Applying the analytical framework to Portugal and Italy
| Field of enquiry | Type of vulnerability source | Portugal* | Italy** |
|---|---|---|---|
| 1. Administrative structure and fiscal rules | Lack of anticipatory capacities | (1) Fiscal rules are in place including budgetary balance, debt limits, early warning mechanisms for deviations and financial recovery, more careful and realistic budget estimations (especially for revenues), arrears rules. These rules were not changed to deal with the pandemic, but the central government temporarily lifted stringent fiscal measures because of known municipal financial vulnerabilities | (1) The three key fiscal rules (“Golden rule”, debt ceiling, and bankruptcy procedures) limit financial vulnerability guaranteeing healthy financial condition and have remained unchanged |
| (2) Very limited spending review policies are present and have not been strengthened in the aftermath of the pandemic | (2) To face financial vulnerability, spending reviews policies were introduced in 2012/13 and were not changed in the aftermath of pandemic, but are limited to certain expenditures items such as consultancy, advertising, and business trips | ||
| (3) Audits are mainly focused on true and fair view representation of current financial conditions, failing to scrutinize readiness for urgent crises. However, there is central government control of debt ceilings (which has continued during the crisis), evidencing this is still a source of vulnerability. The Local Government General Directorate (DGAL), exerts several controls, requiring for constant reporting. In the aftermath of the pandemic, DGAL has continued its close monitoring, also with monthly questionnaires on Covid19-related expenditure | (3) Audits are mainly focused on true and fair view representation of current financial conditions, failing to scrutinize financial vulnerability, and have not been changed in the aftermath of pandemic | ||
| Lack of coping capacities | (4) In the aftermath of the crisis, measures were legally approved, temporarily relaxing some limits and deadlines, such as the temporary suspension of the budgetary current balance rule and the extension of debt limits. Pandemic-related new expenditure budget lines were allowed, even if not formally approved. Within the Commitments and Arrears Law, the calculation of the amount of available funds was lessen, allowing for more payments within the short-term. Also, flexibility was introduced in administrative procedures related to public procurement and for new loans to cover pandemic-related expenses | (4) The law does not provide any possibility to relax fiscal rules to deal with financial vulnerability and this has not changed in the aftermath of crisis; the only possibility that has been provided for is the exceptional extension of budget approval from April to October 2020 exceptionally | |
| 2. Revenue structure | Lack of anticipatory capacities | (1) Own revenues are about 40% of total revenues, so municipalities are rather dependent on resources coming from the central government, making them quite financially vulnerable. In smaller and rural municipalities this dependency is higher with own revenues about 30% of total revenues. Financial independency, usually indicating lower financial vulnerability before the crisis have gained a paradoxical meaning during the crisis, with larger municipalities becoming the most vulnerable, as their own resources (68% of own revenue) are more affected by the crisis. In the aftermath of the crisis there was a reinforcement of the Municipal Social Fund with transfers earmarked for new expenditures for equipment, goods and services associated with fighting the pandemic | (1) While on average 70% of municipal current revenues are represented by own revenues, municipalities' revenue structure is quite differentiated and based on their capability to raise own local taxes and fee which range from 76% of current revenues for large Northern wealthy or touristic municipalities to 54% for small Southern municipalities. In the aftermath of the crisis, financially independent municipalities in the pre-crisis were paradoxically so much worse off that they have benefited from extraordinary transfers from the State to partly counterbalance their own revenue reductions, implicitly becoming more dependent on transfers and hence themselves more financially vulnerable |
| (2) Before the crisis, most municipalities had some financial reserves, only ca 15% had none. Legal measures in the aftermath of the crisis have allowed for the extraordinary immediate usage of the previous year's budgetary (cash) surplus in 2020, and for cash advances on transfers from the central government and the EU | (2) Most medium and large municipalities (pop. over 20.000) had minimal or no financial reserves when the pandemic struck, denoting thus little anticipatory capacity, while small municipalities benefitted from some reserves; all were used in the aftermath of the pandemic and cash advances for national grants were provided by the central government in order to inject liquidity | ||
