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Brazilian municipalities enter election season strapped for funds
Gustavo Ribeiro . Feb 20, 2020
Photo: Ronaldo Almeida/Shutterstock
Brazilians head to the polls in October 2020 to elect new mayors and city councilors. And for many incumbents, their re-election bids could be a tough sell. A report by the National Confederation of Municipalities (CNM), which lobbies for mayors’ interests nationwide, reveals that 229 mayors (out of 5,570) are expected to declare a state of financial calamity in 2020—up from 69 last year.
“Financial calamity” is a maneuver city executives employ to tell voters they will be forced to shut down some public services, with the justification that their budget is insufficient for the municipality to meet all of its obligations. However, it does not exempt mayors from fiscal responsibility laws—which sets the guidelines for how budgets must be run.
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<p>This dire financial situation is the result of a long-lasting crisis that has worsened since the approval of the 1988 Constitution, with municipalities taking on a much bigger role in providing public services, without necessarily having the budgetary capacity to do so. As a matter of fact, municipal taxes barely help finance most municipalities. Housing taxes (IPTU), services tax (ISS), and real estate conveyance taxes (ITBI) account for less than 3 percent of the revenue in cities with up to 5,000 residents.</p>
<p>Even in the 17 biggest cities, home to over 1 million people, these sources of revenue only make up one-quarter of the total budget. The rest comes from contributions from the <a href="https://brazilian.report/newsletters/brazil-daily/2020/01/30/brazil-public-deficit-smaller-dilma-coronavirus/">federal government</a> and <a href="https://brazilian.report/business/2019/09/05/state-finances-biggest-risk-brazilian-economy/">state administrations</a>. </p>
<p>According to representatives of municipalities, 60 percent of cities rely on the Federal Fund for Municipalities—which has shrunk by 9 percent since last year.</p>
<p>“That is very worrisome. We expect revenue in 2020 to be dramatically smaller than in 2019,” said CNM chairman Glademir Aroldi.</p>
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<h2>Inflated public payroll</h2>
<p>The drop in the federal fund is even more worrisome as mayors are being forced to give raises to certain public servants. The federal government passed a 13-percent salary bump for elementary school teachers, who work under municipal administrations. And while city-level servants do not earn anything close to the <a href="https://brazilian.report/newsletters/brazil-weekly/2019/11/18/true-situation-brazil-public-service-charts-psl-bolsonaro/">outlandish salaries their federal counterparts do</a>, the fact of the matter is city governments are overly exposed to any decision to increase wages.</p>
<p>In recent decades, the number of municipal civil servants ballooned from 2.3 million in 1995 to 6.7 million in 2017—a direct result of the decentralization process in the Brazilian government framework.</p>
<p>Spending on salaries and pensions are part of the budget’s “mandatory expenses,” which are eating up a progressively larger part of the pie. That drastically reduces cities’ investment capacity—a study by consultancy Tendências shows that only two of Brazil’s 27 state capitals have an investment rate higher than 10 percent of their budget.</p>
<p>According to CNM, mayors have tried to remedy the situation by adopting several austerity measures:</p>
<ul><li>3,488 cities have slashed costing expenses;</li><li>2,230 have delayed salaries and payments to contractors;</li><li>1,988 mayors have reduced their number of commission-paid workers;</li><li>1,519 cities have stopped using official vehicles.</li></ul>
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<h2>Rationality for municipal administrations</h2>
<p>Last year, Economy Minister Paulo Guedes presented a <a href="https://brazilian.report/power/2019/11/06/paulo-guedes-wants-completely-reform-brazilian-state/">bold plan to practically refound Brazil’s “federative pact</a>“—the name given to the agreements between federal, state and municipal administrations with regard to revenue distribution. The plan includes a proposal to take municipalities with less than 5,000 inhabitants and a tax collection inferior to 10 percent of their revenue and merge them into neighboring towns, while creating much tougher rules when it comes to creating new municipalities. </p>
<p>The idea is to reduce spending on municipal administrations. However, it could have political shockwaves, as diminishing local levels reduces support bases for lawmakers and governors. According to IBGE data published in July, Brazil had 1,254 cities with less than 5,000 inhabitants, though the numbers may be imprecise, as the population was not counted in 2015. </p>
<p>In 56 percent of the cities that could be affected by Mr. Guedes’ plan, there are more people working for the government than there are private workers. In the city of Parintins, in Amazonas state, the rate of public servants is a staggering 63 percent of total workers—not even taking into account commission-based employees.</p>
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<h2>The city that went completely bankrupt</h2>
<p>In August 2019, the mayor of Bento Fernandes—a small town in the northeastern state of Rio Grande do Norte—declared that the municipality had gone bankrupt. The town of 5,500 inhabitants was unable to pay for basic services and public servants’ salaries, and Mayor Júnior Marques said the only solution would be to shut down the municipal government.</p>
<p>The city government stopped transferring the contributions deducted from municipal employees to the Federal Revenue Service’s Social Security Fund. </p>
<p>In this case alone, the city government’s debt stands at BRL 3.79 million, adjusted by inflation. The courts ordered that the payment of the full amount must be made by December 2024, in monthly installments of BRL 73,708.41. </p>
<p>In a Rio Grande do Norte appeals court, the city hall made a request to limit this repayment to BRL 20,000 per month, which was denied. In addition to freezing accounts, the judge ordered the retroactive payment of the installments for the months of March and April. </p>
<p>“It was more than BRL 200,000 in the month of August alone, there was no money left for anything,” said former Administration, Finance and Planning Secretary Jobson Aron, who was dismissed along with his fellow secretaries.
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