The policy of the State Govt. regarding financial management of the Urban Local Bodies rests of two main plans, i.e. strengthening the financial position of the Urban Local Bodies and simultaneously protecting and safeguarding the interest of citizens belonging to economically vehicle sections. The State Govt. has laid particulars emphasis on fiscal sustainability of the Urban Development initiatives and has taken the lead in designing steps on improve municipal management including that of administrative restructuring and the capacity building of the Urban Local Bodies. Two State Finance Commissions setup by the State Govt. have carried out elaborate studies on municipal finances and recommended measures for enhanced municipal finances. In this State the State Govt. has accepted the policy of user charges against certain services in the municipal areas and necessary rules for realization of charges for supply of water have already in brought into force. Necessary provision has also been made in the rules to protect and safeguard the interest of the citizens belonging to economically weaker section.

The policy of financial management of the Urban Local Bodies is based on the following principles :

Internal Audit :
Preparation of accounts of municipal fund in an area where the municipalities, with often changing leadership of elected Councilors, needed befitting assistance. In order to provide such assistance to the Municipalities, the State Government has made provisions in the statute to ensure annual internal audit of municipal accounts. The objective of such audit is not on  to check the accounts, but also to extend befitting help to the municipal authorities in preparation of accounts of municipal fund. Accordingly a detailed guideline for the purpose has been circulated. The work under the aegis of such statutory fixture has already been taken up by way of entrusting the work of preparation of accounts of a number of smaller municipalities to Auditors of Directorate of Co-operative Audit. In the case of municipalities in KMA area, such help is being extended under the aegis of KUSP.

In order to assist the municipalities in preparation of accounts as well as for conducting internal audit, Rules have been framed for such audit of municipal accounts. Auditors from Directorate of Cooperative Audit are being deputed in municipalities for the purpose.

State Government Contribution :
The State Government also shares taxes and levies collected by it with the urban local bodies and also provide for grants-in-aids under various Plan and Non-plan Heads. Salary and remuneration of the employees is the sector where the urban local bodies are to spend a huge fund. The State Govt. bears the lion share of this liability.

Devolution of fund :
Devolution of fund to the urban local bodies has also been made on the basis of the recommendation of both 1st and 2nd State Finance Commission.

Own fund :
Revenue mobilization i.e. own fund of municipal bodies for 2001, 2002, 2004, 2005 has shown a rising trend and expenditure during the same period have been indicated in the Table No.9.

Though some improvement has been noticed, the municipalities and the municipal corporations of the State are still largely dependant on State grants. Besides, a downward trend has been observed in regard to the dependency on the State Grant and the collection of Non-tax revenue has also improved in 2001-2002 when the ratio between tax and non-tax revenue was 56:44,whereas in 2002-2003 and 2003-2004 the ratio remains 53:47 and 51:49 respectively. But this is not sufficient.

A considerable amount of property tax is being under-assessed or remains un-assessed, which has resulted in low demand. A huge amount out of total demand is also not being realized. From the figures available for the last 3 financial years, it transpires that out of total assessed demand an amount ranging between 70% to 73% has remained unrealized. This is mainly due to non-payment of taxes by various Government establishments as well as closed and / or sick industrial establishments. The establishments of many commercial organizations and many developed and modern institutions are however located in these urban areas. As a result there is ample scope to increase collection of revenue in these urban sectors. In spite of that, the collected revenue is ranging between 27% to 30% for a long period of time.