| (3) Supplementary budgets were not allowed before and are not allowed in the aftermath of the crisis | (3) Supplementary budgets were not allowed before and are not allowed in the aftermath of the crisis | ||
| (4) There are no legal requirements for insurance contracts for low probability-high impact event, either before or in the aftermath the crisis | (4) There are no legal requirements for insurance contracts for low probability-high impact event, either before or in the aftermath the crisis | ||
| (5) Provisions for contingent credits are allowed; it is very likely that municipalities have increased impairment losses of receivables in the aftermath of the crisis | (5) There are provision for contingent credits, but since the law provides a method of computation of doubtful account receivables based on the cash collected in the last five years, and this has not changed in the aftermath of the crisis, it is very likely that municipalities experience a higher level of impaired credits in the afteSrmath of the crisis | ||
| Lack of coping capacities | (6) The law seriously restricts the possibilities to sell assets to fund expenditure or repay debt; this has not changed with the crisis, so it continues to be a source of vulnerability | (6) Assets can be sold to fund capital expenditure or reduce debt and no changes have been occurred in the aftermath of the crisis; hence this does not constitute a source of financial vulnerability | |
| (7) Municipalities can manage their fees and charges at their will, within the relevant laws. The crisis limited the possibility of increasing fees and charges; on the contrary municipal property tax collection was temporarily postponed and certain municipal tariffs related to water supply, sewage treatment, waste collection, and occupation of public spaces and areas were reduced, increasing financial vulnerability in the aftermath of the crisis | (7) Before the crisis, municipalities had some possibilities to increase their fees and charges; in the aftermath of pandemic, the property tax for touristic businesses, the tax on the occupation of public spaces and areas, the touristic tax and the airport municipal tax were temporarily suspended by increasing local financial vulnerability | ||
| (8) Before the crisis the possibility of contracting loans was limited. The crisis brought the possibility of contracting new debt, including short-term loans to cover pandemic-related expenses | (8) Before the crisis, it was possible to incur overdraft facilities only in limited and stringent conditions; in the aftermath of the crisis, overdraft facilities equivalent to 12% of current budget were provided by the central government to those municipalities in need of liquidity for commercial debts overdue at the end of 2019; these are, de facto, new loans as the repayment period is 30 years | ||
| 3. Expenditure structure | Lack of anticipatory capacities | (1) There are only few discretionary expenditures, amounting to ca 25% of municipal current expenditures, which are related to non-fundamental services (e.g. cultural events, sports and recreation, touristic services). In the aftermath of the crisis, some local investment projects have been postponed, due to the need to prioritize pandemic-related expenditure | (1) Discretionary expenditures, i.e. non-fundamental services by Italian law (cultural events, sports and recreation, touristic services, etc.), represent ca 22% of municipal current expenditures; in the aftermath of crisis, these services (especially touristic services and those not incurred because of the lockdown) have been treated as a buffer and reduced to focus on more essential expenses |
| Lack of coping capacities | (2) The rigidity of the expenditure structure is a source of financial vulnerability, because it allows for very limited maneuver to cope with shocks: on average, about 40% of current expenditure is personnel-related, and the rest is mostly consumables for the provision of local services of which little can be deferred or unaccomplished. In the aftermath of the crisis, some expenditure related to public services were not incurred, especially during the lockdown | (2) On average, before the crisis only 31% of current expenditure were personnel costs and debt instalments and thus could be considered rigid; in the aftermath of the crisis the situation has not changed | |
