Sborník příspěvků XVI. mezinárodní kolokvium o regionálních vědách Valtice 19.–21. 6. 2013
541
DOI: 10.5817/CZ.MUNI.P210‐6257‐2013‐68 
COMPENSATORY GRANT IN POLISH RURAL COMMUNES
– MODIFICATION CONCEPT AND ITS IMPACT ON
FINANCES OF COMMUNES
JAROSŁAW OLEJNICZAK, PH.D.
Department of Finance, Faculty of Economic Sciences
Wroclaw University of Economics
 Komandorska street 118/120, 53-345 Wroclaw, Poland
E-mail: jaroslaw.olejniczak@ue.wroc.pl
Annotation
The aim of this paper it to present the results of research on the scale of the compensatory mechanism
in Polish rural communes in the context of their differentiation by the development level described by
means of the taxonomic measure of development by Hellwig. The following research questions were
formulated: how significant is compensatory grant for rural communes from the viewpoint of their
income and current expenses, should its present beneficiaries receive funds from the viewpoint of their
development level as a criterion for awarding grants, what financial effects might the modification of
the list of beneficiaries cause. A division of communes into four groups in terms of the designated
development level and four groups in terms of income level per resident was used for the analysis. The
analysis of the basic taxable income ratio per capita in the period 2009-2011 demonstrates the
presence of significant and permanent differences between individual Polish regions. The largest
number of communes with high BTI ratio per capita occurs in western Poland. Based on the research
it can be stated that compensatory grant significantly contributes to the balancing of current expenses
with current income, in particular in communes in eastern Polish voivodeships. The self-financing
ratios adjusted by grant are obtained mainly by communes with a high development level. The number
of these communes was not affected by the financial effects of the 2008-2010 crisis. With the assumed
division of communes into three groups with diverse granting level, it can be stated that grant
liquidation for developed communes would concern merely 5.5% of the entire compensatory grant for
rural communes in 2011. At the same time, it needs to be observed that this would mean disturbing the
financial sustainability of certain communes. The greatest decrease in income per resident would be
experienced by communes in the Lower Silesian, Masovian, Greater Poland and Silesian
voivodeships. Based on the conducted research, it must be stated that accounting for the development
level of communes while building a new funds redistribution model brings along the necessity to pay
attention to ensuring budget stability in the communes which, as a result of grant restriction, might
lose the self-financing capacity and face a current deficit.
Key words
local government finance, rural development, financial indicators
JEL classification: H71, O18
Introduction
Since the new model of horizontal solidarity functioning between local government units was adopted
by the Act of 2003 (the Act of 2003 on income of local government units), the dispute about the
correctness of its shape has been increasing. In 2012 attempts to make changes to this mechanism
were made (parliamentary papers 230 and 19 of 2012) but they did not come into force. The problem
of optimisation the compensatory mechanism comes down to two basic issues. Firstly, to determining
the actual demand for the compensatory mechanism, and secondly, to ensuring the optimum
redistribution method. According to the public finance theory (Patrzałek, 1998, p. 67), the grant
mechanism for local government units should play the regulatory (compensatory) function as well as
Sborník příspěvků XVI. mezinárodní kolokvium o regionálních vědách Valtice 19.–21. 6. 2013
542
the dynamising (stimulating) function. From the viewpoint of the analysed scope of overall grant, it is
obvious that the former function is most related to the horizontal redistribution mechanism. Although
it is particularly associated with eliminating disproportions in supporting budgets of local government
units arising from different financial potentials of these units, it refers more broadly to maintaining a
sustainable structure of the performed social and educational tasks in terms of territory (Patrzałek,
1998, p. 68; Kopyściański, 2011). Hence, the major goal of the compensatory mechanism should be
equalising the level (scope) of the provided public services in all local governments. This will mean
achieving a relatively uniform development level in the financial, social as well as cultural and
educational dimension by communes. The present system is based on the assumption that it is the
scale of income per resident that determines obtaining compensatory transfers by communes. The aim
of this paper is to indicate the possibilities to restrict the compensatory mechanism based on the
development level criterion and the financial effects for communes arising from the proposed
modification.
1. Aim and methods
The aim of this paper it to present the results of research on the scale of the compensatory mechanism
in Polish rural communes in the context of their differentiation by the development level described by
means of the taxonomic measure of development by Hellwig. The conducted analysis should allow
answers to the following research questions: how significant is compensatory grant for rural
communes from the viewpoint of their income and current expenses, should its present beneficiaries
receive funds from the viewpoint of their development level as a grant, should its present beneficiaries
receive funds from the viewpoint of their development level as a criterion for awarding grants, what
financial effects might the modification to the list of beneficiaries cause.
The results of earlier research, conducted by the author, on diversity of the development level of rural
communes in Poland against their basic taxable income were used in the analysis (Olejniczak 2013;
Olejniczak 2012). In accordance with the research conducted earlier, it was assumed that BTI ratios
per resident – reflecting the income level (and at the same time constituting a compensatory
mechanism criterion), as values that are “delayed” in time, would be determined with a two years’
delay with respect to development level ratios. Commune development level ratios, in turn, were
calculated with the use of a procedure involving the analysis and selection of the variables from 2009,
2010, 2011 available in the Local Data Bank of CSO, which reflect the development level of
communes. Measures of development were determined for individual communes in accordance with
the Hellwig’s method based on the obtained ratios (Hellwig, 1968; Sthral, 1998). Variability index Vj
was computed for the selected variables by the formula (1) with the critical value of the coefficient V *
≤ 0.1. The absolute values of the indices for all features exceeded the above level and hence were all
subject to further analysis.
j
j
j
x
S
V 
(1)
where:
jV - variation coefficient for j-variable
jS - standard deviation for j-variable, computed according to (2):



