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Serbia Justice Functional Review

Internal Performance Assessment > Financial Management

e. Arrears

i. Scale of Arrears in the Judicial Sector

  1. The court system is generating massive annual arrears, which, in 2013 amounted to 11.49 percent of expenditures (see Figure 136). Although the Budget System Law prohibits officials from incurring commitments in excess of available budget, arrears are present throughout the public sector. In the judicial sector, arrears render the courts impede service delivery and render them vulnerable to undue influence and a ‘crisis mode’ mentality that distracts from efforts to improve performance.
  1. From 2010 to 2013, the court system’s cumulative arrears have nearly doubled, from 1.99 billion RSD in 2010 to 3.82 billion in 2013. As Figure 137 shows, cumulative arrears are rising at an average rate of 24 percent per year. By the end of 2013, arrears were equivalent to the public prosecution’s entire annual budget.

ii. Factors Explaining Growing Arrears

  1. The court arrears have been accumulating in violation of the Budget System Law. The law forbids budget beneficiaries from committing funds that exceed the available budget.717 However, despite the massive scale of arrears documented in their financial reports, the courts have been allowed to continue accumulating arrears for years without facing enforcement action from the MOF. While nobody gives individual courts permission to run arrears, nobody stops them from doing it.
  2. The causes of the arrears can be found in poor planning at least as much as in the lack of control over spending. Fiscal impact assessments have not been conducted on a series of recent reforms.718 The regulatory framework for rules of procedure, the court network, business processes, staffing, information management, automation, use of externally provided services and the scope of courts’ financial responsibilities has been evolving without any analysis of the costs and the level of efficiency that the courts would require to deliver services within the budget. As a result, reforms are enacted that impose additional obligations on courts and PPOs, and complying with those reforms results in increasing arrears. The issues undermining the courts’ cost-effectiveness can be resolved, but they would require intensive coordination among the governance and management bodies, including the HJC, the MOJ and the SCC.
  3. The court system makes supplementary appropriation requests in order to avoid exceeding its budget, but the degree to which the requests are met depends on the budget situation. According to the HJC, the MOF does not disallow commitments resulting in arrears. The MOF looks for opportunities to supplement the courts’ budget to minimize accumulation of new arrears and periodically pays off old arrears. Such one-off payments have been in response to emergency situations, such as a threat in 2012 by lay judges to go on strike.

iii. Arrears by Court Type and by Creditor

  1. The courts of general jurisdiction accumulated most of the arrears. In 2010, the Basic and Higher Courts were jointly responsible for 93 percent of the arrears incurred by the court system, but in 2013, their share fell to 81 percent. The MOJ is also running arrears that include outstanding obligations to ICT contractors as well as the courts’ and the PPOs’ arrears that the MOJ had undertaken to pay under agreements with the HJC and the SPC (See Figure 138).
  1. Arrears incurred by some courts in 2013 exceeded their executed current non-salary budgets. In 2013, the Higher Courts incurred arrears equal to 143 percent of their current non-salary budget. For the Basic Courts, the ratio was 91 percent (see Figure 139).
  1. Box 26: Impact of the Costs of Criminal Procedure on Arrears One Higher Court reported to the Functional Review Team that approximately 88 percent of its arrears accumulated since 2011 were related to the costs of externally provided services mandated by procedural law and only 10 percent to material costs.
    According to the Basic and the Higher Courts, the largest share of their arrears is related to the externally provided services that the courts are obligated to pay for by procedural law, mainly in criminal cases. These costs are presented in Figure 140 below in a bar labeled as ‘Other.’ Costs of externally provided services procured in compliance with procedural laws include the cost of ex-officio attorneys and expert witnesses, which the courts are obligated to engage in certain judicial proceedings. They also include costs for court interpreters, lay judges, and to the prisons for prisoners’ transfer. For example, regulatory changes to autopsies have almost doubled the costs of conducting an autopsy, but the change has not been budgeted for, and so the costs and arrears for autopsies have increased significantly.
  1. The costs of externally provided services mandated by procedural law could be reduced significantly by changing the compensation system for court-appointed attorneys and expert witnesses. As discussed in the Access to Justice Chapter, attorneys are paid according to an Attorney Fee Schedule that is unrealistic. A 2013 World Bank study explored market-based alternatives to the current tariff-based compensation system for court-appointed attorneys.722 According to the study, ‘compared to hourly compensation, 50 percent tariff rates are still five times higher than hourly compensation.’ The study also suggests providing considerations to alternative vehicles for delivering legal aid such as ‘direct state provision of legal representation, reimbursement of costs of representation, support for access provided through NGOs, Law School clinics and/or pro bono provision by members of the Serbian Bar Association.’ The costs of externally provided services mandated by procedural law (and arrears) could be reduced greatly by reducing the Attorney Fee Schedule, removing its floor or moving to a system of hourly compensation.