| (3) Generally, there is limited possibility of moratorium on debt repayments and covenants. But, in the aftermath of the crisis, a 12-month moratorium was granted on the amortization of financial assistance loan contracts; also, no interest was charged on commercial debt agreements to water and sewerage services companies | (3) While in the pre-crisis period any moratorium or renegotiation of loans was quite limited, in the aftermath of the crisis extraordinary arrangements allow more flexibility by providing the renegotiation of mortgages; capital instalments due in 2020, representing at least 2.5% of current expenditures plus debt instalments, can thus be postponed by one year | ||
| (4) In consideration of the managerial autonomy recognized by the Constitution, before and in the aftermath of the crisis some services could be outsourced or externalized, looking for rationalization and efficiency improvements | (4) Municipalities benefit from managerial autonomy granted by the Constitution and thus can rationalize services, manage their demand, increase their efficiency; in the aftermath of the crisis, a specific law provided further possibilities to adjust the effectiveness and efficiency of services such as social services and school transportation to meet the new environmental conditions | ||
| (5) The possibility of municipalities cancelling doubtful liabilities is limited before and in the aftermath of the pandemic; this option regards only debts to central government | (5) There is no possibility of cancelling doubtful liabilities before and in the aftermath of the pandemic; this is a possibility for regional and State governments only, which limits the room for maneuver for municipalities | ||
| 4. Vulnerability outlook | Lack of anticipatory capacities | (1) Some financial and other statistical data were available at municipality level before the crisis. The Municipalities Financial Yearbook, an unofficial publication, reports on municipalities' budgetary and financial condition; the analysis is aggregated but includes some rankings of municipalities on individual indicators. There is also financial official data on the DGAL portal for the period before the crisis. In the aftermath of the crisis, no statistical data has been made available yet, but a survey is currently ongoing by the Municipalities National Association (ANMP) | (1) Several statistics were available before the pandemic from the Court of Auditors, the Ministry of Economy and Finance, the Bank of Italy, and the Association of Italian municipalities ANCI; in the aftermath of the pandemic, several studies from public and private stakeholders have offered a good understanding mainly of the revenue reduction side, while little information is available concerning expenditure trends |
| (2) Municipalities follow a medium-term financial planning scheme, which continued during the crisis. Monitoring and risk control tools are used by DGAL and in the aftermath of the crisis they have been augmented by its monthly questionnaires on Covid19-related expenditure | (2) Financial planning, risk assessment, scenario analysis and other monitoring tools are quite underdeveloped in most municipalities, with the exception of very large ones; this has not changed in the aftermath of the crisis, and continues being a source of financial vulnerability | ||
| (3) In normal times there is good environmental and self-awareness of municipalities' financial vulnerability. In the aftermath of the crisis, revenue structure is considered critical since especially large, urban and seaside municipalities expect to be negatively and considerably affected, given the weight of tourism and property taxes on their revenues. The great majority, if not all municipalities cannot yet appreciate the effects of the crisis on their budgets | (3) Before the pandemic, available planning tools such as the “Documento Unico di Programmazione” allowed an adequate environmental and self-awareness analysis; in the aftermath of the pandemic, municipalities lack the capacity to understand economic and social trends and their effects on their budgets (e.g. 23% of municipalities with over 15,000 pop. cannot estimate the impact of the pandemic on their expenditures) | ||
| Lack of coping capacities | (4) The improved financial condition reached by most municipalities before the pandemic (only ca15% were still under financial assistance) allows them to better cope with the pandemic. Nevertheless, difficult decisions are likely to have to be made regarding prioritizing new unexpected pandemic-related expenditure at the expense of other local projects, and debt levels are most likely to raise together with financial vulnerability | (4) Pre-pandemic levels of debt and deficit were considered to be at accepted level if compared, for example, to other EU countries, regional differences existed with few municipalities (ca 1,400 out of 7,904) experiencing liquidity issues. It is impossible to ascertain the effects onto the deficit and debt level in the aftermath period, as no statistics are available (see 4.1 above) |
| Field of enquiry | Type of vulnerability source | Portugal* | Italy** |
|---|---|---|---|
