The Association of Estonian Cities and Municipalities has reached out to the Ministry of Regional Affairs seeking greater decision-making authority over how funds allocated from the state's equalization and support funds — currently earmarked for specific purposes — can be used.

The association's executive director, Veikko Luhalaid, told ERR that the level of financial autonomy among Estonian municipalities is extremely low. "If we look at developed European countries, we're in the same weight class as Bulgaria and Greece," he said.

Luhalaid explained that although local governments do have their own budgets, they have little control over their content — municipalities cannot collect taxes or generate revenue independently and their budgets are structured according to national legislation and the state budget adopted by parliament.

The municipalities submitted a proposal to the Ministry of Regional Affairs and Agriculture to eliminate the current "labels" that dictate how the funds must be used.

"For example, €118.4 million from the state budget is currently allocated to municipalities with designated purposes. Of that, €29 million is earmarked for road maintenance. This money is distributed to local budgets based on the length and condition of roads — whether in urban or rural areas and whether gravel or asphalt — but the municipality can only use it for that specific purpose. Under our proposal, this €118 million would lose its label, allowing the local government to use it as it sees fit," Luhalaid said.

He emphasized that these are only support funds and that local governments must contribute additional resources themselves.

"It would create a degree of financial freedom — if municipalities didn't have to match such large sums, they could allocate more toward other areas. But as long as it comes from the support fund, that flexibility isn't possible," he added.

A representative of the municipalities' association noted that the need for change stems from the fact that, although income tax revenue has increased over the years, the support funds have largely remained unchanged.

"If the money had been included in the revenue base rather than in the support fund — meaning it rose in line with income tax — then over the years, local governments would have benefited and we wouldn't have had to hold lengthy negotiations with the state over how to get more out of the support fund," he said.

For example, under the draft 2025 state budget, local governments are slated to receive €130 million in support through the equalization fund and around €600 million via the support fund.

The breakdown of these allocations is as follows:

• Local road maintenance support – €29.3 million
• Labor cost support for preschool teachers – €16 million
• Youth extracurricular activity support – €9.3 million
• Compensation for civil registration services – €1.1 million
• Support for services for children with high care and assistance needs – €2.7 million
• Compensation for subsistence benefit payments – €43.2 million
• General education support – €495.2 million
• Mental health services support – €1.5 million
• Support for transferred former state roads – €0.1 million

According to the proposal, starting in 2027, a total of €118.4 million in currently designated support funding would be transferred into the municipalities' revenue base. Of that, €76.3 million would go toward basic education, excluding teachers' salaries, €9.3 million would be allocated for hobby education and extracurricular activities, €2.7 million for services for children with high care and assistance needs, €29.3 million for local roads and €0.9 million for student housing support, according to the association's memo.

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