The Financial Revenues and Expenditures of Palestinian Local Governance Units (LGUs)

The ability of local governance units (LGUs, including municipalities) to manage their revenues and expenditures, and the relationship between them and central government, are considered two of the most important issues that are constantly addressed globally in studies on the local governance sector. Although the composition of municipal revenues varies according to each country and the laws regulating them, in general, they are usually limited to the following: fees collected by LGUs in exchange for providing certain services, taxes, penalties for violations, and investments of all kind.

Municipalities in Palestine face numerous challenges resulting from the prevailing economic and political conditions in Palestine, in addition to internal challenges related to the structure of municipalities, their financial and administrative systems and their governance system, as well that of the local governance sector at the macro level. Note that these challenges are similar to those prevailing in many developing countries. Municipalities also face a constant dilemma: the need to balance their revenues with their expenditures. This requires successful and effective management to avoid a deficit in the municipal budget, a possibility resulting from the growing value of municipal expenditures. These directly link to population growth, and the decline in revenues, given the challenges outlined above.

Within this context, this study aims to evaluate the financial situation of LGUs in the West Bank, by conducting detailed and comprehensive financial analysis of the components of LGUs’ revenues and expenditures. This study assesses the current situation with regard to LGUs’ needs, their capabilities in the field of financial management, and the extent to which they practice transparency, integrity and community accountability. The study works to identify the most prominent gaps in financial and administrative performance, reaching results that help to enrich the effectiveness of administrative procedures for managing revenues and expenditures at Palestinian LGUs. The study also includes a review of the legal and legislative framework regulating the Palestinian local governance sector, especially laws affecting LGUs’ revenues and expenditures. This study includes the analysis of the financial statements of a sample of 29 municipalities (Class A, B and C). In-depth interviews were held with a number of key stakeholders in the local governance sector.
The study shows that there are clear gaps in the legal framework regulating the local governance sector, especially as this relates to organizing and determining the revenues of LGUs and the distribution of their expenses. The most prominent deficiency is the weak independence of LGUs in managing their financial resources, combined with a lack of clarity on the distribution of powers and responsibilities between LGUs and central government. Additionally, the existing framework does not adequately address the regulation of partnerships between the private and public sectors (LGUs in this context), neither does it address the regulation of partnerships outside the scope of tasks assigned to LGUs.

Moreover, the current legal framework does not distinguish in responsibilities and tasks required of LGUs according to their legal classification (Class A, Class B or Class C). This has resulted in the inability of smaller LGUs (Class C and village councils) to carry out the tasks mandated of them in the Local Authorities Law No.1 (1997), negatively affecting the quality of services provided to citizens.

The study examines - in detail - the governance of LGUs in Palestine, and the reality of how they manage their financial and human resources. It shows the existence of a number of challenges related to collecting revenues and managing expenses at LGUs, leading to large fluctuations in revenue sources and their inadequacy most of the time, all coinciding with an increase in expenses. The sustainability of self-collection revenues is greatly affected by the ability and willingness of citizens to pay their due fees for services, as well as the volume of economic activity within the authority’s borders, and the incorrect pricing of many LGU services, resulting in a mismatch between the cost of services and the value of fees imposed on citizens. Moreover, LGUs lack sufficient independence to allow them to introduce new fees and taxes to meet their financial needs.
The fluctuation of financial transfers (property taxes, road and transport tolls, professional licenses, etc.) from central government to LGUs - combined with the non-comprehensiveness of property valuations for the purpose of collecting taxes - contribute negatively to the provision of services and proper planning at LGUs. This coincides with a failure to allocate sums deducted from the government’s general budget, for periodic transfer to local authorities. In the same context, there are large fluctuations in grants and external support on which local authorities rely (heavily) to finance developmental, investment and infrastructure projects, especially as most international funding is conditioned politically.
The study also shows that there are problems related to local authorities’ management of their expenses, especially in light of the increasing costs of providing services. This is further compounded by the weak efficiency of human resources at LGUs, where administrative and executive staff lack the skills necessary to monitor projects. Many LGUs suffer from the absence of good governance and the predominance of tribal, family factors and partisan, political factors in the process of selecting council members. This leads to the disqualification of candidates with required academic and professional competencies, if they do not conform to tribal or political standards. Finally, it must be noted that the community accountability process is weak across the majority of local authorities, especially given the absence of a legal framework to codify it.
The results of the financial analysis of municipalities included in the study sample show that average expenses at LGUs amounted to (about) 99% of their revenues. Salaries accounted for, on average, 32% of total revenues, while ‘commercial’ expenses constituted about 39% of total expenses. Data analysis also shows a significant decline in cash liquidity ratios – these did not average more than 3.4% of total municipal assets. Moreover, the high percentage of fixed assets limits the ability of municipalities to pay their debts and cover their expenses. At most municipalities, the total ratio of debts to total assets is close to 41%, which is a high percentage that indicates a significant level of risk. This poses a major challenge for local authorities in managing their operational expenses and covering their cash needs, without resorting to borrowing.
The study demonstrates that there is no unified methodology across municipalities for presenting and preparing financial statements, combined with the absence of a specialized guide to explain