iv. Arrears Relating to Prisoner Transfer

  1. To take one example, the courts accumulated large arrears related to prisoner transfer. This has a negative impact on the courts whose hearing schedule is disrupted and on the prison facilities as well. Due to frustration and their own funding constraints, several prisons now refuse to deliver prisoners to courts without upfront payment. Sremska Mitrovica is one large prison that now refuses to transfer prisoners without upfront payment, resulting in delays of criminal cases involving the large number of defendants from those facilities. Several other prisons are now following their lead.
  2. From 2011 to 2013, the courts’ arrears to the Prison Administration grew from 28.5 to 87 million RSD. The breakdown of arrears by court type is shown in Figure 141 below. The Basic Courts are the most indebted to the Prison Administration with 70 million RSD in arrears.
  1. Among the Basic Courts, the First Basic Court in Belgrade has accumulated the largest arrears for prison transfers. By the end of 2013, the Basic Court in Belgrade owed 12.7 million RSD to the prisons, and its largest creditor was the Correction Facility in Zabela to which it owed 3.3 million RSD (see Figure 142 below).
  1. The PPOs may soon find themselves in a similar situation. With the prosecutor-led investigations mandated by the new CPC, the PPOs will need to find a way to settle the costs associated with criminal investigation, including costs associated with witnesses, prison transfers, interviews and hearings. The Functional Review team found no evidence that such costs have been factored into the PPO’s 2014 budget. Currently, the prison administration charges the costs for prisoner transfers to the courts, but there remains contestation as to who should pay for what.
  2. Better planning and coordination can help reduce the costs of prisoner transfer. Judges and prison officials report that it is common for prisoners to be repeatedly transferred back and forth for different cases within the same court. Sometimes a prisoner is scheduled to appear for two hearings at different locations at the same time. With a better scheduling and coordination, unnecessary costs can be minimized, as demonstrated by some successful initiatives taken by courts in Belgrade.725

