnerable, are heard and taken into account in decision making, including where the allocation of resources is concerned. 

-           There is always an honest attempt to mediate between various legitimate interests and to reach a broad consensus on what is in the best interest of the whole community and on how this can be achieved.

-           Decisions are taken according to the will of the many while the rights and legitimate interests of the few are respected.

2)         Responsiveness

-           Objectives, rules, structures and procedures are adapted to the legitimate expectations and needs of citizens.

-           Public services are delivered, and requests and complaints are responded to, within a reasonable time frame.

3)         Efficiency and effectiveness

-           Results meet the agreed objectives.

-           Best possible use is made of the resources available.

-           Performance management systems make it possible to evaluate and enhance the efficiency and effectiveness of services.

-           Audits are carried out at regular intervals to assess and improve performance.

4)         Openness and transparency

-           Decisions are taken and enforced in accordance with rules and regulations.

-           There is public access to all information which is not classified for well-specified reasons as provided for by law (such as the protection of privacy or ensuring the fairness of procurement procedures).

-           The information on decisions, implementation of policies and results is made available to the public in such a way as to enable it to effectively follow and contribute to the work of the local authority.

5)         Rule of law

-           The local authorities abide by the law and judicial decisions.

-           Rules and regulations are adopted in accordance with procedures provided for by law and are enforced impartially.

6)         Ethical conduct

-           The public good is placed before individual interests.

-           There are effective measures to prevent and combat all forms of corruption.

-           Conflicts of interest are declared in a timely manner and persons involved must abstain from taking part in relevant decisions.

7)         Competence and capacity

-           The professional skills of those who govern are continuously maintained and strengthened in order to improve their output and impact.

-           Public officials are motivated to continuously improve their performance.

-           Practical methods and procedures are created and used in order to transform skills into capacity and to produce better results.

8)         Innovation and openness to change

-           New and efficient solutions to problems are sought and advantage is taken of modern methods of service provision.

-           There is readiness to pilot and experiment new programmes and to learn from the experience of others.

-           A climate that is favourable to change is created in the interest of achieving better results.

9)         Sustainability and long-term orientation

-           The needs of future generations are taken into account in current policies.

-           The sustainability of the community is constantly taken into account. Decisions strive to internalise all costs and not to transfer tensions and problems, be they environmental, structural, financial, economic or social, to future generations.

-           There is a broad and long-term perspective on the future of the local community along with a clear sense of what is needed for such development.

-           There is an understanding of the historical, cultural and social complexities in which this perspective is grounded.

10)        Sound financial management

-           Charges do not exceed the cost of services provided and do not reduce demand excessively, particularly in the case of important public services.

-           Prudence is observed in financial management, including in the contracting and use of loans, in the estimation of resources, revenues and reserves and in the use of exceptional revenue.

-           Multi-annual budget plans are prepared in consultation with the public.

-           Risks are properly estimated and managed, including by the publication of consolidated accounts and, in the case of public–private partnerships, by sharing the risks realistically.

-           The local authority takes part in arrangements for inter-municipal solidarity, the fair sharing of burdens and benefits and the reduction of risks (equalisation systems, inter-municipal co-operation, mutualisation of risks, etc.).

11)        Human rights, cultural diversity and social cohesion

-           Within the local authority’s sphere of influence, human rights are respected, protected and implemented and discrimination, on any ground, is combated.

-           Cultural diversity is treated as an asset and continuous efforts are made to ensure that everyone has a stake in the local community, identifies with it and does not feel excluded.

-           Social cohesion and the integration of disadvantaged areas are promoted.

-           Access to essential services is preserved, in particular for the most disadvantaged sections of the population.

12)        Accountability

-           All decision makers, collective and individual, take responsibility for their decisions.

-           Decisions are reported on, explained and can be sanctioned.

-           There are effective remedies against administrative abuses and against actions of local authorities which infringe civil rights.

B. to translate this recommendation into their national language(s) and ensure its wide dissemination to local and regional authorities, their associations and the general public;

C. to review at least once every five years, in co-operation with local and regional authorities, the effect given to the Principles of good democratic governance at local level, for example through available tools such as the Council of Europe Strategy for Innovation and Good Governance at Local Level and/or the Centre of Expertise for Local Government Reform.

