Local Government Financial Management Act


Published: 2012-01-01

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Local Government Financial Management Act

Passed 16.09.2010
RT I 2010, 72, 543
Entry into force 01.01.2011
Amended by the following legal instruments (show)

Passed
Published
Entry into force

13.01.2011
RT I, 03.02.2011, 1
13.02.2011

07.12.2011
RT I, 23.12.2011, 2
24.12.2011, partially 1.01.2012 and 1.02.2012

Chapter 1 GENERAL PROVISIONS 

§ 1.  Scope of application

Local Government Financial Management Act provides the principles of preparation, adoption, implementation and reporting of local government budgets, measures for ensuring financial discipline of local government financial management units, principles of preparation of plans for application of measures for ensuring financial discipline and principles of the procedure for eliminating the risk of a difficult financial situation.

§ 2.  Definitions

In this Act, the following definitions are used:
1) budget – a plan of operating revenue, operating expenditure, investment activities, financing activities and changes in liquid assets for a budgetary year together with additional requirements, authorities and information which are the basis for financing the activities of a local government during the corresponding year;
2) budget strategy – a financial plan for the coming four budgetary years arising from the development plan of a local government;
3) activities – functions of a local government for the fulfilment of which objectives and indicators showing their fulfilment may be established;
4) objective of activities – a particular measurable purpose expressing the expected impact or results established for a budgetary year on the basis of an analysis of the situation and the development plan;
5) income – operating revenue according to §§ 7 and 14 of this Act, revenue from sale of tangible and intangible fixed assets (hereinafter fixed assets) and holdings or other shares, targeted financing received for acquisition of fixed assets, financial income and received payments for loans;
6) expenses – operating expenditure according to §§ 8 and 15 of this Act, acquisition of fixed assets, holdings or other shares, targeted financing granted for acquisition of fixed assets, financial expenses and granting of loans, and performance of the obligations specified in clause 10 (1) 2) and clause 17 (1) 2);
7) investment – acquisition of fixed assets and value added tax expenses related thereto in connection with the construction or renovation of facilities or acquisition of assets;
8) local government financial management unit – a local government and a unit dependent thereof;
9) dependent unit – a unit which is under direct or indirect dominant influence of a local government within the meaning of the Accounting Act which has received more than half of its income from a local government, the state, another legal persons in public law or units under the dominant influence of the aforementioned persons or support and rental income from local governments and units under the dominant influence thereof more than 10 per cent of the operating revenue of a corresponding year.

§ 3.  Application of Accounting Act

In this Act, definitions are used within the meaning of the Accounting Act, taking into account the specifications of this Act.

§ 4.  Budgetary year

(1) The budgetary year of a local government begins on 1 January and ends on 31 December.
(2) The budget of a local government (hereinafter budget) shall be approved for one budgetary year. The budget may include information concerning a longer period than the budgetary year.

§ 5.  Budget structure and classification

(1) The budget is composed of sections and is either cash based or accrual based. The specifications for preparation of a cash based budget are provided for in §§ 6–12 of this Act. The specifications for preparation of an accrual based budget are provided for in §§ 13–19 of this Act.
(2) Budget sections are:
1) operating revenue;
2) operating expenditure;
3) investment activities;
4) financing activities;
5) changes in liquid assets.
(3) The detail of classification of the budget sections specified in subsection (2) of this section shall comply with at least the provisions of §§ 7–11 of this Act in case of a cash based budget and the provisions of §§ 14–18 in case of an accrual based budget.
(4) Sections, annexes and additional information not specified in subsection (2) of this section may be added to the budget including transactions between administrative agencies and agencies under the governance of administrative agencies and between activities and objectives necessary for specifying the financial situation and supplementing the budget of a local government but which are not taken into account in the budget sections specified in subsection (2).
(5) The budget may additionally be classified by activities and the activities additionally by objectives in the budget sections specified in subsection (2) of this section. Indicators shall be added to the objectives in order to measure their fulfilment. An indicator is a quantitative or qualitative measure expressing the fulfilment of the objective which allows to analyse movement towards the fulfilment of the objective.
(6) A council may authorise a rural municipality or city government to classify the budget in more detail.
(7) A reserve for incidental expenses may be separately planned in the budget as operating expenditure. A rural municipality or city government shall allocate funds from the reserve for specific purposes. The procedure for using the reserve shall be established by a rural municipality or city council.

Chapter 2 GENERAL PRINCIPLES OF PREPARATION OF CASH BASED BUDGET 

§ 6.  Cash based budget

(1) In the case of a cash based budget, business transactions are planned in the period when cash is planned to be received or paid for the transactions.
(2) In addition to transactions related to the receipt or payment of cash, the following shall be recorded in the budget:
1) transactions related to targeted financing in the budget sections of operating revenue, operating expenditure and investment activities in the case of which the transferor of targeted financing shall transfer the cash directly to the supplier from whom the local government receives goods or services in the period when transfer of cash is planned;
2) acquisition of fixed assets under financial lease conditions or on the basis of service concession agreements in the budget sections of investment activities and financing activities in the period when obtaining the right of use of fixed assets under financial lease conditions or on the basis of service concession agreements is planned.

§ 7.  Budget section of operating revenue of cash based budget

(1) In the budget section of operating revenue, revenue shall be classified according to economic content at least as follows:
1) tax revenue;
2) revenue from sale of goods and services;
3) received support;
4) other operating revenue.
(2) The following are not planned in the budget section of operating revenue:
1) targeted financing received for acquisition of fixed assets;
2) revenue from sale of fixed assets;
3) revenue from sale of holdings and other shares;
4) financial income.

§ 8.  Budget section of operating expenditure of cash based budget

(1) In the budget section of operating expenditure, expenditure shall be classified according to economic content at least as follows:
1) granted support
2) other operating expenditure.
(2) Value added tax expenses related to business transactions shall be recorded together with the cost of goods and services depending on the classification of cost of goods and services.
(3) The following are not planned in the budget section of operating expenditure:
1) targeted financing granted for acquisition of fixed assets;
2) acquisition of fixed assets;
3) acquisition of holdings and other shares;
4) financial expenses.

§ 9.  Budget section of investment activities of cash based budget

(1) The budget section of investment activities shall be classified according to economic content at least as follows:
1) acquisition of fixed assets;
2) sale of fixed assets;
3) targeted financing received for acquisition of fixed assets;
4) targeted financing granted for acquisition of fixed assets;
5) acquisition of holdings;
6) sale of holdings;
7) acquisition of other shares;
8) sale of other shares;
9) granted loans;
10) received payments for loans;
11) financial income and financial expenses.
(2) In order to calculate the total sum of the budget section of investment activities, the sales revenue specified in clauses (1) 2), 6) and 8) of this section, received targeted financing specified in clause 3), received payments for loans specified in clause 10) and the difference between the financial income and financial expenses specified in clause 11) are added up from which the acquisition cost specified in clauses 1), 5) and 7), granted targeted financing specified and in clause 4) and granted loans specified in clause 9) are deducted.

§ 10.  Budget section of financing activities of cash based budget

(1) The budget section of financing activities shall be classified at least as follows:
1) taking of loans, issuing of bonds, assumption of finance lease and factoring obligations and assumption of obligations on the basis of service concession agreements;
2) repayment of loans taken, performance of finance lease and factoring obligations, redemption of bonds issued and repayments on the basis of service concession agreements.
(2) In order to calculate the total sum of the budget section of financing activities, funds planned for the assumption of obligations specified in clause (1) 1) of this section are added up from which funds planned for the performance of the obligations specified in clause 2) are deducted.

§ 11.  Budget section of changes in liquid assets of cash based budget

(1) The budget section of changes in liquid assets shall be classified as follows:
1) changes in the balance of cash and bank accounts;
2) changes in the balance of shares of money market and interest funds;
3) changes in the balance of acquired bonds.
(2) Assets which comply with subsection 36 (1) of this Act are deemed to be liquid assets.
(3) Items specified in subsection (1) of this section may be planned as changes in liquid assets under one item.
(4) Increase and decrease in the balance of liquid assets shall be recorded in the budget section of changes in liquid assets correspondingly with a plus or minus.

