Estonia's planned municipal funding reform could cost some local governments in its first year

Estonian municipalities are facing one of the most significant financial reforms in recent years. The state plans to shift more than 120 million euros into the revenue base of towns and rural municipalities, giving them greater freedom over how the money is used.

Currently, municipal funding consists of two main components: personal income tax and resources from a state support fund. The fund's defining feature is that its money is earmarked for specific purposes — such as road maintenance, school meals, or extracurricular activities — with the state allocating around 122 million euros to these targeted uses. The planned reform would remove these restrictions.

Hardi Alliksaar, head of the local government department at the Ministry of Regional Affairs, told ERR that the reform's essence is shifting more than 121 million euros of earmarked funds into municipalities' general revenue base, giving local governments greater independence in deciding how to use the money, since municipalities understand local needs best.

Possible losses during the transition

However, because the distribution formula is changing, some municipalities may receive less money in the reform's first year than under the current system. To offset this transitional shortfall, the Association of Estonian Cities and Municipalities has proposed a one-time allocation of 3.5 million euros, though this sum is not currently included in the draft state budget.

Andres Laisk, elder of Saue rural municipality, said the 3.5 million euros is a one-time amount needed to compensate for transition-period losses, adding that going forward everything would proceed as usual, and that this sum should not become a decisive obstacle to implementing the reform.

Jõelähtme is one of the municipalities that could lose part of its revenue in the reform's first year. Its elder, Andrus Umboja, said that even if the state does not find money for the transition period, the municipality will manage its obligations — repairing roads, funding schools with textbook money, and paying salaries. However, he said the real question is whether municipalities are being treated equally.

The Ministry of Regional Affairs stressed that the lack of a decision on the 3.5 million euros should not halt the reform itself. The draft law has already been agreed and, once approved by the minister, will go to the government and then to the Riigikogu. The ministry expects the new funding system to take effect on January 1, 2027.