This content is from: Local Insights

Municipality borrowing

The Government Emergency Ordinance 45/2003 on local public finance (GEO 45) allows municipalities to conclude short-, medium- and long-term loans with internal and external contracting parties, to finance public investments of local interest or refinance local public debt.

The municipality's overall local debt (including loans and guarantees for loans concluded by entities that the authority may guarantee) may not exceed, in any year, 20% of the total local budget revenues, with some exceptions under special laws.

Only a municipality's own revenues, not all local revenues, can be used to repay any debt accrued. So one cannot consider the following local revenues reimbursement sources: (a) amounts assigned from certain revenues of the state budget; (b) subsidies received from the state budget and other budgets; and (c) donations and sponsorships.

The Register of Local Public Debt evidences the total amount of debt payable by the municipality during the relevant budgetary year, while the Register of Local Guarantees evidences the guarantees issued by the municipality, both for its own loans and for loans concluded by entities that the authority guarantees.

Being a public institution, a municipality is compelled to perform all payments and collection operations through accounts opened with the State Treasury. Foreign currency operations can be performed with commercial banks but only within the limited context expressly provided in the law.

Types of collateral

There are no implicit sovereign guarantees for loans concluded by municipalities; any government obligation in relation to such loans is clearly excluded.

Own revenues, as the most important part of a municipality's revenues, are the most common form of guarantee for municipal debt. Law grants the lender in whose favour a guarantee is established a preferential position in relation to any other category of creditors with claims against the relevant municipality.

Although not expressly provided for in GEO 45, movable and immovable goods from the private domain of the municipality may be used to secure municipal debt in accordance with the general principles of Romanian legislation.

The municipality can also request a sovereign guarantee from the Ministry of Public Finance, both for internal and external loans.

A guarantee over escrow account funds allows the creation of a guarantee on the revenues of a public institution collected not at State Treasury, but in accounts held with commercial banks, but it is not a practical solution because the ceiling of collected revenues in an escrow account is limited to the amounts corresponding to two successive instalments and relevant interest.

A municipality's payment obligations, established by documents representing executory titles, may only be enforced from the amounts approved by a municipality's budget, in the expenditure chapter corresponding to the relevant payment obligation. The release of these funds to the creditor is conditional upon approval given to the State Treasury by the public funds dispensers (for example, the mayor).

Dorina Dumitrescu

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