FUNCTIONAL FISCAL AUTONOMY OF MUNICIPALITIES: A CONCEPTUAL MODEL FOR REVENUE MOBILISATION, ADMINISTRATIVE EFFICIENCY AND FINANCIAL INCENTIVES

Abstract

Municipal fiscal autonomy is conventionally assessed through the legal powers assigned over local taxes and fees and through the share of local revenue in gross domestic product or in consolidated public finance, and composite indices of local self-rule follow a comparable logic. These instruments provide valuable comparative information, but they measure the position that legislation confers and that statistics record, rather than the capacity of a municipal administration to convert an available revenue potential into revenue that is actually assessed, collected and sustained over time. This distinction constitutes a gap in the analysis of local public finance, and it is the gap the present paper addresses. The paper introduces functional fiscal autonomy, defined as the institutional capacity of a municipality to realise its revenue potential through effective assessment, administration and collection of public receivables. A Functional Fiscal Autonomy Framework is developed, linking legislative, tax, administrative and organisational autonomy to revenue mobilisation and financial sustainability. The legal foundation of the argument is located in Article 9 of the European Charter of Local Self-Government, in the constitutional allocation of taxing powers to municipal councils within statutory limits, and in the five-year limitation period laid down in the Bulgarian Tax and Social Insurance Procedure Code, which converts administrative inaction into an irreversible loss of public resource. Administrative performance is operationalised through the Compensatory Collection Index, a cohort-based ratio relating payments actually received, net of receivables irreversibly lost through statutory limitation, to the total liability assessed for the same cohort. The index ranges from minus one to one, and a negative value identifies an administration whose limitation losses exceed its receipts. A Corrective Compensatory Collection coefficient is proposed as a bounded incentive component in the allocation of a limited share of intergovernmental transfers, together with the safeguards required to prevent an index reported by the municipality itself from being manipulated. The empirical analysis covers all 265 Bulgarian municipalities and their own-source revenue for 2020-2024. Total own revenue increased from BGN 2.380 billion to BGN 3.546 billion, or by 48.96 per cent in nominal terms but by approximately 11.6 per cent in real terms, while annual growth slowed from 19.92 per cent to 5.88 per cent. Ten municipalities generated 52.56 per cent of all municipal own revenue in 2024, whereas 155 municipalities with less than BGN 5 million each accounted for only 10.69 per cent. The results demonstrate that aggregate revenue growth does not imply an even strengthening of municipal autonomy. Rather than treating higher local taxation as the only route to stronger municipal finance, the study argues that fiscal autonomy can also be strengthened through more effective revenue administration, and that this in turn requires a uniform reporting standard for receivables written off through statutory limitation, which does not presently exist.