Financial instruments used by Polish municipalities in response to the first wave of COVID-19

Studies on the influence of COVID-19 on municipalities are scarce, although it was precisely municipalities that stood in the first line of combat. It is important to estimate the negative budgetary consequences of the crisis for municipalities and to detect potential patterns in the application of their anti-crisis financial instruments. Our study reveals that the initial response of Polish municipalities to the pandemic crisis in this area varied depending on their administrative type, the amount of current income per capita and the population size. However, the correlations between the applied income instruments and expenditures and the above factors were rather weak.


Introduction
Current research on the COVID-19 crisis focuses in particular on the epidemiological and macro-level socio-economic aspects. The impact of the pandemic on government finances has been widely studied (Cho & Kurpierz, 2020;Hale et al., 2020;Joyce & Suryo Prabowo, 2020). Governments were found to adopt widely varied action strategies (Bouckaert et al., 2020;Raudla, 2021). Few studies, however, analyzed the impact of the pandemic on the economy and finances of local governments (Ahrens & Ferry, 2020;OECD, 2020). At the same time, the problems with the initial responses of municipalities to the COVID-19 crisis are important, because the faster public entities introduce anti-crisis programs, the lower will be the public expenditures that are required to slow down the decrease of economic growth. The identified research gap in the form of the low number of studies that analyzed the reactions of local governments to the COVID-19 crisis inspired us to start research on the subject. The research was conducted based on the examples of Polish municipalities, yet in the era of globalization and pandemic conditions, self-government units in all countries were confronted with the same challenges. The presentation of the Polish experiences contributes to the literature on the responses of local government to various types of crises.
The authors attempted to determine the answers to the following research questions: Q1: What types of budget instruments, both of an income-and expenditurerelated nature, were used by municipalities in the first months of the COVID-19 pandemic in Poland? Q2: What was the scale of decrease in current income caused by the application of income-based instruments and what was the expenditure spent on counteracting COVID-19? Q3: What were the sources of financing the expenditures of municipalities on counteracting the effects of COVID-19? In order to obtain a more complex picture of the situation on a local level, certain hypotheses were made (specified in the Research section).

Background
In Poland, public administration operates on two levels: the state and territorial selfgovernment. The state administrates its territory, establishes legislation, guarantees public security, manages the economy, ensures minimum subsistence for its citizens as well as establishes and finances higher education institutions, theaters and national museums.
Local government is organized into three tiers: municipalities (gmina), districts (powiat) and regions (województwo). As of December 31, 2019, there were: 16 regions, 314 districts and 2477 municipalities. Municipalities and districts have a local nature, regions are the highest level of local government. The municipality is the basic unit of local government. The districts perform tasks exceeding the competencies of municipalities, while regions are responsible for tasks that are beyond the competencies of municipalities and districts. The levels of local government are independent of each other and have different sources of financing.
There are three types of municipalities: urban, which comprise towns; rural, which comprise the countryside and urban-rural, which comprise towns with the surrounding countryside. Some of the urban municipalities have a specific status: one administrative center performs the tasks of both the municipality and the district at the same time. They are called cities with district rights. These units do not form a separate level of local government and are still classified as municipalities. The tasks of local government are presented in Fig. 1.
Among the municipalities, 302 are urban municipalities, including 66 cities with district rights, 638 urban-rural municipalities and 1537 rural municipalities. This study focuses on municipalities, including cities with district rights. All municipalities perform the same compulsory tasks and have the same sources of income but their financial standing is different for objective reasons, such as the number of residents, not for legal status.

