Fiscal Decentralization- Part of the Fundamental Reform of Public Administration in Albania

The continuing centralized nature of public administration in Albania could be attributed to a transition period, but since this phenomenon is not unique to Albania, it was necessary searching for underlying reasons for this system of regulation, organization, and financing of public affairs and administration.

It is generally accepted that the provision of public services to citizens cannot be left entirely to the market. In fact, direct government control over public administration with regard to public services is more or less inevitable. The issue is who should provide for these public services–state administration or self-governing bodies–and at what level–local, regional, or central.
The present situation in Albania is that the central government directly, or by means of district and regional offices, provides in the end of 2006 for approximately 70 percent of all public services to citizens. Funding decisions about these services are made solely at the central level; the district and regional offices have no significant decision making power or influence regarding funding amounts or destinations. Furthermore, regional self-governing bodies are not yet operational, and local self-governing bodies are very limited in their ability to make the necessary policy and budget decisions on major public services such as education, social care, health services, culture, and transportation.

An important precondition for the rationalization of public administration is speedy completion of the property transformation process and transfer of the state’s responsibilities for the majority of economic activities to the private sector, and partly to the municipalities, as follows:

o forestry: the state + transfer to municipal ownership,

o agriculture: privatization + transfer to municipal ownership,

o transportation: the state + regional self-governing bodies,

o health care: the state + municipal and regional self-governing bodies,

o education: the state + municipal and regional self-governing bodies,

o culture: self-government + the state,

o recreation: the state + self-government,

o telecommunications: privatization + state participation,

o road network: local and regional self-governing bodies + the state

o management of water supplies: local self-governing bodies + the state.

The aim is:

o to decrease the degree of provision of private property by the public sector,

o to limit interference of public administration with private properties,

o to decrease the operating costs of state administrative bodies, and

o to determine the powers and competencies of state administration and self-governing bodies at their respective levels.

1. Reforming Relations between the State and Local Self-Governing Bodies

1.1 The Role of the State in Public Administration

Obviously, supporters of collectivist doctrines and liberal principles will have a different view of the role of the state in public administration. But the recommendations for reform of public administration in Albania takes decentralization into account and anticipates a significant decrease in the role of state institutions in the management of public affairs as compared with the present situation and a transfer of most public service responsibilities to regional self-governing bodies.

The state’s role in the new structure of public administration should be limited to supporting, controlling, and organizing tasks with respect to the following:

o securing the country’s external independence (in terms of foreign policy and national defense, including civil protection at all levels);

o maintaining law and order (e.g., selected areas of security, education, trade, water supply, medical and hygienic supervision);

o protecting civil rights and freedom;

o social legislation; and

o creating conditions for a healthy economy (currency policy, system of insurance, a tax policy that allows for improve of administration, financial administration, economic policy, participation in regional policy, energy policy, and national transportation policy).

These tasks shall be performed by central bodies of the state and their regional offices (i.e., local state administration institutions). All remaining tasks should be the responsibility of local and regional self-governing bodies.

1.2 The Role of Self-Governing Bodies in Public Administration
While the execution of state power is territorially defined by the frontiers of the state, self-governing bodies regulate public responsibilities within the framework of their territory and competence in compliance with the constitution and the law. As the legislator, the state continually tries, by means of law, to provide limitations for self-governing bodies; therefore, it is necessary to ensure the status of self-governing bodies through the following types of provisions:

o Institutional. Ensure that citizens are represented through free elections at the state, regional, and municipal levels. Regional and municipal representatives must have the right to regulate all appropriate issues within the framework of the law and consistent with their responsibility. City and municipal associations must take an active part in representing their constituents to the government, parliament, and other organizations and associations to ensure that the constitutional rule of the republic conforms to democratic rights and rules. Self-government, as an organizational form, is largely exempt from such control except where the court is entitled to arbitrate on a case of impingement upon the law. The sovereign rights of self-governing bodies are personal sovereignty, sovereignty of the organization, sovereignty in planning, financial sovereignty, regulatory sovereignty, and taxation sovereignty with regard to local and regional taxes.

o Financial. Ensure the participation of municipalities and regions in revenues from state taxes; address and adjust differences across municipal and regional tax potentials.

o Constitutional. Provide a means of constitutional complaint to safeguard self-governing bodies against state-initiated legal recourses.

