One in four municipalities has a bad fiscal situation, even with boosted tax collection – 10/31/2023 – Market

Even having recorded record revenue in 2022, 42% of Brazilian municipalities were in a difficult or critical financial situation, according to an indicator from Firjan (Rio de Janeiro’s industry federation) that assesses personnel expenses, investments, compliance with financial obligations and ability to finance the administrative structure.

The entity classifies the number of municipalities with fiscal problems as high, although last year’s data is the best for the historical series started in 2013. The worst was seen in 2017, when 82% of municipalities were in a difficult or critical situation.

Firjan also states that the 2022 photograph does not represent the current situation of Brazilian municipalities and that the outlook is for data to worsen in the coming years.

Strong economic growth and high inflation boosted revenue last year. Data for this year already shows lower revenue growth. According to the CNM (National Confederation of Municipalities), 2,362 cities spent more than they collected in the first six months of 2023.

Although the situation has improved compared to previous years, structural issues prevented this advance from being widespread and consistent, says Firjan’s Economic Studies manager, Jonathas Goulart.

The scenario is still one of high dependence on revenue transfers from the federal government, vulnerable financial planning in the face of growth in mandatory expenses and the risk of investment penalties. Analysis of the accounts also shows that municipalities remain vulnerable to the economic cycle.

“Conjunctural factors caused municipalities to have an avalanche of revenue and this is reflected in the fiscal management indicator. This will certainly not be repeated in 2023 and should not be repeated in the coming years. Some municipalities have already signaled that they are in crisis”, he states Goulart.

“How do municipalities try to solve this problem? They go to the federal government and ask for more money. It doesn’t solve it.”

According to the entity, an improvement involves issues such as the approval of the Tax Reform, which redistributes revenue on consumption, favoring smaller municipalities, and the review of the rules for sharing federal resources.

The entity also highlights the need for administrative reform, which includes municipalities, and the application of the Pension Reform to retirement systems for local public servants.

Once these adjustments have been made on the revenue and expenditure side, a third step would be to review the rules for creating and merging municipalities —in 2019, the federal government made a proposal in this regard— and applying sanctions under the Fiscal Responsibility Law.

“When you have strong revenue growth, it seems like everything is adjusted. In fact it isn’t. The data was just camouflaged”, says Nayara Freire da Costa, one of those responsible for the indicator.

“There is a structural issue that, every time revenue increases, is left aside. It was left in 2022. What we need to do now is discuss them and find a way to solve it.”

Personnel spending grew in 2022

Last year, data on investments and personnel expenses, in comparison with revenues, presented the best results in the series.

In the first case, there are still 2,229 municipalities with a low level of investment — they invest less than 5% of their revenue.

In relation to civil servants, expenditure grew 14%, but revenue from collections and transfers improved even more. Still, there are 1,066 municipalities above the Fiscal Responsibility Law’s alert limit of 54% of revenue.

A third component of the general indicator, the ability to finance the administrative structure of the city hall and the City Council, worsened compared to 2021. R$6 billion in transfers were used to make up for the lack of revenue to pay these expenses.

According to Firjan, there are 1,570 municipalities that are not sustainable, as administrative expenses are greater than the sum of other social demands, such as transport, sanitation, security, housing, urban planning and social assistance. Only education and health exceed these expenses, as they have mandatory use of resources guaranteed by law.

The fourth and final component shows worsening compliance with financial obligations. There are 1,591 municipalities with a difficult or critical level of liquidity. Among them, 382 city halls that ended the year in the red.

Two capitals in the Midwest have a zero rating

Salvador (BA), Manaus (AM) and São Paulo (SP) remained at the top of the ranking of the highest scores among the capitals.

With a low level of investment, João Pessoa (PB), Cuiabá (MT) and Campo Grande (MS) had the worst scores. They are the only three capitals that are below average when considering all municipalities in the country. The last two had a zero score in fulfilling financial obligations, pushing a large part of the expenses to the following years.

In terms of personnel spending, the most problematic capitals are Palmas (TO) and Fortaleza (CE), the only ones in a bad situation in this regard.

The IFGF (Firjan Fiscal Management Index) uses official data from 5,240 municipalities for 2022 delivered to the National Treasury. Numbers for another 328 were unavailable or had inconsistencies that prevented analysis.

The indicator score ranges from zero to one. The situation is considered critical for results lower than 0.4 points, difficult between 0.4 and 0.6 points, good between 0.6 and 0.8 points or excellent when above this level.

The Brazilian average was 0.6250 in 2022. It was the first time that the overall grade was within the “good” parameter. The number has improved since 2017, when it was 0.4075.