§ 12.  Balance, surplus and deficit of cash based budget

(1) For the purposes of this Act, budget outcome shall mean the difference between the total amount of the budget section of operating revenue and the total amount of the budget section of operating expenditure to which the total amount of the budget section of investment activities has been added. budget outcome shall equal to the difference between the total amount of the budget section of changes in liquid assets and the total amount of the budget section of financing activities.
(2) Budget is balanced if budget outcome is equal to zero.
(3) Budget is in surplus if budget outcome is positive.
(4) Budget is in deficit if budget outcome is negative.

Chapter 3 GENERAL PRINCIPLES OF PREPARATION OF ACCRUAL BASED BUDGET 

§ 13.  Accrual based budget

In the case of an accrual based budget, transactions are recorded when they occur regardless of when cash is received or paid for the transactions.

§ 14.  Budget section of operating revenue of accrual based budget

(1) In the budget section of operating revenue, revenue shall be classified according to economic content at least as follows:
1) tax revenue;
2) revenue from sale of goods and services;
3) received support;
4) other operating revenue.
(2) The following are not planned in the budget section of operating revenue:
1) profit and loss from sale of fixed assets;
2) targeted financing received for acquisition of fixed assets;
3) financial income.
(3) Changes in the claims and obligations related to revenue may be planned in the budget section of operating revenue and taken into account in the total amount thereof if such changes are forecasted to have a significant impact on the changes in the balance of cash and bank accounts recorded in the budget section of changes in liquid assets.

§ 15.  Budget section of operating expenditure of accrual based budget

(1) In the budget section of operating expenditure, expenditure shall be classified according to economic content at least as follows:
1) granted support;
2) other operating expenditure.
(2) The following are not planned in the budget section of operating expenditure:
1) depreciation and revaluation of fixed assets;
2) targeted financing granted for acquisition of fixed assets;
3) financial expenses;
4) value added tax expenses related to acquisition of fixed assets.
(3) Changes in the claims and obligations related to expenditure may be planned in the budget section of operating expenditure and taken into account in the total amount thereof if such changes are forecasted to have a significant impact on the changes in the balance of cash and bank accounts recorded in the budget section of changes in liquid assets.

§ 16.  Budget section of investment activities of accrual based budget

(1) The budget section of investment activities shall be classified according to economic content at least as follows:
1) acquisition of fixed assets;
2) sale of fixed assets;
3) targeted financing received for acquisition of fixed assets;
4) targeted financing granted for acquisition of fixed assets;
5) acquisition of holdings;
6) sale of holdings;
7) acquisition of other shares;
8) sale of other shares;
9) granted loans;
10) received payments for loans;
11) financial income and financial expenses.
(2) The following shall not be planned in the budget section of investment activities:
1) non-monetary targeted financing received for acquisition of fixed assets and fixed assets received in connection with such financing, provided that it does not involve sale of goods and services by the supplier;
2) non-monetary targeted financing granted for acquisition of fixed assets and non-monetary transfer of fixed assets in connection with such financing;
3) non-monetary contributions to equities of companies, foundations and non-profit associations and non-monetary payments from equities of companies, foundations and non-profit associations.
(3) The sales specified in clauses (1) 2), 6) and 8) of this section are planned as sales revenue, not as profit or loss from sale.
(4) Investments shall be planned in the budget section of investment activities as acquisition of fixed assets together with value added tax expenses related to the acquisition.
(5) In order to calculate the total sum of the budget section of investment activities, the sales revenue specified in clauses (1) 2), 6) and 8) of this section, received targeted financing specified in clause 3), received payments for loans specified in clause 10) and the difference between the financial income and financial expenses specified in clause 11) are added up from which the acquisition cost specified in clauses 1), 5) and 7), granted targeted financing specified and in clause 4) and granted loans specified in clause 9) are deducted.
(6) Changes in the claims and obligations related to investment activities may be planned in the budget section of investment activities and taken into account in the total amount thereof if such changes are forecasted to have a significant impact on the changes in the balance of cash and bank accounts recorded in the budget section of changes in liquid assets.

§ 17.  Budget section of financing activities of accrual based budget

(1) The budget section of financing activities shall be classified at least as follows:
1) taking of loans, issuing of bonds, assumption of finance lease and factoring obligations and assumption of obligations on the basis of service concession agreements;
2) repayment of loans taken, performance of finance lease and factoring obligations, redemption of bonds issued and repayments on the basis of service concession agreements.
(2) In order to calculate the total sum of the budget section of financing activities, funds planned for the assumption of obligations specified in clause (1) 1) of this section are added up from which funds planned for the performance of the obligations specified in clause 2) are deducted.

§ 18.  Budget section of changes in liquid assets of accrual based budget

(1) The budget section of changes in liquid assets shall be classified as follows:
1) changes in the balance of cash and bank accounts;
2) changes in the balance of shares of money market and interest funds;
3) changes in the balance of acquired bonds.
(2) Assets which comply with subsection 36 (1) of this Act are deemed to be liquid assets.
(3) Items specified in subsection (1) of this section may be planned as changes in liquid assets under one item.
(4) Increase and decrease in the balance of liquid assets shall be recorded in the budget section of changes in liquid assets correspondingly with a plus or minus.

§ 19.  Balance, surplus and deficit of accrual based budget

(1) For the purposes of this Act, budget outcome shall mean the difference between the total amount of the budget section of operating revenue and the total amount of the budget section of operating expenditure to which the total amount of the budget section of investment activities has been added. Budget outcome shall equal to the difference between the total amount of the budget section of changes in liquid assets and the total amount of the budget section of financing activities.
(2) Budget is balanced if budget outcome is equal to zero.
(3) Budget is in surplus if budget outcome is positive.
(4) Budget is in deficit if budget outcome is negative.

Chapter 4 PREPARATION OF BUDGET STRATEGY AND PREPARATION, ADOPTION, PUBLICATION AND IMPLEMENTATION OF BUDGET 

§ 20.  Preparation of budget strategy

(1) Budget strategy shall be prepared for the achievement of the objectives provided for in the development plan in order to plan the financing of intended activities. Budget strategy shall be prepared and processed in accordance with the provisions of § 37 of the Local Government Organisation Act.
(2) Budget strategy shall be prepared for the coming four budgetary years.
(3) The following shall be presented in the budget strategy:
1) an analysis of the economic situation of a local government and forecast for the period of the budget strategy;
2) actual operating revenue classified at least as specified in subsection 7 (1) or 14 (1) of this Act, estimated operating expenditure classified at least as specified in subsection 8 (1) or 15 (1), the most significant activities and investments of the budget section of investment activities together with the forecasted total value and potential sources of financing, estimated volume of financing activities and changes in liquid assets regarding the year preceding the adoption of the budget strategy, and the above planned for the current year and forecasted for the period of the budget strategy;
3) an overview of the economic situation of a local government and the dependent units thereof, including figures necessary for calculating the operating result and net debt rate;
4) the operating result of a local government and local government financial management unit during the previous year, operating result forecasted for the current year and for every year of the budget strategy period as at the end of every year pursuant to § 33 of this Act;
5) actual net debt of a local government and local government financial management unit during the previous year, net debt forecasted for the current year and for the budget strategy period as at the end of every year pursuant to § 34 of this Act;
6) other information which is important in terms of organising the financial management of a local government.
(4) Operating revenue, operating expenditure and investments may additionally be planned by activities in the budget strategy.
(5) A list of additional activities may be set out in the budget strategy which shall be financed if the planned revenue is exceeded.

§ 21.  Bases for preparation, adoption and implementation of budget

(1) The detail of classification and content of a budget shall be determined, a draft budget shall be prepared and processed, a budget shall be adopted and published, a budget shall be implemented and unincurred expenses shall be planned in accordance with this Act, the statutes of a local government and other legislation, the development plan and budget strategy.
(2) The council may authorise a rural municipality or city government to establish the procedure for the preparation and implementation of the budget and planning of unincurred expenses.

