Overcoming Austerity Measures in Municipal Governments

Overcoming Austerity Measures in Municipal Governments

Published on July 6, 2020 / Leer en español

Research Associate

Four years after the federal law PROMESA was approved, and after nearly fifteen consecutive years of fiscal austerity measures, our public management vocabulary has adopted concepts and terms generally associated with the business sector. Since then, efforts have been made to “optimize” resources, improve “efficiency” when providing services, and achieve “self-sufficiency” in public agencies. In some cases, applying these ideas can lead to improvements in the administration and quality of public services. However, the unreserved adoption of these terms demonstrates that austerity has become the guiding discourse of government management practices. One of the cases that best reflects this dynamic is the recent proposal of the Fiscal Control Board (“the Fiscal Board”) on how to address the fiscal situation of the municipalities.

Several municipalities have certainly had a wide range of fiscal problems for decades. Many have been experiencing operational deficits for years. Corruption cases involving numerous mayors abound. This is not to mention the numerous examples of exorbitant contracts for services of dubious public performance, construction projects that were never completed, the lack of transparency in the management of municipal budgets, the unjustified salaries of mayors and their staff, and funds wasted on completely unnecessary expenses and projects. This situation has undermined the confidence of citizens towards their municipal governments. However, it has also paved the way to justify the implementation of austerity measures that do little or nothing to address these problems.

In the most recent version of its fiscal plan, the Fiscal Board proposes several municipal reforms. We are highlighting three of them: (1) eliminate, in phases, all transfers of funds from the central government to the municipalities to carry out delegated tasks (for some municipalities, these transfers represent about 80% of their budget), (2) reform the property tax system to increase revenues, and (3) consolidate municipal services across regions or counties. The plan highlights that the municipalities must guarantee more “efficiency” when providing public services through the reduction in the cost per unit of each service. Similarly, the Fiscal Board wants the municipalities to reduce their “dependence” on the central government so that they are more “self-sufficient”. Apparently, the Fiscal Board hopes that these budget cuts and tax reforms will push municipalities to reach agreements to consolidate services. The problem is that, in addition to being a perverse incentive that encourages reforms through precariousness, this idea is based on incorrect premises about the nature of the municipalities.

Let’s start by addressing the idea of improving the “efficiency” of municipal services. The premise behind this type of measure is that public services must be provided at the lowest possible cost. But this position fails because, in public management practices, the cost per unit of services is a less important criterion than ensuring that they reach the population that most needs them. In many cases, achieving this goal leads to costs that far exceed the acceptable criteria for a private company. This implies that, instead of seeking “efficiency” through budget cuts, other forms of governance should be encouraged that improve oversight and transparency in management without compromising capacity for implementation.

On the other hand, a superficial analysis of the fiscal situation of the municipalities that proposes the end of “dependency” to achieve higher levels of “self-sufficiency” begins with the premise that each municipality is a closed unit that can guarantee sustained levels of income using only the resources available within their territory. The truth is that municipalities are interdependent, and many of the factors that determine their ability to obtain income are beyond their control. Take the San Juan metropolitan area as an example. Much of the income of the municipality of San Juan depends on consumers and workers who live in neighboring municipalities in the region. Similarly, the concentration of jobs in San Juan has resulted in the construction of housing and businesses in the surrounding municipalities, which in turn translates into revenue from patents and property taxes for these municipalities. This pattern has been accentuated as deindustrialization accelerates in peripheral municipalities, and trade and service activities are concentrated even more in San Juan.

This means that the possibility of generating revenue from one municipality, through property tax reform, will depend on the labor market of another municipality. For this reason, promoting consolidation of services between municipalities through budget cuts can put the poorest municipalities in an even more precarious situation. In this sense, it is better to implement regional practices that promote an equitable redistribution of resources between interdependent municipalities.

We should not overlook the ability of many municipalities to implement creative solutions to meet the needs of their population. Several municipalities have managed to establish consortiums to provide different services, such as the granting of permits and the management of different federal funds, without this being imposed by the Fiscal Board or the central government. Recently, the municipality of Villalba managed to implement a case tracking system that has served as a model for other municipalities amid the COVID-19 pandemic, despite experiencing a precarious fiscal situation. All this points to the fact that, instead of seeking municipal reforms through austerity measures, it would be better to implement solutions that focus on guaranteeing services to populations in need, recognize municipal interdependencies, and use as models some of the successful initiatives that the municipalities have managed to implement.

The Spanish version of this column was originally published in El Nuevo Día on July 5, 2020.