The Saeima¹ has adopted and
the President has proclaimed the following Law:

Law on the Equalisation of Local Government Finances

Section 1. Purpose and Scope of Application of the Law

(1) The purpose of this Law is, taking into consideration the socioeconomic differences between local governments, to create similar possibilities for local governments to perform their functions laid down in law, as well as to promote their initiative and independence in the creation of their financial resources.

(2) The Law prescribes the procedures for performing the equalisation of local government finances, providing for partial equalisation of financial differences between local governments (local governments of republic cities and municipalities).

Section 2. Fund for the Equalisation of Local Government Finances

(1) The equalisation of local government finances shall be performed through the fund for the equalisation of local government finances (hereinafter - the equalisation fund).

(2) Revenue of the equalisation fund shall consist of the following:

1) the local government payments specified as a result of calculation of the equalisation of local government finances;

2) the State budget grant.

(3) Expenditure of the equalisation fund shall consist of the grants to local governments specified as a result of calculation of the equalisation of local government finances.

Section 3. State Budget Grant for the Equalisation Fund

(1) A State budget grant for the financial year (the year to which the equalisation of local government finances applies) shall be determined in the Annual State Budget Law. The abovementioned State budget grant shall not be less than that in the year prior to the financial year, provided the State budget expenditure increases.

(2) Amount of the State budget grant shall be included in minutes of the annual discussions between the Cabinet and the local government association specified in Section 96 of the law On Local Governments, taking into account the following:

1) the macroeconomic development forecasts of the State in the financial year;

2) the budget revenue forecasts of local governments in the financial year;

3) the priorities specified by the government for the financial year.

Section 4. Data to be Used in Calculating the Equalisation of Local Government Finances

The assessed revenue of each local government and the criteria characterising local government expenditure shall be used for calculating the equalisation of local government finances.

Section 5. Assessed Revenue

(1) The assessed revenue of a local government shall consist of the revenue from the immovable property tax forecasted by local government, and the share of the allocation of the revenue from the personal income tax determined for the budgets of local governments in the Annual State Budget Law.

(2) The allocation of the revenue from the personal income tax between local governments shall be performed by the Ministry of Finance according to the actual tax implementation in the year prior to the year of preparation of the State budget, calculating the relevant proportions of the forecasted revenue from the personal income tax of local governments.

(3) The revenue from the immovable property tax shall be forecasted for each local government on the basis of the data of the State Land Service regarding cadastral value of the immovable property in the territory of the local government.

(4) The Cabinet shall issue regulations regarding the procedures by which each local government shall forecast revenue from the immovable property tax for the next taxation period according to the data of the State Land Service regarding cadastral value of the immovable property in the territory of the local government.

Section 6. Criteria Characterising Local Government Expenditure

(1) The following criteria characterising local government expenditure - statistical indicators independent from the activity of local governments - shall be used for calculating the equalisation of local government finances:

1) the number of inhabitants;

2) the number of children under the age of 6 years;

3) the number of children and young people from 7 to 18 years of age;

4) the number of residents over the working age;

5) the area of the territory of the local government in square kilometres.

(2) The statistical indicators referred to in Paragraph one, Clauses 1, 2, 3, and 4 of this Section shall be determined on the basis of the data of the Office of Citizenship and Migration Affairs of the Ministry of the Interior according to the situation as on 1 January of the year of preparation of the State budget.

(3) The statistical indicators referred to in Paragraph one, Clause 5 of this Section shall be determined on the basis of the data of the State Land Service according to the situation as on 1 January of the year of preparation of the State budget.

Section 7. Number of Equalising Units in the Local Government

(1) The number of equalising units shall be used for calculating the equalisation of local government finances which includes information regarding local government expenditure related to the criteria characterising local government expenditure. The number of equalising units in a local government shall be obtained by adding the following to the population of the local government:

1) 2.34 equalising units per each child under the age of 6 years;

2) 3.26 equalising units per each child and young person from 7 to 18 years of age;

3) 0.74 equalising units per each resident over the working age;

4) 1.52 equalising units per each square kilometre of the area of the territory of the local government.

(2) The number of equalising units shall be calculated according to the formula specified in Annex 1 to this Law. The calculated number of equalising units for each local government shall include demographic and territorial differences of the particular local government.

