Report on Local Democracy in Estonia - CPL (7) 7 Part II

Rapporteur: Owen MASTERS (United Kingdom)

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EXPLANATORY MEMORANDUM

The Congress of Local and Regional Authorities of Europe decided to draw up a detailed report on the situation of local democracy in Estonia. For this purpose, the Bureau of the Congress appointed Mr. Owen MASTERS (United Kingdom) rapporteur to visit Estonia from 7 to 10 February 2000 in order to prepare a specific report to the Congress. He was accompanied by Mr. Giuseppe TESSARI, member of Secretariat of the Council of Europe, and Mr. Zoltán SZENTE (Hungary) as expert. From 9 to 10 March 2000, a second visit was taken by the same delegation.

Before the visits, the members of the delegation had plenty of knowledge on the relevant Estonian legislation on local authorities, getting materials and several pieces of legislation from the Secretariat of the Council of Europe.

During the two visits, the delegation accomplished a busy and well-organised programme (see in Appendix 1 and 2) meeting a number of national and local politicians, civil servants and association representatives.1 The members of the mission experienced a very kind, friendly and cooperative reception.

This report consists of three parts: the first chapter describes the basic structure of the Estonian local and regional government setting out the most important characteristics of the whole system. The second part sets out the major problems of the present local government system summarizing the possible reform proposals and problem-solving ways to these challenges raised during the two visits. In the third part, the report formulates/draws up a few considerations, suggestions and recommendations, which, in the spirit of the European Charter of Local Self-Governments, should be taken into account in formulating policy in the near future in Estonia.

There were two major sources of this report. Firstly, the delegation used a lot of written documents, papers and information booklets.2 Then, a lot of information and opinions were given by the people the delegation met during the two visits.

I. Present situation of local government in Estonia

Estonia is situated on the North-Eastern shore of the Baltic Sea. Estonia is the smallest country of the Baltic States with the area of 45,227 km2. The number of population is about 1,445,000. Estonia restored its independence in 1991. At the moment, the country is one of the candidate states of European Union conducting accession negotiations with the EU.

1. Constitutional and legislative bases

The basic provisions concerning local government are laid down by the Constitution of 1992. The Constitution recognises the principle of local government stating that

”All local issues shall be resolved and managed by local authorities, which shall operate independently pursuant to law”.

Local authorities have democratic legitimation, since the representative body of the local government is elected by universal, equal, direct and secret voting.

The Constitution enumerates the basic guarantees of local government as follows:

The major spheres of local government are regulated - within the limits of the Constitution - by laws. The most important laws are:

Local Government Organisation Act determining the functions, responsibilities and organisation of local authorities and the relations of municipalities with one another and with central government.

Territory of Estonia Administrative Division Act which determines the division of the territory of Estonia into counties, cities and rural municipalities regulating also the procedure for the alteration of boundaries, the change of the name of local authorities, etc.

Local Government Council Election Act regulates the procedure for local elections.

Rural Municipality and City3 Budgets Act, and Rural Municipality and City Budgets and State Budget Correlation Act determine the procedure for the preparation, passage and implementation of rural municipality and city budgets.

Local Taxes Act enumerates local taxes providing the procedure to impose and collect them.

2. Administrative structure of Estonia

According to the Local Government Organisation Act and the Law governing the administrative division of Estonia's territory, Estonia is divided into 15 counties and 247 local authorities (42 towns and 205 rural municipalities). 4 All local authorities have the same legal status ranging in size from Tallinn with 420,000 inhabitants to Ruhnu Island with only 47 citizens.

Municipalities consist of settlement units of towns and rural municipalities which can be districts and villages, boroughs and towns respectively. Towns and rural municipalities may be divided into municipal districts (with a limited right to self-government) in order to carry out public services, according to the procedure prescribed by law.