n
i
jijj xxnS
1
21
)( (2)
jx - arithmetic mean for j-variable
Subsequently, Pearson correlation coefficient matrix was built (3).
Sborník příspěvků XVI. mezinárodní kolokvium o regionálních vědách Valtice 19.–21. 6. 2013
543







n
i
j
n
i
j
n
i
jj
xy
yyxx
yyxx
r
1
2
1
2
1
)()(
))((
(3)
where: rxy – Pearson’s correlation coefficient, X, Y – measurable statistical features,
x , y – arithmetic mean, features X and Y, respectively.
It was assumed that the features which show high correlation, whose correlation coefficient
satisfies the condition | rxy | ≥ r* in relation to the critical value r* = | 0.75 | would not be allowed
for in the further study. Thus, matrix X was obtained, with successive lines corresponding to
particular local government units and columns – to the values of the individual features for the
following entities.













nmnn
m
m
xxx
xxx
xxx
X
...
............
...
...
21
22221
11211
(4)
where xij – stands for the value of j-feature for i-object (i = 1, 2, ..., n; j = 1, 2, ..., m). In order to
unify the variables, the features were standardised by the formula:
j
jij
ij
S
xx
z
)( 
 (5)
thus obtaining a matrix of standardised values, where zij stands for the value of j-feature for i-object (i
= 1, 2, ..., n; j = 1, 2, ..., m).













nmnn
m
m
zzz
zzz
zzz
Z
...
............
...
...
21
22221
11211
(6)
Based on the above data, development pattern with standardised coordinates was determined in
accordance with the Hellwig’s taxonomic method of development pattern, including the division into
stimulants and destimulants. Subsequently, the development measure for each municipality was
computed by the formula:
0
0
1
D
D
d i
i  (7)
where:


m
i
iji zzD
1
2
00 )( (8) (deviation from the standard)
000 2SDD  (9)
0
1
1
0 i
n
i
DnD 

 (10)