Self-government functions at the local and regional levels consist of economic responsibilities, territorial planning and construction, local economy and environmental services, housing, transportation, water supply management, education, culture, health services, social care, administration, public order, and fire fighting.

1.3 Local Self-Government Authorities

A frequent topic of discussion is the ability of municipalities with a small number of inhabitants to ensure fulfillment of their designated responsibilities. The Albania’s chose to establish self-governing bodies, it was offered to all municipalities and this became the model. If municipalities are to continue to be self-governing, the establishment of regional self-governing bodies in Albania is inevitable.

I do not, however, consider the establishment of new administrative units to be necessary to ensure that the principles of the original model can be implemented. If it is not efficient for a small municipality to provide public services, these can be provided by different forms of voluntary partnerships, common councils, companies, and agencies operating on a basis of contractual agreements with municipalities. In some cases, larger municipalities can provide services through contractual agreements to smaller municipalities in their region.

2. Proposal for a New System of Financing Self-Governing Bodies

Albania’s 2006 tax reform led to the introduction of tax structures as a better tax administration oriented from the market segmentation and taxpayers needs. The tax system consequently became more transparent, the rate of taxes was decreased, and the taxation education improved.

The proposal for a new system of financing self-government is based on:

o principles, with significant reinforcement of the status of self-governing institutions;

o resolving the income aspect of the budget and the redistribution mechanisms of taxes, as we consider spending to be a responsibility of the respective self-governing bodies and the result of an agreement between the citizen-voters and their representatives–the deputies at the individual levels of public administration;

o the possibility of a differentiated approach for municipal subjects in addressing the scope and content of public properties; and

o independence of public property with regard to social and taxation policy.

One of the aims of public administration reform in Albania is compatibility with the regulations and principles applied in European countries. These principles include:

o increased financial responsibility of local and regional self-governments in order to prevent an excessive debt load which would endanger their autonomy;

o increased transparency of public expenditures to encourage a reduction in administrative steps and improve the possibility of control which should be directed, in compliance with the regulations of the European Charter of Local Self-Government, at conforming with the law and constitutional principles;

o standardized budget submissions and their evaluation;

o provision of fiscal authority to self-governing bodies, since this is the only way to achieve financial autonomy;

o total freedom of self-governing bodies, in accordance with the law, in setting fees and tariffs for local public services;

o elimination of excessive differences in rates set because these differences can lead to a distortion of competition; and

o in case of a temporary need for centralized cash flow management, that this be accomplished so as not to threaten the solvency of local self-governing bodies and cause problems in cash flow.

Recommended adjustments involve the tax systems, the tax authority, changes in the budget structure of self-governing bodies, changes in the relations between state and local self-government budgets, the determination of the extent of debt, and changes in the distribution criterion for the so-called shared tax.

3. New System for Financial Adjustment

Redistribution of tax revenues has, over the last decades, become part of the budgetary regulations in Albania following the EU model.

The new system of financial adjustment fulfills four main functions:

o Fiscal–by increasing the financial means of municipalities, since municipal tax incomes (revenues) do not cover municipal needs;

o redistributional–by correcting differences in tax-raising capabilities;

o spatial/political–by covering the increased costs connected with different municipal tasks in the structure of the settlement; and

o economic–by using local budgets to ensure the stability of the country.

The extent of financial adjustment derives from changes in a country’s economic conditions, which change over time and with changes in politics. Therefore, it is necessary at certain points in time to analyze and adjust the system to new situations. It is very important to define the optimal extent of adjustment.

The volume of financial adjustment is controlled by the institution for public administration that provides for it; for that reason, from the point of view of territorial self-government, the greater the degree of adjustment, the lower the degree of financial independence (autonomy).
The financial adjustment is based on the tax power of territorial self-government, which shall be evaluated on the basis of an approved final invoice (bill) for the preceding fiscal year.

The financial adjustment consists of the following items:

o Vertical financial adjustment, by which the state budget will contribute to weaker tax regions and regional self-government will contribute toward weaker tax self-governing bodies. This means that vertical financial adjustment shall have an impact on the state budget as well as on the budget of regional self-government.

o Horizontal financial adjustment, by which the stronger tax regions will contribute to the weaker, and cities and municipalities with a greater tax capacity will contribute to those with a lower. This means that horizontal adjustment at the state level will not have an impact on the state budget, and adjustment at the regional level will not have an impact on the budget of regional self-government.