Literature overview
The phenomena that have a negative influence on the revenues and expenditures of various entities, including territorial self-government units (TSUs), are referred to in many different ways. As a result, literature mentions economic (or, more narrowly, financial) recession, economic breakdown, slow-down or downturn. The authors of this article decided to use the term "crisis". Crises differ in several aspects, e.g. in terms of the factors that cause them. They may be short and turbulent or rather "crawling" and difficult to suppress within a short period. They may also differ in terms of their tim of occurrence and duration. Crises may cover limited areas or individual units, but they may also affect many countries or even the whole world.
The financial recession that started in 2007 involved dramatic changes in the financial market that were linked to insufficient liquidity or the insolvency of market players and interventions of public authorities aimed at preventing this situation or mitigating its negative consequences (Bordo et al., 2001;Shahrokhi, 2011). The COVID-19 crisis may be defined as a "rapid, varied depending on the sector, deceleration of business activity in response to a strong, poorly recognized pandemic shock and the resulting, far-reaching administrative decisions" (Wojtyna, 2020). One of its characteristic features is the fact that the uncertainty of the course of the pandemic and its duration causes extremely strong insecurity concerning the course of economic processes. Moreover, it is a specific twin crisis, as health problems have a negative influence on the economy and conducting business activity on the pre-crisis level influences the rate of spread of COVID-19 infections, so that the pandemic and the economy "infect each other" (Wojtyna, 2020).
The COVID-19 crisis is significantly different from the financial recession. However, the reactions of public authorities to the crisis should take into account the experiences in the preparation and implementation of previous anti-crisis programs,  as crises always similarly influence the economy, whatever their sources may be. Thus, the recommendations provided by Stiglitz (2020) still remain valid.
The authors wonder what economic consequences the crisis causes for TSU. The recession of 2007 had a negative influence mainly on the budget revenues of selfgovernment units. It is estimated that the previous crisis contributed rather to the decrease in central budget revenues than in the budgets of municipalities because their incomes are less sensitive to the fluctuations of the economic cycle. It was emphasized that the factors that differentiated the influence of the recession on the revenues and expenditures of municipalities were the type of municipality and its size of the population (Špaček & Dvořáková, 2011). One may add to these factors also the model of TSU and the related structure of budget revenues, which may include certain types of income that are sensitive to economic fluctuations. It seems that the same factors may determine the resistance of municipalities to the COVID-19 crisis.
The COVID-19 crisis caused a decrease in production, sales volume and global demand. Research conducted in Poland in mid-2020 revealed that only some of the self-government authorities in economically developed cities (approx. 35%) expected that the pandemic would cause long-term, deep consequences for the local economy. As a result, municipalities did not even attempt to change the priorities and directions of local economic policies (Sztando, 2020). At the same time, the officials argued that the entities affected by the crisis belonged to global capital groups, so the support that they might receive from municipalities would not change their situation. However, small, local producers and service providers were supported nevertheless through small ad hoc tax exemptions. Expectations that selfgovernment will support entrepreneurs and economic growth are quite common (Ahrens & Ferry, 2020).
Another effect of the pandemic was a sudden plunge in budget revenues by several percent (Sztando, 2020). This strongly affected the revenues and expenditures of TSUs (Nemec & Špaček, 2020), although this influence varied (Gordon et al., 2020). The factors that cause the differences in the influence of the COVID-19 crisis on TSUs in individual countries include (Allain-Dupré et al., 2020): the degree of decentralization, the income structure (Chernick et al., 2021) and its ability to absorb fiscal stress, the fiscal stability of TSUs as well as the forms and effectiveness of the aid received from state authorities. Moreover, the negative consequences of the COVID-19 crisis are more severe for small municipalities, large cities, municipalities that have public transport, and, finally, municipalities that are attractive for tourists (Nemec & Špaček, 2020). In the USA, communities with tourist attractions also suffered strong negative consequences (Gordon et al., 2020). The first studies conducted in the Czech Republic and Slovakia (Nemec & Špaček, 2020) suggest that the COVID-19 crisis, as opposed to the recession of 2007, will be more painful for local budgets than for central budgets. Not only are tax revenues falling, but also parking fees, public transport fares, off-license permit fees and the revenues from the lease of community real estate. This trend is accompanied by additional expenses on ensuring sanitary safety, supporting entrepreneurs, etc. (Gordon et al., 2020). The actual influence of the COVID-19 pandemic on the revenues and expenditures of municipalities is still difficult to predict, as the experiences from previous crises show that prolonged recession ultimately leads to cuts in municipality budgets. Such situations usually occur with a 1-2 year delay (Blöchliger et al., 2010). In such conditions, without the support of the central government, TSUs will not be able to support economic growth in a significant way nor satisfy the needs of residents (Ahrens & Ferry, 2020).
In response to the COVID-19 crisis, municipalities may use several strategies (Maher et al., 2020): reduce discretionary expenditures; reduce the investment costs and expenses on ongoing maintenance; limit the time of providing services or reduce employment. They may also actively counteract the consequences of the crisis in two ways. The first one consists of using income policy instruments: reducing local taxes and levies, fees for services and the use of property (Dvorak, 2021;Sztando, 2020). The second method consists of using the expenditure policy instruments of the TSUs and providing business entities with support in the form of so-called incentive packages (Ito & Pongeluppe, 2020).
The TSUs is an element of the public finance sector, so phenomena related to crises penetrate the self-government finance system. During the previous recession, some authors (Poniatowicz, 2014) reported that the revenues of TSUs were decreasing systematically. This led to an increase both in the budget deficit and in the amount of their debt (Reinhart & Rogoff, 2011). In Poland, this trend coincided with large-scale self-government investments co-financed from the public aid funds of the European Union in the 2007-2013 financial perspective. (Guziejewska, 2010).
Municipalities counteract crisis phenomena and stimulate economic growth with the use of instruments of local anti-crisis policy. These instruments may be classified according to various criteria. The authors of this study used the classification presented in Table 1.