n
i
i DDnS
1
2
00
1
0 )( (11)
By the above means synthetic indicators in the years 2009, 2010 and 2011 for each of the rural
municipalities in Lower Silesian Voivodeship were determined. Afterward, the municipalities
Sborník příspěvků XVI. mezinárodní kolokvium o regionálních vědách Valtice 19.–21. 6. 2013
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were divided into four groups. The municipalities of a high development level (type A) included
the entities with the development index higher than the mean plus the standard deviation. The
municipalities of a higher than medium development level (type B1) included the entities with the
index falling within the range of mean to mean plus standard deviation. The third group
municipalities of a lower than medium development level (type B2) included the entities with the
index falling within the range of mean to mean minus standard deviation. The last group
comprised the municipalities of a low development level (type C), where the index achieved was
lower than the mean minus the standard deviation.
The other of the components is the analysis of the grant amount per resident in the examined
communes, the relation of compensatory grant to the operating result and the self-financing ratio from
years 2009, 2010, 2011. The operating result is the difference between current income and current
expenses of a commune. Its positive value reflects the commune’s capacity to engage in additional
projects, whereas its negative value indicates a shortage of funds relative to objectives and incapacity
to take investment actions. The analysis of the impact of the current income decrease by the grant
amount on the operating result and the commune self-financing ratio will enable the assessment of this
grant’s significance for the current sustainability of communes. At the same time, comparing the
development level of communes with the obtained ratios will enable the adoption of another
perspective when assessing the reasonability of applying compensatory grant. The source of the data is
databases of the Ministry of Finance regarding the implementation of LGUs’ budgets, the data from
the Local Data Bank of CSO. The impact of the proposed solution on the change of the redistribution
scale through the budget system will also be analysed.
2. Results of the research
Due to high diversity of income in communes, the new Act of 2004 introduced an advanced
compensatory system aimed at protecting local government units that have a low income potential.
The differences in income are subject to the compensatory mechanism that is progressive in nature.
The compensatory part of the overall grant for communes is composed of the basic amount and the
supplementary amount. With respect to the basic amount, it is significant to determine the amount of
the basic taxable income (BTI) per resident in accordance with the Act (the Act of 2003 on income of
local government units, Article 20). Changes regarding the compensation scale occurred in this area in
the successive years. In general, the basic amount is received by the communes where taxable income
per resident (G) is lower than 92% of the average taxable income per resident of the country (Gg).
G ≤ 40% Gg Sg=L*[0,99*(0,4*Gg-G)+41,97]
40% Gg < G ≤ 75% Gg Sg=L*[0,83*(0,75*Gg-G)+12,92]
75% G g< G ≤ 92% Gg Sg=L*[0,76*(0,925*Gg-G)]
The other component of the compensatory part, the supplementary amount, is received by communes
with a lower population density than the average population density in Poland. This amount is
calculated by multiplying 17% of the Gg ratio, the number of the commune’s residents and the ratio
being the quotient of the difference between the average population density in Poland and the average
population density in the community to the average population density in Poland. The possibility to
obtain the mentioned supplementary amount is restricted – it is not allocated for the communes for
which the G income ratio is higher than 150% of the Gg ratio in Poland. In such a situation, the
supplementary amount calculated in the said manner increases the compensatory part of the overall
grant for communes.
The compensatory part for communes is determined as the total amount of the payments made by the
communes whose G ratio exceeds 150% of the Gg ratio and the said supplementary amounts. This
part is received by communes for the purpose of compensating differences in income, if any, due to
the introduction of changes to the objectives financing system.
Sborník příspěvků XVI. mezinárodní kolokvium o regionálních vědách Valtice 19.–21. 6. 2013
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Tab. 1: Number of municipalities in the individual categories BTI per capita in the years 2009,
2010 and 2011 by voivodeships
G>150%Gg
92%Gg<G
≤150%Gg
75%Gg<G
≤92%Gg
40%Gg<G
≤75%Gg
G≤40%Gg
‘09 ‘10 ‘11 ‘09 ‘10 ‘11 ‘09 ‘10 ‘11 ‘09 ‘10 ‘11 ‘09 ‘10 ‘11
Lower Silesian 7 6 6 20 19 22 19 16 14 32 37 36 0 0 0
Kuyavian-Pomeranian 3 3 3 8 8 7 12 10 8 66 65 69 3 6 5
Lublin 1 1 1 3 3 4 5 6 6 123 91 99 39 70 61
Lubusz 1 1 1 11 8 11 5 7 9 24 25 20 0 0 0
Łódź 5 5 5 8 9 12 16 15 16 82 79 81 22 25 19
Lesser Poland 0 0 0 6 6 6 3 3 4 69 69 74 43 43 37
Msovian 13 14 14 16 14 13 20 20 21 139 136 140 41 45 41
Opolskie 1 1 2 5 5 4 9 9 13 20 20 16 1 1 1
Podkarpackie 1 1 1 2 2 5 4 3 6 63 66 78 39 37 19
Podlaskie 2 2 1 7 9 8 6 3 7 59 56 56 4 8 6
Pomeranian 5 6 5 11 9 10 11 7 10 53 59 55 1 0 1
Silesian 8 8 7 19 23 24 20 18 20 48 45 44 1 2 1
Świętokrzyskie 1 1 1 2 2 2 2 3 3 45 40 47 21 25 18
Warmian-Masurian 0 0 0 9 9 9 12 9 7 44 43 47 2 6 4
Greater Poland 6 6 5 17 17 18 15 12 16 72 72 71 7 10 7
West Pomeranian 7 8 7 6 6 8 10 6 8 27 30 27 0 0 0
Source: Own work based on the results of the study and Ministry of Finance data
The analysis (table 1) of the BTI ratio per capita in the period 2009-2011 that determined the amount
of grant proves the existence of significant permanent differences between individual Polish regions.
The majority of communes with high BTI ratios per capita are located in western Poland (the Lower
Silesian, Pomeranian, Silesian and West Pomeranian voivodeships). Along with the decreasing ratio,
the number of communes in eastern Polish voivodeships increases. The greatest diversity is
noticeable, however, in the case of the Masovian voivodeship, where the number of communes with a
high and low BTI per capita is balanced. It needs to be emphasised that no communes with the lowest
ratios are to be found in several voivodeships. This reflects the significant diversity in the income
potential of communes and exposes the major reason for applying the compensatory mechanism in the
present form.
 