Since the county government is a regional agency of the state administration without elected council, the local government system has only one-tier in Estonia. The county governments are headed by county governors, who are appointed - after approval by local government representatives - by the Government of the Republic. Until 1993, there existed county self-governments with elected councils, but the Local Government Organisation Act abolished them.

3. Scope of authority of local governments

Legally, only an act of Parliament may determine compulsory tasks and functions for local governments. Most responsibilities are set by the Local Government Organisation Act, but other laws may also assign functions to them. The basic functions of local government include the organisation of social services, welfare services for the elderly, housing and utilities, the water supply and sewerage, the provision of public services, physical planning, public transport, the maintenance of local roads and streets. Local authorities maintain pre-school child care institutions (kindergartens), primary and secondary schools, libraries, community centres, museums, sports facilities, shelters, care homes, health care institutions and other agencies and institutions founded and/or owned by the local government.

In addition to these functions, local authorities carry out state administrative tasks which may be assigned to them by law or may arise from a contract between an authorised state organ and a specific local government.

Rural municipalities and cities must establish a local development plan which provides an analysis and forecast concerning the socio-economic situation, environmental condition, the main objectives of development, the physical plan and bases for development of the infrastructure of the local government.

Local government councils have the right to issue local regulations on the basis their own law-making authority.

Most local government responsibilities are full and exclusive, but there are a few tasks shared between the municipalities and the central government. The latter can be exemplified by the function of education, where the maintenance of school buildings is the function of the local government, while the teachers are paid directly by the central government.

4. Organisational structure of local authorities

Local Government Organisation Act determines the general principles of the organisational structure of municipalities as well as the basic organs thereof. Each local authority has a legislative body, the council (volikogu) and an executive organ, the government (valitsus).

The municipal council is elected in general, uniform and direct elections by secret ballot for a three-year term. According to the law, the number of the council depends on the population of the municipality. The council is headed by the chairman, who is elected by the council by secret ballot. The council may set up committees as determined in its statute. Law prescribes only the formation of an audit committee for each municipality.

The council has full and exclusive responsibilities in a lot of major local issues, for instance:

The executive unit of the council is the government. The municipal government is headed by the mayor, who is elected for the period of up to three years by the council by a secret ballot. The mayor forms the body of government and its members are appointed by the council following proposition by the mayor. The rural municipality or city government is responsible for preparing issues to be discussed in the council and decisions to be taken by it as well as implementing the policy of the council.

The mayor is also the head of the municipal administration which is usually divided into branch departments and offices.

5. Finance of local governments

Local government budgets are separated from the state budget. The Rural Municipality and City Budgets Act determines the procedure for the preparation of the annual budgets of local authorites. Pursuant to this law, the revenues and the expenditures of the municipal budgets must be in balance.

The major revenue sources and their share in local government budget are shown in the table below.

Structure of local government revenues in 1998

type of revenue

as percentage of the total revenue

central grants

25

general grant (state subsidy)

10

grants for municipal investments

4

revenues from shared taxes

54

personal income tax

50

land tax

4

fees for the use of natural resources

1

local revenues

11

local taxes

1

revenue from fees and charges, from municipal assets, etc.

9

loans

8

others

2

Total

100

Source: Ministry of Internal Affairs

About half of the total local revenues come from personal income tax, which is a centrally imposed and collected tax. At the moment, local authorities' share in this tax revenues is 56% (there having been a moderate increase in the past few years). Land tax is also a national tax, but all its revenues are paid into local budgets.

The amount of central grants are calculated on an automatic formula using a number of data (number of population, revenues in the previous year, etc.).

The Local Taxes Act determines the types of local taxes, the subject of taxation, exemptions from tax, the basis of assessment and the rate of taxes. Under these legal conditions, local government may decide about the type and rate of local taxes. Local taxes are:

Local authorites may freely decide on fees and charges paid by users for public services. They may have some resources from municipal assets, for example, from the privatisation of municipal property. But there are significant differences between the cities and rural municipalities in their capacity to get revenues from this source. While, for instance, Tallinn, the capital city of Estonia had about 12% of the total revenues from property sale in 1999, the smaller municipalities (like Väike-Maarja, where the delegation made a visit), there is no profitable or moveable municipal property.

