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Interbudgetary transfers granted from the budgets of RF subjects to local budgets According to the new version of the RF Budget Code, significant changes were made in the sphere of interbudgetary relations between regions and municipal entities. In fact, the legal norms of interbudgetary relations between the center and regions were projected to the sub federal level. Thus, the new version of article 136 of the RF Budget Code enter ing into force on January 1, 2006, sets forth the key conditions of granting interbudgetary transfers from the budgets of RF subjects and practically duplicates the provisions of arti cle 130 with respect to relations between regional and local authorities. As concerns inter budgetary relations at the sub federal level, Article 135 of the RF Budget Code sets forth the forms of financial support mainly similar to those envisaged by article 129 of the RF Budget Code with respect to transfers provided from the federal budget:

Financial aid to local budgets, including the grants from regional funds of financial support of settlements, grants from regional funds of financial support of municipal districts (town okrugs), other grants and subsidies;

Subventions to local budgets from the regional compensatory funds and other subven tions including those to the budgets of autonomous okrugs being in the composition of krais and oblasts; for exercise of the powers of the state authorities of RF subjects delegated on the basis of agreements concluded in compliance with the federal legis lation between the state authorities of autonomous okrugs and the state authorities of respective krais or oblasts;

The funds transferred to the federal budget in relation to the repayment and (or) servic ing of the public debt of RF subjects to the federal state authorities and (or) fulfillment of other obligations of the RF subject to the federal budget;

Other free and irrevocable transfers;

Budgetary credits to local budgets.

In accordance with the new version of the RF Budget Code regional funds of financial support of settlements are formed within the budgets of RF subjects for the purposes of equalization proceeding from the number of residents, financial resources of local gov ernments of settlements as concerns the exercise of their powers aimed at the settlement Section 2.

Monetary and budgetary spheres of problems of local importance. The procedure of formation and allocation of financial re sources of the fund are determined by the legislation of the respective RF subject. Be sides, in the course of formation and (of) approval of the budget of the respective RF sub ject, grants from the regional fund of financial support of settlements due to the budget of the settlement may be in full or partially substituted by additional rates of assignment of the revenues generated by the income tax on individuals. During the financial year, it is prohib ited to change the additional rates of assignment of the income tax on individuals due to the settlement, and the financial resources received by the settlement from the additional rate of assignment of the income tax on individuals in excess of the estimated amount of grants (estimated portion of the grant) from the regional fund of financial support of set tlements should not be transferred to the budget of the respective RF subject and (or) be taken into account in the course of the next allocation of financial aid to local budgets.

These provisions, on the one hand, permit regions to carry out financial equalization inde pendently, and on the other hand protect municipal entities from the changes in the rules of the game during the financial year.

Regional funds of financial support of municipal districts (town okrugs) are formed within the budgets of RF subjects for the purposes of equalization of budgetary security of municipal districts (town okrugs). The procedure of formation and allocation of financial resources of the fund are also regulated by the respective RF subject. Grants from the re gional fund of financial support of municipal districts (town okrugs) of RF subjects are pro vided to the municipal districts (town okrugs), where the level of rated budgetary security is at or below the level set as the criterion of equalization of the rated budgetary security of municipal districts (town okrugs).

In accordance with the provisions of the new version of the RF Budget Code, the level of rated budgetary security of municipal districts (town okrugs) is determined by the rate of the tax revenues per one resident, which could have been received by the budget of the municipal district (town okrug) proceeding from the level of development and structure of the economy and (or) the tax base (tax potential), as well as the similar indicator character izing the average level across municipal districts and town okrugs of the respective RF subject taking into account the differences in the structure of the population, social, eco nomic, climate, geographical, and other objective factors and conditions affecting the costs of provision of budgetary services (amount of payments) per one resident.

However, part of the grants from the regional fund of financial support of municipal districts (town okrugs) may be provided to municipal districts (town okrugs) proceeding from the number of residents of the municipal district (town okrug) and calculated per one resident and in accordance with the uniform methodology.

These provisions are rather a reference point than an action plan for the region as con cerns its financial policy. The majority of mandatory stipulations concern the provision to the local governments of certain guarantees that financial policy of the region will be stable over the year. Other norms in fact grant the regional authorities the opportunity to form their own financial policy and are therefore to a significant extent of dispositive character.

According to article 139 of the RF Budget Code, within the budgets of RF subjects there may be formed funds of municipal development of RF subjects in order to provide local budgets with subsidies for participation financing of investment programs (projects) aimed at the development of public infrastructure of municipal importance, while for the purposes of provision of local budgets with subsidies for participation financing of priority socially important expenditures of local budgets there may be formed regional funds of co financing of social expenditures.