From the viewpoint of the efficiency of providing financial support for communes, the mentioned
amount of the current budget balance (the operating result) is a significant criterion. This balance
shows how a commune handles financing all its most important objectives. Surplus is usually a
beneficial situation indicating the capacity to extend the scale of the pursued objectives, financing new
projects or covering borrowings and loans from previous years. Deficit proves that the commune does
not manage to finance its current activities. Excluding the amount of the received grant from the
calculation should demonstrate the degree to which it affects activities taken by communes.
 
The results of the analysis (table 2) indicate an extremely significant impact of compensatory grant on
the balancing of current expenses with current income, particularly in the communes in eastern Polish
voivodeships. However, the income adjustment by grant results in a considerable decrease in the
number of surplus budgets also in other voivodeships (e.g. Lower Silesian – by a half, Greater Poland
– by 2/3). To conclude, the results of the research prove the high significance of compensatory grant
in the present financing system of rural communes. This means that changes in the redistribution scale
should be made with the account for negative effects of reducing communes’ income.
Sborník příspěvků XVI. mezinárodní kolokvium o regionálních vědách Valtice 19.–21. 6. 2013
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Tab. 2: Number of municipalities in the years 2009, 2010 and 2011 by voivodeships – with surplus or deficit
in budget balance with and without equalization grant
Number of communes with surplus Number of communes with deficit
with grant without grant with grant without grant
‘09 ‘10 ‘11 ‘09 ‘10 ‘11 ‘09 ‘10 ‘11 ‘09 ‘10 ‘11
Lower Silesian 63 57 68 29 23 36 15 21 10 49 55 42
Kuyavian-Pomeranian 91 84 90 24 24 20 1 8 2 68 68 72
Lublin 170 147 162 12 11 12 1 24 9 159 160 159
Lubusz 37 35 40 18 10 11 4 6 1 23 31 30
Łódź 131 123 128 32 29 25 2 10 5 101 104 108
Lesser Poland 115 115 113 20 16 17 6 6 8 101 105 104
Msovian 225 218 223 65 50 50 4 11 6 164 179 179
Opolskie 33 27 34 7 7 11 3 9 2 29 29 25
Podkarpackie 101 89 105 19 12 11 8 21 5 90 98 99
Podlaskie 78 64 69 11 14 11 0 14 9 67 64 67
Pomeranian 77 72 75 29 27 25 4 9 6 52 54 56
Silesian 90 85 90 48 46 48 6 11 6 48 50 48
Świętokrzyskie 69 61 67 10 9 7 2 10 4 61 62 64
Warmian-Masurian 60 49 54 9 9 8 7 18 13 58 58 59
Greater Poland 114 106 113 35 33 35 3 11 4 82 84 82
West Pomeranian 46 34 41 18 13 18 4 16 9 32 37 32
Source: Own work based on the results of the study and Ministry of Finance data
At the next stage of the research, the proposed division of communes into A, B1, B2, C categories was
combined with the amount of the self-financing ratio of communes adjusted by the grant amount
(table 3). It illustrates the degree to which a commune might finance projects contributing to its
development with its own funds. The higher the relation, the lower the risk of losing financial liquidity
due to excessive costs of debt service; yet its high value might also prove the low level of the
implemented projects compared to its capacities. The adjustment by the grant amount enables the
assessment of the impact of this income source on the capacity of the examined communes to selffinance
projects.
Tab. 3: Number of municipalities in the years 2009, 2010 and 2011 by voivodeships – with surplus or deficit
in budget balance with and without equalization grant
Total Type A Type B1 Type B2 Type C
‘09 ‘10 ‘11 ‘09 ‘10 ‘11 ‘09 ‘10 ‘11 ‘09 ‘10 ‘11
Lower Silesian 78 7 9 5 30 34 23 12 12 14 0 0 0
Kuyavian-Pomeranian 92 4 3 3 21 17 18 37 38 46 6 10 5
Lublin 171 1 1 3 25 28 26 99 108 107 34 23 23
Lubusz 41 1 4 3 10 9 12 12 18 15 0 0 0
Łódź 133 2 4 1 31 35 41 61 59 62 7 6 4
Lesser Poland 121 7 2 8 38 38 33 47 52 50 9 13 13
Msovian 229 1 3 1 24 37 32 113 112 111 26 27 35
Opolskie 36 3 6 3 12 13 10 13 10 11 1 0 1
Podkarpackie 109 1 1 1 21 17 20 58 70 69 10 9 8