Methodology and characteristics of the community
The article was written based on a literature review and survey conducted by the authors among Polish municipalities (as of June 30, 2020) concerning the actions aimed at supporting business entities and residents that had been introduced by municipalities in the first four months (March-June) of the COVID-19 pandemic. The aim of the paper is to answer the research questions specified in the Introduction. The following hypotheses were made: H1: The type of revenue instruments used depends on the administrative type of the municipality, its population, the amount of current budget revenues per capita and the amount of expenses related to actions aimed at counteracting COVID-19. H2: The type of expenditure instruments used depends on the administrative type of the municipality, H3: The administrative type of the municipality influences the sources of financing the increased budget expenses related to counteracting the effects of COVID-19.
Data was collected on an electronic survey form that was filled out by the respondents independently. The survey was sent to all municipality offices in Poland and covered a total of 2477. Ultimately, 1874 (N) municipalities responded to the survey (the return rate was 75.7%). It is a representative sample of the entire population of municipalities in Poland. The characteristics of the respondents are presented in Table 2.
Most of the municipalities declared a decrease in revenues due to granted exemptions, allowances, discounts and other activities aimed at counteracting the effects of COVID-19 on a level below 12.6 thousand USD. The expenses incurred on activities connected with combating the consequences of the pandemic were also usually below 12.6 thousand USD (Table 3).