| 1. Administrative structure and fiscal rules | Lack of anticipatory capacities | (1) Fiscal rules are in place including budgetary balance, debt limits, early warning mechanisms for deviations and financial recovery, more careful and realistic budget estimations (especially for revenues), arrears rules. These rules were not changed to deal with the pandemic, but the central government temporarily lifted stringent fiscal measures because of known municipal financial vulnerabilities | (1) The three key fiscal rules (“Golden rule”, debt ceiling, and bankruptcy procedures) limit financial vulnerability guaranteeing healthy financial condition and have remained unchanged |
| (2) Very limited spending review policies are present and have not been strengthened in the aftermath of the pandemic | (2) To face financial vulnerability, spending reviews policies were introduced in 2012/13 and were not changed in the aftermath of pandemic, but are limited to certain expenditures items such as consultancy, advertising, and business trips | ||
| (3) Audits are mainly focused on true and fair view representation of current financial conditions, failing to scrutinize readiness for urgent crises. However, there is central government control of debt ceilings (which has continued during the crisis), evidencing this is still a source of vulnerability. The Local Government General Directorate (DGAL), exerts several controls, requiring for constant reporting. In the aftermath of the pandemic, DGAL has continued its close monitoring, also with monthly questionnaires on Covid19-related expenditure | (3) Audits are mainly focused on true and fair view representation of current financial conditions, failing to scrutinize financial vulnerability, and have not been changed in the aftermath of pandemic | ||
| Lack of coping capacities | (4) In the aftermath of the crisis, measures were legally approved, temporarily relaxing some limits and deadlines, such as the temporary suspension of the budgetary current balance rule and the extension of debt limits. Pandemic-related new expenditure budget lines were allowed, even if not formally approved. Within the Commitments and Arrears Law, the calculation of the amount of available funds was lessen, allowing for more payments within the short-term. Also, flexibility was introduced in administrative procedures related to public procurement and for new loans to cover pandemic-related expenses | (4) The law does not provide any possibility to relax fiscal rules to deal with financial vulnerability and this has not changed in the aftermath of crisis; the only possibility that has been provided for is the exceptional extension of budget approval from April to October 2020 exceptionally | |
| 2. Revenue structure | Lack of anticipatory capacities | (1) Own revenues are about 40% of total revenues, so municipalities are rather dependent on resources coming from the central government, making them quite financially vulnerable. In smaller and rural municipalities this dependency is higher with own revenues about 30% of total revenues. Financial independency, usually indicating lower financial vulnerability before the crisis have gained a paradoxical meaning during the crisis, with larger municipalities becoming the most vulnerable, as their own resources (68% of own revenue) are more affected by the crisis. In the aftermath of the crisis there was a reinforcement of the Municipal Social Fund with transfers earmarked for new expenditures for equipment, goods and services associated with fighting the pandemic | (1) While on average 70% of municipal current revenues are represented by own revenues, municipalities' revenue structure is quite differentiated and based on their capability to raise own local taxes and fee which range from 76% of current revenues for large Northern wealthy or touristic municipalities to 54% for small Southern municipalities. In the aftermath of the crisis, financially independent municipalities in the pre-crisis were paradoxically so much worse off that they have benefited from extraordinary transfers from the State to partly counterbalance their own revenue reductions, implicitly becoming more dependent on transfers and hence themselves more financially vulnerable |
| (2) Before the crisis, most municipalities had some financial reserves, only ca 15% had none. Legal measures in the aftermath of the crisis have allowed for the extraordinary immediate usage of the previous year's budgetary (cash) surplus in 2020, and for cash advances on transfers from the central government and the EU | (2) Most medium and large municipalities (pop. over 20.000) had minimal or no financial reserves when the pandemic struck, denoting thus little anticipatory capacity, while small municipalities benefitted from some reserves; all were used in the aftermath of the pandemic and cash advances for national grants were provided by the central government in order to inject liquidity | ||