mechanisms for preparing financial statements and their components. Numerous municipalities still rely on the cash basis - and not the accrual or modified accrual basis – to prepare their financial statements. Moreover, several municipalities do not include the value of fixed assets in their accounts, limiting their reliability in terms of budget and accounts’ analysis.
In conclusion, the study proposes a roadmap for municipalities, central government and other stakeholders, to overcome various challenges facing local authorities, while enhancing their financial sustainability. These are outlined below.

Strengthen the legal framework regulating the local governance sector, to address (direct and indirect) legislative challenges associated with this sector that negatively affect LGUs’ ability to collect their revenues and manage their expenses. This requires a review of Local Authorities Law No. 1 (1997), as well as Cabinet Resolution No.11 (2019) regarding the financial system for local bodies; Regulation No.27 (2022) on the partnership system between LGUs and the private sector; and Decree-Law No.21 (2017) that is in itself an amendment of the Temporary Cities, Villages and Buildings’ Planning Law No.79 (1966).

Promote sustainable financial management at LGUs, by establishing a specialized and unified financial management system for municipalities with similar legal classifications (A, B, C or village councils). This must take into account the financial, material and human capabilities of LGUs according to their legal classification. Develop detailed foundations and standards for financial management at LGUs in a participatory manner. Ensure accuracy by LGUs when preparing, approving and implementing annual budgets, and when specifying the foundations for building these budgets. Develop effective tools and solutions in the field of financial management to ensure the payment of local authorities’ debts. Adopt clear and sound principles for measuring the cost of services provided by LGUs to citizens. Enhance the revenue generation capabilities of LGUs from diverse sources, while exploiting revenue sources permitted to them by Law. Expand partnerships with the private sector, including productive investment projects, aiming to create more diverse and sustainable revenue opportunities for LGUs. Adopt incentives for collection employees to boost collection rates. Develop effective systems for collecting dues and fees from citizens, and rescheduling late payment of fees. Compare service fees and costs across municipalities, such that they are proportional to per capita income and the number of residents within municipal jurisdiction.

Strengthen LGUs’ administrative and governance systems, by developing a specialized and unified administrative system for municipalities with similar legal classifications and circulating these to employees. Direct all local authorities to commit to preparing realistic medium-term strategic plans that take into account the LGU’s financial and administrative situation. Adopt a participatory budgeting approach similar to many countries, by encouraging civil-society organizations and citizens to participate in preparing the annual budget. Involve representatives of the local community, non-governmental organizations and the private sector in the planning of projects. Enhance the dissemination of information, making it clearly available to the public. Municipalities must also provide a citizens’ guide to inquire about fees for each type of service, including the mechanisms for calculating these fees and their compatibility with the costs borne by the LGU. Establish and adopt formal systems of control and accounting, whether internal control systems (implemented by assigning a specialized employee from within the local authority to monitor their application), or efficient external control systems.


Develop and build LGUs’ capabilities in adopting effective financial and administrative policies, by building the capabilities of employees in finance and administration. Build LGUs’ capacities in implementing projects through continuous training and education. Clarify the differences between the trial balance, allocated budgets and expended budgets for those working in finance at municipalities. Provide LGUs (especially Classes B and C) with the necessary educational qualifications and practical experience to overcome challenges associated with limited HR competency. Qualify accountants working at municipalities and LGUs on methods for the preparation of accounting/financial statements according to the accrual basis, further developing their accounting capabilities.