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 domain of financial resources holds a place of high importance in Spanish legislation, as illustrated in Act 2/2004 and Section 142 of the Constitution, which specifically state that “Local treasuries must have sufficient funds available in order to perform the tasks assigned by law to the respective Corporations, and shall mainly be financed by their own taxation as well as by their share of State taxes and those of Self-governing Communities”.
The autonomous communities’ funding system distinguishes two regimes. Due to their “historical rights”, which are recognised by the Constitution, Navarra and the Basque Country have a special regime that gives them significant autonomy in financial and tax issues. All other autonomous communities fall under the general regime. They obtain their resources mainly from totally or partially devolved State taxes; their own taxes; transfers from the Inter-territorial Compensation Fund; returns from their own patrimony; and credit transactions. The Inter-territorial Compensation Fund was created to soften economic unbalances across the regions and to give effect to the principle of solidarity among autonomous communities.
Generally, local authorities decide and, consequently approve their respective budgets by an affirmative vote of the municipal council. Thus, annual budget decisions are taken without prior approval or intervention from regional or national authorities. Decisions regarding the expenditure of local authorities are also taken autonomously. Certain budgetary decisions, such as taking up loans above a given ceiling do, however, require the approval of a higher administrative authority.
Municipalities rely on their own specific taxes from which they can determine rate, a participation in State taxes, specific subsidies for public transport, the creation of infrastructures, services and equipment, public payment for activities under their own competence, and public or private credit. For their part, provinces do not have “taxes” but they may establish a surcharge (recargo) on the municipal tax on economic activities, and may collect charges and fees and special contributions in addition.
The own revenues (recursos propios) of local authorities comprise the total of fiscal incomes (taxes, charges and fees) and additional non-fiscal revenues. Contrary to municipalities, provinces can not levy taxes, but may merely establish surcharges (recargos) on the municipal tax on economic activities. In addition to that, provinces may collect fees, charges and special contributions. While municipalities may only collect taxes on basis of legislation enacted by the state or regional parliament, they are not in the position to freely create or establish such taxes (impuestos).
The Spanish Local Finances Act divides municipal taxes into mandatory and operational ones. The former comprises, among other, the tax on real estate, and the tax on motor vehicles and economic activities. Optional local taxes include the tax on real estate capital gains in urban areas as well as taxes on construction and installations.
Furthermore, local authorities are entitled to establish several charges or fees (tasas, precios públicos) for usage of municipal or provincial properties (sidewalks, square etc.) or the delivery of certain services such as the collection of waste, use of local sports facilities or depuration of residual waters etc. Ultimately, special contributions (contribuciones especiales) may be collected by the local authority in order to finance public works (renovation or improvement of sidewalks, streets etc.).
Other sources of own revenue can result from economic activities, the sale of property and assets or the collection of sanctions and fines.
Economic activities: Through public or local companies, local authorities may carry out economic activities which lead to an additional non-fiscal income.
Sanctions and fines: As in most European countries, Spanish municipalities enjoy the right to impose different administrative sanctions on natural and legal persons alike. A breach of local regulations and ordinances usually leads to the collection of monetary fines, which are particularly relevant in big cities (i.e. transit and parking fines, environmental fines etc.).
An additional key income for municipalities, which are located in areas that experienced a housing boom during the last decades, is generated by urban activities. In particular, cities located at the seaside and the urban conglomerations of Barcelona and Madrid profited from two major sources of income: Firstly, these municipalities have participated in the process of transformation of the rural land in to urban areas which has generated significant income from mandatory disbursements (either in land or money) that private property owners should make for such transformation. Secondly, the aforementioned building and development activities generated additional different sources of income by means of taxes, charges and fees. The explosion of the housing bubble in 2008-2009 instantly stopped the fast development of the building sector and thus resulted in a drastic drop in income for municipalities.
