## 1braea2019003

## Source details

**Canonical URL:** [1braea2019003](https://www.imf.org/-/media/files/publications/cr/2019/1braea2019003.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2019/1braea2019003.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2019/1braea2019003.pdf.json)

---

### Preface and mission
- A Fiscal Affairs Department (FAD) mission visited Brasilia, Brazil from April 29-May 13, 2019 to provide technical cooperation on strengthening the fiscal framework for subnational governments.
- Mission led by Paulo Medas and comprised Majdeline El Rayess, Roberto Perrelli, Mauricio Soto (all FAD), and André Glória (external expert).
- Authorities and stakeholders met include officials from the National Treasury, Ministry of Economy, Supreme Federal Court, State Secretariats of Finance, Federal Court of Accounts, Independent Fiscal Council, Brazil Central Bank, World Bank, Interamerican Development Bank, and support staff from the Under-Secretary of Intergovernmental Relations.

### Executive summary — overall situation and institutional need
- Findings:
  - States faced severe fiscal pressures following the deep economic recession in 2014-16.
  - Subnational spending adjustments were required amid much weaker revenue growth and prior large spending increases—especially on wages and pensions.
  - Several states manage high debt levels, liquidity pressures, and accumulation of large payment arrears.
- Performance of existing framework:
  - Fiscal rules and administrative controls were increasingly ignored or circumvented.
  - Heavy federal involvement created an ingrained expectation of future bailouts; confirmed by a large debt relief to all states starting in 2014 and judicial decisions favoring subnationals.
  - More financial support from the federal government is expected over the next years while the fiscal position of the Union remains fragile.
- Need for institutional change:
  - Demand greater transparency and accountability by subnational governments.
  - Make the borrowing framework more flexible while introducing risk sharing among states.
  - Enhance the insolvency framework and tighten fiscal rules.
  - Place more emphasis on market incentives.
  - Address fiscal pressures from rising budget rigidities (including pensions) and excessive tax incentives (the so-called tax wars).

### Main recommended legal and institutional changes (summary)
- Reform the subnational borrowing framework:
  - Restrict the use of federal guarantees to exceptional cases, or even eliminate them, and limit lending by public banks.
  - Allow more flexibility to access private funding (banks and capital markets).
  - Improve the Fiscal Recovery Regime (FRR):
    - (i) Adjustment plans should bring debt down to prudential levels.
    - (ii) Debt relief should be phased in tranches and conditional on performance under the adjustment plan.
    - (iii) Plans should have more clarity on treatment of all creditors (not only the federal government).
  - Consider a fund for state debt to promote risk sharing and more credible fiscal adjustment programs; consider an insolvency regime for municipalities.
- Strengthen the fiscal responsibility framework:
  - Create an independent fiscal council to monitor fiscal performance and compliance by subnationals; one option is to add this mandate to the Independent Fiscal Institution while strengthening its independence and resources.
  - Strengthen fiscal rules, including adopting an expenditure rule and reducing debt limits to more prudent levels.
  - Set up the fiscal management council (FMC) as envisaged in the Fiscal Responsibility Law (FRL).
  - Accelerate implementation of matriz de saldos contábeis (information system to collect and share accounting data).
  - Strengthen public financial management systems at subnational levels to ensure transparent treatment of existing arrears and prevent new ones.
- Follow-up:
  - Further technical cooperation could include support on strengthening subnational fiscal rules, setting up the debt fund, and improving fiscal reporting at the subnational level.

### Diagnostic of subnational finances — decentralization and transfers
- Key facts:
  - Subnational government spending is about 23 percent of GDP, equivalent to over half of total public spending.
  - Nearly half of subnational government revenue comes from taxes.
- Historical evolution:
  - Share of state and municipal taxes in the national tax burden declined from 40 to 25 percent in 1950-1980.
  - The 1988 Constitution contributed to raising the total tax burden from 25 in 1980 to 33 percent of GDP today.
  - Share of revenue in states and municipalities rose from 25 in 1980 to 35 percent of the total tax burden today.
- Intergovernmental transfers:
  - FPE receives 21.5 percent of the collection from income taxes and IPI.
  - FPM receives 24.5 percent of the income and IPI taxes.
  - The federal government allocates 20 percent of the state collected on behalf of states to Fundeb.
- Regional figures (2017, percent of total revenue unless noted):
  - NE: GDP per capita 16,400 (reais); Transfers 41; Taxes and contributions 52; Other 7.
  - N: GDP per capita 19,657 (reais); Transfers 51; Taxes and contributions 40; Other 9.
  - S: GDP per capita 37,630 (reais); Transfers 16; Taxes and contributions 73; Other 11.
  - SE: GDP per capita 40,067 (reais); Transfers 17; Taxes and contributions 71; Other 12.
  - CW: GDP per capita 41,680 (reais); Transfers 20; Taxes and contributions 69; Other 11.
  - Total: GDP per capita 31,554 (reais); Transfers 22; Taxes and contributions 67; Other 11.