APPENDIX 4

                                                            

Draft Recommendation CM/Rec(2011)… of the Committee of Ministers to member states

on the funding by higher level authorities of new competences for local authorities

(Adopted by the Committee of Ministers on … 2011

at the … meeting of the Ministers’ Deputies)

The Council of Europe Conference of Ministers responsible for Local and Regional Government, by delegation from the Committee of Ministers, in conformity with paragraph 17.c of Resolution (89) 40 on the future role of the Council of Europe in European construction of 5 May 1989 and under the terms of Article 15.b of the Statute of the Council of Europe,

Considering that the aim of the Council of Europe is to achieve greater unity between its members for the purpose of safeguarding and realising the ideals and principles which are their common heritage and to foster their economic and social progress;

Recalling that the European Charter of Local Self-Government (ETS No. 122) provides in Article 9, paragraph 2, that “local authorities’ financial resources shall be commensurate with the responsibilities provided for by the constitution and the law”;

Recalling that the European Charter of Local Self-Government provides in Article 4, paragraph 6, that ”local authorities shall be consulted, insofar as possible, in due time and in an appropriate way in the planning and decision-making processes for all matters which concern them directly” and in Article 9, paragraph 6, that “local authorities shall be consulted, in an appropriate manner, on the way in which redistributed resources are to be allocated to them”;

Considering that it is a generally agreed principle of accountability in multilevel public finances that the financial consequences should be borne by the same level of authority as the one making the expenditure decisions;

Considering that it is the experience of several member states that granting compensation to and consultations with local governments foster accountability at all levels and result in better legislation and improved implementation;

Considering that national policies on compensation often include many detailed guidelines, but that the aim of the present recommendation is to address only the most central issues, based on best practice among Council of Europe member states;

Recommends that the governments of member states:

A.         Act in accordance with the following provisions:

1.         Compensation for new competences

i.              When higher-level authorities take decisions which impose or could result in additional net costs for local authorities, compensation should be given by the higher-level authorities to local authorities. In this recommendation such cases are referred to as new competences.

ii.             When standards set by supra-national structures such as the European Union and the European Economic Area or obligations arising from international treaties or agreements result in new competences entailing additional net costs for local authorities, and these standards are not so general that they are covered by the exemption in paragraph 4.ii, the issue of compensation is not clear-cut. However, compensation to local authorities should preferably be given by the higher-level authority taking part or represented in the structure or negotiation.

iii.            When new competences are introduced at the request of local government, such competences should be funded from local resources, but some sharing of the new net costs may be justified.

iv.            When higher-level decisions reduce the net costs for local authorities, the principle of accountability also justifies that the local savings attributable to such decisions are transferred to the higher-level authority.

v.             Compensation for a limited number of years only should be avoided in case of a new function that local authorities cannot easily stop when the compensation stops.

2.         Adjustment for over- or under-estimated costs 

Subsequent reviews may reveal that net costs differ from the original cost estimates. In general this could result in adjustment of the compensation, but for administrative reasons rules should be introduced limiting the number of cases in which discussions on compensation may be re-opened.

3.         Compensation for transfer of competence

i.              The increase of net local costs stemming from a transfer of competence from a higher level to local authorities, not aiming to change the level of service to the user, should be compensated. Compensation should be based on estimates of the expected net cost of the new competence. The cost of the transfer of staff, including the estimated wages and conditions of employment, should be included. The cost of obligations resulting from acquired pension rights of staff transferred should also be included in the compensation.

 

ii.          The ownership of buildings, land and other assets necessary for continued delivery of the service should be transferred to the local authorities concerned. The debts associated to the property, as far as they stem from the cost of purchase and/or improvement, may also be transferred, but in that case the cost of debt-servicing should also be compensated.

4.         No compensation for general regulation

i.              Compensation is not required when the higher-level authority reduces grants, caps on local tax rates, or shares of tax sharing revenues in order to reduce spending by local authorities for macro-economic policy reasons. But in such cases the higher-level authority should make the purpose to reduce local spending clear to the public.

ii.          Compensation is not required for changes in local net costs because of changes in general standards with similar effects for the private sector and local authorities, for example general taxation or employment legislation, unless they have a disproportionate effect on local authorities.

iii.         Changes in the distribution of grants to individual local authorities should not be compensated when there is no change to the amount being given to local government as a whole.