In the cases and under procedures set forth by laws of RF subjects and other norma tive legal acts of the state authorities of RF subjects, local budgets may receive other RUSSIAN ECONOMY in trends and outlooks grants and subsidies from the budgets of RF subjects at or below 10 per cent of the total amount of financial aid granted to local budgets from the budgets of RF subjects. This limi tation should somewhat unify interbudgetary relations at the subnational level, since no less than 90 peer cent of financial aid to local budgets from the budget of the RF subject should be provided in the forms envisaged by the RF Budget Code. However, because of the considerable degree of freedom as concerns the formation and allocation of financial aid at the subnational level, this restriction is insignificant.

Article 140 of the RF Budget Code regulates regional compensatory funds. Regional compensatory funds are formed within the budgets of RF subjects in order to provide fi nancial backing to local governments exercising certain state powers at the expense of:

subventions from the Federal Compensatory Fund aimed to assist local governments to exercise certain powers vested with the federal authorities;

own revenues and sources of financing of the budget deficits of RF subjects in the amount necessary to local governments to exercise certain powers of the state authori ties of RF subjects.

As concerns the formation and allocation of the compensatory fund, the only signifi cant restriction on regional authorities is the necessity to elaborate the uniform methods of provision of subventions to all municipal entities.

The procedure governing the granting of budgetary credits from the budgets of RF subjects to local governments is similar to the procedure under which budgetary credits are granted to the budgets of RF subjects from the federal budget as discussed above.

The new version of article 142 of the RF Budget Code envisages the following forms of interbudgetary transfers provided from local budgets:

financial aid granted to the budgets of settlements from the budgets of municipal dis tricts;

subventions transferred to regional funds of financial support of settlements and re gional funds of financial support of municipal districts (town okrugs);

subventions transferred from the budgets of settlements to the budgets of municipal districts in order to settle the local problems of inter municipal nature;

financial resources transferred to the federal budget or budgets of RF subjects in rela tion to the repayment and (or) servicing of municipal debts of municipal entities to the federal state authorities or the state authorities of RF subjects, and (or) other obliga tions of local governments to the state authorities;

other free and irrevocable transfers.

The procedures governing the formation and allocation of the said types of interbudg etary transfers is rather similar to the organization of interbudgetary transfers at the regional level. No such regulation was envisaged in the preceding version of the RF Budget Code. For the first time in the Russian legislation there was envisaged the procedure of granting sub ventions from local budgets to the budgets of RF subjects. Laws of RF subjects may stipulate the transfers of subventions to the budgets of RF subjects from the budgets of settlements or municipal districts (town okrugs), where the estimated tax revenues of local budgets (without taking into account tax revenues associated with additional rates of assignment) exceeded the levels set forth by the laws of the respective RF subjects.

The said level should not be set below the double average level observed across settlements or municipal districts (town okrugs) of the respective RF subject calculated per one resident. Subventions from the budgets of settlements transferred to the budgets of RF subjects as stipulated by this article are due to the regional fund of financial support of settlements. In fact, this provision introduces negative interbudgetary transfers at the re gional level. The RF Budget Code sets only two requirements with respect to negative in terbudgetary transfers:

Section 2.

Monetary and budgetary spheres 1) the amount of the said subvention for individual municipal entity in per one resident terms should not exceed 50 peer cent of the difference between the rated tax revenues of the local budget (without taking into account the revenues from additional rates of assignment) in per resident terms and the double average level of rated tax revenues in per resident terms in the last reporting year;

2) rated tax revenues of the municipal entity in per resident terms after the exclusion of the subvention due to the budget of the RF subject should not be below the rated tax revenues in per resident terms of another municipal entity, where prior to the exclusion of the said subvention had demonstrated a lower level of rated tax revenues in per resi dent terms.

Therefore, the adoption of law No. 120 FZ resulted in the following changes in the system of regulation of interbudgetary financial flows via the federal legislation.

1. All interbudgetary transfers at the federal, regional, and local levels were classified in three groups: financial aid, transfers from compensatory funds, and transfers from funds of regional development. There was indicated the distinction between the financial aid, i.e. the support of relatively poor regions / municipal entities, and the compensations provided by the federal / regional authorities for the expenditures associated with the ex ercise of delegated powers, and assistance to investment in territories. As a result, the budgetary classification differentiates between the financial resources provision of which may result in various restrictions on the part of federal / regional authorities, and other types of transfers to the budgets of lower levels, which are not related to their financial needs and are determined only by the necessity to comply with the federal / regional legis lation or priorities of upper levels of authorities and various forms of joint activities.

2. The procedures governing the formation and allocation of all funds involved in distribu tion of interbudgetary transfers from the federal budget were fixed in the RF Budget Code.

3. The RF Budget Code was supplemented with the provisions regulating interbudg etary transfers at the regional and municipal levels. Among the specific features of these innovations there should be noted that these norms are to a significant extent of dispositive character. The majority of imperative norms in this sphere are related to the necessity of creation of equal and predictable conditions, in which municipal entities could pursue their own fiscal policies.

4. One of the most important innovations in the practice of interbudgetary relations at the regional level has become the introduction of so called negative transfers for municipal entities, i.e. the transfers from municipal budgets to the budgets of RF subjects.

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