§ 22.  Preparation of draft budget

(1) A rural municipality or city government shall prepare a draft budget pursuant to the provisions of §§ 5 and 21 of this Act. An explanatory note shall be appended to the draft budget.
(2) At least the following information shall be presented in the explanatory note:
1) explanations and justification regarding the previous, current and coming budgetary year according to the classification specified in subsection 5 (3) of this Act.
2) an overview of the plan to fulfil the objectives indicated in the development plan and other development documents for the coming budgetary year and the activities planned for their fulfilment;
3) an overview of the investments planned for the budgetary year together with the cost and sources of financing;
4) an overview of activities planned for the coming budgetary year in the plan for the application of measures for ensuring financial discipline or in the recovery plan during the procedure of eliminating the risk of a difficult financial situation;
5) other relevant information concerning the budgetary year.
(3) A rural municipality or city government shall submit the draft budget and explanatory note to the council not later than one month before the beginning of the budgetary year.
(4) The draft budget and explanatory note shall be published on the website of the local government within seven working days after their submission to the council. The explanatory note shall be available on the website until the end of the budgetary year.

§ 23.  Adoption of budget

(1) The initiator of a proposal for amending the draft budget shall append justification and calculations to the proposal which demonstrate the expenses arising from the planned amendments and the sources for covering such expenses. Upon assessment of a proposal made by the council, the opinion of the rural municipality or city government shall be heard.
(2) The council shall adopt the budget by a regulation.
(3) The budget shall be published on the website of the local government within seven working days after adoption of the budget. The minutes of council sessions and meetings of council committees concerning the budgetary procedure shall also be published on the website.
(4) The budget shall enter into force as of the beginning of the budgetary year.

§ 24.  Budget not adopted by beginning of budgetary year

(1) If a council has not adopted a budget by the beginning of the budgetary year, the rural municipality or city government may incur expenses every month in an amount of up to one twelfth of the expenses prescribed for the previous budgetary year until a budget is adopted if such expenses are planned in the draft budget of the new budgetary year at least to the same extent.
(2) If the amount of expenses planned in the draft budget of the new budgetary year is smaller than the amount of expenses of the previous budgetary year, the rural municipality or city government may incur such expenses in the amount of up to one twelfth of the expenses planned in the draft budget of the new budgetary year.
(3) A rural municipality or city government may incur expenses planned in the draft budget if the term for incurring such expenses arrives before the budget is adopted and if such expenses arise from:
1) law, legislation issued on the basis thereof or legislation of the council;
2) a contract entered into for the performance of the obligations specified in subsection 34 (2) of this Act before the beginning of the budgetary year;
3) subsection 27 (2) of this Act;
4) a court judgment.
(4) If a council is unable to adopt a budget within three months after the beginning of the budgetary year or after the adoption of the state budget if it has not been adopted by the beginning of the budgetary year, the council is unable to act.

§ 25.  Compensation for decrease in budget income or increase in budget expenses

If decreases in budget income and increases in budget expenses of a local government occur during the current budgetary year on the basis of legislation enacted by the Riigikogu or the Government of the Republic after the beginning of the budgetary year of the local government, the state shall compensate for such impacts of legislation to the same extent or proportionally decrease the obligations imposed on the local government.

§ 26.  Supplementary budget

(1) A budget may be amended by a supplementary budget during the budgetary year. A rural municipality or city government shall prepare a draft supplementary budget and submit it to the council. An explanatory note with justification regarding the need for the supplementary budget shall be appended to the draft supplementary budget.
(2) The draft supplementary budget and the explanatory note shall be published in the manner and at the time provided by subsection 22 (4) of this Act.
(3) The council shall adopt the supplementary budget by a regulation. The supplementary budget shall be processed by the council and the adopted supplementary budget shall be published pursuant to subsections 23 (1) and (3) of this Act.
(4) A supplementary budget need not be prepared if:
1) revenue increases and expenditure is not increased;
2) expenditure decreases and it is not caused by decreases in revenue;
3) revenue decreases and expenditure decreases by the same amount;
4) revenue increases by funds allocated for specific purposes or by donations and expenditure increases by expenses incurred from such funds or donations.
(5) If a supplementary budget is prepared during a budgetary year, the funds for specific purposes or donations and expenses incurred from such funds or donations specified in clause (4) 4) of this section shall be planned in the supplementary budget.
(6) A rural municipality or city government may incur expenses planned in the draft supplementary budget before the supplementary budget is adopted if the term for incurring such expenses arrives before the supplementary budget is adopted and if such expenses arise from:
1) law, legislation issued on the basis thereof or legislation of the council;
2) a contract entered into for the performance of the obligations specified in subsection 34 (2) of this Act before the beginning of the budgetary year;
3) subsection 27 (2) of this Act;
4) a court judgment.
(7) The council shall adopt the amendments arising from a recovery plan by the supplementary budget within one month from the approval of the plan. If the budget of a local government has not yet been adopted, the amendments shall be recorded in the draft budget of the local government.

§ 27.  Planning of unincurred expenses in following budgetary year

(1) Expenses prescribed in the budget of the previous year which remained unincurred shall be planned in the current budgetary year either by the budget, if the budget has not been adopted by the beginning of the year, or by the supplementary budget.
(2) Unincurred expenses of the previous budgetary year may be planned in the budget or supplementary budget in budget sections as the total amount if such expenses arise from:
1) a contract entered into for the implementation of investments or announced public procurement;
2) a contract of granted targeted financing entered into for the acquisition of fixed assets;
3) targeted financing received on the basis of the contract entered into.
(3) In the case of planning the expenses specified in subsection (2) of this section as total amounts, a rural municipality or city government shall establish a more detailed division of the expenses. Expenses carried forward may be used for the purpose prescribed in the budget of the previous year.

§ 28.  Implementation of budget

(1) A rural municipality or city government shall organise the implementation of budget and accounting. Implementation of the budget is the collection of revenue, incurring of expenses and transactions with assets and obligations, as well as keeping an account thereof pursuant to the accounting principles used in the preparation of the budget.
(2) Rural municipality and city governments, local government agencies or agencies under the governance of administrative agencies are prohibited from concluding transactions which are not prescribed by the budget except in the case specified in subsection 24 (3) and clause 26 (4) 4) and subsection 26 (6) of this Act.
(3) Rural municipality and city governments, local government agencies or agencies under the governance of administrative agencies may enter into contracts for assumption of obligations specified in subsections 34 (2) and (7) of this Act, grant of loans or securing obligations for a period longer than the budgetary year in accordance with the budget strategy and on the basis of an authorisation granted by the council.
(4) In the case of an accrual based budget, depreciations, write-downs, write-offs, value adjustments arising from accounting principles, receivables regarded as doubtful, exchange gains and losses, forming and adjustment of appropriations and other revaluations and adjustments arising from the accounting principles may be recorded upon implementation of the budget regardless of whether they were prescribed in the budget or not.
(5) Upon implementation of the budget sections of operating expenditure and investment activities, one of these sections may be implemented more by the same extent if the other section is not implemented and if it is caused by the conditions appeared after the organisation of procurements due to which upon implementation of the budget the planned transaction is classified according to the rules for registering fixed assets differently than prescribed in the budget.