One means used to reduce the amount of expenditure at local level is the establishment of limits at the central level, which consist largely of a comprehensive ceiling established for the total amount of expenditure. While such a measure, related to the economic situation, is only temporary, it is very difficult to establish whether the restrictions will affect standards in the exercise of public responsibilities or public services. Conversely, if the objective is structural and permanent reduction, changes can be envisaged regarding the standard costs of public functions and services with, however a risk to the standards hitherto maintained in the delivery of services. This second case could lead to a violation of the principle of to dispose freely of financial resources (Article 9, paragraph 1).
As regards the provisions of paragraphs 1, 2 and 3 of the Charter, it should be noted that the major form of revenue for municipalities still comes from transfers, awarded by the regions and most importantly by the State, which in fact grants 63.5% of all transfers. This is not in line with the Charter’s provisions. Above all, specific and non-earmarked transfers, awarded by national authorities according to a specific formula, allow municipalities to participate in the tax revenues of the State (participación en los tributos del estado). Additionally, municipalities that meet certain requirements, may receive a share of State tax revenues (cesión de recaudación de impuestos del Estado). A similar “noncompliance with the Charter” situation would follow from a general adoption of strict limits to the financial autonomy of local authorities.
In February 2012, the Ministry of Finance and Public Administration stated, at a meeting of the Senate’s Local Authorities Commission, that the government planned to support local administration: proper funding of “the administration closest to the citizens” was to be ensured through initiatives such as boosting the fiscal autonomy of local councils. In addition, the ministry set out the key measures that the government planned to take in order to support local authorities, and also stated that three important decisions had already been made in less than one month to provide financial support for local administrations: the increase in the municipal property tax (IBI), an advance of 50% of the definitive payment of local authorities’ share and an increase in the balance repayment period from 60 to 120 monthly instalments for 2008-2009. The Ministry also explained that the mechanism for providing funding to local authorities would be in place throughout 2012. These measures will be applied only if local government approves an adjustment plan according to the Organic Law on budgetary stability and financial sustainability of public administration. The aim of this mechanism is to ensure the sustainability of the financial situation of local authorities.
In this context, according to the information provided by FEMP, local authorities will receive a total of around 16 000 million euros in 2013, amounting to a surplus of 7.1%, compared to the previous year. The Rapporteurs consider this national decision as a positive step, even though it does not imply a structural change in the financing of local authorities: the increase of the 2013 local budgets is based on the anticipation of liquidity transferred from the central government to the local authorities, with an expected return within ten years.
An important subject discussed during the visit concerns the imbalance between the distribution of powers and the distribution of potential income between central, intermediate and local governments. This imbalance has become more marked of late because of (among other reasons) the fall in fiscal capacity (many of the taxes levied by the municipalities depend on the property sector) and the increase in municipal costs resulting from municipalities having to provide services that correspond to other levels of government. According to several financial experts the solution to this imbalance involves an increase in the resources that the State should be injecting into the municipal finance model. A further proposal made by the experts is that the local finance model should distinguish more clearly between small and large municipalities. The rapporteurs also stress the need to establish more equitable distributive formulae, based on indicators of need (population with weightings) and capacity (index based on IBI). The aim of such a reform would be to link resources to capacities.
Given the decentralised nature of Spain’s public finances, a strong institutional framework is essential. The medium-term budgetary framework has a good track record overall, but the crisis put Spain’s fiscal institutions under strain and exposed a need to tighten the control over regional and local authorities’ budgets and to take better account of cyclical developments when setting budgetary targets.