6. Regional policy and regional development

Whereas Estonia has a dynamically growing economy, there are great regional differences between her various territories. Besides that, Estonia is one of the first-round candidate countries of the European Union so she has to prepare for her accession to the European integration. All these circumstances made it necessary to establish the institutional system of regional policy and development setting also its principles and objectives.

At central level, the Ministry of Internal Affairs has a primary responsibility for regional policy. A Minister without portfolio is in charge of the co-ordination of the activities of the central government affecting regional development, while a few other ministries (Ministry of Economic Affairs, Ministry of Agriculture and Ministry of Environment) are also involved in the policy formation of regional development. At regional level, the county governments are responsible for the co-ordination of sectoral policy activities (e.g. by regional strategic planning or economic development). The central government organs manage a number of regional development programmes focusing either on the underdeveloped territories (e.g. programme for border regions) or on specific issues (e.g. business support system).

The involvement of local authorities in regional policy formation could be improved. At present, the regional development plan has to be approved by the constituent authorities of the county in question, and co-ordinated with neighbouring counties. Local authorities make local physical plans that have to be co-ordinated with the county government.

7. Central-local government relations and the local government associations

Local government issues belong to the competence of the Ministry of Internal Affairs at central level. The Ministry exercises legal control over local government through the county governments. Exercising legal supervision over local governments, the county governor, as the head of the state administrative county has no right to suspend or repeal the acts taken by the councils; he may only initiate the amendment or withdrawal of the objected decision, and, if local government does not agree with his opinion, he may turn to the court for altering or annulling the act. The Legal Chancellor and his office has the authority to ensure that local government acts in accordance with the Constitution and the law.

The preparation of the general forecast for the total local government budget takes place in the Ministry of Finance on the grounds of local governments' obligation to provide data on their budgets, financial management and general trends in the economy. The forecast is later negotiated between the Government and the representatives of local authorities.

Local authorities are entitled to form associations or establish joint intitutions. The latter way is often used for jointly running certain public services, like health care services or waste disposal. Then, many smaller municipalities buy public services from a neighbouring larger local government.

Since there is no regional level of self-government, the territorial co-operation of local authorities located within the same county has real importance. In every county there is a county association uniting almost all the municipalities of its territory. As for the national level, there are three national associations:

The basic functions of the associations are the representation and protection of local government interests and the participation in the legislative process concerning local authorities. In 1994 a joint organ of the three associations was set up, the Co-operation Assembly of Associations of Local Authorities in order to conduct negotiations with the central government and to coordinate between the member associations.

II. An overview of the problems to be solved

The ”Government Programme on Public Administration Reform”, prepared by the Office of Public Administration of the State Chancellery in November 1999 extends to the whole system of local government, including the administrative division of the country, the redistribution of the functions between the government tiers as well as to local government finance. The CLRAE delegation had a number of opportunities to hear opinions and proposals from different sides and positions.

1. Administrative structure

One of the most important issues is the reorganisation of the administrative division of Estonia. The need for territorial restructuring of local government is motivated by various considerations:

A number of local government units are too small in size having insufficient financial and other resources to fulfil their tasks and functions properly;

Local government finance and administration should be more effective and efficient in all local governments;

There are great differences between the smaller and the larger local authorities in their capacity to provide public services on the same level and quality;

The basic direction of the change of the current administrative structure is to reduce the number of local authorities encouraging the smaller municipalities to merge on voluntary basis. Nevertheless, there are many alternatives for administrative-territorial rearrangements, from the conception of setting an optimal size in population (e.g. 4 or 5,000 inhabitants per local azthority) for each local government, to the proposal of organising local authorities on the basis of the old parish structure.

