Financing Urban Development in Unstable Times – Local Development Forum seminar report
Financing urban development in unstable times was the chosen theme of a yet another Local Development Forum online seminar organised as part of a series to prepare our cities and towns for participation in the World Urban Forum in Katowice this June.

This was the third online meeting organised by the Association of Polish Cities in anticipation of the World Urban Forum. The seminar held on 24 May was broadcast from a studio in Zgierz.

Seminar participants, experts and practitioners discussed local funding, coming up with a diagnosis of the condition of local financing, and describing ongoing challenges faced by large, medium-sized and small cities and towns.

Today, Local Government Units receive approximately 60% of the revenue they could have been collecting were it not for changes to the tax system, or if these changes were compensated on a regular basis. It is notable that property tax apart, Personal Income Tax revenue remains the lion’s share of own income in municipal budgets.

“Good times” are what we are looking at in the rear view mirror…

Association of Polish Cities expert Jan Maciej Czajkowski, Ph.D., presented a general analysis of change to local government finance, opening with a quote from Virgil on the Golden Age of the past: “The great cycle of the ages is renewed; now (…) returns the Golden Age”. He went on, “The situation of the local government has changed since 2021, a ‘watershed’ year for the local governments’ financial system, the final frontier of the former Local Government Unit income scheme. A new and profoundly changed system was put in place in 2022 in haste, under pressure of the risk of current revenue losses incurred by Local Government Units in connection with the ad hoc 2019 and 2020 amendments to Personal Income Tax laws, backed by no in-depth analyses or pilot solutions suggested by local governments (even on a “county pilot” level, such as the 1996-1998 Sącz Public Services Zone, which had turned out to be a source of priceless knowledge allowing safe county reform introduction). Changes to the income system were described as “support” for local governments, permanently deprived of a major share of their current (Personal Income Tax-related) income as a direct outcome of the state’s financial policy, albeit that had been the local governments’ salient source of financing public services.”

As already hinted at by harbinger events, the new world of local finance regrettably is not even conducive to local governments providing proper quality e-public services to their own residents. Notably, the level of identified issues is far from identical across all Local Government Unit categories. As proven by analyses carried out by the Association of Polish Cities expert, most of the unfavourable changes to budget volumes and indicators have proven especially painful for urban municipalities and county law towns (given their income structure, Personal Income Tax share reduction has had particular impact on their wellbeing). Yet Jan Maciej Czajkowski remarked, “On the other hand, the situation is not as unambiguous as it might seem at first glance, as the ‘income autonomy’ level, for example, has remained lowest in rural and – to a certain extent – rural-and-urban municipalities, and highest in cities”.

The year 2021 also brought an atypically high share of “non-systemic” changes affecting Local Government Unit budgets in a variety of ways. “In consequence, should we refrain from analysing the local governments’ financial situation in sufficient depth, the ostensible image of Local Government Unit financial condition remains considerably optimistic, as frequently emphasised by the Ministry of Finance,” said the speaker.

In his presentation comprising over 50 slides, Jan Maciej Czajkowski offered a detailed analysis of the local finance situation and dynamics, including related challenges (presentation attached below).

Engines of development without own revenue

Andrzej Porawski pointed out that recent changes have caused a dual shift, of major importance to financial planning and management. One involves a shift from own revenue to income local governments have to apply for, mainly under a discretionary system, never a good solution. The other involves a shift of income from urban to rural areas. “While the shift of income to rural areas in itself is not necessarily adverse, as Polish rural areas do require funding, a shift specifically from, that is at the expense, of towns and cities – rather than through a special-purpose programme of rural assistance – will be of enormous importance. Once engines of development stop investing, the state budget tax revenue will plummet, its VAT share in particular. Citizens apart, the government has already become the greatest casualty of the drop in investment rates,” said the Executive Director of the Office of the Association of Polish Cities.

“Developing cities seen as flywheels of the entire economic system is of major importance, as is the drawing up of relevant strategies. Once opportunities of tapping resources generated by local residents or businesses are curbed, we are going to lose the momentum we had been using to develop,” mayor of Zgierz and host of the meeting Przemysław Staniszewski observed.

Zgierz is a city which has been employing assorted financial solutions and tools for years, to better the living conditions of local residents. Back in 2015, the local government of Zgierz still held PLN 6 million in investment funding alone. Yet the current financial and geopolitical situation has brought a complete change to how local governments predict the future. “Despite the multiple options of how Local Government Units can secure funds and our fundraising effort preparations, we are troubled by major concerns with regard to how we can bring the entire financial puzzle together. This is our greatest issue – as the expectations of local residents who have already tasted higher living standards keep growing,” said the mayor of Zgierz.

Public-Private Partnerships for uncertain times

During the seminar, treasurers of Łódź and Zgierz discussed financial management in large and medium-sized cities in uncertain times. A similar analysis was carried out and presented by Association of Polish Cities expert Daniel Budzeń for a small town, with Uniejów as the case study.

Ryszard Grobelny encouraged municipalities to seek options of delivering local investments with the use of Public-Private Partnership mechanisms. “Poland has considerably few endeavours carried out in such formula,” he said, “Their volume is growing by no more than ten per annum, albeit it is currently apparent that care and educational facilities – an archetypal area of local government activity – are becoming an increasingly popular field when it comes to the use of such financial vehicles.” Ryszard Grobelny further emphasised that European financial statements have been suggesting that a high share of 17% of savings across Europe is generated through Public-Private Partnership, albeit the partner’s profit has to be covered, and private funding loans tend to be more expensive. Yet shifting the risk over to private partners, greater experience of the private sector, better long-term cost management and innovativeness do produce the aforesaid 17% in savings.

It is noteworthy that the series of seminars is delivered as part of the “Local Development” Programme implemented by the Ministry of Development Funds and Regional Policy within the framework of the 3rd edition of Norway and European Economic Area Grants.