Podlaskie 78 2 1 2 6 8 9 38 38 34 21 17 22
Pomeranian 81 3 0 1 28 23 26 20 29 26 1 2 3
Silesian 96 6 8 6 34 32 34 8 10 8 0 0 0
Świętokrzyskie 71 1 1 0 10 8 14 43 48 43 7 5 7
Warmian-Masurian 67 1 1 2 8 9 7 33 33 32 16 15 18
Greater Poland 117 14 14 15 15 14 12 6 5 8 0 0 0
West Pomeranian 50 10 8 11 7 3 6 1 2 1 0 0 0
Source: Own work based on the results of the study and Ministry of Finance data
Sborník příspěvků XVI. mezinárodní kolokvium o regionálních vědách Valtice 19.–21. 6. 2013
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The results of the analysis prove unambiguously that the positive “adjusted” self-financing ratios are
achieved mainly by communes characterised by a high development level. The number of these
communes was not affected by the financial effects of the 2008-2010 crisis since their number in
individual voivodeships did not change significantly over the examined period. What can be observed,
however, is analogies in the distribution of communes with respect to the previous ratio. Normally,
communes from western Polish voivodeships are more developed, have better income ratios per
resident and much more frequently achieve positive self-financing ratios. It needs to be noticed that
the division line runs usually between the communes with the development ratio qualified to B1 and
B2 groups. This means that it could prove reasonable in practice to include the development level ratio
as the criterion for obtaining compensatory grant
Conclusions - Financial effects of changing the financing system of rural
communes on a system accounting for diversity of development levels of
communes.
With the use of the 2011 data as the basis for calculation and with the assumption that the
compensatory mechanism should divide communes into four categories distinguished based on the
development level (A,B1,B2,C) and the BTI amount per capita compared to the country’s average, the
following were distinguished: communes with very high both ratios – not covered by compensation
and paying in funds for the poor, neutral communes (with acceptable income and a good development
level), communes requiring partial support (due to the development level being lower than the average
or a significant shortage of funds), and communes with a high demand for support (with a low
development level and relatively poor income).
Tab. 4: Estimated number of municipalities in the years 2011 by voivodeships after proposed
change in grant system
Source: Own work based on the results of the study
When taking into consideration only the abandoning of financing the best communes (the first two
categories) with grant, it would have been possible to obtain as much as PLN 210,394,000 in 2011,
which constituted circa 5.5% of the overall compensatory grant for rural communes. At the same time,
it needs to be noticed that this would mean disturbing the financial sustainability of certain communes
from the viewpoint of the analysed ratios. The consequences of such a solution would be diverse in
individual voivodeships. The greatest decrease in income per resident would be experienced by the
Lower Silesian, Masovian, Greater Poland and Silesian voivodeships. It should be observed that the
change in the redistribution scope would also enable shifting some funds from the pool currently
transferred to communes with an average development and income level, which receive merely 26.7%
of grant at present.
Equalization
LowerSilesian
Kuyavian-Pomeranian
Lublin
Lubusz
Łódź
LesserPoland
Msovian
Opolskie
Podkarpackie
Podlaskie
Pomeranian
Silesian
Świętokrzyskie
Warmian-Masurian
GreaterPoland
WestPomeranian
Liczbagminłącznie:
amountmlnPLN:
share:
No 35 12 7 14 18 15 28 10 6 8 16 40 2 9 24 17 261 210, 4 0,05
Partly
43 71 95 27 95 71 141 24 79 45 62 55 48 38 87 33 1014 2636,4 0,68
Full 0 9 69 0 20 35 60 2 24 25 3 1 21 20 6 0 295 103,5 0,27
Sborník příspěvků XVI. mezinárodní kolokvium o regionálních vědách Valtice 19.–21. 6. 2013
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