| (3) Supplementary budgets were not allowed before and are not allowed in the aftermath of the crisis | (3) Supplementary budgets were not allowed before and are not allowed in the aftermath of the crisis | ||
| (4) There are no legal requirements for insurance contracts for low probability-high impact event, either before or in the aftermath the crisis | (4) There are no legal requirements for insurance contracts for low probability-high impact event, either before or in the aftermath the crisis | ||
| (5) Provisions for contingent credits are allowed; it is very likely that municipalities have increased impairment losses of receivables in the aftermath of the crisis | (5) There are provision for contingent credits, but since the law provides a method of computation of doubtful account receivables based on the cash collected in the last five years, and this has not changed in the aftermath of the crisis, it is very likely that municipalities experience a higher level of impaired credits in the afteSrmath of the crisis | ||
| Lack of coping capacities | (6) The law seriously restricts the possibilities to sell assets to fund expenditure or repay debt; this has not changed with the crisis, so it continues to be a source of vulnerability | (6) Assets can be sold to fund capital expenditure or reduce debt and no changes have been occurred in the aftermath of the crisis; hence this does not constitute a source of financial vulnerability | |
| (7) Municipalities can manage their fees and charges at their will, within the relevant laws. The crisis limited the possibility of increasing fees and charges; on the contrary municipal property tax collection was temporarily postponed and certain municipal tariffs related to water supply, sewage treatment, waste collection, and occupation of public spaces and areas were reduced, increasing financial vulnerability in the aftermath of the crisis | (7) Before the crisis, municipalities had some possibilities to increase their fees and charges; in the aftermath of pandemic, the property tax for touristic businesses, the tax on the occupation of public spaces and areas, the touristic tax and the airport municipal tax were temporarily suspended by increasing local financial vulnerability | ||
| (8) Before the crisis the possibility of contracting loans was limited. The crisis brought the possibility of contracting new debt, including short-term loans to cover pandemic-related expenses | (8) Before the crisis, it was possible to incur overdraft facilities only in limited and stringent conditions; in the aftermath of the crisis, overdraft facilities equivalent to 12% of current budget were provided by the central government to those municipalities in need of liquidity for commercial debts overdue at the end of 2019; these are, de facto, new loans as the repayment period is 30 years | ||
| 3. Expenditure structure | Lack of anticipatory capacities | (1) There are only few discretionary expenditures, amounting to ca 25% of municipal current expenditures, which are related to non-fundamental services (e.g. cultural events, sports and recreation, touristic services). In the aftermath of the crisis, some local investment projects have been postponed, due to the need to prioritize pandemic-related expenditure | (1) Discretionary expenditures, i.e. non-fundamental services by Italian law (cultural events, sports and recreation, touristic services, etc.), represent ca 22% of municipal current expenditures; in the aftermath of crisis, these services (especially touristic services and those not incurred because of the lockdown) have been treated as a buffer and reduced to focus on more essential expenses |
| Lack of coping capacities | (2) The rigidity of the expenditure structure is a source of financial vulnerability, because it allows for very limited maneuver to cope with shocks: on average, about 40% of current expenditure is personnel-related, and the rest is mostly consumables for the provision of local services of which little can be deferred or unaccomplished. In the aftermath of the crisis, some expenditure related to public services were not incurred, especially during the lockdown | (2) On average, before the crisis only 31% of current expenditure were personnel costs and debt instalments and thus could be considered rigid; in the aftermath of the crisis the situation has not changed | |
| (3) Generally, there is limited possibility of moratorium on debt repayments and covenants. But, in the aftermath of the crisis, a 12-month moratorium was granted on the amortization of financial assistance loan contracts; also, no interest was charged on commercial debt agreements to water and sewerage services companies | (3) While in the pre-crisis period any moratorium or renegotiation of loans was quite limited, in the aftermath of the crisis extraordinary arrangements allow more flexibility by providing the renegotiation of mortgages; capital instalments due in 2020, representing at least 2.5% of current expenditures plus debt instalments, can thus be postponed by one year | ||
