Local authorities shall be entitled, within national economic policy, to adequate financial resources of their own, of which they may dispose freely within the framework of their powers.
The most important issue concerning local finances for the association representatives is whether it is admissible to limit the size of local indebtedness through national law and if so, under what conditions. As a member of the EU, Portugal has to comply with the TFEU and Protocol no. 12 on the excessive deficit procedure. The national government is therefore responsible not only for its own deficit but also for the deficits of regional or local governments.
The Court of Auditors stated the following in connection with the effects of the Local Finances Act 2/2007: The general question of admissibility and the size of limits of local indebtedness is not a question for the court in general. But the court is aware that the setting of debt limits to regional and local authorities within the Local Finances Act 2/2007 is linked to the political problem of the risk of regional and local debt accruing through non-transparent debt schemes within the local units themselves and within MOEs. Setting limits is a way of regaining transparency and limiting financial risks with respect to the country’s European obligations. Debt limits for local authorities, set by national legislation, are a common instrument and may be found in different legal systems in EU member states.
Nevertheless, several particular aspects are a feature of the Portuguese situation. First of all, the debt limits have been significantly increased since 2007. Second, due to the fact that local authorities’ own resources are largely dependent on the PIE and that the PIE is calculated on the basis of the yield of three taxes, a reduction in the income from these taxes is equivalent to a loss of revenue for local authorities. Thirdly, state grants to local authorities, which are of particular importance for these entities, have been radically cut back since 2009. In addition, the accumulated local debt is responsible for only about 0.25% of the yearly state debt in terms of GDP. The delegation has been told that the Secretary of State for Public Administration is willing to discuss these issues with the associations in the law-making process concerning local and regional finance laws.
Lastly, the general debt limit does not make any allowance for the different budgetary situations of local authorities. ANMP representatives and mayors have pointed out that the financial situation of Portuguese local authorities varies significantly. Some of them have fewer financial problems in balancing their budgets. Others are extremely vulnerable to volatile funding or shrinking revenues, due to different expenditure structures or time constraints for adapting the budget. More than 200 out of 308 municipalities have severe problems in balancing their budget. Furthermore, local authorities have to deal with increasing interest rates for local investments. For example, one municipality had to invest in a school centre with EU funding. The interest rates of the syndicated loans taken from banks are currently 6-7%, whereas formerly the municipality had to pay an interest rate of only 2-3%. On the expenditure side, local authorities have increased charges in contracting with state service providers. Costs are rising (e.g. water supply, sewage), but the authority is not able to pass on these increases to the citizens since about 50% of the people are unable to afford them. As a result, the municipality is subsidising a part of the cost increase with negative effects for the budget.
With respect to the cumulating effects of this revenue depreciation, the debt limit blocks the only instrument local authorities have to balance their accounts. A strict debt limit might not be sufficient to restrict local revenue schemes if there is not only a general will to offer special aid programmes but also a concrete compensation scheme for special financing needs of local authorities within the 2011 and 2012 State budget. The government has committed itself to set out definitions and procedures to make the revenue reduction mechanism more transparent, but the details are yet not known.
The dispute concerning debt limits seems to be rooted not merely in different legal assessments of the constitutionality, proportionality or expediency of such a guiding instrument. The Ministry of Finance’s position is based on the premise that there is a need now to improve control over municipalities in general, and particularly their budgets. On the other hand, central government and local authorities face new financial challenges, and not only with respect to the commitments of the Economic Adjustment Programme. At EU Level, the commitments of the “Six pack” regulation relate to the European Semester, the stability and growth programmes and the new stipulations regarding budgetary supervision at central and local level. The Euro-plus pact will link more closely decisions having a financial impact on state and local level. Closer macro-economic co-ordination will be introduced at European level, which will obviously result in more detailed guidelines concerning budgetary and economic core decisions at local and regional level as well. The draft of a “new international agreement on a reinforced economic union”, to which the heads of governments of the Eurozone committed themselves on 9 December, will strengthen the budgetary discipline rules for all tiers of government. Finally there are difficult aspects of fiscal equalisation between urban and rural areas as well as between coastal and inland municipalities to consider. The government indicated that it is aware of the complexity and the inter-connectivity of these topics with respect to their special relevance for the local and regional level.
With a view to guaranteeing coherent policy co-ordination between the different tiers of government with respect to the aforementioned topics and to maintaining the fiscal autonomy of local authorities within the meaning of Article 9 of the Charter, the rapporteurs suggest that a national stability board be set up. Its members could be representatives of the associations of regional and local authorities along with an equivalent number of representatives from the relevant ministries. The board should be chaired by the Ministry of Finance; the vice-chairmanship should rotate between regional and local representatives. The recommendations and decisions of the board, though not legally binding, would have an effect through peer pressure and should be published.
Although Article 9 of the Charter contains no special provision concerning the municipal business sector (MBS), this topic was of special interest during the monitoring visit. First of all, municipal assets are protected by Article 9.1 of the Charter, where national law authorises the setting up of an MBS and economic integration within the local authority. Article 238 of the Constitution allows local authorities to own assets, so existing assets are constitutionally protected within the limits of the law. Second, the Green Paper announced a far-reaching reform of the MBS as one of the main focal points. There is broad political agreement in the government that the MBS depends economically and financially on municipal resources. Following a meeting with the Court of Auditors the government’s approach has been refined: There will not be a total prohibition for setting up an MBS, but some further regulations to avoid the negative impact of MBSs on their municipalities are necessary. The rationalisation effect must also be strengthened. A government white paper on MOEs (municipality owned enterprises), will now serve as the basis of this reform.
According to the Green Paper (page 15 seq.), the reform of local government within the domain of MOEs pursues the following objectives:
to adapt the number of MBS entities to the local situation in their municipality (significant reduction of the number of entities);
to limit the functions of MOEs to strategic purposes (to define the sectors where MOEs should operate in lieu of and/or in addition to the municipalities);
to match the aim and activities of MOEs to the powers and responsibilities of municipalities;
to limit the significance of the (fiscal) contributions of the municipalities towards the own resources of the MBS (establishing a maximum ceiling for subsidies from the municipality).
A reform of the MBS should take these factors into consideration, because the simple abolition of MOEs on a cost-effectiveness basis may fail to take into account the advantages that can be derived from setting up such enterprises, if differences in the management culture between the classical local administration and administration through MOEs persist. Cost-effectiveness is clearly not the sole benchmark for all MOEs. For example public transport enterprises are generally not able to cover the cost of the service throughout Europe – a massive tax or cross subsidy system is necessary to stabilise the revenue of the systems concerned.