In the past few years, central government has taken a number of steps to survey local governments' readiness for mergers, to work out variants of amalgamations as well as giving advice on the merging process. As a result of these efforts, in 1999 a few local authorities decided to merge reducing the total number of local governements from 256 to 247.

It is worth noting that the present reform proposals affect all levels of government. For example, during the two visits, many people said that the number of counties could be decreased from the current 15 to 9 or even fewer, since their scope of authority did not justify so many separate organs. Or, we heared a number of proposals on the establishment of directly or indirectly elected county self-governments.

Another issue on the agenda is to give a special legal status to the City of Tallinn. The representatives of the capital told the members of the CLRAE delegation that they supported the preparation of a separate law on Tallinn's status recognizing the special role and significance of the metropolitan government.

2. The redistribution of powers and duties among the different levels and units of government

The members of the mission heard a lot about the need for redistribution of state functions among the different tiers and units of government. During our visits, it was said many times that the reallocation of responsibilities should fit into the wider context of a public sector reform which could determine the range of functions of the state.

Nonetheless, certain movements have commenced so far in this field. One clear phenomenon of this is the transfer of functions from the county government to the county associations of local authorities. These associations are seen by many as appropriate organisations to represent local government interests at regional level as well as to provide adequate structural frameworks for the performance of certain tasks which cannot be carried out effectively at municipal level.

This direction for transfer of tasks and functions can contribute to the profile cleaning of the county governments preserving only the pure supervisory jurisdictions.

3. Reform of local government finance

The financial incapacity of small local authorities is the question of the hour. Our delegation has been informed about a lot of proposals for the enhancement of local resources.

The partial transformation of the personal income tax is preferred mainly by local authorities. Presently, it is a shared tax from which local governments receive 56%. In the future, the tax could be imposed in part directly by the municipalities setting its local rate by themselves. Another proposal suggests enhancing the revenue basis of the local taxes (e.g. by property-based local taxation).

The shortcomings of local taxation derive from the incapacity of local authorities to collect and administer local taxes. As we were informed, this activity would be too costly for the municipalities, because they have no appropriate apparatus to perform it. Besides that, at the moment, there is no existing and useful citizens' register for this purpose. The lack of a general and accepted register of tax-payers together with the obligation to declare one's place of residence significantly hampers the assessment of the true personal income tax revenues in local authorities. Finally, any changes in the present system of personal income tax would need political decision, but presently there is no consensus on this matter.

Another problem is that the central calculation of state subsidy concentrates on the revenue side of local governments, which preserves the differences in the financial resources of municipalities. The effects of this budgetary automatism are not balanced by specific grants which fail to recognise the differing needs and requirements of individual local authorities.

4. Transfrontier co-operations and the situation of the Russian minority

Estonia has not signed the “European Agreement on Transfrontier Co-operation” yet. Its reason is that there are no official state borders between Estonia and the Russian Federation. Apparently, this issue must be dealt without delay. Firstly, there is a day-by-day cross-border traffic between the adjoining areas, and, secondly, Estonia must prepare for the effects of the Schengen Treaty after her accession to the EU.

The state of the Russian minority has been a sensitive question for the last ten years. Due to the Estonian legislation of the early 90s, the former Soviet citizens had to choose new citizenship. Those who chose Russian citizenship, are to be regarded as ”aliens”, therefore, Russian people who live in Estonia have a different status. At the same time, there is a legal differentiation between the Estonian citizens as to the right to vote in local elections. Pursuant to Local Government Council Election Act, while every Estonian citizen over 18 has the right to vote5, only those who are proficient in the Estonian language due to a level prescribed by law may run as candidate for membership of the local government council. In other areas, there are no important differences between the citizens and the aliens with permanent residence permission.