5.         The formalisation of rules for compensation

The rules for compensation to local authorities should be formulated in such a way that the higher-level authority respects the present provisions and compensates local authorities for the local net costs of the new competences accordingly.

6.         Methods of compensation

i.              Compensation may be given in the form of changes in other competences with an opposite, neutralising effect on local net costs.

ii.             Compensation will not be needed for services normally funded from user charges.

iii.            In all cases pertaining to tax-financed services, compensation should be given in the form of grants or tax-sharing arrangements.

iv.            Compensation by allowing local governments to raise new local taxes or increase existing local taxes should be avoided. In cases of transfers of competences, compensation can take place through the transfer of the right to taxation previously exercised by the higher-level authority.

7.         Compensation preferably as general grants

i.              Compensation should preferably be made in the form of general grants from the outset.

ii.             The use of earmarked grants for compensation purposes, as for any other purpose, should be limited. Earmarked grants can, however, be used in the following circumstances:

a.         the new local competence is relatively costly, or

b.         the net costs are very unevenly distributed across local authorities, or

c.         no objective indicators that match the allocation of the costs well enough are available, or

d.         the aim is to cover the costs arising from partnership contracts with other national or international authorities.

iii.         When earmarked grants are used it should, as far as possible, be under the explicit condition that they will be transformed into general grants after a defined period.

8.         Precedent effects

The original estimates of the net cost of a new competence may become inadequate because of subsequent decisions by courts, complaints boards or other independent bodies setting precedents. In such cases the higher-level authority should consider the need for compensation.

9.         Consultation with local government level

i.              Consultation with the local level should be held on all issues of allocation and size of compensation for new competences.

ii.             Consultation should be held as early as possible in the drafting phase of the new competence and the local government side should be given reasonable time to consider fully the likely net costs.

 

iii.         Any proposal to parliament on new competences for local authorities should include information about the consultations that have taken place with the local government side.

B.         Translate this recommendation into their official language(s) and disseminate it to local authorities and associations of such authorities.

Explanatory report

General comments

This recommendation addresses the relationship between a higher level authority and local government as regards the funding of new competences for local authorities.

The notion of higher level authority is used in a general sense and refers to the relative position of one authority over another. Thus, in a unitary state, the central state authority will usually be the higher authority in its relation to local and regional authorities. In federal countries the notion of higher level authority will also apply to the federated entities in their relations to municipalities.

In this recommendation the terms “local authorities”/”local government” are used for all sub-national levels of government covered by the European Charter of Local Self-Government.

It is a generally agreed principle of accountability in multilevel public finances that in order to avoid undue pressure on local taxes the financial consequences of expenditure decisions should be borne by the political level making them. Implementation of this principle requires higher level authorities to compensate for additional net local costs that arise as a consequence of higher level decisions.

A CDLR study[3] (CDLR(2008)48) revealed a variety of designs between member States for the rules on compensation for and consultations on new local competences. It is the experience of several countries that granting compensation to and consultations with local governments foster accountability at all levels and result in better legislation and improved implementation. A CEMR study[4] found that “consultation procedures have been established in the majority of European countries, but in very different contexts”. The IMF Secretariat (2009) drew the lesson from experiences in this area that the sequencing of decentralisation matters, concluding that resources should be made available to subcentral governments pari passu with the assignment of spending responsibilities[5].

These findings, together with the fact that many countries are engaged in (further) decentralisation processes led the CDLR to conclude that a closer examination of the rules on compensation of local authorities for new competences was called for as it would allow member States to discuss and share views this topical matter.

In October 2010 the CDLR decided that a draft Recommendation to member States on this topic should be prepared.

The principle of accountability is sometimes also applied internally at central government level. Several governments have introduced internal rules obliging any higher level ministry that introduces new local competences resulting in an increase in local government net costs to finance the compensation from its budget. And if a ministry introduces changes in local competences that result in local net savings it is rewarded by the transfer of the savings to its budget. However, it was decided that this application of the principle at central government level should not be included in the current Recommendation as it raises a range of issues of general public administration which are beyond the remit of the Ministers responsible for local and regional government.

For similar reasons this recommendations also does not address the issue of net costs imposed by new local competences emanating from Parliament where applicable. Nevertheless, practice suggests that in most cases such new compensations are funded by the relevant lead ministry.