### Subnational debt history, concentration, and risks
- Historical bailouts:
  - Combined amount refinanced by major bailouts is estimated at about 11 percent of 2017 GDP.
  - Brazil had the costliest subnational bailouts among advanced and emerging market economies between 1990-2014.
- Concentration (2017):
  - Two-thirds of state debt is owned by Minas Gerais, Rio de Janeiro, and São Paulo.
  - Minas Gerais: 199 percent of the net revenue limit (FRL).
  - Rio de Janeiro: 288 percent of the net revenue limit.
  - São Paulo: 202 percent of the net revenue limit.
  - Share of subnational debt in Minas Gerais, Rio de Janeiro, Rio Grande do Sul, and São Paulo increased from 60 percent in 2000 to 75 percent today.
- Debt dynamics:
  - Decline of 0.8 percentage points of GDP per year over 2002-2014.
  - Increase of 0.5 percentage points of GDP per year in 2014-2018, even after the 2014 debt relief.
- Guarantees and exposure:
  - Outstanding guarantees to state and municipalities reached R217 billion (3.2 percent of GDP) in 2018, equivalent to near 25 percent of total state and municipal gross debt.
  - In 2018, the federal government covered R4.8 billion in guarantees (0.1 percent of GDP).

### Structural fiscal pressures and revenue issues
- Subnational pensions:
  - Aggregate deficit reached 1.4 percent of GDP in 2017.
  - Absent a pension reform, projected increase to 2.9 percent of GDP by 2030.
  - Regional aging projections: ratio of population 65+ to 15-64 projected to increase by factor of 1.8 in the South and 1.7 in the South East between 2015 and 2030, relative to 1.6 in the rest of the regions.
- Tax competition and revenue:
  - Predatory tax competition among states results in revenue losses of at least 1.2 percent of national GDP per year.
  - ICMS is the largest revenue source for states and subject to state-provided exemptions.

### Weaknesses in the borrowing and oversight framework
- Current framework features:
  - States are not allowed to issue bonds; can borrow from banks.
  - Federal guarantees allocated by CAPAG grading system and annual global limits approved by the senate.
  - FRL includes limits set by the senate for debt, debt issuance, personnel expenditure, and debt service; breaches forbid further credit operations and receiving voluntary transfers.
  - FRR (2017) provides financial alleviation to states that meet conditions and agree on adjustment plans.
- Identified weaknesses:
  - Conflict of interest and weakened credibility of the Union as enforcer and main creditor.
  - Procyclical design of FRL limits (ratios to revenue) allowing spending increases in booms.
  - Weak fiscal reporting and enforcement; divergent methodologies can place states within limits under state methodology but above limit under a standard definition.
  - Courts may prevent execution of counter guarantees.
  - Budget rigidities: in 2017 between 51 and 67 percent of state governments expenditure was devoted to salaries, pensions, or debt service.
  - Alternative low-quality financing: Restos a Pagar increased by 0.3 percent of GDP between 2015 and 2017.

### Recent support measures and consequences
- 2014 retroactive debt relief estimated at about 100 billion reais, or 1½ percent of GDP.
- 2016 measures: debt service payments temporarily reduced for 24 months (difference capitalized) and repayment schedule extended for another 20 years; estimated reduction in debt service to the federal government by 50 billion.
- Risks of further support:
  - Temporary fiscal plans (PEF) and sharing oil-related bonuses/royalties could create moral hazard, procyclical policies, and perceptions of bailouts.
- Recommendation:
  - Accompany short- and medium-term support with reforms to change borrowing framework and incentives toward greater fiscal discipline over time.

