Costs and Revenues Balance: The Case of Municipal Delegated Competences in Slovakia

The arrangement of public administration levels, as well as the performance of individual public finance functions covered by these levels and the system of financial relationships between the levels and units of public administration (intergovernmental fiscal relationships), differs in many countries. However, in each country, vertical financial relationships between different levels of public administration and horizontal financial relationships between different units of public administration at the same level determine the efficiency of the performance of public finance functions.

The degree of decentralization of public finances and the optimization of financial resources in the budget system (concerning its vertical and horizontal structure with the aim of effective distribution and the use of public finances within various sources of public budgets) are crucial issues for discussion (Schapiro, 2020). Fiscal decentralization often brings problems in the form of vertical and horizontal imbalance when the revenues of public administration units at different levels (vertical) or at the same level do not correspond to the expenses associated with the exercise of the competences entrusted to them.

Delegated competences are a specific case. Municipalities realize these competencies on behalf of the state: the state delegates the execution of those decisions to lower (mainly local) levels, which ensures they are executed more effectively in this way than in the case of their execution from the central level. According to the Constitution of the Slovak Republic (Article 71), the following applies: “Performance of specified tasks of local state administration can be delegated to municipalities and higher territorial units by law. The state covers the costs of such a delegated performance of state administration.” Similar provisions are contained in the legislation of most developed countries.

However, in every country, local governments “complain” that the amount of resources provided by the state for performing the delegated competences does not cover the costs associated with the performance of the given tasks. Therefore, it is surprising that only a very small number of academic studies have analyzed the relationship between the costs of delegated competences and the rate of reimbursement of these costs. Indeed, a Google Scholar search using the words “financing delegated responsibilities” did not identify a single study dealing with this issue. Of course, this does not mean that more generally focused studies by Kim (2018), Hagemann (2018), or de Mello (2000) investigating municipal finances do not address this issue at all. However, it is evident that a fundamental research gap exists in the given area.

The paper aims to determine the extent to which delegated competences (carried out by local governments on behalf of the state) are financed in practice in Slovakia. The authors’ direct research is the fundamental source of primary data. The entire basic set of 2890 municipalities in the Slovak republic was obtained from a questionnaire. In the “Discussion” section, the findings from Slovakia are compared with the situation in the Czech Republic, which the authors analyzed using an informative sample of municipalities based on a report by EEIP Praha and Accendo Ostrava (2018).

The structure of the paper is as follows: the introductory part presents a theoretical introduction to the issue and interprets the current state of art. In the methodological part, we describe the samples and the research methods used. The analytical part maps in detail the level of financing of delegated competences in Slovakia. The discussion summarizes the results, verifies their informative value, and provides an interesting comparison with the situation in the Czech Republic.

Controversies exist (Schapiro, 2020; Bird, 1999) regarding the degree of decentralization of various public finance functions to lower levels of public administration, especially in connection with the fulfillment of the requirement in the democratic society of functioning (Prud’homme, 1995; Fjeldstad, 2001 or Rafaj et al., 2022). Here, a consensus is found in delegating the allocation function of public finances through public services provision to lower levels of public administration. The decentralization of public administration in a democratic society, according to the theory of fiscal federalism (Oates, 1972), enables the coordination of supply and demand for public services provided at the level of public administration closer to the citizen (Engineer, 1990) and creates healthy competition between territorial units (Brennan and Buchanan, 1980), which increases the efficiency of the local public services provision.

When defining fiscal federalism, we start from the basic term “federalism,” which indicates the way of governance and points to the division of authority in the exercise of certain competences (Schapiro, 2020). The power to implement the given competence is distributed between the central and regional governments when both parties achieve a certain degree of autonomy in the given political area (Law, 2013). The process of dividing political powers among individual levels of public administration is accompanied by the subsequent distribution of fiscal management within the framework of the implementation of public finance functions. Fiscal interactions in intergovernmental fiscal relations arise among individual levels of public administration (Oates, 1972, 2008; Breton and Scott, 1978; Tanzi, 2000; Fossati and Panella, 1999; Židonis and Raišienė, 2020). An appropriately set mechanism of fiscal federalism should have a positive effect on the provision of public services, which is the core content of the key theories of fiscal federalism, including Tiebout's (1956) model of local public goods, Buchanan's (1965) economic theory of clubs, Oates's (1972) decentralization theorem, and Brennan and Buchanan's (1980) decentralization hypothesis.

Olson (1969) draws attention to the connection between decentralization and the spillover of the benefits of local public goods beyond the borders of the local government or, conversely, the failure to cover the whole territory of the local government with the offer of local public services when fiscal equivalence is violated. For this reason, it is necessary to find a balance between the centralization and decentralization of public finance functions and the extent of the delegation of powers to lower levels of government.