v. Debt Collection from the Courts by Creditors

  1. Lawyers and expert witnesses routinely pursue enforcement cases against the courts for failure to pay their invoices. Some of those claims are pursued in the court where the invoice is owed, and sometimes they are pursued in the First Basic Court in Belgrade. When the creditor obtains judgments at the court in which the invoice is owed, the amount can be collected from the bank account of that court. This at least allows reconciliation of the collection with accounts payable in that court.
  2. Special problems arise when a collection judgment is issued by the First Basic Court of Belgrade.This court has exclusive jurisdiction over collection from the accounts of central government agencies (i.e., the MOJ and the HJC). There are also precedents where the First Basic Court of Belgrade issues enforcement judgments against the general state budget execution account, even though stakeholders report that this is contrary to the law. When the amount is collected from an account that does not belong to the court that owes the money, the chances of reconciling the collection with accounts payable are low because there is no reliable mechanism to receive detailed information of execution orders.
  3. To further complicate the process, the First Basic Court fails to regularly inform the HJC or the relevant court regarding the collection judgments that it issues. Sometimes, creditors trying to maximize their chances of collection will pursue the same claim against multiple judicial organizations. There are instances where lawyers have collected the same debts from the MOJ, the HJC and the court who owed the money, thus tripling their claim. The National Bank of Serbia has a highly effective Forced Collection Department that quickly executes collection. However, by law, it has an obligation to report on the executed collection only to the organization that has issued the collection order, which may not necessarily be the court that owed the money. As a result, courts which are the subject of enforcement judgments in arrears cases must go to great efforts to find out whether the payment has been executed and to whom they must reimburse.
  4. Box 27: Managing Expenditures Proactively: An Example from Sombor A proactive approach to managing expenses can make a difference. The Sombor courts used to pay a local mechanic 8,500 RSD for testifying as an expert witness on the condition of vehicles involved in accidents. Upon taking over the criminal investigation function from the courts, the PPOs started bearing such costs. The Chief Prosecutor was puzzled by their magnitude and obtained comparative rates from the neighboring areas, and was able to renegotiate the mechanic’s rate down by 60 percent. The PPO reduced the costs of procedure while the mechanic retained a high volume customer.
    The prevalence of large arrears and corresponding enforcement judgments against courts create a massive amount of unnecessary work. Creditors are required to pursue their claims in the court system, and the courts are required to process the cases and ironically defend them too. Staff in courts, the MOJ, the MOF and elsewhere must administer, reconcile and report on the judgments. The time of all parties involved could be better spent supporting more productive activities such as budget planning, expenditure control and reporting.
  5. Recent reforms related to the settlement of cash liabilities were intended to make it easier for private contractors to collect debts against the state through legal action. However, no significant changes in the courts' financial behavior have been reported in connection with this law.726
  6. Arrears are likely to be underreported. Although the courts are supposed to register all their commitments, financial experts question the accuracy and completeness of the courts’ commitment data. Many courts register their commitments in paper ledgers and do not update these regularly, and this leaves a significant room for errors. Courts have been also reported to delay registering their commitments.

vi. Potential for Emergence of Arrears in Public Prosecution

  1. Arrears are becoming a problem for the Prosecution service. PPOs did not show any arrears in the 2012 and 2013 financial results. However, there are indications that the PPOs have started accumulating arrears after assuming responsibility for criminal investigations from the courts in late 2013 and through 2014.
  2. As discussed above, there is a lack of clarity regarding the division of financial responsibilities between the PPOs and courts for the services related to the processing of criminal cases. Such services include mandatory legal defense, expert witnesses, interpretation, prisoner transportation and detention. Although the data on PPO’s expenditures on these services is not yet available, the amounts are significant in comparison with their budget. Many courts attribute their inability to operate within budget to this type of expenditures mandated by the CPC.
  3. While the issue remains unresolved, many the PPOs have not made any payments since October 2013 to the lawyers or expert witnesses that they engage in accordance to CPC. This makes the financial situation of the public prosecution non-transparent and can result in a sudden explosion of arrears.

vii. Impact of Arrears on Service Delivery

  1. Arrears have a series of direct negative impacts on service delivery. An increasing number of lawyers and expert witnesses refuse to work unless the courts pay them upfront, which can cause delays and adjournments in the scheduling of hearings. Other reportedly high-quality expert witnesses have been ‘burnt’ by the arrears process and refuse to work with certain courts at all, causing delays and reducing overall quality of those services. Stakeholders reported to the Functional Review team that delays frequently occur in pathology testing (and occasionally even autopsies) due to arrears. Prisoners’ transfers often do not occur as scheduled, resulting in adjournment of hearings.
  2. Arrears undermine the courts’ operational effectiveness by complicating their relations with service providers. Courts owing providers money are in a poor position to negotiate for better quality or lower rates for services. Relationships with providers should be at arm’s length and beyond reproach, but that is not always the case. This is reflected in situations where courts are overwhelmed in managing their cash accounting systems by constantly having to decide which service providers’ bills to pay or not. Staff reported that exchange of favors, informal networks, and personality politics creep into what should be purely business decisions. Some stakeholders reported to the Functional Review team that the service providers exerting the greatest pressure on the courts, by complaining or via other means, are most likely to be paid.
  3. Courts in arrears operate in conditions similar to bankruptcy. They have very little control over their resources and operate in a constant firefighting mode unable to take proactive actions. Firefighting and damage control, be it fielding calls from unhappy creditors or attempting to reconcile amounts collected by enforcement judgments, consume a large amount of staff time and energy which could be used to manage the core business of the courts. Although impact on morale is difficult to quantify, financial management staff report that arrears undermine their confidence in the ability to effectively serve the public.