Highlights

Dutch municipalities operate in a supportive institutional framework marked by a large support from the central government in the form of grants.

We think Dutch municipalities have sufficient resources to fulfill their tasks, so their indebtedness stays modest.  Thanks to the solid level of grants municipalities in the Netherlands receive from the central government, they will continue to retain sufficient revenue to adequately cover spending responsibilities.

There is an uncertainty about the Municipality Fund's size and the formula that determines the allocation of resources among municipalities, which could change from 2026. We think this reduces system predictability, given their limited ability to influence the central government's decisions. However, we think any implementation of changes would be gradual, considering the Dutch system's maturity.

Trend: Stable

The trend is stable. We do not expect any major changes to the municipal layer's scope of responsibilities that could stress the framework under which they operate.

We could revise down our institutional framework assessment if the central government significantly reduced its transfers to municipalities, other things being equal. We could also consider revising our assessment downward if municipalities were given further responsibilities without receiving matching resources.

We could revise the assessment upward in case municipalities were granted greater autonomy that would help them increase their tax bases to cover spending. Also, an upward revision could result from better transparency of local government operations, including regular disclosure of financial reports in compliance with full accrual accounting standards.

Predictability Of The Framework

Predictability is strong due to generally infrequent reforms.   We consider the Dutch local and regional government (LRG) sector well-developed and relatively mature with limited reforms, which are implemented gradually and phased in well. The sector has been moving toward decentralization in the past three decades. This has involved allocating various responsibilities, especially in social policy, to municipalities while simultaneously decreasing the number of municipalities (342 in 2023 compared with 913 in 1970).

Dutch municipalities' ability to withstand unwanted changes is constrained.  Municipalities depend highly on central government grants, so we view their ability to oppose reforms as limited. Nevertheless, municipalities cooperate, both with each other and other government layers, to influence central government decisions. The Association of Netherlands Municipalities (VNG) is the main organization driving Dutch municipalities' agenda and plays a key lobbying and advocacy role for decisions affecting the sector.

Revenue And Expenditure Balance

There is a general adequacy of revenue sources to finance spending responsibilities, thanks to the solid amount of grants municipalities receive.   With the strong central government support, we consider Dutch municipalities' ability to cover expenditure strong. Their primary responsibility is social domain, which is gradually increasing. To cover these, municipalities depend mainly on the generous central government transfers, which make up about 57% of the municipal total revenue.

We think the equalization system for municipalities is robust and the predictability of grant distribution is high, with a clear formula. In our view, the equalization system allows municipalities to provide adequate basic services. Municipalities with a wealthier population receive fewer fiscal transfers, while those with a poorer population receive more. Transfers are distributed through the Municipality fund. The allocation per municipality is based on a range of indicators related to size and need. Transfers can be general or specific grants (meant to cover the delegated from the central government tasks' costs).

While most municipal revenue comes from the state, municipalities can generate income through taxes, charges, asset sales, dividends, and reserves.

The Dutch system of municipal taxes allows municipalities to levy property taxes independently, providing them the autonomy to make choices, buffer for unexpected financial setbacks, and counter inefficiencies in the allocation of central grants. While municipalities are also allowed to charge administrative fees, this revenue is intended to cover the costs of the services they provide, and municipalities are not allowed to make a profit on these.

Although we anticipate rising expenditure, we think the sector's budgetary performance will remain sound thanks to the continuing support from the central government and the operating balanced budget requirement.

Chart 1

Chart 2

Chart 3

Owing to strong budgetary performance, Dutch municipalities' debt remains modest. Debt equaled €38 billion (about 55% of 2022 total revenue).

We think debt will be largely unchanged over the next couple of years as municipalities get adequate resources to finance spending responsibilities and have flexibility to adjust capital spending if needed.

Municipalities can borrow from capital markets and from two Dutch public sector funding agencies, BNG Bank N.V. (AAA/Stable/A-1+), and Nederlandse Waterschapsbank N.V. (AAA/Stable/A-1+), if needed. Municipalities borrow from the banks, which provide municipalities with below market rates and long-term funding, reducing the risk of capital market volatility.

The Dutch fiscal framework for municipalities prevents operating deficits and large debt accumulation.   Dutch municipalities are subject to a balanced budget requirement on the operating side, which helps ensure operating surpluses in the sector on an accrual reporting basis.

At the same time, we consider the balanced budget requirement fairly flexible, meaning a single-year deviation from the balanced budget requirement does not by itself indicate a breach. The budget should be balanced over the medium term (two-to-three years), allowing for adjustments in case of one-off events in a given fiscal year. The balanced budget requirement is expressed in accrual terms while municipalities employ modified accrual accounting standards, meaning revenue is recognized when it is both measurable and available; expenditure, however, is recorded on an accrual basis because it is always measurable when incurred. Still, we understand the difference between the cash method and accrual is small, taking into account only moderate municipal debt increase over the past 10 years.

The municipalities' heavy dependence on central government income also means that they expect support from the state if they encounter financial difficulties.   We think the Dutch central government will continue to provide support to the municipalities based on past actions, for example during the COVID-19 pandemic or more recently to host Ukrainian refugees. Generally, the central government supports municipalities by increasing their general grant transfers or providing additional earmarked transfers. Funding provided through earmarked grants can address specific issues and might last only for a short time.

We consider the Dutch government well-prepared to handle severe budgetary issues of local governments. Since Dutch local governments cannot declare bankruptcy, municipalities experiencing severe financial issues can apply to receive funding from the "bailout fund" (Article 12 of the Financial Relations Act). Municipalities receiving financing from the fund must demonstrate a severely weakened financial condition by having property tax rates above the national average and a structural deficit larger than 2% of the general grant and property tax capacity combined. If the central government approves the municipality's application, the local government receives additional funding but effectively loses its ability to make independent decisions concerning its budget. The bailout fund is part of the regular municipal fund (itself part of the general fund), which means that any funding used for bailout purposes comes directly from the budgets of other municipalities. Cash-rich provinces can also provide funding to municipalities in case of need. There have never been defaults or restructuring in the municipal sector.

Transparency And Accountability

The budgetary process is transparent and institutionalized.  We think the institutional framework for Dutch municipalities provides for significant accountability of elected officials and financial managers. Roles and responsibilities for elected officials and managers are well defined.

Supervision over municipalities is undertaken by the municipal council and the provinces. The council has up to nine independent members from government finance and public administration. They are selected on the basis of their expertise and experience in public affairs.

We think the quality of disclosure and accounting standards is relatively good and well monitored, but data on the state-owned enterprises (SOEs) and cash flow reports is not available.  

Dutch municipalities publish financial reports once a year as well as an annual budget and three-year plan. The financial plans are comprehensive and the differences between the plan and actual budget execution are fairly small.

Accounting standards are nationally established and financial statements are subject to formal internal or external audit, which we think increases the data's reliability. Dutch municipalities apply modified accrual accounting standards based on the instructions from the Ministry of Internal Affairs. Cash flow data, including a cash flow statement, is not available for the municipalities, which we view as a weakness. Furthermore, they do not consolidate the entities they own shares in, which reduces the sector's transparency, in our view.

Related Criteria

• Methodology For Rating Local And Regional Governments Outside Of The U.S., July 15, 2019

Related Research

• Sector And Industry Variables: Institutional Framework Assessments For Local And Regional Governments Outside Of The U.S., July 31, 2024