The CLRAE delegation visited Sillamäe Municipality, a local government with Russian majority. The Russian-speaking representatives of the local council said that although the official language of the meetings of the local government council is Estonian, they are not restricted from using their own language. According to the law on Estonian language in certain areas the council can work in the language of the majority of that particular area. However, the acts of the local government organs (council or government) should originally be in Estonian.

A number of cities and rural municipalities have active connections with Russian towns and rural settlements.

As for the other neighbouring countries, Estonia has good cross-border connections, particularly with Denmark, Finland and Sweden jointly conducting specialised development programmes.

III. Conclusions

Since the entire local government system is under discussion and is facing a far-reaching change, there is an excellent opportunity for Estonia to correct its shortcomings that have emerged during the last ten years and to raise the standards and quality of the system before her expected accession to the EU. In revising her present structure of local government, Estonia must keep in mind the principles and guidelines of the European Charter of Local Self-Government.

Having made a detailed study on the state of local democracy in Estonia, we found that the legislation and practice of local government provide appropriate frameworks for local democracy. Nevertheless, at certain points some changes would be advisable to improve the democratic participation and the capacity of local administration approaching the current practice to the standards of the Charter. Below, we are setting out a few recommendations, suggestions and considerations that could be taken into account in restructuring the local government. We labelled the major issues into four categories making distinctions between their nature.

1. Administrative division

1.1. Having regard to the restructuring of the administrative division, local authorities, local government associations concerned must be consulted prior to the final decision-making in accordance with Article 4, paragraph 6 of the European Charter of Local Self-Government. The concerned inhabitants should also be involved in the process of the change in local authority boundaries, possibly by means of local referendum or plebiscite.

1.2. We find it necessary to encourage the voluntary mergers of small municipalities by financial incentives taking into account the opinions of the municipalities and the inhabitants concerned.

1.3. Establishing larger local government units with greater financial and administrative capacities, the interests of effectiveness and efficiency should be reconciled with the principle of subsidiarity as it is expressed in Article 4 paragraph 3 of the Charter. The alternatives for the new administrative division must respect the virtual role of the attraction centres as well as the citizens' access to public services as easily as possible.

1.4. As part of the modification of the Local Government Organisation Act, the legislature and the central government should consider giving special legal status for the City of Tallinn recognising the capital's importance in the country.6 In doing so, the current distribution of tasks and functions between Tallinn and the relevant county government could also be reviewed.

2. Redistribution of functions

2.1. We support the present tendency of transferring functions from the county government to county associations of local authorities, because the associations embody the interests of the municipalities. Estonian parliamentary and government authorities should consider the reestablishment of the county self-government on the basis of the strengthening county assemblies.

2.2. Larger local authorities would be more capable of providing higher level public services. Other ways of public service management, like establishing joint institutions of municipalities or widening the contracting-out practices could result in ensuring citizens have the right to choose service producer.

3. Financial issues

3.1. We recommend that the Estonian parliamentary and government authorities change their legislation and practice so that, in the future, local authorities may have, at their disposal a greater proportion of financial resources of their own, in particular having greater capacity to raise revenues from local taxes. Pursuant to the Charter, ”Part at least of the financial resources of local authorities shall derive from local taxes and charges of which, within the limits of the statute, they have the power to determine the rate”.

3.2. Local governments should be able to impose personal income tax being empowered to determine its rate. For this purpose, the conditions of a more effective local taxation should be ensured, mainly by reducing the administrative costs of tax collection (e.g. by means of contracts with state tax boards to collect them) and by establishing a local citizens' register. In order to enhance the revenue basis of local authorities, new types of local taxes could be introduced or the current forms could be transformed (e.g. introducing property tax from land tax).

3.3. Referring to Article 9 paragraph 5 of the Charter, we recommend that Estonian authorities should consider the introduction of a more specialised financial equalisation system which would be able to take into account the special circumstances and conditions of the individual local authorities. The current automatism of calculating the amount of the so-called ”state subsidy” (block grant, actually) does not seem to be sensitive enough for local authorities, particularly the rural municipalities in detrimental situations.