Section 8. Calculation of the Equalisation of Local Government Finances

(1) Calculation of the equalisation of local government finances shall be performed, taking into account the following principles:

1) a local government whose assessed revenue per one equalising unit is smaller than the average assessed revenue per one equalising unit in local governments in total, shall receive a grant from the equalisation fund which accounts for 60 percent of the difference per one equalising unit, and this difference consists of the average assessed revenue per one equalising unit in local governments in total and the assessed revenue of the local government per one equalising unit;

2) a local government whose assessed revenue per one equalising unit is larger than the average assessed revenue per one equalising unit in local governments in total, shall make a payment into the equalisation fund which accounts for 60 percent of the difference per one equalising unit, and this difference consists of the assessed revenue of the local government per one equalising unit and the average assessed revenue per one equalising unit in local governments in total;

3) the difference between the assessed revenue of a local government per one equalising unit and the assessed revenue of the local government per one equalising unit which has the largest revenue shall be reduced proportionally by means of the State budget grant.

(2) Taking into account Paragraph one of this Section, payments of a local government into the equalisation fund or grants from the equalisation fund shall be calculated according to the formula specified in Annex 2 to this Law.

(3) As a result of the equalisation of local government finances the equalised revenue of a local government shall consist of the assessed revenue of the local government reduced by the calculated payment into the equalisation fund or increased by the calculated grant from the equalisation fund.

Section 9. Performing and Approval of the Calculation of the Equalisation of Local Government Finances

(1) Calculation of equalisation of local government finances shall be performed by the Ministry of Finance in the year of preparation of the State budget. The Ministry of Finance shall publish the calculation of the equalisation of local government finances on its website in the course of development of the Draft Medium Term Budget Framework Law and Draft Annual State Budget Law.

(2) The Cabinet shall, within two weeks after proclamation of the Annual State Budget Law, issue regulations regarding the equalisation of local government finances:

1) which include information regarding the following:

a) the number of inhabitants in each local government,

b) the calculated number of equalising units in each local government,

c) the forecast of the revenue from the personal income tax in each local government,

d) the forecast of the revenue from the immovable property tax in each local government;

2) which determine the following:

a) the grant to be received from the equalisation fund or the payment to be made into the equalisation fund for each local government which has been calculated in accordance with Section 8 of this Law,

b) the procedures for making payments into the equalisation fund,

c) the procedures for paying grants from the equalisation fund.

Section 10. Making of Payments into the Equalisation Fund and Receipt of the Grants from the Equalisation Fund

(1) Payments shall be made into the equalisation fund by the Treasury from the share of allocation of the revenue from the personal income tax determined for budgets of local governments in the Annual State Budget Law.

(2) Payments into the equalisation fund shall constitute a percentage from the actual implementation of the revenue from the personal income tax determined for each local government.

(3) The Treasury shall pay grants from the equalisation fund to local governments by making deductions from the equalisation fund and paying the relevant local governments twice a month - not later than by the 15th and 25th day of the relevant month.

(4) Grants from the equalisation fund shall be transferred to the local governments that receive them as a percentage from the revenue of the equalisation fund determined for each local government.

(5) Funds of the equalisation fund shall be handled by the Treasury which is responsible for timely transfer of financial resources to local governments.

Section 11. Supervision of Operation of the Equalisation Fund

(1) For the purpose of supervising the operation of the equalisation fund, the Cabinet shall establish a council of the fund for equalisation of local government funds composed of a representative - member of the Saeima recommended by the Budget and Finance (Tax) Commission of the Saeima and approved by the Saeima, one representative from the Ministry of Finance, the Treasury, the State Revenue Service, the Ministry of Environmental Protection and Regional Development, the Ministry of Education and Science, and the Ministry of Welfare, as well as the chairperson or a deputy of the Riga City Council, and six chairpersons of local government councils nominated by the local government association specified in Section 96 of the law On Local Governments, ensuring that two of them represent local governments of republic cities, and four - local governments of municipalities.

(2) The Cabinet shall issue regulations regarding the by-laws of the council of the fund for equalisation of local government finances, specifying the procedures for performing supervision of the equalisation of local government finances and operation of the equalisation fund.

Section 12. Mutual Payments between Local Governments

(1) The Cabinet shall determine the procedures by which local governments shall enter into agreements with other local governments on payment for the services provided to the inhabitants who have been declared in the administrative territory of one local government and use services provided by educational institutions of another local government.

(2) If a local government has failed to comply with the requirements laid down in accordance with the procedures provided for in Paragraph one of this Section, the Treasury shall, on the basis of a relevant decision by the council of the fund for equalisation of local government resources, write off an amount which is necessary for payment of the services provided by other local governments, from the revenue from the personal income tax of the relevant local government or from the grants to be paid thereto from the equalisation fund.

Transitional Provisions

1. With the coming into force of this Law, the law On the Equalisation of Local Government Finances (Latvijas Republikas Saeimas un Ministru Kabineta Ziņotājs, 1998, No. 8; 1999, No. 22; Latvijas Vēstnesis 2009, No. 178), is repealed.