Finally, it has to be borne in mind that this Recommendation addresses only the most central issues, based on best practice among Council of Europe member states.  National policies on compensation often include many more detailed guidelines. Further inspiration on the best design of rules for compensation may therefore be gained in direct dialogue betweenmember States.

Comments on the provisions

1.         Compensation for new competences

i)          The imposition of new local duties by higher levels of government may also impose additional net costs on local government. To avoid that this results in undue pressure on local finances it is generally agreed that the principle of accountability should be followed. This principle, namely: those who take the decisions should also pay for them, requires the higher level to compensate for such new local net costs.. As a result it becomes difficult for a higher level of government to take popular decisions on new government expenditure whilst leaving it to the local level of government pay for them. Indeed, this consequence is the prime argument for compensating local authorities for the net cost of new competences, or for loss of local revenues caused by decisions of higher level authorities.

New competences to be compensated for also include decisions by the higher level authority to establish new powers for local governments because governments do not generally provide powers unless they expect them to be used and local authorities will come under pressure to make use of any new powers they have been given.

New competences also include cases of exhortation to local authorities (e.g. formal circulars, Ministerial speeches, informal guidelines) through which the central government creates expectations of new or better local services that local governments are effectively obliged to fulfil. Finally new competences also include changes causing local authorities to lose income.

Charging of local authorities by higher level authorities for services currently provided without charge should be compensated. Compensation should also be given for the local net costs when the higher level authority introduces restraints on the level of fees charged by local authorities, or grants exemptions from such fees or charges to certain categories of persons.

Administrative costs at the local level related to the introduction of new competences should, as a rule, be compensated only in cases when the new competence consists of a change in administrative procedures.

ii)          New competences for local authorities may also arise from international treaties or international agreements. For example, in member States that are also members of the EU and EEA much national legislation and regulation concerns the implementation of EU regulations and directives that may result in an increase in local net costs. In such cases it is more difficult to use arguments of accountability to decide whether compensation should be paid. The EU is not subject to any obligation to compensate for the costs of the national implementation of EU decisions, and EU regulation presents an accountability problem without clear answers. The higher level authority may have had only limited influence on the EU rules, but local authorities usually have had even less. Therefore, where such new competences result in additional net costs for local authorities, compensation by the higher level is also called for.

iii)         In cases where new competences have been requested by local government, the principle of accountability could, on the basis of consultations, justify some sharing of the net costs between the local government side and the higher level.

iv)         Changes to the rules resulting in reduced local spending obligations, or opening ways of local savings not possible before the change, should give rise to reverse compensation from the local to the higher level. This is also the case where realisation of the savings requires initiative to be taken by local authorities. The question of the extent to which local government can reduce net costs should be the subject of consultations between the levels.

v)         Compensation for a limited number of years can only be justified if the new pressure on the net costs for local government does not continue beyond this period.  

2.         Adjustment of over-or under-estimated costs    

Subsequent reviews may reveal that net costs differ from the original cost estimates. In such cases the higher authorities may make good the local losses resulting from under-estimation, and may have the right to recoup benefits resulting from over-estimation. However, in order to avoid that the system of compensation becomes overburdened and considering that the annual number of new compensations may be substantial, the scope for subsequent adjustments should be limited. For instance, making claims for adjustments should be subject to reasonable time limits, only be allowed in cases where substantial amounts are at stake, and only where the possibility of subsequent adjustment has been explicitly foreseen.

3.         Compensation for transfer of competence

i)             The effects on net costs when competences are transferred from one level of government to another should be compensated. The calculation of the amount of the net costs raises some particular questions. As concerns staff transferred to a new authority, the compensation should include the wages to be paid by the new authority, any agreements on future working conditions and the costs resulting from acquired pension rights.

ii)          The ownership of buildings, land and other assets necessary for continued delivery of the service, should be transferred to the local authorities concerned. Any debts associated to the property, as far as they stem from the cost of purchase and/or improvement, may also be transferred, but in that case the debt-servicing should also be compensated for.