As mentioned in paragraph 84, the Government took a significant step forward to improve the fiscal framework with the adoption of the organic law. This law develops the constitutional balanced budget rule adopted in 2011 and sets out new financial mechanisms for budgetary coordination and control vis-à-vis regional governments. It introduces a set of fiscal rules which are binding for all levels of Government, including public-sector companies (structural balanced budget rule, debt rule and expenditure rule). It also gives a mandate for a medium-term budgetary strategy, introduces an early warning mechanism for budget deviations, provides for corrective mechanisms and sanctions, and strengthens reporting requirements for all levels of Government. The law is a positive step, as it compels not only the national parliament, but also regional parliaments, to comply with budgetary stability. The definition of the rule in terms of a structural deficit should allow for better reflecting cyclical developments in future budget Laws. Under the original proposal made by the Ministry, two bodies are required to prepare a report on fiscal targets: the Council of Fiscal and Financial Policy (Consejo de politica fiscal y financiera, CPFF); the National Commission for Local Government (Comisiòn Nacional de Administracion Local, CNAL). During 2012, there were three meetings of the National Commission for Local Government on the issues such as the funding mechanism for payment to providers, budgetary stability in local government and the approval of a new Basic Law on Local Government as well as one on Local Finance.
Despite the Government’s measures, some of the delegation’s interlocutors complained that no specific measures have been agreed on in order to guarantee municipal governments a similar level of fiscal income.
Another subject raised during the visit with the delegation concerns measures required in order to avoid local government debt. As a general rule, local authorities may have recourse to the private sector for loans and credit from the banking system, as well as issuing bonds. According to Act 17/2012 of 27th December on the 2013 State Budget, local governments who achieved a positive balance in the previous (financial) period may enter into new long-term credit operations to finance investment when:
a) the total volume of outstanding debt does not exceed 75% of current revenues or accrued income;
b) the debt represents between 75% and 110%, in which case they may conclude debt transactions following authorisation by the competent authority to which financial supervision of local authorities has been attributed.
If local entities present a negative net savings or a debt volume greater than 110% of current revenues or accrued income they may not enter into long-term credit operations. "
In contrast to the aforementioned rules, a major concern regarding current local authorities’ finances is represented by the accumulated debt they are carrying. In fact, local authorities have been increasing their debt with private contractors and banks (short and long-term loans) over the last decades in response to the expansive budgetary policies linked to electoralism, excessive borrowing and the previously mentioned housing bubble that dominated the Spanish economy over the last twenty years. In the light of the current economic and financial crisis, the figures have become a matter of national political concern, particularly, since the end of 2009, when the total amount of Spanish local authorities’ accumulated debt amounted to 34 594 million euros. This amount represented 3.3% of Spain’s GDP. While more than 80% of the debt (28 770 million euros) corresponded to municipalities and municipal associations, the remaining 5 825 million euros corresponded to provinces and island councils. Furthermore, municipal companies accumulated a debt of 7 885 million euros. In the first quarter of 2011, the total accumulated debt of Spanish local authorities amounted to 35 420 million euros representing an increase of 3.2% with respect to the 2009 figures.
Specific attention must be paid to evaluating participation mechanisms where financial measures are concerned. On the one hand, the mechanisms provided are based on the participation of representatives from the general categories of regional and local authorities, and are unsuited to the needs of participation where general national decisions are concerned (laws, administrative acts of general relevance to financial policy). On the other, a different system governs the rights of participation when the national government adopts a measure directed in detail at a single local authority (or a specific group of them). In these cases, the participation rights provided for by the Charter should be secured to the particular local authorities concerned.
The Foundation for Democracy and Local Government highlighted the fact that local governments had not been included in the decision-making process in relation with the recent reforms as required by Article 9 paragraph 6. For example, the increase of the Properties Tax by the Central Government was done without prior consultation, constituting a breach of Article 9.6 of the Charter, in so far as the discretional powers of the city council to determine the applicable rates within the limits established in the Local Finances and Tax Act were eliminated.
In general, the provisions of Article 9 are formally respected but, in respect of paragraphs 1, 2, 3 and 5, the Rapporteurs would underline that the major form of revenue for municipalities still comes from transfers, awarded by the regions and, most importantly, by the State, which in fact grants 63.5% of all transfers, a situation that is not in line with the Charter’s provisions.