The Brennan–Buchanan decentralization hypothesis solves the range of powers in providing public goods at the local government level (Brennan and Buchanan, 1980). Here, the dominant idea is that the needs, preferences, and ability to pay for public goods differ, and they are transformed in relation to the geographic location of citizens. Better information for local governments about the preferences of the inhabitants in a territory enables them to respond by offering public goods more appropriately than from the central government (Halásková and Halásková, 2020; Tkachenko, 2020; Engineer, 1990), resulting in greater efficiencies in good public provision at the local level.

In the context of fiscal federalism, the key issue is the optimization of financial relations in the budget system concerning vertical and horizontal structure—namely, the effective creation, distribution, and use of public finances within different levels of public budgets (Schapiro, 2020; Bird, 1999).

The aim of the research is to analyze the extent to which delegated competences carried out by local governments on behalf of the state are financed in Slovakia. In this regard, we developed two research questions:

RQ1: Do the municipalities know the total costs

Municipalities often calculate the costs of providing the service only in the amount of expenses from the budget due to the nonfunctionality of cost centers—the costs calculated in this way do not include indirect costs associated with providing the service—overhead costs

The key methods of scientific research are the methods of classification analysis, comparison and abstraction in the creation of the theoretical–methodological framework of problem solving, methods of primary data analysis in the application part of the study, and the methods of synthesis and partial induction in drawing conclusions. The primary data collection was conducted through the questionnaire and interview methods. Analysis focuses on financing of delegated competences in the areas of civil registry and planning and building offices at the local government level for the selected municipalities included in the research sample. It is possible to observe the differences between the departments of the registry office and the planning and building office within one municipality, as well as the differences between municipalities.

A survey was conducted between September and October 2022, focusing on the performance of delegated competences in selected sections of local government.

To obtain data, we used a questionnaire, with which we electronically addressed the entire basic set of 2890 municipalities and, based on their consent, we visited 66 municipalities (Table 1). We collected data in the visited municipalities to ensure the accuracy of the data. A sample of 66 municipalities has an almost representative character from the point of the number of municipalities.

When investigating, we decided to focus on two delegated competences: the registry and planning and building offices. These competences, especially in the planning and building office, are among the most important tasks of the state carried out through municipalities (the most complex and most expensive delegated competence is primary education, but original and delegated competences overlap in this area; therefore, we did not include it in this research). The choice to include the analyzed competences was mainly determined by the fact that the scope and content of the given competence's performance were clear and easily identifiable.

A registry office, in its delegated competence, keeps the state register of persons who were born, married, or died in the territory of the Bratislava-Nové Mesto municipal district. The registry office records data on the personal status of citizens and other facts necessary to establish and verify the personal status of citizens based on public documents. Extracts (birth, marriage, and death certificates), which are public documents, are issued by the registry office. The register of births, marriages, and deaths comprises a register of births, a register of marriages, and a register of deaths. The planning and building office, in its delegated competence in territorial proceedings and building regulations under the Building Act, issues planning decisions, building permits, and building approval decisions and decides on penalties for breaches of the Building Act.

We asked each municipality if they knew the exact costs of the delegated competence. In the case of a positive answer, we also asked about the method of ascertaining (calculating) these costs. We evaluated the municipalities’ responses to the second question, which is a control question. Based on the description of the cost calculation procedure provided by the municipality, we placed them in one of the three selected categories: (a) the municipality does not calculate the costs, (b) the municipality calculates direct costs, or (c) the municipality calculates/knows the total costs. In several cases, a situation arose where the municipality stated that it knew the costs. However, the description of the calculation procedure clearly showed that the reality was different (e.g., municipalities confused the fact that they knew the revenues for the exercise of the competence with the fact that they knew the costs). A final question asked about the municipality's opinion on the level of coverage of costs for the delegated competence from the state budget.

For a simplified comparison of Slovakia with other countries, we conducted a framework survey of the situation in several municipalities in the Czech Republic. We use the results (due to their incomparability) in the “Discussion” section.

The results from our analysis document two basic facts:

municipalities mostly do not know (and many of them probably do not even need to know) the total amount of the costs of delegated competences and

We expected the first result because with the excessive territorial fragmentation of municipalities and nonexistent cost accounting, which would be needed to allocate overheads to specific activities, knowing the costs is impossible (see, e.g., Oplotnik et al., 2012). However, such a minimal capacity (and willingness) to calculate exact costs, even among larger municipalities, was surprising.

The second result also confirms an expected outcome. As discussed in the literature review, existing relevant studies came to the same conclusion (see, e.g., also Alibegovic et al., 2013). However, again, the excessive and unrealistic dispersion of municipalities’ opinions on the level of coverage of the costs of delegated competences, which includes extremely high and extremely low values, was surprising.