4.         No compensation for general regulation

     

i)              Changes in general grants, caps on local tax rates, reduction in tax-sharing arrangements and other such measures may be introduced to reduce local government spending for reasons of macro economic control In such cases no compensation should be given, but the higher level should show clearly that the purpose of the cut is to reduce local spending.

ii)             Compensation is also not required where increased costs result from changes in general standards with similar effects for the private sector as for local government, such as changes to national taxation, in social security charges, or general employment legislation (like a change in minimum wages). Compensation is only called for in these cases when they have a disproportionate effect on local authorities.

iii)            Changes in the grants for individual authorities without changes in the overall amount of grants to local government, such as in the case of reforms of the equalisation system, cannot justify compensation. However, governments should explain the changes clearly to local authorities and, in case of major changes, allow for a period of gradual introduction of the new rules. 

5.         Formalisation of the rules for compensation

There are several ways to formalise compensation procedures such as constitutional or legal requirements, cooperation agreements, government and/or parliamentary rules, or commitments based on good practice. Decisive for the choice of method is how effectively it discourages the higher level from making changes to local net costs without compensation. Different methods may serve this purpose in different ways and to different degrees. One such a method is to require that the estimates of net local costs are signed off by the top official of the lead ministry. Publication of the rules is another way to discourage deviations. The most compelling way for the higher level to be committed to the practice of compensation is for the principles of compensation for local government to be laid down by law or in the constitution.

6.         Methods of compensation

 

i-iv)       Compensation can be given by introducing other changes to local competences with opposite, neutralising effects.

For services which are paid for from user-charges, the issue of compensation does not arise. In other cases compensation should be paid in the form of grants or changes in tax-sharing arrangements. Funding through grants has been shown to be the usual way of compensation in member countries (CDLR, 2008).

Ultimate responsibility for changes would be blurred and accountability weakened if compensation took the form of allowing local authorities to raise new taxes. However, in cases of transfers of competences, compensation can take place through the transfer of the right to taxation previously exercised by the higher level of authority.

7.         Compensation preferably with general grants

Where compensation is to be paid with grants, decisions have to be made as to the type of grants to use.

i)              When compensation is made by grants, it should, as a rule, be made through the adjustment of general grants. The experience of several member States has demonstrated that in the long run local authorities facing a loss in one case of compensation are likely to win in another.

Compensation through earmarked grants should, as for any other purpose and in keeping with the provisions of the European Charter of Local Self-Government[6], be limited.

Nonetheless, the CDLR 2008 report[7] suggests that most countries do use earmarked matching grants because such grants appear to best allocate compensation to those local authorities where the extra net cost of the new competence is highest. General grants may fail to do so because it is difficult to identify objective indicators that allocate the grant to those authorities with the extra net costs. It may therefore be difficult to avoid entirely the use of earmarked grants for compensation, but their use should, as far as possible, be limited to the following three cases: the new local competence is relatively costly, the net costs are very unevenly distributed across local authorities or no objective indicators are available to ensure the allocation of the costs well enough through general grants.

ii)             The use of such earmarked grants should, as far as possible, be for a limited period only, which is to be specified from the outset, after which they are replaced by adjusted general grants.

8.         Precedent effects

Court decisions – for instance by constitutional courts - that set a precedent can be seen as the expression of a better understanding of the obligations of local authorities. They are, or at least should be, seen as clarifications of existing rules that the higher level previously was not aware of and hence had not taken into account when calculating the original level of compensation. Such a correction should give occasion for the higher level to consider the need for compensation.The higher level may also have established other independent bodies whose decisions set precedents. The decisions of such bodies, being the creatures of the higher level, should be treated likewise.

9.         Consultations with the local government level

i)          The calculation of the additional net costs resulting from a change in local competences does not always follow directly from the formulation of the new competence. Often some further clarification is needed. The following box gives some examples of where clarification and estimations are needed.

Examples of cases where clarification of new competences through consultation is needed. ·         Public statements by the higher levels, which are not binding but get media attention, saying that the level of local service is unacceptable. On the one hand, this may result in pressure on local taxes that local authorities cannot easily resist. Local costs following directly from such spending pressures should be compensated, thus having a preventive effect on ministers at the higher level making such declarations. On the other hand, the right of higher level political bodies to initiate political debate must be accepted without having to consider compensation. The decision on whether compensation is called for or not depends on the interpretation of the specific case (par.1.i) ·         The question of the extent to which new powers will be used needs to be estimated (par.1.i). ·         A further question of clarification is whether new decisions (e.g. by a Court) are only clarifications of existing competences that have already been compensated, or are new competences and result in new costs for local governments qualifying for additional compensation (par.8).

