Apart from the economic crisis the Island is going through, the fiscal problems in the municipalities are due to the fact that, until quite recently, the financing structures did not force city councils to manage their resources in an accurate way.
In other words, a municipality on the verge of bankruptcy got more or less the equal treatment than one with a solid fiscal health, due to the fact that the financing, mostly provided by the Government Development Bank (GDB), did not leave much margin to render real accounts.
The high dependency levels that some towns maintain with the transferences they get from the State are added to this.
According to Arnaldo Cruz, from the Center for Integrity in Public Policy (CIPP), at least 30 municipalities received over 40% of their incomes from the central government for the financial year of 2016.
That dependency exists because many municipalities do not have a contributory base that allows them to keep their operations.
However, a lot of this is changing. The central government, for instance, is currently eliminating a significant share of the municipalities money transfers. Municipalities will get $350 million less for the fiscal year 2019.
In the same way, the serious cash flow problems faced by the Government Development Bank (GDB) have narrowed the possibilities of municipalities to get financing as they did in the past.
But, according to Cruz, this is not enough. He pointed out that in the future the municipal loans system must take the financial health of municipalities into account.
An example of this would be if the interest rates of towns will reflect the risk of the investment, in a way that there is a concrete consequence of the bad administration of municipal resources.
This sort of financing is common in the private sector, remarked Cruz. In fact, he claimed that, in the future, the creation of a local municipal bonds market should be considered, so that the central government will not be the loan provider of municipalities, but the private sector.
“What there used to be was an artificial model that allowed municipalities to make projects, like aquatic parks, convention centers or courts, without counting on the resources to sustain them and without the capacity to make additional incomes. Therefore, they end up paying those buildings with municipal funds and, in order to pay the payroll, they end up asking for money”, said Cruz.
The cash shortfalls in municipalities, caused by the poor access to loans and high levels of the dependency on the central government, are being taking care of with a series of contributory impositions. Some towns, like Cabo Rojo and Arecibo, for instance, have opted to start charging for the garbage collection and others, like San Juan, San Lorenzo and Caguas, have decreed increases in municipal patents.
Similar increases will probably get to small towns by the fiscal year 2019, when the cuts in state transfers affects them, as stated in the certified Fiscal Plan.
In some instances, the tax increase would not be enough, since the contributory base of a municipality is not enough to maintain operations.
As reported by Cruz, the solution is to consolidate municipal functions, whether it is by using the consortiums model or by creating new administrative structures that will take the tax base needed to maintain a local operation solvent into account.
"Right now, we have a disarticulated policy that creates problems with 78 types of taxes, 78 mayors offices, 78 legal divisions, 78 human resources offices" , he claimed.
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