For illustration purposes, we compared the results obtained in Slovakia with the situation in the neighboring Czech Republic, which has similar conditions from the point of view of the functioning of local governments (Matějová et. al., 2017). In the Czech Republic, municipalities are divided into three categories: those with basic powers, those with an official municipal office (municipalities of category II), and those with extended powers (municipalities of category III). This categorization eliminates one of Slovakia's specific problems: the fact that every, even the smallest, municipality in Slovakia exercises the same range of delegated competences.

In the Czech Republic, similar to Slovakia, no data set takes Alibegović into account (a) the amount of the contribution to individual municipalities in the context of the costs delegated to competences or (b) the distribution of the contribution between individual agendas concerning their cost and the necessary scope.

In 2020, the Czech Republic's Ministry of the Interior prepared a methodology for determining the costs of the performance of state administration in the delegated competences (Ministry of Interior, 2020). However, it mainly deals with methods of financing the delegated competences. Subsequently, the financing model for the performance of delegated competences was updated, which has its own application interface (web application) and contains both methodologies and illustrative examples of contribution redistribution. The contribution changes yearly depending on the parameters (the number of inhabitants changes) and since another agenda for funding can be added.

Unlike Slovakia, where the Constitution of the Slovak Republic directly imposes the obligation to finance delegated competences, the Czech Act on Municipalities does not assume total financing or cover the costs (contribution). Thus, it is expected that the municipalities in the sections where they collect administrative fees will use these resources to cover the costs of the delegated competences.

The question of how much the financing system reflects the actual costs is the subject of great discussion at professional forums and conferences. From time to time, it is also the subject of criticism in the media, especially from local government representatives. Such criticism is primarily due to the bias in providing compensation for the state administration's performance concerning disadvantaged municipalities, such as having a bad social situation (Nogol, 2020). For the purposes of our paper, we conducted our own anecdotal investigation (October–November 2022), during which we asked municipal representatives about the calculation of the cost of delegated competitions, namely, whether the representatives of the municipalities do the calculations and in what way. Finally, we anonymized the answers we received. Selective evidence from individual authorities confirms the difficulty and complexity of determining costs and the skepticism of municipal representatives in this area.

As one representative of a municipality told us, “For the municipalities, the exact quantification of the costs of performing the delegated competence is difficult. No one orders a separate record of costs for independent and delegated competence, which is probably why no one keeps it consistently. The costs of employees’ delegated competences who only perform full-time can be easily identified. The problem is with employees who perform both functions or with the municipality's management, where it is necessary to estimate the ratio of both activities for each such employee.

It is nearly the same as the other costs of running the office. Only a fraction of them is demonstrably related to only one type of scope; for most costs it would again be necessary to estimate the ratio of both activities. It would make sense for municipalities to keep such demanding records only if they were the basis for reimbursement of costs by the state; otherwise, they have no reason to do so and it does not make sense from the point of view of the entire system” (email communication, November 9, 2022).

Another representative of the municipality was quite skeptical about the determination of costs: “I don’t know if they do it in any office; we don’t do it in our country and I haven’t come across it anywhere in practice. I can tell you from my own experience that it is very complicated. I once did a bachelor's thesis on this topic. With a mixed model of delegated and independent competence, it is quite complicated. The same goes for personal expenses for workers who perform only one function, but many employees participate in the performance of separate and delegated functions. They carry out some activities irregularly and perhaps only a few times a year, so it is poorly defined” (email communication, October 15, 2022).

Another respondent pointed out that the calculation can even be done based on separate records and by finding the employment ratio for the state administration and the local government: “As for the calculation procedure, some expenses are tracked separately in accounting due to the subsidy. I multiplied the other expenses (officials’ salaries, operation of the municipal office, employee benefits, depreciation of the municipal office property) by a coefficient based on the ratio of duties of the state administration and local government. We are a member of a benchmarking initiative, which has a method of dividing duties between state administration and local government, and I drew input data from it. It is certainly not the most accurate result, but we believe that we have obtained a relevant result in a short time” (email communication, November 9, 2022).

A respondent from another municipality confirmed that he performs the calculation for his own needs, and that they identify the appropriate ratio of employees who perform independent and delegated competences: “We have around 130 employees; we identify how many of them with independent competences and how many with delegated competences, or proportionally, and thereby determine the total independent/delegated competences ratio. The remaining (service) employees are indistinguishable, and their total costs are then calculated according to this ratio and the operation or any investments. It is calculated annually” (email communication, November 9, 2022).

The situation in the Czech Republic is relatively similar to that in Slovakia, even though only larger municipalities can exercise more complex delegated competences. Moreover, Czech municipalities cannot calculate the costs of delegated competences, and the state pays only a part of the actual costs of the performance of state administration, which is carried out by the municipalities themselves within the framework of delegated competences.

