Latvian municipalities are raising concerns that a fresh financial equalization model will place a significant financial burden on the capital region and potentially hinder the country’s economic growth.
While the new model doesn’t specify which entities will be contributors and which will be recipients of the equalization funds, officials say it’s a flawed approach to redistributing financing.
Initial estimates suggest the new model could increase net contributions to the equalization fund from municipalities within the “Riga Metropolis” by several million euros annually.
This, they argue, would mean fewer resources for local road infrastructure, educational development, improvements to public transportation, and new investments.
The organization points out that every million euros diverted for redistribution represents a loss of investment in a region that generates a substantial portion of the country’s gross domestic product and tax revenue – a region closely watched by international investors.
Municipalities within the “Riga Metropolis” have previously expressed limited ability to attract European Union (EU) funding, while other regions benefit from new, and sometimes exclusive, infrastructure and initiatives supported by the EU. The current proposal, they say, would further increase the financial burden on the capital region to fund development elsewhere, according to Līce.
Specific criticism from the Riga region’s municipalities centers on the inclusion of state-targeted funding for education and school meals for grades 1-4 within the equalization system. This creates the illusion of increased revenue, when in reality, it expands the redistribution mechanism.
municipalities within the “Riga Metropolis” are deducting a portion of the “targeted funding” to other municipalities, meaning it can no longer be considered targeted funding. This construction of the financial equalization mechanism distorts the true fiscal impact.
Concerns also exist regarding the new mechanism for distributing personal income tax (PIT), which could make municipal budgets dependent on annual political decisions.
The plan proposes that only 30% of the current 78% of PIT revenue would be allocated as base funding for municipalities, with 70% earmarked for equalization among municipalities based on the new coefficients.
there’s an indication that this proportion could be adjusted annually with the adoption of the state budget.
This creates instability for long-term investments and risks in municipal financial planning. The municipalities argue that this model places a disproportionate burden on a region where infrastructure usage is significantly higher than elsewhere in Latvia.
“If this policy weakens the region that drives the country’s economy, it deliberately reduces Latvia’s overall competitiveness. The municipal financial equalization reform, in its current form, is not solidarity – it is an economically unjustified redistribution,” said Signe Grūbe, co-chair of the “Riga Metropolis” board and chair of the Ropaži municipality (JV/P).
Grūbe emphasized that financial equalization should not rely solely on municipalities in the Riga region and that state funding for the equalization fund should be equivalent.
Riga Vice Mayor and co-chair of the “Riga Metropolis” board, Māris Sprindžuks (AS), stressed that a developed and attractive Riga means a strong and attractive Latvia. The equalization mechanism should reduce inequality, but not diminish the capacity of the country’s development center.
Sprindžuks believes Riga is already strained by addressing the needs of all of Latvia and should be able to compete with other capitals for investment and residents.
“Riga Metropolis” is calling on the government to immediately halt the progress of the bill in its current form and develop a fair, transparent, and economically sound model that strengthens the country’s development center rather than weakening it.
“Riga Metropolis” unites the municipalities of Riga, Ādaži, Ķekava, Mārupe, Olaine, Sigulda, Saulkrasti, Salaspils and Ropaži to collaborate on issues of common importance, with municipal financial equalization being a key concern.
The Finance Ministry (FM) recently submitted the draft of the new municipal financial equalization law for coordination.
Following discussions with the Latvian Union of Municipalities (LPS), the Latvian Association of Large Cities, the Association of Regional Development Centers, and the Riga and Pierīga Municipalities Association “Riga Metropolis,” the FM submitted the draft of the new PFI model for coordination with the relevant ministries and the LPS, after considering their views.
A key element of the FM’s proposed model is the exclusion of real estate tax revenues from the PFI system, leaving them entirely at the disposal of the municipalities.
The FM explains that this approach, which has received support from all municipal groups, will strengthen municipal fiscal autonomy and allow for a more direct link between tax payments and the development of specific territories, while also providing opportunities for more targeted infrastructure planning, public space improvement, and investment attraction.
The proposed model also envisions a balanced distribution of PIT revenue, with a portion allocated based on actual performance indicators and the other portion included in the PFI basic funding and distributed according to average costs per equalization unit.
This allows for the elimination of the previous division of municipalities into payers and recipients, replacing it with a unified, transparent, and systematically understandable approach to funding distribution. The FM believes this reinforces the overall goal of the equalization system – to ensure equal access to basic services for all residents, regardless of location.
The FM also notes that the new model is designed to significantly reduce administrative burden, integrating state funding for interest education and school meals for grades 1-4 into the PFI calculation. Simultaneously, changes to the criteria will eliminate mutual settlements between municipalities for educational services, starting from the first grade.
This, the FM says, reduces the administrative burden associated with complex settlement procedures, simplifies the flow of funds, and allows municipalities to focus more on service quality.
The FM notes that municipalities have primarily emphasized the need for additional state budget funding within the PFI system. Analyzing international indicators (“Eurostat” 2024 data) on municipal revenues and expenditures in relation to GDP and their share in general government indicators, the FM concludes that the level of funding for Latvian municipalities corresponds to EU indicators and exceeds the level in the Baltic states with similar functions.
the FM believes that the issue of increasing PFI grants and their indexation should be considered during the state budget preparation process, evaluating financial availability at all levels of government.
Jolanta Plūme, Deputy State Secretary for Budget Issues at the FM, noted that the proposal for the new PFI model was developed in collaboration with stakeholders and is based on both current data and several years of analysis of municipal revenue and expenditure trends. Plūme emphasizes that the FM’s goal is to improve the PFI system to ensure municipalities have stable and predictable financial resources for the performance of legally defined functions and to reduce administrative burden.
The FM explains that the purpose of the PFI in Latvia, as in other EU countries, is to provide municipalities with resources to perform their functions at a comparable level. The FM points out that the PFI is not a regional development instrument, as other instruments are used for this purpose, including EU funds, loans, and public-private partnership projects.
The current PFI law was adopted by the Saeima in 2015, and as a result of economic development, population migration, administrative territorial reform, and tax changes, the revenues of Riga and Pierīga municipalities have grown much faster than those of other municipalities, explaining the need to develop the draft law.
