New bill aims to tighten financial management of local councils

A bill which will empower the Department of Local Councils to act against local councils which run up a deficit, in violation of the Local Councils Act, started being debated in parliament yesterday.

The bill is being supported by the opposition after its details were discussed in meetings of the Public Accounts Committee (PAC).

Opening the debate, Justice and Local Government Minister Austin Gatt said that despite what the law said, several local councils had run up deficits and the law did not provide ways in which action could be taken against them.

Neither was the law clear on the definition of deficits. Such deficits could stem from income and expenditure, working capital or retained funds.

At the time of the PAC debate, it was found that for the financial year 2000-2001 five councils had an income and expenditure deficit and 16 had a working capital deficit. None had a deficit regarding retained funds.

The PAC had agreed on solutions based on the principles that no local council should have a deficit and that the working capital audit would be used as the method to judge whether a deficit existed.

It was further agreed that the department should not depend on the end of year audits to assess the financial situation of local councils since that would excessively delay reaction. The situation would therefore be assessed every three months on the basis of management accounts.

The committee agreed that, rather than a deficit, every council should be required to end every quarter with a 10 per cent favourable balance, a decision which the Association of Local Councils disagreed with.

When a local council did not have a favourable balance of 10 per cent, the Local Councils Department would ask it to submit a plan to restore the situation. The council would be obliged to appoint a finance committee to examine all spending and authorise all payments in the context of ensuring that a favourable balance of 10 per cent was achieved within six months. If that was not achieved, the minister responsible for local government would authorise the department to deduct from the government`s funding of the council an amount equivalent to the shortfall through which the department would pay the council`s creditors until a favourable balance of 10 per cent was achieved.

The minister could, however, remove the 10 per cent requirement in the case of councils which otherwise had consistently shown a favourable balance.

The second scenario, Dr Gatt said, was when councils had a deficit of less than five per cent in their management accounts. In that case a formal meeting would be held between the department and the council and formal notice would be given to the council to provide a detailed financial programme showing how, within a year, it would remove the deficit and produce a 10 per cent favourable balance. That period would be reduced to just two months if the deficit resulted in annual accounts. This was meant to avoid the possibility of councils going into deficit in their last year before elections. In this way, new councils would not be saddled with a deficit.

The deficit recovery programme would have to be approved by the department and it would have priority over any other council commitment. When the council programme was not approved, the department would be able to deduct funds equal to the deficit and the 10 per cent favourable balance, from which the council`s creditors would be paid.

In the worst case scenario, when the management accounts showed a working capital deficit of more than five per cent, the department would consult the council and then itself come up with a financial restructuring plan for the council. The plan would be sent to the minister who would adopt it after hearing the views of the Association of Local Councils. Upon adoption, the council`s funds would fall under the control of the department for the whole restructuring period. All payments that would need to be made by the council would have to be authorised by the departments and all council correspondence would state that the council`s finances were under the control of the department.

The minister said the plans for this law had already had an impact in that there were at present only six councils that had a working capital deficit, compared to 16 last year. The problems were somewhat contained except for two cases involving Cospicua and Mosta local councils, even though they too were managing to reduce their deficits.

Dr Gatt said the department was already requesting all councils to submit their management accounts every three months. The department had a monitoring unit composed of two persons to oversee the financial situation of the councils. Another two posts had been approved and a fresh call for applications would be made because the first one had not drawn a satisfactory response.

Dr Gatt said the bill also included other technical amendments to the law. It was being laid down that while candidates for local council elections had to be resident (in terms of the electoral register) in the localities they were contesting, this would no longer be a requirement once they were elected. Councillors, therefore, would not have to resign if they moved residence.

Other amendments, Dr Gatt said, involved working hours of local council offices, submission of minutes to the Local Councils Department, the recruitment of employees by local councils and regulation of donations by local councils. It was being laid down that donations could not exceed 0.5 per cent of the annual allocation of funds to the councils concerned. Donations could not be given in kind and they could only be made as established in the schedule to the principal act.

Opposition local councils spokesman Charles Mangion confirmed that the Opposition backed this bill and agreed with its contents.

He said the bill was an effort to plug a loophole in the law that regulated the activities of local councils. Its aim was to ensure that the councils exercised better financial management. It was important that public funds were managed well. Every public entity should be made accountable for its spending. Public funds should be spent effectively according to business plans drawn up in line with available budgets.

Indeed, this should not apply only to local councils but to every public entity.

Happily, local councils were being increasingly cautious when making financial commitments and were seeking more value for money.

A local councillor was a public officer and had a duty to ensure that public funds were spent efficiently.

Unfortunately, the same could not be said of the central government, where expenditure was continuing to grow faster than revenue.

Notary Mangion said this bill needed to be complemented by effective, ongoing monitoring as it would otherwise be rendered useless.

The Labour MP observed that the bill provided that councils could engage on an indefinite contract an employee for every 2,500 residents in its locality, compared to 3,000 as was the case to date.

This reflected the workload which local councils had because their responsibilities had increased as duties were transferred from government departments.

Every additional worker was an added financial burden on the councils, and one should therefore consider transferring workers from government departments. Measures should be taken to avoid duplication of work and make best use of human resources.

Turning to donations, Notary Mangion observed that local councils used their creativity and found ways and means to give donations not provided for in the schedule of the law, especially when elections approached.

One had to understand that funds given in donations did not belong to the mayors or the councillors. Hence, donations from public funds needed to be regulated and justified.

Although abuses had to be curbed, local councils should continue to have discretion when making donations to associations organising cultural or sports activities. This discretion should be incorporated in the law.

Notary Mangion called for closer collaboration between the central government and the local councils, such as on infrastructural projects, in a way which excluded political pique and sought to improve the situation of all localities.

Local councils should also pool resources when justified on the basis of regionality. This could be especially beneficial in sectors such as protection of the environment. For the benefit of the country, there should be a co-ordinated effort for the best use to be made of available resources.

Mr Joseph Cuschieri (MLP) also welcomed the bill and said the Labour Party had campaigned on the need for local councils not to run up deficits.

Local councils had to be responsible enough to ensure that their expenditure on certain projects was realistic and within budget.

Mr Cuschieri said he agreed with the amendment on the residency requirements of local council candidates but he pointed out the PN view as given in its electoral programme was that citizens residing outside the localities where elections were due should also be able to contest those elections.

It was important to ensure that the offices of local councils were open during normal working hours as the bill laid down. It was time to monitor the service offered by local councils. They should be rated on the level of customer care being given.

Mr Cuschieri asked the minister to investigate how, on January 31, 2002, just before the election, the local council of St Julian`s had decided, without having a quorum, to sign a Lm100,000 contract for works in the road where the mayor lived. In the following sitting, the councillors who had not been present when the agreement was signed had objected to the decision and asked for it to be annulled as there was no quorum. In the meantime the elections had been held and the minutes of the disputed sitting were not signed. In the first sitting of the new council, the mayor asked for the minutes to be signed. Was this possible?

Dr Gatt said he would look into the matter.

Mr Cuschieri said this case reinforced his point that monitoring should take place not only with regard to the financial management of local councils, but also the way decisions were taken, without affecting the autonomy of the councils.

The debate continues on Monday.