Municipalities play a large role in theBulgarian public sector. They provide primary and secondaryeducation. They own and operate about one-third of thehospitals in the country. Until 2003, they administered allthe major social assistance programs (except pensions andunemployment insurance). The municipalities of larger citiesown (wholly or partially) the water companies operatingwithin their territories. Throughout the 1990's andinto the first years of the present decade, problems in thestructure of intergovernmental relations undermined effortsto achieve efficiency in public service provision andgenerate savings for investment in public utilities.Persistent deficits and bailouts undermined fiscal stabilityat both the central and local levels. A fundamental reformin intergovernmental fiscal relations went into effect in2003. This has addressed many, although not all, of theseproblems. This report evaluates the reform, identifies majorremaining issues, and recommends means to resolve them. Thereport is structured as follows: After the Introduction,which discusses existing government boundaries, functions,regulation, and revenues, Section 1 parses the issuesregarding unfounded mandates, arrears, and fiscal autonomy;incentives to overstaffing; arbitrary disparities in percapita revenues; and infrastructure decline. Section 2analyzes the 2003 Reform. Section 3 examines what remains tobe done immediately and in the long-term.
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