Chapter 5 REPORTING 

§ 29.  Preparation and approval of annual report

(1) Annual reports shall be prepared in accordance with the principles provided for in the Accounting Act, taking into account the specifications provided for in this Act.
(2) A rural municipality or city government shall prepare and approve an annual report. The annual report shall be signed and dated by the rural municipality or city mayor immediately after the rural municipality or city government has approved the report.
(3) In addition to the provisions of §§ 24 or 31 of the Accounting Act, the management report shall contain:
1) an overview of the fulfilment of the objectives prescribed in the development plan or other development documents of a local government during the accounting year. If indicators are applied, intended and actual information of the indicators shall be presented in the overview;
2) the value of operating result of the preceding five accounting years pursuant to subsection 33 (1) of this Act;
3) net debt of the preceding five accounting years pursuant to subsection 34 (1) of this Act;
4) reasons for failure to comply with the permitted value of the operating result specified in subsection 33 (2) of this Act or the upper limit on net debt specified in subsections 34 (3)–(5) of this Act if such failure has occurred;
5) an overview of the implementation of the plan for the application of measures for ensuring financial discipline or the recovery plan during a corresponding procedure.
(4) The report on the implementation of the budget which is a part of the annual accounts shall contain according to the classification specified in subsection 5 (3) of this Act at least the following:
1) initial budget of the accounting year;
2) final budget of the accounting year;
3) information on the implementation of the budget of the accounting year.
(5) An initial budget is the budget of an accounting year adopted pursuant to subsection 23 (2) of this Act.
(6) A final budget is the initial budget together with the amendments arising from supplementary budgets, clause 26 (4) 4) of this Act and the decision to use the reserve.
(7) It is not compulsory to present comparable figures concerning the financial year preceding the accounting year in the report on the implementation of the budget.
(8) An annex to the annual accounts shall be prepared concerning the report on the implementation of the budget which shall contain:
1) explanations and justification regarding the significant differences between the initial budget and the final budget;
2) explanations and justification regarding the significant differences between the final budget and the implementation of the budget;
3) in the case of an accrual based budget, comparison between the figures with corresponding titles presented in the report on the implementation of the budget and other main statements of and annexes to the annual accounts at least according to the classification specified in subsection 5 (3) of this Act which shall also include the actual figures which were not planned on the basis of this Act or which were planned in other budget sections and explanations and justification regarding significant differences.
(9) Within the meaning of the Accounting Act and legislation established on the basis thereof, companies, foundations and non-profit organisations under dominant or significant influence of a local government shall submit to the rural municipality or city government within four months after the end of the financial year the approved annual report and the sworn auditor's report if auditing of the annual accounts is compulsory on the basis of the Auditors Activities Act.
(10) Before the approval of the annual report by the council, the revision committee shall review the annual report submitted to the council and prepare a written report concerning the annual report, which shall be presented to the council. The revision committee shall state in the report whether it supports the approval of the annual report prepared by the rural municipality or city government. In addition, the revision committee shall give an overview of its activities.
(11) A rural municipality or city government shall submit the approved and signed annual report to the council for approval not later than by 31 May. The sworn auditor's report and decision of the rural municipality or city government on the approval of the report shall be appended to the annual report. The council shall approve the annual report by a resolution not later than by 30 June.
(12) The annual report, the sworn auditor's report, the officially recorded decision of the rural municipality or city government on the approval of the report and the resolution of the council on the approval of the report shall be published within seven working days after their approval on the website of the local government.
(13) An audit of the annual accounts of a local government shall be conducted in accordance with the Auditors Activities Act.

§ 30.  Budget and budget strategy submitted to state

(1) A local government shall submit the budget strategy, budget and supplementary budget in the prescribed format and information on the implementation of the budget to the Ministry of Finance.
(2) The conditions and format for submitting the documents specified in subsection (1) of this section shall be established by a regulation of the Minister of Finance.
(3) A local government shall submit information on the budget strategy by 15 October of the year preceding the budgetary year.
(4) A local government shall submit information on the budget, supplementary budget and implementation of the budget by the last date of the month following each quarter.

§ 31.  Other information on financial activities

(1) In justified cases, the Ministry of Finance has the right to receive information on one occasion from local governments which is not included in the annual report, budget or budget strategy, or reports established on the basis of subsection 35 (2) of the Accounting Act, and other information, including copies of the contracts entered into for the assumption of debt obligations specified in subsection 34 (2) of this Act. If such information concerns all local governments, the Ministry of Finance shall inform national local government associations (hereinafter national association) before requesting the information.
(2) A local government shall notify the Ministry of Finance of entry into service concession agreements by submitting information on the content, duration, financial terms and conditions, and financial volume of the project. The information shall be submitted within 30 working days from entry into the agreement. The Ministry of Finance has the right to demand the submission of the agreements concerning the above projects and other documents related thereto.
(3) State agencies, except the National Audit Office, shall ask for an approval from the Ministry of Finance before requesting additional financial information from local governments, unless the reporting is conducted on the basis of legislation or arises from a contract.
(4) In the application submitted for the receipt of financial information specified in subsection (3) of this section, a state agency shall indicate the purpose for requesting financial information and the content and volume of the requested information. The Ministry of Finance shall present its opinion to the state agency within ten working days after the date of receipt of the application. The Ministry of Finance has the right to disapprove the application if such information can be obtained from the existing reports.

Chapter 6 ENSURING FINANCIAL DISCIPLINE 

§ 32.  Measures for ensuring financial discipline

(1) Measures for ensuring financial discipline of a local government include compliance with:
1) the permitted value of the operating result of a local government and local government financial management unit for the purposes of § 33 of this Act;
2) the upper limit on net debt of a local government and local government financial management unit for the purposes of § 34 of this Act.
(2) The value of the operating result and net debt shall be calculated on the basis of the information of accrual based accounting:
1) regarding a local government as at the end of the accounting year;
2) regarding a local government financial management unit in consolidated form as at the end of the accounting year;
(3) Consolidation shall be carried out in accordance with subsection 27 (4) of the Accounting Act.
(4) Specific calculation methods for the figures specified in subsection 33 (1) and subsection 34 (1) of this Act shall be established by a regulation of the Minister of Finance.

§ 33.  Permitted value of operating result

(1) Operating result is the difference between operating revenue and operating expenditure.
(2) The permitted value of operating result as at the end of an accounting year is zero or positive.

§ 34.  Upper limit on net debt

(1) Net debt is the difference between the amount of the debt obligations specified in subsection (2) of this section and the total amount of the liquid assets specified in § 36 of this Act.
(2) The following obligations recorded in the balance sheet are taken into account upon calculating net debt:
1) loans taken;
2) finance lease and factoring obligations;
3) bonds issued;
4) obligations not performed within the term;
5) advance payments received as targeted financing and co-financing subject to repayment;
6) long-term debts to suppliers;
7) obligations arising from service concession agreements;
8) other long-term obligations requiring future payments.
(3) At the end of an accounting year, the net debt may amount to a sixfold difference between the operating revenue and operating expenditure of the accounting year ended but shall not exceed the total amount of the operating revenue of the same accounting year.
(4) If the sixfold difference between the operating revenue and operating expenditure calculated on the basis of subsection (3) of this section is less than 60 per cent of the operating revenue of the corresponding accounting year, the net debt may amount to up to 60 per cent of the operating revenue of the corresponding accounting year.
(5) Net debt may exceed the upper limit on net debt established by subsections (3) and (4) of this section by the total amount of debt obligations assumed to provide bridge financing for support.
(51) Net debt my exceed the upper limit on net debt established by subsections (3) and (4) of this section during the period from 1 January 2011 until 31 December 2015 in order to comply with the requirements of the Council Directive concerning urban waste water treatment 91/271/EEC (OJ L 135, 30.5.1991, pp 40–52) and the Council Directive 98/83/EC on the quality of water intended for human consumption (OJ L 330, 5.12.1998, pp. 32–54) by the total amount of debt obligations assumed to cover self-financing of the projects which are being implemented if the loan for such projects is granted by the person specified in subsection 56 (1) of the Environmental Charges Act from own funds without increasing the debt of the public sector.
[RT I, 03.02.2011, 1 - entry into force 13.02.2011]
(6) For the purposes of this Act, bridge financing shall mean the assumption of debt obligations to the extent of targeted foreign financing and received co-financing related thereto in order to make payments within the framework of the respective project until the receipt of targeted financing and co-financing.
(7) In addition to the on-balance sheet debt obligations specified in subsection (2) of this section, lease obligations of the following periods arising from non-cancellable operational leasing contracts with a non-cancellable period of more than one year recorded in off-balance sheet items shall be taken into account in the net debt.
(8) Upon calculation of the difference between the operating revenue and operating expenditure specified in subsections (3) and (4) of this section, leasing costs arising from contracts specified in subsection (7) of this section shall be deducted from the operating expenditure of the accounting year.