### Proposed strategy — reduce federal guarantees, increase market discipline, and risk sharing
- Reduce dependence on federal guarantees and public banks:
  - Finding: Loans from or guaranteed by the Union represent 90 percent of the total debt of the states.
  - Federally owned banks account for a large share of loans not guaranteed by the Union; in 2009-2019 there were only two private financing transactions without security or a union guarantee.
  - Recommendation: Significantly reduce the use of federal guarantees to exceptional cases or eliminate them, and reduce exposure to public banks.
  - Policy note: Any reduction should be accompanied by greater flexibility to access private credit markets, strengthened transparency and subnational fiscal rules, and an effective framework to share risk across states.
- Strengthen CAPAG as risk management:
  - CAPAG ranks subnational entities into A, B (good) and C, D (weak); eligibility for Treasury guarantees requires at least an overall B rating.
  - CAPAG indicators: (i) overall gross debt levels; (ii) current savings; (iii) liquidity.
  - Partial-rating thresholds (verbatim):
    - Debt-to-net current revenue: Less than 60% → A; Between 60% and 150% → B; Equal or more than 150% → C.
    - Current savings: Less than 90% → A; Between 90% and 95% → B; Equal or more than 95% → C.
    - Liquidity: Less than 100% → A; Equal or more than 100% → C.
  - Findings:
    - CAPAG may place too little weight on indebtedness; up to 150 percent of net current revenues can be B.
    - Gross financing needs are an important predictor of fiscal distress (example: Rio de Janeiro’s gross financing needs were above 30 percent of its net current revenues in 2014).
    - CAPAG analysis may omit securitized tax arrears and future tax receipts.
  - Recommendations:
    - Give more prominence to debt levels and debt service.
    - Elaborate prospective “Capacity to Repay” analysis and a rigorous debt sustainability analysis (DSA) with stress tests.
    - Use improved CAPAG and National Treasury reports as enhanced monitoring and transparency tools.
- Emphasize market-induced fiscal discipline and expand private funding:
  - Legal constraints: Senate prevented states from issuing new bonds until 2010; prohibition made permanent in 2014.
  - Distortions: cost of borrowing does not reflect state financial situation; states with worse CAPAG have tended to have lower borrowing costs.
  - Preconditions for market access: high fiscal transparency standards, effective legal framework, expanded private credit ratings, enhanced monitoring, comprehensive reporting system, national registry of subnational bond issuances.
  - Recommendation: Allow more flexibility to access private financing while strengthening transparency and reporting.

### Fiscal Recovery Regime (FRR) — design, shortcomings, and improvements
- FRR overview:
  - Launched in 2017 as insolvency framework for most indebted states; at time of writing only RJ has entered; MG and RS negotiating.
  - State that adheres granted suspension of (i) service on its debt with the federal government and (ii) enforcement of federal guarantees; state commits to a 3-year fiscal adjustment plan, extendable once (maximum 6 years).
  - Typical measures: privatizations, suspending wage increases and new hires, reducing tax expenditures, reforming state pension scheme.
- Shortcomings and recommended improvements:
  - Inconsistent triggers vs. FRL limits (examples):
    - FRR liquidity requirement exists while FRL lacks one.
    - FRR 100-percent debt-to-net-current-revenue trigger is reached before FRL absolute debt limit of 200 percent.
    - FRR’s 70-percent limit on personnel+interest+amortization can apply before FRL limits.
  - Upfront debt relief reduces incentives for adjustment; suggestion: phase debt relief and condition on performance.
  - Monitoring: strengthen periodic reviews (quarterly or semi-annual) tied to quantitative criteria and tranches of relief.
  - Fiscal sustainability: FRR operational target (overall fiscal balance) may not ensure sustainability; need explicit goals to return indebtedness within legal/prudential limits.
  - Credibility: require realistic, evidence-based plans; example DSA for Rio de Janeiro indicates net debt to net current revenue remains well above prudential limit at end of 6-year FRR plan.
  - Private creditor treatment: FRR lacks provisions for structured renegotiation with private creditors; auction mechanism is sole tool; recommend clear, predictable rules on priority and equal treatment; involve courts if restructuring is part of regime.
  - Essential public services: law lacks clear definition; recommended explicit list or guidance to protect essential services.
  - Legal uncertainty and ad-hoc bailouts undermine FRR credibility; recommendation to strengthen legal certainty and limit discretionary bailouts.
  - Sanctions: current sanctions include end of suspension of debt service to the Union and inability to borrow under exemptions in article 11; possible enhancements include delays in reviews/disbursements, penalties for officials, temporary loss of fiscal autonomy, and nullification of actions breaching the plan.