Results
The responses of municipality authorities to the COVID-19 crisis were varied. Municipalities used various types of financial instruments. Research demonstrated that the majority of municipalities did not establish subjective exemptions from local taxes and charges. Only 26.0% of municipalities used this instrument. Less than half of municipalities extended the periods for the payment of local taxes and charges (41.0%). Approximately half of all units granted allowances on local taxes and charges (50.4%) ( Table 4).
In the first months of the COVID-19 pandemic in Poland, the payments of local charges or the related arrears were divided into installments in a small number of municipalities. Such preferences usually applied to real property tax (16.8%) and tax on means of transport (6.4%). Few municipalities divided the payment of local charges such as the location charge (0.7%), climate fee (0.6%), advertising fee (0.5%) and the dog owners' fee (0.6%) or the related arrears into installments (Table 5).
As far as cities with district rights are concerned, very few units limited the administrative enforcement of financial liabilities. Those who decided to do so more often decided not to enforce the amounts due from natural persons (16.1%) than from legal entities and organizational units without legal personality (15.2%). Tenants of community premises were also rarely released from the obligation to pay rent. Such exemptions were made in 25% of municipalities for commercial premises and 9% of municipalities for residential premises (Table 6).
Few municipalities lowered the fees for the use of municipal infrastructure, e.g. for water supply, waste disposal or subsidized utility bills. Municipal receivables under civil law that were deferred or divided into installments included mainly rent (12.3%), less often lease (9.6%) and the fee for the use of municipal land (8.5%). Residents were also seldom released from the obligation to pay for public nurseries (12.2%) and kindergartens (11.4%) ( Table 7). In search for patterns in the responses of municipalities to the COVID-19 crisis, the authors analyzed whether, and to what extent, the administrative type of the municipality was linked to the type of the revenue instruments used (H1). To verify it, an analysis with χ 2 Pearson tests was conducted. It revealed that municipalities differed in terms of using exemptions, allowances, and deferrals of payments of local taxes and charges p < .001. Exemptions or allowances were most often used in urban municipalities and least often in rural ones. On the other hand, the municipalities that most often used payment deferrals were cities with district rights as well as urban municipalities, while rural units used these instruments least frequently. However, these differences were not very significant (Cramer's V coefficient was lower than 0.03). The surveyed municipalities also differed in terms of the policies for the division into installments of: real property tax p < .001, tax on means of transport p < .01 and agricultural tax p < .05. The first two of these taxes were divided into installments in urban municipalities and cities with district rights, while the agricultural and forest taxes -in rural municipalities, which is not surprising, considering the specificity of the tax base of these levies. No differences were found between municipalities in terms of the division of other charges or the related arrears into installments (Table 8).
The authors analyzed the correlation between the administrative type of the municipality and the types of revenue instruments other than local taxes and charges. The analysis was conducted using Pearson χ 2 tests. Table 9 revealed that municipalities differed in terms of releasing tenants of municipal premises from the obligation to pay rent for residential p < .01 and commercial premises p < .001. Such exemptions were most often used in cities with district rights. In these cities, lessees of municipal land were also significantly more often released from the obligation to pay rent (p < .001). A similar situation applied to subsidies on bills (p < .05), deferring the payment of rent, leases and fees for the use of municipal land (p < .001) and the release from payment for kindergartens and public nurseries (p < .001). Such preferences were least often used in rural municipalities.
Then, the correlation between the size of the municipality (expressed as population), its current revenue per capita and the expenses on counteracting COVID-19 and the use of non-tax revenue instruments were analyzed. The Kendall tau correlation analysis (Table 10) demonstrated that all these factors influenced the use of such instruments as: releasing tenants from the payment of rent for premises, releasing lessees from the payment of rent for land, deferral of civil law liabilities due to the municipality and exempting residents from the payment of fixed fees for kindergartens and public nurseries. The correlations were positive, which means that these revenues were more often used in municipalities with a larger population, higher current revenue per capita, but also those that spent more funds on actions to counteract COVID-19. The correlation between the scope and diversity of the instruments used and the population was the strongest: municipalities with a higher number of residents used more diversified non-tax revenue instruments and they used such instruments more often.
The authors also analyzed issues related to expenditure instruments by identifying the directions of budget expenses incurred by municipalities for combating COVID-19. These expenses were usually related to the purchase of protective masks, gloves, and sanitizing liquids for employees of municipal offices and communal organizational units, followed by the costs of purchasing protective masks for residents and sanitizing public spaces (Fig. 3).
Expenses related to counteracting COVID-19 were financed mainly from the reserves provided in the budget for 2020 (79.8%). More than half of municipalities (51.0%) reduced other expenses planned for 2020 in order to finance actions aimed at counteracting COVID-19. Such reductions usually applied to the organization of cultural events and to subsidies for public utility organizations. Municipalities also decided not to provide lighting of their area at night and suspended the financing of investment tasks planned by residents in the participatory budget formula (Fig. 4  and 5).
The expenditures of municipalities were aggregated into four categories, which were also linked to the type of municipality, in an attempt to find out whether the type had an influence on the diversification of expenditure instruments used to .23*** support business entities and residents in combating the pandemic (H2) and on the sources of financing these expenses (H3). The analysis was based on Pearson χ 2 tests (Table 11). Considering the types of expenditures, it was only demonstrated that different municipalities used different policies for supporting hospitals p < .001. Cities with district rights incurred expenses on such support more often. On the other hand, no differences were found between different types of municipalities in terms of expenses on protective equipment (masks, gloves and sanitizing liquids) for residents, support for the district, and purchasing equipment to facilitate the organization of remote meetings of city council members and office employees. The  municipalities did not differ in the aspect of sources of financing expenditures on counteracting COVID-19, either.

Discussion
The H1 hypothesis was partly confirmed. Tax exemptions, allowances and deferrals were most often used in urban municipalities and cities with district rights and the least often in rural municipalities. However, these differences were not very significant. Urban municipalities and cities with district rights usually divided real property tax and tax on means of transport into installments, while rural municipalities divided agricultural tax. These findings are not surprising and they may be explained by the specificity of the taxation base for these taxes because agricultural tax is charged mainly on arable land, which is usually located outside the borders of towns.
The administrative type of the municipality was a factor that differentiated the approach to releasing tenants from the obligation to pay rent. Such exemptions were most commonly used by cities with district rights. Thus, one may assume that the more rural the municipality, the less often it used non-tax revenue instruments. This may result from the specificity of the business activity conducted in rural municipalities, which have a lower number of service facilities and entities that provide hospitality or entertainment services. Other factors that differentiate the approach of municipalities to releasing tenants from rent are the size of the population, the amount of current revenue per capita, and even the expenses on counteracting the pandemic. These revenue instruments were Realisation of the tasks foreseen in the so-called "participatory budget" If the answer "other current expenditures were reduced" was selected in the previous question, what types of expenditures were reduced?