§ 35.  Strengthening consolidated budget position and increasing financial capability of local governments

(1) If the agreement specified in subsection (2) of this section is reached, support shall be prescribed by the state budget for local governments for increasing financial capability and strengthening the consolidated budget position (hereinafter support for increasing financial capability).
(2) The agreed amount of the consolidated annual deficit of local government financial management units which constitutes the basis for the payment of the support for increasing financial capability and the corresponding amount of the support shall be determined by an agreement between the authorised representatives of local governments and local government associations and the representatives of the Government of the Republic. The amount of the support for increasing financial capability and the agreed amount of the consolidated annual deficit of local government financial management units which constitutes the basis for the payment of support shall be prescribed in the state budget.
(3) If the agreement specified in subsection (2) of this section is not reached, the maximum permitted amount of the consolidated annual deficit of local government financial management units may be prescribed in the state budget. Annual limits on deficit for local governments shall be determined in accordance with subsection (8) of this section.
(4) Principles for calculating the consolidated deficit of local government financial management units shall be determined by a regulation of the Minister of Finance established on the basis of subsection 32 (4) of this Act.
(5) The national association shall organise the allocation of limits on deficit to local governments within the agreed annual deficit specified in subsection (2) of this section. Upon allocation of the limits, the national association shall consult with local governments which are not members of the association in a timely and appropriate manner. The limit on deficit for a local government financial management unit shall be presented regarding the local government.
(6) If an agreement on the allocation of limits on deficit exists, the national association shall submit a proposal to the Ministry of Finance concerning the allocations of the limits on annual deficit to local governments by 1 December of the year preceding the budgetary year.
(7) If the national association fails to submit the information on the limits on annual deficit for all local governments by the date specified in subsection (6) of this section, the limit on annual deficit for every local government shall be calculated in proportion to the allocation of income tax to local governments on the basis of the information of the accounting year ended.
(8) The Minister of Finance shall approve the limits on annual deficit of local government financial management units by local governments.
(9) The actual consolidated surplus or deficit of local government financial management units of the year preceding the year when support is allocated shall constitute the basis for the payment of the support for increasing financial capability. The support for increasing financial capability paid to local governments shall be reduced by the amount by which the actual consolidated deficit of local government financial management units exceeded the consolidated annual deficit of local government financial management units specified in subsection (2) of this section.
(10) If at the end of a budgetary year the actual annual deficit of a local government financial management unit exceeds the limit approved on the basis of subsection (8) of this section, the support for increasing financial capability granted to the local government on the basis of subsection (12) of this section shall be reduced in the following years by the amount which exceeded the limit on deficit.
(11) The support for increasing financial capability shall be allocated to local governments through the budget equalisation fund prescribed in clause 9 (2) 1) of the State Budget Act to the extent determined in the state budget, taking into account the conditions specified in subsections (9) and (10) of this section.
(12) The extent, conditions and procedure for the payment of the support for increasing financial capability shall be established by a regulation of the Government of the Republic.
(13) The support for increasing financial capability may be used to finance investments, acquire holdings and shares, and perform obligations specified in clauses 34 (2) 1)–3) and 7).

Chapter 7 REQUIREMENTS FOR ASSETS AND ASSUMPTION OF OBLIGATIONS 

§ 36.  Liquid assets

(1) For the purposes of this Act, liquid assets shall mean cash and funds on bank accounts, shares and units of money market and interest funds, and acquired bonds.
(2) A local government may own the following as liquid assets:
1) deposits in credit institutions, if the credit rating of the credit institution or a foreign credit institution acting as a parent undertaking or a branch thereof is not lower than by two rating categories from the rating issued to the Estonian state by an internationally recognised rating agency;
2) bonds which issuer has been issued a credit rating at least equal to the rating issued to the Estonian state by an internationally recognised rating agency;
3) shares and units of money market and interest funds which comply with the requirements provided for in the Investment Funds Act concerning UCITS-s;
4) cash, but not exceeding the upper limit on the amount kept in cash established by a rural municipality or city government.
(3) A credit institution or a foreign credit institution acting as a parent undertaking or a branch thereof who is the issuer of the securities or depositary of the deposits specified in clauses (2) 1) and 2) of this section must be established in the contract state of the European Economic Area or the prudential ratios applicable to such institution must comply with the requirements which are at least as strict as those established by the legislation of the European Union.
(4) The conditions and procedure for the investment and use of liquid assets of a local government shall be established by the rural municipality or city government, taking into account the requirements of this Act.

§ 37.  Requirements for other assets

(1) A local government shall not acquire shares and other equity instruments and securities which are not considered liquid assets according to § 36 of this Act unless such acquisition is necessary for the performance of functions arising from subsections 6 (1) and (2) of the Local Government Organisation Act or other acts.
(2) The council may, in accordance with the budget strategy, authorise the rural municipality or city government to grant a loan only to a dependent unit thereof and to secure the obligations assumed by the unit.
(3) The council may, in accordance with the budget strategy, authorise the rural municipality or city government for the performance of functions arising from subsections 6 (1) and (2) of the Local Government Organisation Act to encumber an important immovable or transfer the right of superficies encumbering the immovable or encumber the immovable with limited real rights in such a manner that upon the transfer or encumbrance of the immovable or right of superficies, the immovable shall be used for the same purpose.

§ 38.  Requirements for assumption of obligations

(1) A local government may take loans, issue bonds, assume finance lease and factoring obligations and obligations on the basis of service concession agreements only for investments and the acquisition of holdings, shares and other equity instruments, for granting loans specified in subsection 37 (2) of this Act and performing debt obligations specified in clauses 34 (2) 1)–3) and 7).
(2) In addition to the provisions of subsection (1) of this section, a local government may take loans for the purpose of managing cash flows provided that the loan shall be repaid by the end of the budgetary year.

Chapter 8 PLAN FOR APPLICATION OF MEASURES FOR ENSURING FINANCIAL DISCIPLINE 

§ 39.  Failure to apply measures for ensuring financial discipline

(1) If a local government or local government financial management unit fails to comply with the permitted value of the operating result specified in subsection 33 (2) of this Act or exceeds the upper limit on net debt prescribed by subsections 34 (3)–(5) as at the end of an accounting year for the first time, the Ministry of Finance shall inform the local government concerned of the consequences of continuous violation.
(2) If a local government or local government financial management unit fails to comply with the permitted value of the operating result specified in subsection 33 (2) of this Act or exceeds the upper limit on net debt prescribed by subsections 34 (3)–(5) as at the end of two consecutive accounting years, the local government shall prepare a plan for the application of measures for ensuring financial discipline.
(3) The application of measures for ensuring financial discipline shall be verified on the basis of the figures presented in the annual report as at the date of approval of the corresponding annual report by the council.

§ 40.  Preparation of plan for application of measures for ensuring financial discipline

(1) In the case specified in subsection 39 (2) of this Act, the rural municipality or city government shall prepare a plan for the application of measures for ensuring financial discipline (hereinafter plan) within 60 days after the date of approval of the annual report and present it to the council for approval. The council shall approve the plan within 30 days after the receipt of the draft plan.
(2) The plan shall include activities as a result of which it is possible to apply measures for ensuring financial discipline, description of the content of the activities and their monetary value. The plan shall not prescribe activities which hinder the application of measures for ensuring financial discipline. A financial plan for the period of validity of the plan which has been prepared in the format for submitting information on budget strategy prescribed by subsection 30 (2) of this Act shall be appended to the plan.
(3) The plan shall be prepared in such a manner that it is possible to apply measures for ensuring financial discipline by the activities prescribed therein upon termination of the validity of the plan. The plan shall be valid for the year of preparation thereof and the following three budgetary years.
(4) The plan which has been approved by the council shall constitute the basis for the preparation of the budget, supplementary budget, budget strategy and development plan during the period of validity of the plan.
(5) The plan which has been approved by the council shall be presented to the Ministry of Finance and the Ministry of Internal Affairs and the plan shall be published on the website of the local government within seven working days from the approval thereof.
(6) If the plan or the amended plan does not comply with the conditions specified in subsection (2) of this section, the Ministry of Finance shall submit to the local government within working ten days from the receipt of the plan a reasoned proposal to bring the plan into conformity with the requirements of the Act within 60 days from the receipt of the proposal.
(7) Upon amendment of the plan, the local government shall present the amended plan to the Ministry of Finance and the Ministry of Internal Affairs and publish it on the website of the local government within seven working days from the approval thereof.
(8) In accordance with subsection 37 (7) of the Local Government Organisation Act, the budget strategy shall be brought into conformity with the plan approved by the council within 60 days from the approval of the plan.
(9) The plan for the application of measures for ensuring financial discipline may be prepared with regard to a local government financial management unit in such a manner that a health care provider, within the meaning of the Health Services Organisation Act, may with the approval of the Ministry of Finance increase its net debt up to 60 per cent of the amount of operating revenue, if necessary, if the compliance with the conditions specified in subsection (2) of this section is ensured.