Title of Property and Housing Finance India

The economic reforms pursued by India nearly two decades ago has resulted in growth of many areas which are essentials to financial system of the country. The financing is one area that has shown remarkable growth in the recent time and is seen to play a major role in growth & development of Country.

The bank financing in housing sector has completely changed the way immovable property are sold and purchased in the country. It has certainly helped hitherto marginalized groups in society to have access to and fulfill the dreams of owning the property which as a jurisprudential concept is as old as the beginning of the formation of the social society among the human kind. A person desire to own something of its own which he can use and enjoy to the exclusion of all others has been a fundamental right recognized by all legal systems across the globe.

The formal mortgage housing finance sector continues to elude the lower income groups on account of non-availability of clear title, high transaction cost and difficulties in risk assessment due to irregular income behaviors.

Credit market is pivoted around mortgages. Creation of collaterals by way of deposit of title deeds is the most common method employed in the industry for its simplicity and cost effectiveness. Mortgage Deeds have duty implications and therefore an avoidable option in comparison to the former method. Such fundamental problem of absence of clear title is preventing greater penetration of credit business across the market. It is not just affecting the housing credit business but also have far reaching consequences. Even courts have considered the legality of creation of equitable mortgage by deposit of legally infirm documents like letter of allotment, possession etc. however opinion is divided across various courts and the matter is now under consideration before the Hon’ble Supreme Court.

Therefore, there is felt a fundamental need of clearly defining the rights of the persons in tangible objects in order to ensure that the persons enjoy such rights without any confusion and to the exclusion of others. This gives rise to a legal need to clearly define the title in the properties owned by people. Growth of credit market in housing sector largely depends upon how soon a legal and efficient system can be evolved to record and recognize people’s right in the properties in the form of clear title.

In India title to properties can be claimed by persons in diverse legally recognizable means. The most common and legally efficient way of claiming title in property is by possessing a sale deed in one’s favor however even such legally executed document is not free from competing claims made by others to the title.

Such competing claims arise out of inefficiently maintained system of recording land titles by the State controlled and run land registries whose inefficiency and corrupt practices have become an order of the day. It is commonplace to note that even a duly registered sale deed is doubted by for its lack of authenticity and legal competence to convey clean titles. Such problem is attributable to fragmented land registries that do not have real time access to other land registries to avoid multiple registrations. Even loop holes in registration laws are exploited by corrupt players to obtain multiple registrations over the same property by getting the registration affected in the registry other than where the property is situated to avoid detection.

In Delhi we have seen many examples where for properties situated in Delhi sale deeds have been registered in Mumbai by exploiting a provision in law that allows one land registry in Mumbai to register properties situated anywhere in India.

Succession laws in the country allow family members to lay a competing claim to the ownership of a person who claims a property as his own by alleging that the property being ancestral in nature necessarily belongs to all family members and not to just one.

Likewise agricultural properties have their own peculiar legal problems. Laws recognize ownership by way of possession and recordal of cultivatory rights in the statutory registers. Such ownership claimed on the basis of recordal of rights in a statutory register and not on the basis of a document of title acts as an impediment in housing credit market.

Credit help people to aspire beyond their existing means by allowing them to take advantage of borrowed money and in the absence of such facility the buyer is forced to buy cheap and not so good options that are within their limited resources. Such cheap options give rise to unplanned development in the form of unauthorized developments and banks keep away from properties in such areas due to lack of clear title and building as per the guidelines issued by Reserve Bank of India based on the judgment of Delhi High Court.

Another problem faced today by the housing credit market is the legal status of the state owned lands. Due to socialist policies adopted earlier the land always vested in the State who would allow its subjects to use the same as lessees. I am referring to lease-hold lands. Title never passed on to the occupier or lessee. Even if the rules permit conveyance of title in favour of the lessee, such conveyance is fraught with legal complications and is a costly affair. Banks are normally shy of financing transactions pertaining to lease hold properties. Such legal requirement creates legal complications and hence acts as an impediment in the growth of the housing credit market.