When an estimate of the amount of the net cost for local government is needed it should be calculated in consultation with the local level.

But also in cases where there is limited room for estimations and clarifications, consultation between the levels of government has advantages. Decisions are better understood and accepted when the local level is heard. Consultations may thus improve local implementation. Consultations on the size and allocation of compensation may also result in better legislation because it improves the knowledge at the higher level of the factual circumstances. Consultations are therefore recommended as a general rule for all cases of compensation. 

ii)            Consultations need to take place as early as possible in the drafting phase, but the timing also needs to take into account that the preparation of new legislation or regulation sometimes requires confidentiality.

iii)         All proposals for new legislation presented to Parliament should include information about the consultations that have taken place with the local government side, so as to give members of Parliament a chance to ask for more information before deciding on proposal.

APPENDIX 5

Elements for consideration in a possible Response of the CDLR Bureau to the Opinions of the Congress on the draft Recommendation on good governance at local level and on the draft Recommendation on the funding by higher level authorities of new competences for local authorities

The CDLR Bureau, meeting on 29 June 2011 in Paris, examined the Opinions of the Congress on the draft Recommendation on good governance at local level and on the draft Recommendation on the funding by higher level authorities of new competences for local authorities, Opinions 34(2011) and 35(2011) respectively.

The Bureau considers that thanks to the extensive and in-depth discussions of the draft recommendations in the CDLR and its sub-committees (LR-FS and LR-GG) it is in a position to respond to the Congress Opinions. A plenary discussion of these Opinions could only take place at the next CDLR meeting on 19-21 September 2011, which would seriously jeopardise timetable by which the Deputies can take the necessary decisions in time for the 17^th Session of the Ministerial Conference in Kyiv on 3-4 November 2011.

The Bureau therefore submits the following comments to the GR-DEM and Ministers’ Deputies:

As concerns the draft Recommendation on good governance at local level

The Bureau notes that the Congress does not object to the draft Recommendation and concludes that there is nothing to prevent Ministers’ Deputies from taking the decisions proposed by the CDLR.

As concerns the suggestion by the Congress to develop guidelines, it is important to distinguish between the guidelines referred to in paragraph 4 of the Congress opinions, which are those to be elaborated by the Stakeholders Platform (of which the Committee of Ministers is one of the members^[8]), and the guidelines the Congress proposes the Committee of Ministers elaborate under paragraph 5 of its Opinion.

The guidelines of the Stakeholders’ Platform thus relate specifically to the Strategy for Innovation and Good Governance, whereas the second type of guidelines would, presumably, have a wider objective.

As the Congress, the CDLR is at the disposal of the Committee of Ministers should it wish to develop guidelines, both inside and/or outside the realm of the Stakeholders’ Platform. However, it underlines that as a first step it is important to give the principles of good democratic governance clear legitimacy and visibility by adopting the proposed draft recommendation as well as the draft Declaration prepared on the same topic.

As concerns the draft Recommendation on the funding by higher level authorities of new competences for local authorities

The CDLR Bureau notes that the Congress “believes that paragraph 6.iv of the draft recommendation with regard to raising local taxes^[9], contradicts Article 9.3 of the ECLSG which stipulates that at least part of the financial resources of local authorities shall derive from local taxes and charges, the rate of which they have the power to determine within the limit of the statute”.

It further notes that the Congress” believes that in its present form the draft recommendation, by giving an unduly restrictive interpretation of Article 9 of the ECLSG, represents a step backwards as regards to development of local and regional democracy in Europe” and that “consequently, (it) invites the Committee of Ministers to re-examine this issue and suggests that it entrust the Congress with the preparation of a report on this subject which would take into account the needs and perspectives of local and regional authorities and citizens and serve to strengthen local and regional democracy in the European area.”

Although the CDLR cannot share the interpretation of paragraph 6 iv of the draft Recommendation put forward by the Congress, it is ready to accept its deletion, should the GR-DEM and Ministers’ Deputies so wish, in the interest of removing the only objection raised by the Congress obstacle and enabling the Ministers’ Deputies to approve the draft Recommendation (without paragraph 6 iv) as proposed by the CDLR in time for its formal adoption by the 17^th session of the Ministerial Conference on 3-4 November 2011 in Kyiv.