4. Central-local government relations and local government associations

4.1. In this scope, the national associations of local authorities should strengthen their ability for common and coordinated actions in particular for representing uniform interests in the negotiations with central government. They could consider the possibility of the unification.

4.2. As for regional policy and development, the democratic participation of local authorities and involvement of local interests in the decision-making process seem to be unsolved. After being admitted into the European Union, the reception and reallocation of EU-grants will raise this issue. There are various procedures in Europe which ensure the representation of local government interests in regional policy formation from the corporative regional bodies to the directly elected regional self-governments. These considerations should not be eliminated from the current discussions.

5. Transfrontier co-operation and the situation of Russian minority7

5.1. No doubt, Estonia should sign and ratify the “European Agreement of Transfrontier Co-operation” as soon as possible. Although a lot of problems prevent Estonia from reaching an agreement with Russia on the state borders (e.g. due to Russia's protectionist custom policy, as were informed), more and more efforts should be taken in this area.8

5.2. The stipulation of the Local Government Council Election Act requiring Estonian proficiency from candidates in local elections should be reconsidered in the near future.

5.3. The legislative and government authorities should examine the ways and possibilities to protect minority languages including the right to use mother language at local government council sessions as well where it is possible (e.g. where the Russian speakers are in majority).

6. Other issues

We recommend that the present three-year-term of the representatives' mandate could be reconsidered. This period - taking into account the political nature of the council membership - does not seem to be enough to realise political promises and programmes, which might cause certain instability in local politics.

APPENDIX 1

The CLRAE Mission in Estonia 07-10 February 2000 Programme

APPENDIX 2

The programme of the second mission to Estonia, from 9 to 10 March 2000

APPENDIX 3

Written sources:

The Ministry of Internal Affairs and its Subordinate Institutions. The Ministry of Internal Affairs, December 1998.;

Local Government in Estonia. Published by Ministry of Internal Affairs. Tallinn, 1999.

Estonia Municipalities. Selected Data of Selected Municipalities. [Manuscript.]

Toomas Välimäe: Estonia. Multi-County Workshop, 27-28 April 1999, Brussels, TAIEX Office.

Discover Tallinn, on the Pulse of Opportunity. Presentation to Investors. Prepared by Tallinn City Government, January 2000.

Regional policy in Estonia. Ministry of Internal Affairs, Department of Local Government and Regional Development.;

Estonia. Structure and Operation of local and regional democracy. Situation in 1999. Council of Europe, Strasbourg, 1999.

Administrative Reform Program of the Government of the Republic. [Manuscript.] November 1999.

The relevant laws studied are:

The Constitution of the Republic of Estonia;

Local Government Organisation Act;

Local Government Council Election Act;

Law governing the administrative division of Estonia's territory;

Local Taxes Act;

Rural Municipality and City Budgets Act;

Rural Municipality and City Budgets and State Budget Correlation Act;

Language Act.

1 The detailed programmes of the visits are described in Appendix 1 and 2.

2 See the Appendix 3 about the used sources.

3 In this study, the term of the ”city” is equivalent to that of the ”town”.

4 By the end of 1999, 18 municipalities were merged on their own initiative reducing the number of local authorities from 256 to 247.

5 It is to be noted that even the aliens have the right to vote in local elections, but they cannot be candidates for membership of the council.

6 For example, Tallinn accounts for about 28% of Estonia's population. Over 50% of Estonian registered companies are registered in Tallinn. The capital provides more than 50% of Estonian GDP. Source: Tallinn City Council.

7 According to the official data, Estonia's ethnic distribution is as follows: Estonians 65.1% ; Russians 28.2% ; Ukrainians 2.6% ; Byelorussians 1.5% ; Finns 0.9% ; others 1.7%

8 Estonia and Russia have reached an agreement on their common state borders. The signature and ratification of this agreement is still pending.