recte rempublicam gerere gerindo a coisa pública corretamente proper management of the public good...

Recte Rempublicam Gerere Gerindo a coisa pública corretamenteProper Management of the Public Good

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Foro de Capitalidad/Capital Forum Ciudad de Mexico

July 19th, 2010

Renato VillelaSecretaria de Fazenda

Estado do Rio de Janeiro


The Brazilian Federation: Financing Cities and

Mega Cities


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BackgroundFinancing the CitiesLarge and Mega Cities Main ServicesOther Relevant IssuesFinal Remarks


• Federative Republic of Brazil (since 1988)

• 26 States + 1 Federal District

• 5,560 Municipalities• 4,491 in 1990• 3,991 in 1980

More than 1,500 created after 1988

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Population: 190 millionUrbanization rate: 82%Annual population growth (2008): 1.01%GDP (2008): US$ 1,575.9 billion

GDPpc (2008): US$ 8,311


City Population

Largest São Paulo 10,886,518

Smallest Borá 804

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• In 1988 the Federal Constitution was voted.• It marked the end of a 20-year dictatorship.• Restoration of democracy and civil liberties were the main

drive, and decentralization was viewed as a major way to achieve that.

• The Constitution decentralized – not merely deconcentrated:– Revenue mobilization (strengthened tax base and

transfers)– Expenditure functions

• Municipalities were recognized in 1988 as having the same hierarchy of states in the Brazilian federation

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Tax Assignment by government tier

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Municipal State Central• on Urban Property• on Services• Real estate transfers by inheritance or legacy• fees and improvement charges

• “VAT”• on Motor vehicles• Real estate transfers (market operations)

• on Foreign trade• on Rural property• on Income (corporate and personal)• on Industrial products• on Financial operations • Payroll tax (social security general regimen)• Social contributions• Economic contributions


2008 Municipal States Central

Tax Revenue (US$ billion) 22.4 129.2 138.6

% 7.7 44.6 47.7

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TAX BURDEN IN BRAZIL

Own tax collection Available after transfers

Percent of GDP % Percent of GDP %

Total 38.9 100 38.9 100

Central 26.7 69 22.5 58

State 10.1 26 9.8 25

Municipal 2.1 5 6.6 17Source: Afonso & Araújo (2006)

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Expenditure assignent

Municipal expenditure by Functions

Function Distribution

Total US$ 39.3

Education 23.7%

Health 21.6%

Administration 13.8%

Urban services 12.4%

Pensions 4.6%

Transportation 3.5%

Social assistance 2.9%

Sanitation 2.6%

Housing 0.8%

Public order 0.8%

Other (incl legislative and debt)

13.3%

Source: Afonso & Araújo (2006)

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Expenditure Assignment

Gov´t tier Function

Shared (M, S and C) Health and social assistance; historic and cultural heritage preservation; environment; education and culture; agriculture and food distribution; housing and sanitation; transportations and traffic safety; small business improvement; and tourism and sports.

Mainly local Pre-school and primary education; and preventive health care

Local Intra-city public transportation; and land use regulation

Source: Afonso & Araujo (2006)


VERTICAL IMBALANCEMUNICIPALITIES

Total Expenditure100%

Own revenue and loans 32%

Tax sharing

68%Mandatory transfers

Discretionary transfers

Source: Brazilian National Treasury

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HORIZONTAL IMBALANCE

Population brackets (thousand inhabitants)

Tax RevenueUS$ per capita

Total Population in the Bracket

(million inhabitants)

Less than 50 178 61.1

50 to 100 339 20.0

100 to 500 541 39.5

500 to 1,000 654 12.0

More than 1,000 1,193 33.3

Total 521 166.5*Source: National Treasury and Brazilian Statistics Bureau (IBGE)

* Corresponds to the population of the municipalities for which there was fiscal data.

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Three major types:

• Tax sharing• Based on the Constitution or

the law (mandatory)• Discretionary

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Central

States

Municipalities


Tax Sharing: Municipalities get• 25% of the state VAT [main criteria: economic

activity (3/4), population, area, local tax collection]• 50% of the state tax on motor vehicles (# of licensed

vehicles in the municipality)• 50% of the federal tax on rural property (property

localization)• 70% of the federal tax on financial operations with

gold (amount of gold extracted locally)

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Equalization fund(22.5% of the federal income tax and of the tax on indl products)

10% of the fund to the state capitalsf(Population + Income per capita -1)

90% to remaining municipalities Population: 16 brackets with index varying from:

Less than 1,188 inhabitants => 0.6 ….