Unless we resolve and address the fundamental issue of title in the property by making laws that remove all complications and government strengthen the foreclosure laws, land records, create the conducive environment for setting up of credit bureaus, mortgage insurance / guarantee company etc., it will be very challenging for the housing credit market to reach out to all cross sections of the society particularly the weaker and underprivileged section of the society.

Now You Can Get Paid to Buy a House!

You probably have never heard of Mortgage Credit Certificates (MCC) before, most real estate professionals don’t even know about it. This is one of the best kept secrets in real estate, but it shouldn’t be!

Basically, MCCs allow homebuyers an opportunity to purchase a property that they might not have otherwise qualified for. By reducing the amount of federal income tax you pay, the Mortgage Credit Certificate (MCC) gives you more available income to qualify for a mortgage loan and assist you with house payments. Now that increase in your take-home pay can be incorporated into your mortgage application!

Any first-year tax preparer will tell you that the federal government allows each homeowner to claim an itemized federal income tax deduction for the amount of interest paid each year on a mortgage loan. But for a homeowner with a MCC, they’re allowed to deduct 20% of their annual mortgage interest directly from their tax liability, resulting in a dollar-for-dollar reduction in taxes owed. Now this is where I lose some people. I have found that sometimes it’s best to let the numbers tell the story.

Loan Amount: $250,000
Interest Rate: 6%
Payment: $1,499

Now in the first year, you will pay a total of $14,916 in interest on your mortgage. Those numbers don’t change if you have a MCC or not. Now let’s assume you have a MCC.

You paid $14,916 in total mortgage interest. 20% of that equals $2,983. That means if you would normally owe the IRS, let’s say, $4,297 that year, you would now owe $1,314 ($4,297-2,983) instead! It’s a dollar-for-dollar reduction in your tax liability. And the remaining 80%, ($14,916 X 80% = $11,933) would be an itemized deduction on your Schedule A as usual. Please note: if your tax liability is less than the credit, you will not receive a refund for the difference. I know, I know, wouldn’t that be nice. But you can carry the unused portion forward for up to 3 years to offset future income taxes, so all isn’t completely lost.

You can wait for your annual tax return if you want, but if you have a MCC, you might as well take full advantage and receive more immediate benefits, right? How’s an extra $249 a month in your pocket? Homeowners with a MCC can file a revised W-4 withholding form with their employer to reduce the amount of federal income tax withheld from their wages, which increases their take-home pay.

Most readers, right now, are wishing they heard of this MCC thing years ago. It must be new right? Wrong. The Mortgage Credit Certificate Program was authorized by Congress in the 1984 Tax Reform Act as a means of providing housing assistance to families of low and moderate income. The MCC is available to homebuyers who meet household income and home purchase limits established for the program, as well as other federal eligibility regulations.

Obviously, not every real estate transaction is going to qualify. This program is typically for first-time homeowners, or those who have not had ownership interest in a principal residence at any time in the last 3 years. The home you buy must also be used as your primary residence, so no investment or second home properties. Also, MCCs will not be issued for refinance mortgage transactions. Last but not least, the feds consider the MCC tax credit to be a subsidy, and as such, you may be subject to a “recapture tax” if you sell the home or your income increases above a specified level. I urge anyone buying a home to consult with a tax professional (a CPA, an EA, or an attorney specializing in taxes) to calculate the possible credit. But for the curious, more tax information can be found at on page 259.

All-in all though, the MCC is a great benefit for anyone who qualifies. So whether or not you need the credit to qualify for a home purchase, you should still investigate within your area to find out what the guidelines are. Most likely, you’re going to find information on the MCC at your local Housing, Finance, and Development Corporations. Along with the forms you’ll need, they will also have a list of participating lenders. Always ask your loan officer or mortgage professional if they are affiliated with a participating lender.

The Reform of Fannie and Freddie

Earlier this year, the House Subcommittee on Capital Markets and Government Sponsored Enterprises passed eight bills that significantly reform Fannie Mae and Freddie Mac. Though there has been lots of talk, this is the first time since the 2008 bailout that concrete steps have been taken to change the way Fannie and Freddie do business.