§ 41.  Termination of implementation of plan for application of measures for ensuring financial discipline

The implementation of the plan shall be deemed to be terminated:
1) as at the date of approval of the annual report, if the local government and local government financial management unit apply measures for ensuring financial discipline as at the end of the accounting year;
2) as at the date of the decision to initiate of the procedure for eliminating the risk of a difficult financial situation specified in subsection 44 (3) of this Act or
3) as at the end of the year of entry into force of the alteration of administrative-territorial organisation.

Chapter 9 RISK OF DIFFICULT FINANCIAL SITUATION 

§ 42.  Risk of difficult financial situation

(1) A local government is in risk of a difficult financial situation if:
1) the council of the local government has not approved a plan which complies with subsection 40 (3) of this Act by the term prescribed by 40 (6) of this Act;
2) the local government or local government financial management unit does not apply measures for ensuring financial discipline according to the annual report approved as at the end of the last accounting year of the period of validity of the plan specified in subsection 40 (3) of this Act;
3) the local government is permanently incapable of performing assumed obligations and satisfying the claims of creditors within the term.
(2) If a local government or local government financial management unit fails to apply measures for ensuring financial discipline, the local government may submit an application to the Ministry of Finance to initiate the process for eliminating the risk of a difficult financial situation.
(3) If a local government and local government financial management unit apply measures for ensuring financial discipline but the local government is permanently incapable of performing the assumed obligations, the local government may submit an application to the Ministry of Finance to initiate the process for eliminating the risk of a difficult financial situation.
(4) Reasons for the emergence of the risk of a difficult financial situation shall be given in the application specified in subsections (2) and (3) of this section. The Ministry of Finance has the right to request additional information about the financial situation of the local government and set a term for specifying the information presented in the application.

§ 43.  Committee on risk of difficult financial situation

(1) During the procedure for eliminating the risk of a difficult financial situation, a committee on risk of difficult financial situation (hereinafter committee) shall observe the economic activities and financial reports of a local government and the dependent units thereof in order to ensure that the local government and the dependent units thereof act in accordance with law with the aim to eliminate the risk of a difficult financial situation and treat the creditors equally.
(2) The Minister of Finance shall form the committee and approve the statutes thereof.
(3) The committee shall be permanent and the members of the committee shall be two officials of the Ministry of Finance, an official of the Ministry of Internal Affairs and two persons appointed by national associations. The chairman of the committee shall be an official of the Ministry of Finance. The committee may engage experts in its work.
(4) Members of the committee shall be independent of the local government in risk of a difficult financial situation and the dependent unit thereof.
(5) The Ministry of Finance shall ensure support to the work of the committee.
(6) The committee shall make decisions at a meeting of the committee by voting in writing or electronically. All members of the committee participating in a meeting shall be obliged to vote and shall not remain undecided. Decisions of the committee shall be published on the website of the Ministry of Finance.
(7) A member of the committee shall not participate in the making of decisions and shall remove himself or herself if any circumstances exist which give reason to doubt his or her impartiality.
(8) A decision of the committee shall be an administrative act within the meaning of subsection 51 (1) of the Administrative Procedure Act and it may be challenged in accordance with the Administrative Procedure Act.

§ 44.  Initiation of procedure for eliminating risk of difficult financial situation

(1) If circumstances specified in clauses 42 (1) 1) and 2) of this Act become evident, the Ministry of Finance shall submit a reasoned proposal for the initiation of the procedure for eliminating the risk of a difficult financial situation within 20 working days after becoming aware of such circumstances.
(2) If a local government has submitted the application specified in subsections 42 (2) or (3) of this Act, the Ministry of Finance shall forward the application to the committee together with its position on the initiation of the procedure for eliminating the risk of a difficult financial situation within ten working days from the receipt of the application.
(3) The committee shall make a decision to initiate or refuse to initiate the procedure for eliminating the risk of a difficult financial situation.
(4) The committee may refuse to initiate the procedure for eliminating the risk of a difficult financial situation if in the opinion of the committee the local government is able to satisfy the claims of the creditors and apply measures for ensuring financial discipline.
(5) In connection with the initiation of the procedure for eliminating the risk of a difficult financial situation, the council shall submit draft legislation related to the activities specified in clauses 22 (1) 1)–8), 19), 21), 22), 24), 25) and 34)–36) of the Local Government Organisation Act for approval to the committee until the approval of a recovery plan.
(6) For the approval of draft legislation specified in subsection (5) of this section, the council of a local government shall submit draft legislation together with an explanatory note to the committee.
(7) The committee shall refuse to approve draft legislation if the approval thereof would aggravate the financial situation of the local government and the dependent unit thereof or damage the interests of the creditors. In the event of refusal to approve draft legislation, the committee shall present justification therefor.
(8) A local government shall appoint an authorised person who shall participate in the work of the committee without the right to vote within ten working days from the declaration of the risk of a difficult financial situation.

§ 45.  Terms prescribed for committee concerning procedure for eliminating risk of difficult financial situation

(1) The committee shall decide within ten working days from the receipt of draft legislation, proposal, opinion, draft plan or application on:
1) the initiation of the procedure for eliminating the risk of a difficult financial situation or refusal to satisfy the application for initiation of the procedure;
2) the approval or refusal to grant the approval specified in subsection 44 (5) and subsection 49 (2) of this Act;
3) the provision of an opinion on the draft recovery plan and draft financial plan;
4) the termination of the procedure for eliminating the risk of a difficult financial situation or refusal to satisfy the application for termination of the procedure.
(2) The local government shall be notified of the decision of the committee within five working days from making the decision.

§ 46.  Terms prescribed for local government concerning procedure for eliminating risk of difficult financial situation

(1) A local government shall present a draft recovery plan and draft financial plan to the committee for approval within 60 days from:
1) the receipt of the decision to initiate the procedure for eliminating the risk of a difficult financial situation;
2) the receipt of the decision to refuse to satisfy the application for termination of the procedure for eliminating the risk of a difficult financial situation.
(2) A local government council shall approve the recovery plan and financial plan and the amendments thereto within 30 days from the receipt of the opinion on the draft plans and the approval of proposed amendments from the committee.
(3) A local government shall bring all legislation related to the fulfilment of the objectives indicated in the recovery plan into conformity with the recovery plan within 60 days from the acceptance of the recovery plan.
(4) A local government shall submit the approved recovery plan and financial plan and the amendments thereto to the committee within ten working days from the approval thereof.
(5) A local government shall publish the approved recovery plan and financial plan and the amendments thereto on the website of the local government within seven working days from the approval thereof.

