Legal framework

The local self-government funding is governed by the Law on the Budget and Fiscal Responsibility (Official Gazette of Montenegro 66/19) and the Law on Local Self-Government Finance (Official Gazette of Montenegro 003/19).

The Law on Local Self-Government Finance governs the sources of funding, the method for financial equalisation, and financing the functions performed by local self-governments, which are: municipalities, the Capital City borough, the Capital City, and the Old Royal Capital.

The financing of core municipal functions is provided by municipal budgets. The funding for municipal functions is provided from four sources: own-source revenues, shared revenues, the Equalisation Fund, and the Central Budget.

A set of secondary legislation was adopted pursuant to the Law on Local Self-Government Finance:

The Equalisation Fund

Financial levelling of municipalities is done via the Equalisation Fund. The Equalisation Fund revenues are deposited to a separate account of the Ministry of Finance and are secured as follows:

11%

of the total personal income tax collected;

10%

of the total property sale tax revenues;

100%

of the collected tax for usage of motor vehicles, watercraft, aircraft and air-borne craft;

40%

of concessions from gambling operations.

Exceptionally, the Equalisation Fund’s revenues may be secured through short-term loans from the Central Budget. The Law stipulates that the municipality with development levels below 100% of the average development index value, as stipulated by separate regulation, is eligible for funding from the Equalisation Fund for the year in which such distribution is made.

The distribution of the Equalisation Fund is done based on the data for the year that precedes the distribution year as follows:

8 %

fixed allocation in equal amounts for all municipalities eligible for using the Equalisation Fund

19 %

further based on the total area and population in the ratio of 50:50

38 %

based on the average calculated PIT revenues per capita individually for each municipality for the year preceding the year when the allocation is made in reference to the average calculated PIT revenues per capita for all municipalities for the given period

By way of exception, the equalisation for municipalities where the average calculated PIT revenue accounts for less than 20% of the average across all municipalities is done up to 50% of the calculated PIT average for all municipalities for the given period.

The Support Fund for Pre-Financing Municipal Donor-Supported Projects (The Revolving Fund)

The Support Fund for Pre-Financing Municipal Donor-Supported Projects operates as a revolving fund, and aims at creating opportunities for allocating to municipalities, in the form of a loan, the funds needed for pre-financing donor-supported projects. The prior qualifying condition for using the Support Fund is a project implementation agreement concluded between the municipality and a donor or a lead partner on the project. It is quite common, once a project is approved and the implementation starts, following the first evaluation period, for the donor to reimburse the funds spent till then, and make an advance payment of the funds for continuing with the project implementation.

 

Given the above, in order to make withdrawals from the Support Fund, municipality makes an application with the Ministry of Finance, supported by the copy of the agreement entered into with the project donor or the lead partner, based on which the Ministry makes the disbursement to the subaccount intended for project implementation.

 

Article 24 of the Law on Local Self-Government Finance (Official Gazette of Montenegro 003/19) stipulates that the municipality is to reimburse the Support Fund after having received the donor or lead partner funding, and no later than within 12 months from such withdrawal.

 

In case of a failure to perform the reimbursement, the Ministry of Finance is obliged to withhold the disbursements owed to the municipality on the account of shared revenues or the Equalisation Fund up to the amount owed.