### Extending insolvency to municipalities and debt fund proposal
- FRR expansion:
  - FRR could be expanded to apply to municipalities, at least the largest ones; current legal framework lacks an ex-post insolvency regime for municipalities.
  - Recommend further analysis of municipal situation.
- Debt Fund rationale and design choices:
  - Risk-sharing fund could realign incentives by making states directly economically exposed to subnational debt outcomes.
  - Fund could act as lender of last resort, provide liquidity under FRR, impose conditionality, monitor adjustment, and potentially redeem existing debt stocks.
  - Design choices (enumerated):
    - Governance (board with states and possibly the Union; management committee); allocation of shares (equal or based on FPE rules).
    - Functions: debt redemption, liquidity provision, technical assistance.
    - Capitalization: part of existing state debt with federal government; revenue sources such as oil royalties; future regular contributions from states; states receive dividends.
    - Temporary or permanent nature; coordination with FRR (e.g., Article 11); rules for cash calls and dividends; role in enforcing fiscal rules and penalties.
  - Policy caution: legally establish the fund as sole mechanism for debt relief/liquidity to eliminate possibility of federal bailouts.

### Fiscal rules, transparency, and PFM reforms
- Fiscal rules:
  - Subnational fiscal rules were ignored or circumvented; design as revenue ratios is procyclical.
  - Numerical observations:
    - The 200 percent of revenue debt limit appears too high.
    - Among OECD countries, debt ceiling varies between 60 to 150 percent of revenues; debt services limits range between 12 to 25 percent of revenues.
    - Example: assuming a maturity of 20 years and an interest rate of 7 percent, the debt service would be close to 25 percent of revenue.
    - Safer debt limit recommendations: between 100 or 150 percent of revenues.
  - Recommendation: create independent fiscal council; move to an expenditure rule for total spending growth; reduce the debt limit to a more prudent level.
- Transparency and reporting weaknesses:
  - FRL requires publication three times a year (Articles 54-55) but major weaknesses persist in quality and standardization.
  - Divergent methods in calculating wage bill and personnel spending; 33 regional and municipal courts of accounts (SCU) produce diverse practices.
  - MACSP and standard chart of accounts issued in 2014 with yearly updates, but application varies.
  - Lack of reconciliation notes between above-the-line and below-the-line balances for states/municipalities; example table (Primary balance figures):
    - Primary balance - Above the line (2015: (1,763); 2016: (2,827); 2017: (13,873))
    - Primary balance - Below the line (2015: 7,135; 2016: 4,519; 2017: 8,812)
- Ongoing reforms and recommended acceleration:
  - Implementation of matriz de saldos contábeis and reporting platform required by Complementary law 156/2016; starting January 2019 states and municipalities obliged to report monthly or risk withholding of voluntary transfers.
  - National Treasury created eight sub-working groups to enhance transparency and implemented a platform to share subnational accounts with SCUs and partners.
  - Recommendations:
    - Accelerate implementation of the matrix and platform; pilot two case studies to demonstrate benefits and provide support.
    - Provide SCUs access; encourage fiscal management council (FMC) creation.
    - Publish explanatory reconciliation notes on differences in fiscal statistics.
- PFM focal areas:
  - Credible budgets: reduce budget rigidities, improve medium-term budget framework, avoid overoptimistic revenue forecasts.
  - Commitment controls: enforce initial incurrence controls, possibly based on quarterly expenditure plans and ceilings; roles for commitment control officers.
  - Cash management: establish Treasury Single Account (TSA) and short-term cash forecasting; many states lack full TSA coverage.

### Implementation priorities and timelines
- Matrix of accounts and platform:
  - Projected completion: expected to be completed by 2022-23 or later.
  - Priority: give priority to transition work because greater transparency is critical.
  - Pilot two case studies; increase resources to support states and municipalities.
- Fiscal Management Council (FMC):
  - Essential for converging accounting standards, consolidation, and facilitating comparative evaluations.
  - FMC could promote convergence with IPSAS and GFSM 2014 and involve technical and political stakeholders.