| (4) In consideration of the managerial autonomy recognized by the Constitution, before and in the aftermath of the crisis some services could be outsourced or externalized, looking for rationalization and efficiency improvements | (4) Municipalities benefit from managerial autonomy granted by the Constitution and thus can rationalize services, manage their demand, increase their efficiency; in the aftermath of the crisis, a specific law provided further possibilities to adjust the effectiveness and efficiency of services such as social services and school transportation to meet the new environmental conditions | ||
| (5) The possibility of municipalities cancelling doubtful liabilities is limited before and in the aftermath of the pandemic; this option regards only debts to central government | (5) There is no possibility of cancelling doubtful liabilities before and in the aftermath of the pandemic; this is a possibility for regional and State governments only, which limits the room for maneuver for municipalities | ||
| 4. Vulnerability outlook | Lack of anticipatory capacities | (1) Some financial and other statistical data were available at municipality level before the crisis. The Municipalities Financial Yearbook, an unofficial publication, reports on municipalities' budgetary and financial condition; the analysis is aggregated but includes some rankings of municipalities on individual indicators. There is also financial official data on the DGAL portal for the period before the crisis. In the aftermath of the crisis, no statistical data has been made available yet, but a survey is currently ongoing by the Municipalities National Association (ANMP) | (1) Several statistics were available before the pandemic from the Court of Auditors, the Ministry of Economy and Finance, the Bank of Italy, and the Association of Italian municipalities ANCI; in the aftermath of the pandemic, several studies from public and private stakeholders have offered a good understanding mainly of the revenue reduction side, while little information is available concerning expenditure trends |
| (2) Municipalities follow a medium-term financial planning scheme, which continued during the crisis. Monitoring and risk control tools are used by DGAL and in the aftermath of the crisis they have been augmented by its monthly questionnaires on Covid19-related expenditure | (2) Financial planning, risk assessment, scenario analysis and other monitoring tools are quite underdeveloped in most municipalities, with the exception of very large ones; this has not changed in the aftermath of the crisis, and continues being a source of financial vulnerability | ||
| (3) In normal times there is good environmental and self-awareness of municipalities' financial vulnerability. In the aftermath of the crisis, revenue structure is considered critical since especially large, urban and seaside municipalities expect to be negatively and considerably affected, given the weight of tourism and property taxes on their revenues. The great majority, if not all municipalities cannot yet appreciate the effects of the crisis on their budgets | (3) Before the pandemic, available planning tools such as the “Documento Unico di Programmazione” allowed an adequate environmental and self-awareness analysis; in the aftermath of the pandemic, municipalities lack the capacity to understand economic and social trends and their effects on their budgets (e.g. 23% of municipalities with over 15,000 pop. cannot estimate the impact of the pandemic on their expenditures) | ||
| Lack of coping capacities | (4) The improved financial condition reached by most municipalities before the pandemic (only ca15% were still under financial assistance) allows them to better cope with the pandemic. Nevertheless, difficult decisions are likely to have to be made regarding prioritizing new unexpected pandemic-related expenditure at the expense of other local projects, and debt levels are most likely to raise together with financial vulnerability | (4) Pre-pandemic levels of debt and deficit were considered to be at accepted level if compared, for example, to other EU countries, regional differences existed with few municipalities (ca 1,400 out of 7,904) experiencing liquidity issues. It is impossible to ascertain the effects onto the deficit and debt level in the aftermath period, as no statistics are available (see 4.1 above) |
Source(s): *Fernandes et al. (2019), ANMP (2020) and key legislation on municipal financial regime; **Capalbo and Grossi (2014), Raffer and Padovani (2019), ANCI (2020), MLPS & ANCI (2020), Padovani (2020) and key legislation on municipal financial regime
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