§ 47.  Recovery plan

(1) As a result of the implementation of the recovery plan, a local government shall be able to satisfy the claims of the creditors pursuant to the conditions of the recovery plan and the local government and local government financial management unit shall apply measures for ensuring financial discipline.
(2) The period of validity of the recovery plan shall be the year of the preparation of the recovery plan and the four subsequent budgetary years.
(3) If the committee finds that the measures for ensuring financial discipline can be applied or the claims of the creditors can be satisfied earlier than after four budgetary years, the committee may determine in the draft recovery plan and draft financial plan a period shorter than coming four budgetary years for the implementation of the recovery plan.
(4) A recovery plan shall be prepared regarding a local government and shall include:
1) an opinion on the reasons for the emergence of the risk of a difficult financial situation;
2) information on the claims of the creditors;
3) information on the assets and obligations;
4) measures for increasing income and decreasing expenses;
5) restrictions on and conditions for investment activities and assumption of obligations;
6) conditions for performance of obligations and satisfaction of claims by an agreement with the creditors;
7) conditions for the situation when income exceeds the amount forecasted in the financial plan;
8) proposals for the organisation of management and reorganisation of administrative agencies and agencies under the governance of administrative agencies and reduction of the composition of their staff of public servants, if necessary;
9) proposals for amending the legislation of the local government, if necessary;
10) the obligation to obtain an approval of the committee regarding draft budgets or draft supplementary budgets submitted to the council during the period of validity of the recovery plan, if necessary;
11) other information and proposals necessary for recovery.
(5) A financial plan is a part of the recovery plan. Budget sections of a local government shall be planned in the financial plan for the period of implementation of the recovery plan.
(6) A financial plan shall be prepared by budget sections which are classified, in addition to the classification prescribed by subsection 5 (3) of this Act, at least to the detail of the class of account prescribed by the general rules for state accounting established on the basis of subsection 35 (2) of the Accounting Act or, in the absence thereof, to the smallest detail preceding the precision of the class of account at least by areas of activity.
(7) The following regarding a local government and local government financial management unit shall be presented in the financial plan as at the end of each year for the period of validity of the recovery plan:
1) forecasted operating result according to subsection 33 (1) of this Act;
2) forecasted value of operating result according to subsection 33 (2) of this Act;
3) forecasted net debt according to subsection 34 (1) of this Act;
4) forecasted compliance of net debt with the upper limit according to subsections 34 (3)–(5) of this Act.
(8) If a procedure for eliminating the risk of a difficult financial situation has been initiated because the local government financial management unit does not apply measures for ensuring financial discipline due to the activities of a dependent unit, then:
1) the recovery plan may prescribe instructions for directing the financial activities of the dependent units, if necessary;
2) the forecasted operating revenue, operating expenditure, investment activities, financing activities and changes in liquid assets, forecasted surplus or deficit and net debt for the year of preparation of the recovery plan and every coming four budgetary years concerning the dependent units shall be presented in the financial plan.
(9) A recovery plan may be prepared in such a manner that a health care provider, within the meaning of the Health Services Organisation Act, may with the approval of the Ministry of Finance increase its net debt up to 60 per cent of the amount of operating revenue, if necessary, if the compliance with the conditions specified in subsection (1) of this section is ensured.

§ 48.  Preparation and approval of recovery plan

(1) A local government in risk of a difficult financial situation shall prepare a draft recovery plan and a draft financial plan in accordance with § 47 of this Act and submit them to the committee.
(2) If in the opinion of the committee the local government is unable to escape from the risk of a difficult financial situation upon the implementation of the draft recovery plan or the draft financial plan, the committee may submit proposals for amending the draft recovery plan and the draft financial plan. The committee may decide on the addition of information specified in clauses 47 (4) 8)–11) and subsection 47 (8) of this Act to the draft recovery plan. The committee shall provide an opinion on the draft recovery plan and the draft financial plan and, if necessary, propose amendments together with justification to the council for approval.
(3) The recovery plan and financial plan approved by the council shall constitute the basis for the preparation and amendment of the development plan, preparation of the supplementary budget, if the preparation of a supplementary budget is necessary for the implementation of the recovery plan, and the preparation of draft budgets for the coming years. Upon preparation of the draft budget, the classification of the financial plan shall be observed.
(4) If the recovery plan and financial plan have been approved, the financial plan shall substitute for the budget strategy of the local government. The preparation of budget strategy shall be continued as of the year following the year of termination of the procedure for eliminating the risk of a difficult financial situation.

§ 49.  Amendment of recovery plan and budget

(1) If the committee is aware of circumstances which may hinder the implementation of the recovery plan, the committee shall inform the local government.
(2) The council has the right to initiate the amendment of the recovery plan or financial plan and, as a result of amending the financial plan, adopt the budget or supplementary budget. The local government shall submit the proposal for amending the recovery plan and financial plan to the committee for approval. In order to plan expenses on the condition specified in subsection (3) of this section it is not necessary to apply for the approval of the committee.
(3) In every budgetary year during the period of implementation of the recovery plan, the local government may plan amendments in the budget or supplementary budget compared to the financial plan if it does not result in decrease in surplus or increase in deficit. Upon increase in income, the provisions of clause 47 (4) 7) of this Act shall be applied. In other cases, amendments may be planned in every budget section during the budgetary year to the extent of up to 10 per cent of the total annual amount of the corresponding budget section presented in the financial plan.
(4) The committee shall submit relevant justification upon refusal to approve the proposal specified in subsection (2) of this section. The committee may refuse to approve the proposal if the amendment of the recovery plan or financial plan or the adoption of the supplementary budget would aggravate the financial situation of the local government or local government financial management unit and hinder the fulfilment of objectives and activities prescribed by the recovery plan.

§ 50.  Failure to implement recovery plan

(1) If in the opinion of the committee a local government is unable to comply with the recovery plan, the Government of the Republic shall have the right to apply one or both of the following measures at the request of the committee and on the proposal of the Minister of Finance:
1) to decide on the grant of support or loan from the state budget according to the State Budget Act;
2) to initiate the alteration of administrative-territorial organisation according to the Territory of Estonia Administrative Division Act.
(2) Upon the grant of support from the state budget in the case specified clause (1) 1) of this section, the Minister of Finance shall enter into a contract for the use of appropriations from the state budget with the local government. The Minister of Finance has the right to prescribe in the contract the requirement to pay contractual penalty or return the support upon breach of contract.

§ 51.  Supervision of procedure for eliminating risk of difficult financial situation

(1) The committee shall exercise supervision over the activities of a local government in the risk of a difficult financial situation as of the declaration of the procedure for eliminating the risk of a difficult financial situation, involving the Ministry of Finance, the Ministry of Internal Affairs and other agencies and persons in performing the supervisory operations, if necessary.
(2) A local government in risk of a difficult financial situation is required to submit information and documents regarding the local government or the dependant unit, including accounting records and copies of the contracts entered into, to the committee at the request thereof.
(3) The committee has the right to receive information and documents from state agencies, local government agencies, credit and credit and financial institutions, and other persons necessary for determining the financial status of a local government and dependent unit and monitoring the implementation of the recovery plan.
(4) If it becomes evident in the course of supervision proceedings that a local government has committed the violation specified in § 57 of this Act, the committee has the right to issue a precept for bringing the activities of the local government into conformity with this Act, the recovery plan and financial plan and to set a term for the elimination of the violation. If the violation has not been eliminated within the term specified in the percept, the committee shall inform the Ministry of Finance thereof.

§ 52.  Termination of procedure for eliminating risk of difficult financial situation

(1) A local government may apply for the termination of the period of implementation of the recovery plan and the procedure for eliminating the risk of a difficult financial situation after the approval of the annual report if as at the end of an accounting year:
1) the local government is able to satisfy the claims of the creditors under the conditions prescribed by the recovery plan;
2) the local government and local government financial management unit implement the measures for ensuring financial discipline.
(2) Upon compliance with the conditions and fulfilment of the objectives prescribed by the recovery plan specified in subsection (1) of this section, the committee shall decide on the termination of the procedure for eliminating the risk of a difficult financial situation.
(3) The committee shall decide on the termination of the procedure for eliminating the risk of a difficult financial situation if:
1) circumstances specified in subsection 141 (10) of the Territory of Estonia Administrative Division Act become evident;
2) bankruptcy proceedings have been initiated with regard to the dependent unit on the basis of the Bankruptcy Act and the local government financial management unit shall apply financial discipline measures as a result of the removal of the dependent unit from the consolidation group.
(4) The committee shall refuse to satisfy the application specified in subsection (1) of this section if the local government fails to comply with at least one of the following conditions:
1) the local government has not been able to satisfy all the claims of the creditors under the conditions prescribed by the recovery plan;
2) the local government or local government financial management unit does not apply measures for ensuring financial discipline as at the end of the accounting year;
3) the local government has failed to perform the activities prescribed by the recovery plan and such failure may cause the risk of a difficult financial situation to re-emerge in the coming years.
(5) The committee shall decide together with the decision to refuse to satisfy the application whether:
1) to impose an obligation on the local government to continue the implementation of the approved recovery plan;
2) to impose an obligation on the local government to submit a draft recovery plan and draft financial plan for up to four following budgetary years prepared pursuant to § 47 of this Act by the term specified in subsection 46 (1) of this Act or
3) to submit a proposal for initiating the alteration of administrative-territorial organisation.

