The possibilities to issue debt by LG are subject to conditions (constraints), which result from the law on public finance (lpf) and regard value of total debt to total revenue, and cost of debt service to total revenue, observed each year.
The constraints, and thus, the possibilities to issue debt, changed in the new law on public finance of 2009 (n-lpf). The numbers, which restrained from above the values of debt to revenue, and cost of debt service to revenue, disappeared. However, the upper limit on value of debt service to revenue remained and, presently, depends on operating surplus (funds in excess of operating expenditure) over the past three years preceding the budget year.
The n-lpf requires maintaining the operating expenditure at a level, which is not outstripping the operating revenues. It requires the central government prepare a long-term financial-investment plan (minimum for four years), which includes projection of the operating surplus and recommends LG to prepare such a plan. The new law introduces consistency between EU regulations and recommendations of Operating Programs, and coordinates long-term budget planning with debt management: the operating surplus has to be projected until debt is matured. However, the new rule for restraining the upper limit of debt service to revenue, and thus, for the face value of LG debt, is strongly biased by the past. This will have strong consequences in the years 2012 – 2015, when the past operating surplus (os) will regard period of the world financial crises (2009-2011). The os of LG in Poland will be low over this period, and this will substantially limit debt issuance and financing investment, specially those, which could be financed from EU funds, but will not, because LG will not have enough funds for their own financial share.
We submit a rule of limiting debt service to total revenue level, which depends on past values of operating surplus, but also on its future value, planned for the budget year.
Based on 2007-2010 data from several cities, we compute and compare 2011 values of limits for debt service to revenue level (limits on debt issuance), for three rules, which result from: the old lpf, the n-lpf and the rule introduced by the author. We also project value of the os for these cities over 2011-2013, and calculate the limits on debt issuance for 2014.
We demonstrate that the authors rule is less restrictive than that of the n-lfp. It allows to issue debt for financing investment to the LG, which financial situation has improved in the current (preceding the budget) year, as compared to past year, and which anticipate that their financial situation will still improve in the budget year.