We believe that the situation is similar in other post-socialist countries, where, to date, it has not been possible to build high-quality management information systems in public sector organizations, that is, systems that would accurately map the total costs and allocate them to individual cost units. This problem was described long ago, but despite some experiments, no progress has been made (see Nemec et al., 2008, Nemec, 2018).

This research aimed to analyze the extent to which delegated competences, which local governments carry out on behalf of the state, are financed in the conditions of Slovakia. In this direction, we developed two research questions. First, based on the data from 66 participating municipalities and the results of our analysis, we can draw several conclusions.

Concerning our first research question (i.e., Do the municipalities know the total costs of exercising the selected delegated competences?), we found that in the main, the municipalities do not know the total amount of the costs of delegated competences in the selected areas.

Specifically, the costs of the performance of delegated competences in registry offices were reported to be known by 34 municipalities, but 50 municipalities do not calculate them. As for the costs of delegated competences in the planning and building offices, only 28 municipalities stated they know the costs, but 49 do not calculate them. The control question, which asked about the method of calculation, demonstrated that the answers to the first question, verified by the mayors’ signatures, were partially true. Indeed, a municipality cannot know its exact amount if it does not calculate the costs.

Municipalities confuse the costs of delegated competences with the income (transfers) they receive for this performance in the sense that “I received such a volume of funds for the given delegated competence, I spent this amount on it, and that is my cost.” However, when answering our questions, they did not consider the actual costs or include overhead costs.

The calculation of real total costs for the performance of delegated competences is an exception, and we encountered it only in the case of one larger city. Smaller municipalities do not know these costs, and thus, the cost centers formally introduced by legislation in the conditions of local governments do not really work. The financial need to ensure the performance of delegated competences is determined on the basis of the previous year's budget, which is not the correct approach. The overwhelming majority of municipalities do not know the costs of the performance of competences delegated to them, and thus we cannot determine the actual percentage of coverage of these costs by the contribution allocated by the state for the performance of delegated competences.

This situation is related to our second research question (i.e., RQ2: What is the level [extent] of financing of delegated competences according to the municipalities?). If the municipality does not know the costs, it cannot know whether their financing by the state is sufficient (i.e., what the level of funding of the delegated competences by the state is). However, according to the municipalities’ answers, the state finances only a part of the costs incurred by the municipalities in the performance of delegated competences. At the same time, the coverage rate varied significantly depending on the size of the municipality. For all size categories, the variance in the answers was significant. For example, in municipalities with a population of 2500 to 4999, the coverage rate in the registry office services ranged between 11% and 95% and the coverage rate in the planning and building office services ranged between 18% and 80%. These estimates suggest that the state is violating its own law, the Constitution of the Slovak Republic itself, which stipulates that the state shall pay the costs of delegated state administration.

It is possible to talk about the existence of a vertical fiscal imbalance (the contribution allocated to the state for the performance of transferred competences is insufficient, and municipalities describe the need for additional financing for the performance of transferred competences from their own resources), but we can neither determine its extent due to the nonfunctioning of cost centers nor the amount of the optimal state contribution. If we compare the financing situation of the transferred competences in the monitored sections of the register and the building office, the results of the survey identify significant problems with the calculation of costs and the degree of their coverage by the contribution allocated by the state in the section of the building office.

One limitation of this research is that it focused on one country (with only a partial comparison to the neighboring Czech Republic). Due to the numerous reforms of local administration and the high fragmentation of public administration, Slovakia represents an interesting example from Central and Eastern Europe (CEE). Other CEE countries are likely to be in a similar situation, especially those with a socialist past. Future research could thus focus on expanding this research to other countries, mapping the methodology of financing delegated competences, and identifying the situation regarding monitoring the costs of delegated competences. As it transpired, Slovakia's costs are unknown, but the municipalities seem fine without knowing them. If we rule out capacity obstacles, the question remains: Why do municipalities not want to (or why are they unable to) calculate the exact costs?

The conclusions of our research confirm the results of research by Mederly et al. (2019) characterizing the system of local self-government in Slovakia and the system of original and delegated competences, legislative anchoring, organizational security, method of financing, and performance parameters of the delegated performance of the state administration. The conclusions of the research are critical—the state has practically no mechanisms for calculating real costs in any of the sections. The study also reminds that the universal transfer of competences to all municipalities regardless of size represents an “automatic source of disturbances” in the conditions of excessive territorial fragmentation of Slovakia, which is also confirmed by the results of our research. The solution is operationalization of cost centers, calculation of real total costs for the performance of delegated competences, and identification of the extent of the vertical fiscal imbalance, which is the starting point for its solution by the functioning of inter-level financial relations, so that the incomes of public administration units at their various levels correspond to the expenses associated with the performance of the competences entrusted to them.