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Czech Republic: Mayors Meet On Urban Financial Issues

Prague, 18 September 1997 (RFE/RL) -- As the transition to a market economy proceeds in Central and Eastern Europe, cities in the fastest changing countries are facing a new problem of managing their finances independently of central governments.

That challenge brought mayors and financial officers from some 500 Czech municipalities to Prague this week to exchange experiences.

The meeting, co-hosted by the Union of Towns and Cities of the Czech Republic, was supported by the U.S. Agency for International Development (USAID) and included urban development experts from the independent Washington-based Urban Institute and Prague-based Urban Research group.

Organizer of the meeting Peter Tajcman, President of Urban Research, told RFE/RL that Czech municipal officers are still working to adapt to the country's 1993 tax reform, which handed most municipal budget responsibilities over to the cities.

During the Communist era municipalities depended on the central budget for 80 percent of their monies and raised the remaining 20 percent themselves. The 1993 tax reform decreed that 75 percent of municipal budgets must come from the municipalities own resources and the rest from the central government.

The handover also has meant municipal financial officers have had to learn how to obtain credits from the private credit market through municipal bonds sold on capital markets and through bank loans. And they have had to learn how to manage their resources without counting on the central government to solve their problems.

So far the transition has worked well. Urban Research says it is not aware as yet of any defaults on debts by the muncipalities.

At the current meeting, which ended yesterday, participants discussed government concerns that the municipalities may be borrowing too heavily to fund their development.

According to urban experts, towns and cities in the Czech Republic are borrowing principally to improve their technical infrastructure. That includes gassification, waste water treatment, sewer lines, and water distribution. All were largely ignored in older city and town centers as Communist planners preferred to build relatively inexpensive new panel-construction housing on the outskirts of communities.

Tajcman says that municipal revenues in the Czech Republic, which come from tax revenues and investments, total some $5 billion. The municipalities have so far incurred debts totalling some $1 billion.

For most cities, the ratio of debt service to revenues falls below 15 percent, which urban developers consider a good standard. But some small communities have worried experts by running a debt service ratio as high as 35 percent of their revenues.

Prague has warned municipal officials that they may have to curb borrowing as the Czech economy currently experiences a downturn. The conference participants did not take any resolution on the government's concern but their organization, the Union of Towns and Cities of the Czech Republic, is likely to issue a statement later this year.

As Czech municipalities discuss the problems of financial independence, other cities in Central and Eastern Europe are following suite at a mixed pace.

Tajcman says that Polish municipalities, which also have been largely set free of the central government, face similar concernsm while in Slovakia municipalities still depend on the central government for financing despite legislation declaring them independent. Hungarian and Bulgarian towns and cities are also said to depend on the central governments.