Chapter 10 ENSURING IMPLEMENTATION OF ACT 

§ 53.  Suspension of transfer of equalisation fund and income tax appropriations

(1) Upon the violations specified in § 54–56 of this Act, the Ministry of Finance shall issue a precept to the local government for the termination of the violation and set a term for the elimination of the violation.
(2) If the violation has not been terminated within the term prescribed by the precept specified in subsection (1) of this section or subsection 51 (4) of this Act, the Minister of Finance shall issue a directive suspending:
1) the transfer of appropriations from the state budget equalisation fund of local governments established on the basis of subsection 9 (2) of the State Budget Act;
2) the transfer of amounts of income tax subject to transfer pursuant to the procedure for transferring income tax to local governments established on the basis of subsection 5 (2) of the Income Tax Act.
(3) The Ministry of Finance shall submit a draft directive to the local government and set a term for the provision of an opinion.
(4) The Ministry of Finance shall immediately inform the local government of suspending the transfer of the amounts of equalisation fund and income tax.
(5) Upon the violations specified in §§ 54, 56 and 57 of this Act, 10 per cent of the funds allocated from the budget equalisation fund to the local government on the basis of the annual State Budget Act and the amount of income tax calculated for the local government pursuant to the procedure for the transfer of income tax to local governments established on the basis of subsection 5 (2) of the Income Tax Act shall be withheld from the amounts subject to transfer from the equalisation fund and income tax during the budgetary year.
(6) Upon the violations specified in § 55 of this Act, the amount by which the violation was committed, but not more than 20 per cent of the funds allocated from the budget equalisation fund to the local government on the basis of the annual State Budget Act and the amount of income tax calculated for the local government pursuant to the procedure for the transfer of income tax to local governments established on the basis of subsection 5 (2) of the Income Tax Act, shall be withheld every budgetary year.
(7) The transfer of amounts subject to transfer from the budget equalisation fund and income tax may be suspended until the circumstances which caused the suspension cease to exist. The Minister of Finance shall approve the termination of withholding the amounts by a directive within five working days from establishing that the circumstances have ceased to exist. The Ministry of Finance shall inform the local government of terminating the suspension of transfer of the amounts immediately after making the decision and transfer the withheld amounts to the local government on the following regular date on which transfers are made.

§ 54.  Violation of requirements for reports, terms for approval of reports and submission of information

The following circumstances are deemed to be violations of the requirements for reports, terms for approval of reports and submission of information:
1) a local government has failed to approve the annual report for the term specified in subsection 29 (11) of this Act;
2) a local government has failed to submit information specified in subsection 30 (1) of this Act within the term specified in subsections 30 (3) and (4) of this Act;
3) a local government has failed to submit the balance records for the term for submission of reports established on the basis of subsection 35 (2) of the Accounting Act;
4) the annual accounts of a local government do not comply with the Accounting Act.

§ 55.  Violation of requirements for assets and obligations

The following circumstances are deemed to be violations of the requirements for assets and obligations:
1) a local government has failed to comply with the requirements established in subsection 37 (1) of this Act upon investment of assets;
2) a local government has failed to comply with the conditions established in clauses 36 (2) 1)–3) of this Act upon possession of liquid assets;
3) a local government has failed to comply with the conditions established in subsection 37 (2) of this Act upon grant of loans or securing obligations;
4) a local government has failed to comply with the conditions established in subsections 38 (1) and (2) of this Act upon assumption of obligations;
5) a local government or local government financial management unit has violated the provisions of subsections 59 (71) and (72) of this Act in the year 2012.
[RT I, 23.12.2011, 2 - entry into force 01.01.2012]

§ 56.  Violation of plan for application of measures for ensuring financial discipline

The following circumstances are deemed to be violations of the plan for the application of measures for ensuring financial discipline:
1) a local government has failed to adopt the plan for the application of measures for ensuring financial discipline within the term specified in subsection 40 (1) of this Act;
2) a local government has failed to submit an overview of the implementation of the plan in the management report pursuant to clause 29 (3) 5) of this Act.

§ 57.  Violation of procedure for eliminating risk of difficult financial situation

The following circumstances are deemed to be violations of the procedure for eliminating the risk of a difficult financial situation:
1) a local government fails to submit a draft recovery plan and draft financial plan to the committee within the term;
2) a local government approves legislation specified in subsection 44 (5) of this Act without the approval of the committee or disregards the refusal of the committee to approve the legislation upon passage of the legislation;
3) a local government shall approve a recovery plan and financial plan or amendments thereto without the approval of the committee or not corresponding to the amendments made or proposals submitted by the committee;
4) a local government disregards the recovery plan and financial plan upon adoption of the budget, supplementary budget or making of other decisions, except in the case specified in subsection 49 (3) of this Act;
5) a local government fails to submit an overview of the implementation of the recovery plan in the management report pursuant to clause 29 (3) 5) of this Act.

§ 58.  Premature termination of authorities of council members upon violation of procedure for eliminating risk of difficult financial situation

Upon violation of subsection 46 (2) of this Act, the council shall be unable to act and the authority of every council member shall terminate prematurely. A new council shall be formed pursuant to the procedure provided by § 52 of the Local Government Organisation Act.

Chapter 11 IMPLEMENTING PROVISIONS 

§ 59.  Implementation of Act

(1) This Act shall be implemented with regard to the year 2012 and the following years, taking into account the specifications provided in this section.
(2) Budgets for the year 2011 shall be prepared, processed, adopted and published, and implemented and amended, expenses shall be carried forward to the following budgetary year, implementation of budgets shall be reported on and annual reports shall be prepared on the basis of the Rural Municipality and City Budgets Act and legislation established on the basis thereof.
(3) Section 20 of this Act shall be implemented as of 1 January 2012.
(4) Section 29 of this Act shall be implemented with regard to annual reports prepared for the year 2012 and the following years.
(5) As of 1 January 2011, a local government may grant study loans only on the basis of study loan agreements entered into before the year 2011.
(6) The obligation to publish the minutes of council sessions and meetings of council committees specified in subsection 23 (3) of this Act shall be implemented with regard to budgets and supplementary budgets of the year 2012 and the following years.
(7) Sections 32–37 of this Act shall be implemented with regard to the year 2012 and the following years.
(71) A local government or local government financial management unit the net debt of which is more than 60 per cent of the total amount of operating revenue as at the beginning of an accounting year shall not increase the net debt by taking loan obligations specified in subsection 34 (2) of this Act or lease obligations specified in subsection 34 (7) during the year 2012.
[RT I, 23.12.2011, 2 - entry into force 01.01.2012]
(72) A local government or local government financial management unit the net debt of which is less than 60 per cent of the total amount of operating revenue as at the beginning of an accounting year shall not increase the net debt to the extent exceeding 60 per cent of operating revenue of the same accounting year by taking loan obligations specified in subsection 34 (2) of this Act or lease obligations specified in subsection 34 (7) during the year 2012.
[RT I, 23.12.2011, 2 - entry into force 01.01.2012]
(8) Subsections 34 (7) and (8) of this Act shall be implemented with regard to transactions concluded after 1 January 2012.
(9) Clauses 63 4) and 10)–19) of this Act shall be implemented as of 1 January 2013.
(10) A local government shall prepare a budget on an accrual basis not later than for the following budgetary year after the state budget has been prepared on an accrual basis.
§ 60. – § 66. [Omitted from this text.]

§ 67.  Entry into force of Act

(1) This Act enters into force on 1 January 2011.
(2) [Omitted from this text.]

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