2. Section 8 of this Law shall be applied when performing calculation of the equalisation of local government finances for the year 2016 and subsequent years.

3. Until 31 December 2015 Cabinet Regulation No. 830 of 23 December 2014, Regulations Regarding Revenue from the Fund for Equalisation of Local Government Finances and Procedures for Allocation Thereof in 2015, shall apply.

4. Until issuing of Cabinet regulations in accordance with Section 5, Paragraph four, Section 11, Paragraph two, and Section 12, Paragraph one of this Law but not longer than until 30 June 2016, the following Cabinet regulations shall be applied:

1) Regulation No. 802 of 24 August 2010, Regulations Regarding Immovable Property Tax Forecast;

2) Regulation No. 189 of 19 May 1998, By-laws of the Council of the Fund for Equalisation of Local Government Finances;

3) Regulation No. 250 of 13 July 1999, Procedures for Making Mutual Payments between Local Governments for Services Provided by Educational Institutions or Social Care Institutions.

5. When submitting the Draft Annual State Budget Law to the Saeima the Cabinet shall provide for a grant therein to local governments for children in children's homes and residents in old people's homes and centres who have been placed therein until 1 January 1998. The amount of the planned grant shall be determined, taking into account the average expenditure in the State per one child in a children's home and one resident in an old people's home. The grant to local governments for the children in children's homes who have been placed therein until 1 January 1998 shall be granted for the children up to 24 years of age.

6. If the planned equalised revenue of a local government which has been determined taking into account the payments to be paid into the equalisation fund or the grants to be received from the equalisation fund calculated in accordance with Section 8 of this Law, has decreased in 2016 in comparison with the planned equalised revenue in 2015, then:

1) the local governments the planned equalised revenue of which in 2016 is smaller than the planned equalised revenue in 2015, shall adjust payments into the equalisation fund or grants from the equalisation fund, so that the planned equalised revenue in 2016 does not decrease in comparison with the planned equalised revenue in 2015;

2) the local governments the increase in the planned equalised revenue of which in 2016 exceeds the increase in the total planned assessed revenue, in comparison with the planned equalised revenue in 2015, shall adjust payments into the equalisation fund or grants from the equalisation fund, so that the increase in the planned equalised revenue in 2016 does not exceed the increase in the maximum planned equalised revenue. When submitting the Draft Annual State Budget Law for the year 2016 to the Saeima the Cabinet shall include therein a limitation to the increase in the planned equalised revenue of local governments, specifying the maximum increase in the planned equalised revenue (to the extent the equalised revenue may increase faster than the assessed revenue).

This Law has been adopted by the Saeima on 4 June 2015.

President A. Bērziņš

Riga, 18 June 2015

Law on the Equalisation of Local Government Finances
Annex 1

Formula for Calculation of the Number of Equalising Units

The number of equalising units in each local government shall be calculated according to the following formula:

,

where the following designations are used:

N_i - the number of equalising units in the relevant local government;

1 - the number of equalising units per each resident;

2.34 - equalising units per each child under the age of 6 years;

3.26 - equalising units per each child and young person from 7 to 18 years of age;

0.74 - equalising units per each resident over the working age;

1.52 - equalising units per each square kilometre of the area of the territory of the local government;

a_i - the number of inhabitants in the relevant local government;

b_i - the number of children under the age of 6 years in the relevant local government;

c_i - the number of children and young people from 7 to 18 years of age in the relevant local government;

d_i - the number of inhabitants over the working age in the relevant local government;

e_i - the area of the territory of the relevant local government in square kilometres.

 

Law on the Equalisation of Local Government Finances
Annex 2

Formula for Calculation of the Equalisation of Local Government Finances

Equalisation of local government finances shall be performed according to the following formula:

,

where the following designations are used:

Y_i - the total amount of the payment or grant for the relevant local government. If Y_i is less than zero, the local government shall make a payment into the equalisation fund, if Y_i is greater than zero, the local government shall receive a grant from the equalisation fund;

X_i - amount of the payment or grant per one equalising unit for the relevant local government;

N_i - the number of equalising units in the relevant local government;

I_vid - the average assessed revenue per one equalising unit in the State;

I_i - assessed revenue per one equalising unit for the relevant local government;

I_max - the highest assessed revenue per one equalising unit in the State;

D - State budget grant in total;

N - the number of equalising units in all local governments in total.

 

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¹ The Parliament of the Republic of Latvia

Translation © 2018 Valsts valodas centrs (State Language Centre)