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Recte Rempublicam Gerere Gerindo a coisa pública corretamente Proper Management of the Public Good 1 Foro de Capitalidad/Capital Forum Ciudad de Mexico.

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Presentation on theme: "Recte Rempublicam Gerere Gerindo a coisa pública corretamente Proper Management of the Public Good 1 Foro de Capitalidad/Capital Forum Ciudad de Mexico."— Presentation transcript:

1 Recte Rempublicam Gerere Gerindo a coisa pública corretamente Proper Management of the Public Good 1 Foro de Capitalidad/Capital Forum Ciudad de Mexico July 19 th, 2010 Renato Villela Secretaria de Fazenda Estado do Rio de Janeiro Recte Rempublicam Gerere Gerindo a coisa pública corretamente Proper Management of the Public Good The Brazilian Federation: Financing Cities and Mega Cities

2 Recte Rempublicam Gerere Gerindo a coisa pública corretamente Proper Management of the Public Good 2 Background Financing the Cities Large and Mega Cities Main Services Other Relevant Issues Final Remarks

3 Recte Rempublicam Gerere Gerindo a coisa pública corretamente Proper Management of the Public Good Federative Republic of Brazil (since 1988) 26 States + 1 Federal District 5,560 Municipalities 4,491 in ,991 in 1980 More than 1,500 created after

4 Recte Rempublicam Gerere Gerindo a coisa pública corretamente Proper Management of the Public Good Population: 190 million Urbanization rate: 82% Annual population growth (2008): 1.01% GDP (2008): US$ 1,575.9 billion GDP pc (2008): US$ 8,311

5 Recte Rempublicam Gerere Gerindo a coisa pública corretamente Proper Management of the Public Good CityPopulation LargestSão Paulo10,886,518 SmallestBorá804 5

6 Recte Rempublicam Gerere Gerindo a coisa pública corretamente Proper Management of the Public Good 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 6

7 Recte Rempublicam Gerere Gerindo a coisa pública corretamente Proper Management of the Public Good 7 Background Financing the Cities Large and Mega Cities Main Services Other Relevant Issues Final Remarks

8 Recte Rempublicam Gerere Gerindo a coisa pública corretamente Proper Management of the Public Good Tax Assignment by government tier 8 MunicipalStateCentral 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

9 Recte Rempublicam Gerere Gerindo a coisa pública corretamente Proper Management of the Public Good 2008MunicipalStatesCentral Tax Revenue (US$ billion) %

10 Recte Rempublicam Gerere Gerindo a coisa pública corretamente Proper Management of the Public Good TAX BURDEN IN BRAZIL Own tax collectionAvailable after transfers Percent of GDP% % Total Central State Municipal Source: Afonso & Araújo (2006) 10

11 Recte Rempublicam Gerere Gerindo a coisa pública corretamente Proper Management of the Public Good Expenditure assignent Municipal expenditure by Functions FunctionDistribution TotalUS$ 39.3 Education23.7% Health21.6% Administration13.8% Urban services12.4% Pensions4.6% Transportation3.5% Social assistance2.9% Sanitation2.6% Housing0.8% Public order0.8% Other (incl legislative and debt) 13.3% Source: Afonso & Araújo (2006) 11 Expenditure Assignment Gov´t tierFunction 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 localPre-school and primary education; and preventive health care LocalIntra-city public transportation; and land use regulation Source: Afonso & Araujo (2006)

12 Recte Rempublicam Gerere Gerindo a coisa pública corretamente Proper Management of the Public Good VERTICAL IMBALANCE MUNICIPALITIES Total Expenditure 100% Own revenue and loans 32% Tax sharing 68% Mandatory transfers Discretionary transfers Source: Brazilian National Treasury 12

13 Recte Rempublicam Gerere Gerindo a coisa pública corretamente Proper Management of the Public Good HORIZONTAL IMBALANCE Population brackets (thousand inhabitants) Tax Revenue US$ per capita Total Population in the Bracket (million inhabitants) Less than to to to 1, More than 1,0001, Total * Source: National Treasury and Brazilian Statistics Bureau (IBGE) * Corresponds to the population of the municipalities for which there was fiscal data. 13

14 Recte Rempublicam Gerere Gerindo a coisa pública corretamente Proper Management of the Public Good Three major types: Tax sharing Based on the Constitution or the law (mandatory) Discretionary 14 Central States Municipalities

15 Recte Rempublicam Gerere Gerindo a coisa pública corretamente Proper Management of the Public Good 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) 15

16 Recte Rempublicam Gerere Gerindo a coisa pública corretamente Proper Management of the Public Good Equalization fund (22.5% of the federal income tax and of the tax on indl products)  10% of the fund to the state capitals f(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 16

17 Recte Rempublicam Gerere Gerindo a coisa pública corretamente Proper Management of the Public Good 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) 17

18 Recte Rempublicam Gerere Gerindo a coisa pública corretamente Proper Management of the Public Good 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. 18

19 Recte Rempublicam Gerere Gerindo a coisa pública corretamente Proper Management of the Public Good 19 Background Financing the Cities Large and Mega Cities Main Services Other Relevant Issues Final Remarks

20 Recte Rempublicam Gerere Gerindo a coisa pública corretamente Proper Management of the Public Good 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 20 Are reimbursed by the Central government for medication, consultations, exams, and surgeries and complex treatments Managing health care centers, hospitals, and clinics Public providers (central, state, and municipal) Private providers

21 Recte Rempublicam Gerere Gerindo a coisa pública corretamente Proper Management of the Public Good 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 21

22 Recte Rempublicam Gerere Gerindo a coisa pública corretamente Proper Management of the Public Good Education The sector benefits from a earmarking of 25% of own taxes and general purpose transfers Fund 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 22

23 Recte Rempublicam Gerere Gerindo a coisa pública corretamente Proper Management of the Public Good Water and Sanitation Before 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 23

24 Recte Rempublicam Gerere Gerindo a coisa pública corretamente Proper Management of the Public Good 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. 24

25 Recte Rempublicam Gerere Gerindo a coisa pública corretamente Proper Management of the Public Good 25 Background Financing the Cities Large and Mega Cities Main Services Other Relevant Issues Final Remarks

26 Recte Rempublicam Gerere Gerindo a coisa pública corretamente Proper Management of the Public Good 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 26

27 Recte Rempublicam Gerere Gerindo a coisa pública corretamente Proper Management of the Public Good 27 FRL & Senate Observance of maximum service and debt ratios to be able to contract new debt PAF Declining Debt Trajectory Multiyear 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

28 Recte Rempublicam Gerere Gerindo a coisa pública corretamente Proper Management of the Public Good 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 fired Not 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 28

29 Recte Rempublicam Gerere Gerindo a coisa pública corretamente Proper Management of the Public Good 29 Background Financing the Cities Large and Mega Cities Main Services Other Relevant Issues Final Remarks

30 Recte Rempublicam Gerere Gerindo a coisa pública corretamente Proper Management of the Public Good 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 30

31 Recte Rempublicam Gerere Gerindo a coisa pública corretamente Proper Management of the Public Good 31 Thank you ! Rio de Janeiro, o melhor lugar para trabalhar Rio de Janeiro, the best place to work

32 Recte Rempublicam Gerere Gerindo a coisa pública corretamente Proper Management of the Public Good 32 Thank you Niterói Campos Costa Verde Teresópolis Sefaz/RJ – excelência de serviços


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