The issue of deductions from the shares allocated to municipalities from general budget tax revenues

Deductions are made from the General Budget Tax Revenue Shares due to the public debts of municipalities (Treasury, Social Security Institution debts, tax debts, etc.). With the Presidential Decree No. 9161 dated November 27, 2024, amendments were made to the "Principles Regarding Deductions to be Made from the Shares Allocated from the Total Collection of General Budget Tax Revenues in Exchange for the Debts of Special Provincial Administrations and Municipalities and Their Affiliated Organizations and Legal Entities Belonging to Them," which had been in effect for more than 14 years since March 15, 2010 (Decree No. 2010/238).

With this amendment, a practice has been introduced whereby the debts of legal entities (municipal companies, affiliates) in which municipalities and their affiliated organizations directly or indirectly, jointly or separately, own more than half of the capital are also collected by making deductions at the source from the municipalities' central government budget tax shares. The sudden implementation of this regulation after many years has brought significant controversy with it. It is evident that municipalities, which already have a significant debt burden, will experience financial sustainability problems with this practice.

On the other hand, companies and affiliates in which municipalities and their affiliated organizations own more than half of the capital are private law legal entities, separate from the municipal legal entity. Municipal companies are not organizations that are directly affiliated with or in organic integrity with municipalities, such as the municipalities' affiliated organizations (İSKİ, BUSKİ, ASKİ, İETT, EGO, etc.). If debts are collected through municipal tax shares instead of from the companies, the duties and responsibilities of the company officials will have been assumed by the municipal administration.

In the article titled "Inter-Municipal Service Relations and Coordination" of the Metropolitan Municipality Law No. 5216, it is stated that: "The metropolitan municipality and its affiliated organizations may meet each other's cash needs with the approval of the mayor. No interest is applied to such loans." In cases where any investment concerns one or more of the metropolitan municipality and its affiliated organizations simultaneously and it is understood that carrying it out under a single authority will reduce costs, the metropolitan municipal council may decide for one of the organizations to carry out the investment. In this case, the expenditure amount pertaining to the part of the investment concerning the other relevant institution is shown as a debt in that institution's account and as a receivable in the investor organization's account." As can be understood from this article, metropolitan municipalities and their affiliated organizations can provide interest-free loans to each other to meet their cash needs with the approval of the mayor. However, such a borrowing relationship covering a municipality and its affiliated organization does not apply to a municipality and its affiliates.

If company-affiliate debts (especially in cases where share ownership is below 100%) are paid by making deductions from the municipalities' general budget tax shares, it may create problems in terms of both legal and national and international accounting standards for municipalities that now also have credit ratings from international credit rating agencies. According to the Municipal Law, municipalities do not have the authority to lend money to municipal companies (affiliates). If the debts of companies where share ownership is below 100% and whose entire capital does not belong to the municipality are paid by the municipalities regardless of share ownership, the debts falling to the share of the company's other partners will also have been paid by the municipality.

With the reforms and regulations made recently to address the scale problem and ensure service integrity in our country, the number of town municipalities has been reduced, while the scope of metropolitan municipalities has been expanded, and their duties and powers have been increased. On the other hand, special provincial administrations have been abolished in metropolitan areas, the boundaries of metropolitan municipalities have been expanded to provincial borders, and their number has been increased to 30. While 94% of our population lives within municipal boundaries, the proportion of the population receiving public services from metropolitan municipalities has continuously increased to 78%, so that when we say local government in our country, we now think of municipalities, and when we say municipalities, we think of metropolitan municipalities.

In Article 127 of the Constitution of the Republic of Turkey, "local administrations" are defined as "public legal entities whose establishment principles are specified by law to meet the local common needs of the people of the province, municipality, or village, and whose decision-making bodies are formed by being elected by voters... These administrations are provided with revenue sources proportional to their duties." However, despite this mandatory provision of our constitution regarding the revenues of municipalities, the resource sharing that metropolitan municipalities receive from the general budget is disproportionate when their duties are taken into account.

In the Metropolitan Municipality Law No. 5216 and the Municipal Law No. 5393, municipalities are given authority and responsibility in a wide range of areas, such as urban infrastructure including zoning, water and sewage, and transportation; geographic and urban information systems; environment and environmental health, cleaning, and solid waste; municipal police, fire department, emergency aid, rescue, and ambulance; urban traffic; burials and cemeteries; afforestation, parks, and green spaces; housing; culture and art, tourism and promotion, youth and sports; social services and aid, marriage, vocational and skill training; and development of economy and trade to pre-school education. In Article 59 of the Municipal Law No. 5393, titled "Revenues of the Municipality," the "share allocated from general budget tax revenues" is listed among municipal revenues.

In Article 11 of the Local Administrations Budget and Accounting Regulation, "Level 1 Revenue Types" are listed as: "Tax Revenues, Enterprise and Property Revenues, Received Grants and Aids, Other Revenues, Capital Revenues, and Collections from Receivables." The Municipal General Budget Tax Revenue Share is tracked under Other Revenues. When we want to make a classification as a method for municipalities to obtain their revenues, we can classify the revenues originating from the municipalities' own resources and enterprises as "Operating Revenues" and the revenues related to General Budget Tax Revenue Shares as "Ministry of Treasury and Finance Shares." In general, municipalities maintain their budget and cash management system based on General Budget Tax Revenue Shares, with approximately 80% of their revenues consisting of General Budget Tax Revenue Shares and approximately 20% consisting of Operating Revenues.