### International comparative experience and annex highlights
- Annex I — Portugal’s Financial Support Fund for Municipalities (FAM):
  - Capital divided 50 percent central government / 50 percent municipalities; initial capitalization loan from central government repaid by municipalities with local contribution over seven years.
  - Eligibility thresholds: mandatory for debt-to-revenue ratio of 3 times revenues; optional for 2.25.
  - As of 31 December 2018, 12 municipalities had accessed a fiscal adjustment program.
  - Outcomes (Change 2014-2017):
    - Eligible Municipalities that did not Enter a Program: Change in gross debt -20%; Change in Revenue 6%; Change in Current expenditure -9%.
    - Municipalities that Adhered to a Program: Change in gross debt -17%; Change in Revenue 16%; Change in Current expenditure 31%.
    - All other Municipalities: Change in gross debt -29%; Change in Revenue 15%; Change in Current expenditure 6%.
- Annex II — Selected insolvency frameworks (Switzerland, USA, Colombia, Hungary, South Africa, Portugal):
  - Procedures vary: Administrative, Hybrid, Judicial.
  - Key triggers and features include 60-day overdue recognized debt triggers (South Africa, Portugal), consolidated debt to current revenue thresholds (e.g., 2.25 and 3), automatic stays (Portugal, Hungary), ability to cram down dissenting creditors (Hungary, South Africa, Switzerland/Colombia formats vary), and explicit essential services coverage in some frameworks (Hungary: 27 items; Portugal: listed essential functions).
  - Comparative lessons inform options for municipal insolvency design and creditor treatment.

*Italic: Source: IMF staff summary of chapter 4 and selected sections from 1braea2019003 (IMF PDF chapter/section).*

### PREFACE _________________________________________________________________________________________ 6

### PREFACE

### Mission and team
- A Fiscal Affairs Department (FAD) mission visited Brasilia, Brazil from April 29-May 13, 2019 to provide technical cooperation on strengthening the fiscal framework for subnational governments.
- The mission was led by Paulo Medas and comprised Majdeline El Rayess, Roberto Perrelli, Mauricio Soto (all FAD), and André Glória (external expert).

### Authorities and stakeholders met
- National Treasury: Special Secretary of Finance Waldery Rodrigues Junior; National Treasury Secretary Mansueto de Almeida Junior; Otavio Ladeira (Deputy Treasury Secretary); José Franco Medeiros de Morais (Under-Secretary of Public Debt); Pricilla Maria Santana (Under-Secretary of Intergovernmental Financial Relations); Pedro Jucá Maciel (Under-Secretary of Fiscal Planning and Statistics); Gildenora Batista Dantas Milhomem (Under-Secretary of Public Accounting).
- Ministry of Economy: Jefferson Luis Bittencourt (Director); Bruno Funchal (Director); Marco Antonio Freitas de Hollanda Cavalcanti (Deputy Secretary of Fiscal Policy); Allex Albert Rodrigues (Deputy Secretary of Pensions—RPPS); Edson Leonardo Dalescio Sá Teles (Coordinator, Rio de Janeiro’s Fiscal Recovery Regime Council).
- Other public institutions and officials: Luiz Fux (Vice-President of the Supreme Federal Court); Luiz Claudio Rodrigues de Carvalho (State Secretary of Finance, State of Rio de Janeiro); Leonardo Rodrigues Albernaz (Secretary of Governmental Macro Evaluation at the Federal Court of Accounts); Marcos Mendes (Legislative Advisor to the Senate); Felipe Salto (Executive Director, Independent Fiscal Council); Fernando Alberto Sampaio Rocha (Statistics Department Chief, Brazil Central Bank).
- Multilateral and international partners: Rafael Muñoz Moreno (World Bank); Hugo Florez Timoran (Interamerican Development Bank).
- Support staff from the Under-Secretary of Intergovernmental Relations: Gabriela Guerra de Queiroz; Acaua Brochado; Cecilia de Souza Salviano; Sarah Araujo Andreozzi; Itanielson Silveira Cruz; Paulo Monteiro Gomes.

*The mission expresses gratitude to the Brazilian authorities for outstanding cooperation and candid discussions.*

### EXECUTIVE SUMMARY

### Overall situation
- Brazil’s states faced severe fiscal pressures following the deep economic recession in 2014-16.
- Subnational governments had to adjust to much weaker revenue growth while managing the consequences of past large spending increases—especially on wages and pensions.
- Several states are managing high debt levels, liquidity pressures, and accumulation of large payment arrears.