Fig. 5
Reduction of current expenses of municipalities resulting from the need to finance activities to prevent COVID-19 more often used in cities with district rights, i.e. municipalities with a larger population and higher current revenue per capita, but also those that spent more funds on actions to counteract COVID-19. They also more often released their residents from the obligation to pay for kindergartens and public nurseries. The strongest correlation was found between the scope and variety of the instruments applied and the population. Such policy may be explained by the fact that cities with district rights are usually cultural and economic centers of their regions, so the businesses that suffered most in the pandemic are concentrated there. These municipalities have larger property resources that they may make available to private entities. These are also quite affluent municipalities, which are able to perform their statutory tasks in spite of the loss of revenues caused by such reductions.
H2 assumed that the type of expenditure instruments used depends on the administrative type of the municipality. This assumption was confirmed only for support for hospitals. Expenses on such support were more often made by cities with district rights. No other statistically significant differences were found. However, it is worth noting that the number of rural municipalities which purchased electronic equipment for their authorities and their officials was rather high. The observed pattern may be explained as follows: the duties of cities with district rights include, among others, maintaining hospitals, which means that providing them with additional funds and purchasing new equipment belongs to the competencies of such municipalities. Other types of municipalities may also support hospitals, but it is a more time-and workconsuming process, as it requires taking the relevant resolutions. H3 assumed that the administrative type of the municipality influences the sources of financing the increased budget expenses related to counteracting the effects of COVID-19. This hypothesis was disproven. Municipalities did not differ in terms of the sources of financing such expenditures. This results from the fact that the pandemic crisis was unforeseen. However, the authors suppose that a similar research project conducted at the beginning of 2021 might reveal that cities with district rights and municipalities with higher revenues financed these expenses from loans and municipalities of all administrative types -from additional subsidies from the State Budget. On the other hand, some of the costs of the anti-crisis policy may be transferred to entities that provide services, e.g. sports clubs, or directly to residents.

Conclusions
The COVID-19 crisis is a completely new phenomenon that gave rise to a new approach to counteracting crisis through budget revenues and expenditures. Already in the first months of the pandemic, municipalities took the effort to adapt local communities to function in the sanitary regimen and took some anti-crisis actions, although it is difficult to state that their activities formed a consistent anti-crisis strategy. First municipalities attempted to ensure sanitary protection for their residents by changing the conditions of work of self-government entities and their officials and attempted to create favorable conditions for remote education. Secondly, they supported small entrepreneurs and residents. However, one cannot say that these actions were financial strategies. They were taken ad hoc and most likely inspired by actions taken by other municipalities. Few municipalities used tax exemptions. More often, real property tax was divided into installments on request of the taxpayers. Also, few municipalities lowered the fees for water consumption and waste disposal or subsidized utility bills. The payment of municipal receivables for the use of municipal land and presidents (residential and commercial ones) was deferred or divided into installments. Cities with district rights also abstained from enforcing the outstanding payments for the use of such premises.
Polish municipalities did not incur any expenses on the treatment of ill people or the activities of sanitary and epidemiological services, because the whole healthcare system is financed from state sources. Moreover, municipalities do not perform any tasks that would involve increased expenditures in pandemic conditions (apart from managing hospitals in cities with district rights), so they only incurred expenses on the promotion of health. Nearly all municipalities purchased protective masks and gloves as well as disinfection liquids for local government officials. Almost 70% of them also purchased masks for residents and half of the municipalities disinfected public spaces.
The scale of revenue loss and increase in expenditures was not large. Most of the municipalities declared a decrease in revenues due to granted exemptions, allowances, discounts and other activities aimed at counteracting the effects of COVID-19 on a level below 199 thousand USD. The extraordinary expenses connected with the pandemic were also usually below 199 thousand USD.
Expenses on counteracting COVID-19 were financed mainly from the reserves provided in the budget for 2020. The municipalities also reduced other, unnecessary current expenses: on cultural events and subsidies for public utility organizations. They also decided not to provide lighting of their area at night and stopped the financing of current and investment tasks proposed by residents in the participatory budget formula.
March and April 2020 were characterized by a high level of insecurity, both concerning the pandemic itself, its course, effects, as well as to decisions that would be made on the central level that might affect the activities of municipalities. A much more precise diagnosis of the influence of the COVID-19 pandemic on the functioning of local communities and a deeper reflection on the possibility to support recovery from the crisis is expected to emerge in the third quarter of 2020, after the end of the survey.
Funding Poznań University of Economics and Business.

Declarations
Ethical Approval None.

Conflict of Interest None.
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