With the Law No. 5779 dated July 2, 2008, on the Allocation of Shares from General Budget Tax Revenues to Special Provincial Administrations and Municipalities, the principles regarding transfers to be allocated from central government revenues to local governments were regulated. According to Article 2 of the Law, it is calculated in four ways: metropolitan, metropolitan district, water and sewage administrations, and other municipalities (provincial, district, and town), and is distributed according to the procedures in Articles 3 and 5. However, without a specific political and economic purpose, the mere transfer of certain revenues to local government units in the resource sharing system is not sufficient. In addition, the revenues transferred to local governments must be at a level to meet their service requirements and must be used for policy purposes in a way that eliminates income and development differences between regions and cities.

In this method, which can be called a "share allocation system," transfers/revenues are distributed in two ways: one is the "place-based" principle and the other is the "country-based" principle. In the place-based principle, a certain percentage of certain taxes collected in the settlement where a specific local government unit is located is allocated to that local government unit. In the country-based principle, a certain percentage of certain taxes collected everywhere in the country is taken into a distribution pool and distributed to local government units according to predetermined principles.

When the data from recent years is taken into account, approximately 80% of the total share received by metropolitan municipalities consists of taxes collected in the provinces (Metropolitan Municipality Share - finance shares), and 20% consists of amounts taken from district municipality shares (Metropolitan District Share - Iller Bank Share).

6% of the tax collection in metropolitan areas is allocated as the metropolitan municipality share. 60% of this share is transferred directly to the metropolitan municipality in the province where it is collected, and after the remaining 40% is collected in a pool, 70% of this is distributed to the 30 metropolitan municipalities according to population and 30% according to surface area. In addition, 90% of 30% of the 4.5% share allocated for district municipalities from general budget tax revenues is distributed to metropolitan municipalities according to population, and 10% according to surface area.

Furthermore, the fact that an average of 80% of metropolitan municipalities' revenues is dependent on the central government and 20% on their own operations can lead to both advantageous and disadvantageous results in the eyes of creditors, investors, and credit rating agencies. The advantage is that this is sustainable (regular monthly income), and the disadvantage is that there is excessive economic dependence on the central government. In other words, during periods of economic contraction, tax revenues fall, and consequently, the shares that municipalities receive from the central government also decrease.

Local governments, which aim to create a sustainable municipal administration and have become a factor directly affecting the quality of life of more than three-quarters of the country's population, have a financial structure highly dependent on tax shares coming from the central government. However, the injustice in the distribution of tax shares coming from the central government negatively affects the ability to produce services under equal conditions among metropolitan municipalities that have the same duties, powers, and responsibilities, and negatively affects the competitive power of the cities. There is no objective and justifiable reason for why some municipalities receive low shares and others receive high shares.

The Deduction Rates Made from Municipalities' Finance Shares Must Be Reduced

In Article 7 of the Law No. 5779 on the Allocation of Shares from General Budget Tax Revenues to Special Provincial Administrations and Municipalities, titled "Making Deductions," it is stated that: "Debts to the State, which are followed up according to the provisions of the Law on the Procedure for Collection of Public Receivables No. 6183 dated July 21, 1953, of special provincial administrations and municipalities and their affiliated organizations and legal entities belonging to them, ... and their debts to the organizations within the scope of these articles that have accrued as of December 31, 2006, and for which no settlement has been reached, are paid to the creditor institutions by making deductions by the Ministry of Finance or Iller Bank, as appropriate, upon the request of the creditor institutions, from the amount to be allocated over the total collection of general budget tax revenues each month on behalf of these administrations."

In Article 2 of the Presidential Decree published in the Official Gazette dated January 21, 2021, it is stated that: "For the total of debts within the scope of subparagraphs (ç), (d), (e), and (f) of the 1st paragraph of Article 4, an additional 10% deduction is made for organizations for which a 40% deduction is made according to the 1st paragraph of this article, and an additional 25% deduction is made for organizations for which a 25% deduction is made, to be offset against monthly installment amounts from the shares to be allocated over the total collection of general budget tax revenues of the organizations."

As can be seen, the deduction rate that can be made from the General Budget Tax Revenue Share in exchange for the debts of municipalities reaches 50%. With the amendment made by law, the capacity of municipalities to do business, provide services, and make investments can be increased by bringing the deduction rates to a reasonable level, for example, by reducing them from 50% to 25%.

Municipalities do not have the authority to lend money to municipal companies (affiliates). If company-affiliate debts are paid by making deductions from the municipalities' general budget tax shares, it will cause disputes in terms of both legal and national and international accounting standards and will also create a financial sustainability problem in municipalities that already have a significant debt burden. Considering that central government and local government organizations are not substitutes for each other but are complementary in the provision of public services, instead of imposing restrictions with regulations, a strong cooperation and coordination between them for the benefit of society and the interests of our country must be ensured.