OREANDA-NEWS. Fitch Ratings says in a new report that the institutional framework for Estonian counties and municipalities is stable, predictable and ensures financial transparency.

Fitch believes that the institutional framework clearly regulates the local authorities' (LGs) responsibilities and funding and the relationship between them and with the state government. The proximity to the latter governs the LGs' low revenue flexibility, as over 80% of total revenue is dependent on the state government's decision and revenue distribution.

The share of transfers from the state budget is high, accounting for about 30%, including payments under the equalisation mechanism. The state is the only donor under the equalisation mechanism as there is no equalisation among LGs. Ultimately the state decides the annual amount of the equalisation payments and their distribution.

LGs in Estonia are tightly controlled by the state government and a strict publication procedure provides financial transparency. All important documents, including council resolutions, development plans, and budgets and annual reports, are made public, otherwise a violating LG will be penalised.

Estonian LGs' budgets can be cash- or accrual based. The annual reports, including the financial data of the LGs' dependent entities, have to be published based on accruals and have to be audited by an external auditor.

There are prudent safety regulations in place that promote financial discipline and the avoidance of excessive indebtedness. The individual net debt limit includes the indebtedness of an LG's public sector entities. Unlike other jurisdictions, LGs cannot shift debt to them to avoid reaching their borrowing limit. In case of financial stress, the framework regulates recovery procedures. If this is insufficient, the state may decide to provide financial support to the affected LG.

The report entitled "Institutional Framework for Estonian Subnationals" is available at www.fitchratings.com or by clicking on the link above.