More than 156,216 inhabitants => 4.0

Smaller municipalities get proportionally much more

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Compensation/cooperation purposes

• Loss of tax on industrial products due to exports exemption• Loss of VAT due to exports of primary and manufactured

goods• Royalties and other compensations on oil and natural gas

production, hydroelectricity, and mineral resources• 25% of the states quota on a federal contribution on fuels• Fund for basic education (better described later)• National Health Fund (better described later)

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Discretionary Transfers

• Depend on political will and agreement between administrations

• Very small (only about 0.2 % of GDP), but increasing very fast

• Project linked: consistent with federal or state policies

• Matching funds (at least 20%, with few exceptions)

• Concentrated on 2 ministries (health and education), but recently the Ministry of the Cities (Urban Affairs) has become also an important player. Program for Acceleration of Growth – mostly paying for investment in sanitation services.

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The Health Sector The 1988 Federal Constitution ensured universal access to publicly

provided health services. Centralized financing (only the federal government), and

decentralized service delivery based on strict rules and government and social oversight

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Municipal service delivery

The Health Sector (cont.)

Municipalities also spend their own resources in health(12% of taxes and general purpose transfers => health services)

Large and Mega Cities have their own health network, which is only partially funded by the NHS

Metropolitan problems are dealt with by States and the NHS - coordination problems

The dynamics of the costs of services are posing an increasing challenge for local public and state public health networks

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EducationThe sector benefits from a earmarking of 25% of own taxes and general

purpose transfersFund for Basic Education Development (FUNDEB)• One fund for each state and corresponding municipalities:

– 20% of the own taxes and transfers of each entity go to the fund– The resources of the fund are redistributed according to the number of

students enrolled in the respective basic-education public school system of unit

The idea is to ensure that the public funds earmarked to basic education (first 9 years, pre-school included) are matched with the

actual supply of the service

In Rio, the municipality covers all public primary education and the State responds for the high school system

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Water and SanitationBefore 1988:• State responsibility

– State enterprises • collected, treated, and distributed water• collect, and disposed of the sewage

– Billing according to consumption, allowing for some subsidy of low consumption levels and some cross-subsidies for poorer areas

– Municipalities had no influence on the enterprises´ investment plans

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Water and Sanitation (cont.)After 1988:

– Companies are still there (some privatized)– Fierce dispute over the concession powers– Mid-size cities in rich areas took over the concessions,

and either set-up their own companies or auctioned the concession to private partners.

– Some new experiments with PPPs.– Larger cities mostly are still with the state companies,

and many of them have opened their capital.

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Municipal borrowing

All municipalities are free to borrow and issue bonds, both domestically and abroad

– except those that signed debt agreements with the Federal government (183 municipalities, representing around 90% of municipal debt)

– And provided that the legal debt rules be complied with

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FRL & Senate

Observance of maximum service and debt ratios to be able to contract new debt

PAF

Declining Debt TrajectoryMultiyear limit for

new operations

CMN

Rationing of total credit to the public sector

(excp. for multilaterals)Prudential limit by

bank (45% of capital)

Subnational Debt is constrained by several mechanisms and ratios


Budget rigidity (mostly due to earmarking)

Constitution:• 12% for health (NHS not included)• 25% for education (FUNDEB included)Debt agreements: 13% of state/municipal revenues to debt service

(25 states and 183 municipalities)Personnel and pensions – public servants cannot be firedNot much money left for other functions, especially investments

Bottom-line: the mayors – especially from Mega Cities - have very little space to implement their own policies or

to meet other needs of their constituency

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• Municipalities have the same status in the federation as states: the Central government deals directly with the municipal government.

• Small, large and Mega cities in Brazil are bound to the same legal and institutional framework, but very different problems

• The bulk of the transfers are not attached to federal or state programs. Which is good, but…

• High budget rigidity leaves very few resources available to the discretion of the municipal authorities

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Thank you !

Rio de Janeiro, o melhor lugar para

trabalhar

Rio de Janeiro, the best place to work

[email protected]


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Thank you

Niterói Campos Costa Verde

Teresópolis

Sefaz/RJ – excelência de serviços

recte rempublicam gerere gerindo a coisa pública corretamente proper management of the public good...

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