The bills address everything from the size of Fannie and Freddie’s portfolios, to compensation for executives and the overall mission of the entities. H.R. 1226, called the GSE Mission Improvement Act, makes significant changes to the scope within which Fannie and Freddie can operate, and what their goals should be. The bill strikes Sections 1331 to 1336 from the original Federal Housing Enterprises Financial Safety and Soundness Act, effectively repealing Fannie and Freddie’s affordable housing goals. The elimination of affordable housing-related goals is intended to prevent both Fannie Mae and Freddie Mac from generating mortgages for people whose income or credit rating put them at greater risk for default, as they have previously done.

Other bills passed by the House Subcommittee require greater transparency, prohibit either entity from engaging in new business until bailout money has been repaid, and require approval from the Treasury Department if Fannie or Freddie want to take on any additional debt. They are: H.R. 31; and H.R. 1221-1227.

H.R. 31 gives the Federal Housing Finance Authority Inspector General authority to directly hire and fire employees of Fannie Mae and Freddie Mac. In addition, it directs the IG to submit quarterly reports regarding Fannie Mae and Freddie Mac activities and overall financial conditions for as long as the entities are in conservatorship.

H.R. 1221 effectively eliminates any monetary compensation, other than the actual salary, paid to the executives of Fannie Mae and Freddie Mac. The remaining bills each address a different issue that is considered a contributing factor to the financial crisis and the current financial troubles and Fannie and Freddie. If the bills are signed into law, both entities will be required to charge a “guarantee fee” for each loan guarantee they make for residential properties. They will be forbidden from giving special consideration to asset-backed securities based on loans they originated, and their debt holdings will be limited to $700 billion in mortgage assets, decreasing incrementally to no more that $250 billion in five years. In addition, both lending entities will be required to obtain approval from the Secretary of the Treasury before making any additional loan obligations, and they will be prohibited from creating any new mortgage products as long as they are in conservatorship or receivership.

No More Tax Money for Decaying, Underwater Housing Industry

The Obama Administration has gone to extraordinary measures to try and prop up the US housing market and the US economy. Time and money are short these days, and the director of the Federal Housing Finance Agency Edward Demarco has virtually eliminated the possibility of passing the buck to the taxpayer.

This spells doom and gloom for a Presidential Administration that has, since 2008, poured billions of dollars into a beleaguered economy and housing industry. Federal housing programs designed to help troubled borrowers amend their current mortgages have only caused banks to drag their feet. In effect, there seems to be no systemic approach that can effectively restructure the US housing market and meet the demands of all the players involved-regulators, banks, borrowers, and taxpayers.

Little political will on the part of Administration and Congress

President Obama is set to deliver a landmark national job creation speech this week. The speech will unveil his Administration’s plans to create jobs for the nearly 1 million unemployed construction workers in the country. Pundits across the political spectrum seem to agree on one thing: Obama will need a miracle to get the spending for job creation and infrastructure updates.

Obama and his cohorts at the FHA and HUD have bandied about the idea of converting foreclosed or short sale properties into rentals. Policymakers and banks have received this scheme with only lukewarm approval. With Freddie and Fannie Mae now requiring banks to push seriously delinquent homeowners out, it is increasingly unclear who is winning and who is losing out of banks and taxpayers. This zero-sum equation has lead pundits to conclude Washington is simply unable to provide leadership.

These next few months, with the election rising into its usual cacophony of political discord, are poised to be the most difficult for Obama yet. Front center will be domestic issues, and policymakers within the Administration are confident that refinancing schemes are a surer way to recovery and won’t hurt investors in mortgage-backed securities in the longer term.

Banks and fiscal experts are uproarious over the so-called repurchase losses. Repurchase losses are monies that may be restored to Fannie and Freddie from the loan originators for poor or fraudulent accounting practices.

A sweeping plan and Obama may be swept in the next election

What is clear is that no one in D.C. seems to possess the political will to push through any major federal initiatives and taxes. The public and private sector are on unusually intimate terms in the mortgage industry.

As the backbone of the country, the mortgage industry has suffered more than a few major breaks in the last half decade. Capitol Hill is depleted of resources and unwilling to assess new taxes. It should come as no surprise that politicians are readily cannibalizing the institutions they serve. Policy experts and economists are already saying the same thing: any dramatic changes by the President will cost an arm or a leg somewhere.