### Performance of existing framework
- The fiscal responsibility framework established in the early 2000s proved insufficiently resilient.
- Fiscal rules and administrative controls were increasingly ignored or circumvented, failing to prevent large spending increases and overborrowing by large states.
- Heavy federal involvement led to an ingrained expectation of future bailouts; this was confirmed starting in 2014 with a large debt relief to all states and judicial decisions in favor of subnational governments.
- More financial support from the federal government is expected over the next years while the fiscal position of the Union remains fragile.

### Need for institutional change
- A significant change in the institutional framework is needed to impose hard budget constraints and promote stable and sustainable policies.
- Key elements of the proposed approach:
  - Demand greater transparency and accountability by subnational governments.
  - Make the borrowing framework more flexible while introducing risk sharing among states.
  - Enhance the insolvency framework and tighten fiscal rules.
  - Place more emphasis on market incentives.
  - Address fiscal pressures from rising budget rigidities (including pensions) and excessive tax incentives (the so-called tax wars).

### Main recommended changes to legal and institutional framework
- Reform the subnational borrowing framework:
  - Restrict the use of federal guarantees to exceptional cases, or even eliminate them, and limit lending by public banks to reduce incentives for fiscal profligacy and contain risks to the federal government.
  - Allow more flexibility to access private funding (banks and capital markets) to improve efficiency, transparency, and market discipline.
  - Improve the Fiscal Recovery Regime (FRR) with key design changes:
    - (i) Adjustment plans should bring debt down to prudential levels.
    - (ii) Debt relief should be phased in tranches and conditional on performance under the adjustment plan.
    - (iii) Plans should have more clarity on treatment of all creditors (not only the federal government).
  - Consider a fund for state debt to promote risk sharing and more credible fiscal adjustment programs; consider an insolvency regime for municipalities.

- Strengthen the fiscal responsibility framework:
  - Create an independent fiscal council that monitors fiscal performance and compliance of fiscal rules by subnational governments; one option is to add this mandate to the Independent Fiscal Institution while strengthening its independence and resources.
  - Strengthen fiscal rules, including adopting an expenditure rule to constrain and stabilize total expenditure growth and reducing debt limits to more prudent levels.
  - Set up the fiscal management council (FMC) as envisaged in the fiscal responsibility law (FRL) to promote adoption of common accounting standards across all levels of government.
  - Accelerate implementation of matriz de saldos contábeis (information system to collect and share accounting data).
  - Strengthen public financial management systems at the subnational levels, especially to ensure transparent treatment of existing expenditure arrears and prevent emergence of new ones.

### Follow-up
- Further technical cooperation could include support on strengthening subnational fiscal rules, setting up the debt fund, and improving fiscal reporting at the subnational level.

### I. DIAGNOSTIC OF SUBNATIONAL FINANCES

### A. High Degree of Decentralization — Key findings
- Brazil has a high degree of fiscal decentralization:
  - Subnational government spending is about 23 percent of GDP, equivalent to over half of total public spending.
  - Nearly half of subnational government revenue comes from taxes—a level well above the average in other countries and similar to other federations such as Canada, Germany, and the United States.
- Historical evolution of tax burden and decentralization:
  - The share of state and municipal taxes in the national tax burden declined from 40 to 25 percent in 1950-1980.
  - The 1988 Constitution expanded spending mandates for subnational governments and contributed to raising the total tax burden from 25 in 1980 to 33 percent of GDP today.
  - The share of revenue in states and municipalities rose from 25 in 1980 to 35 percent of the total tax burden today.
- Intergovernmental transfers:
  - Transfers are largely formula-based and mainly directed to compensate for horizontal imbalances.
  - For states, transfers are largely through the Fundo de Participação dos Estados e do Distrito Federal (FPE), which receives 21.5 percent of the collection from income taxes and the federal government VAT (IPI).
  - For municipalities, transfers are mainly through the Fundo de Participação dos Municipios (FPM), which receives 24.5 percent of the income and IPI taxes.
  - The federal government allocates 20 percent of the state collected on behalf of states to Fundeb to fund basic education and provide a complement to pay for teachers’ salaries.
- Vertical imbalances and regional variation:
  - Vertical imbalances (difference between own spending and own revenue) are not as significant in Brazil as in other countries on average, though significant variations exist across states.
  - Transfers represent on average 41 and 51 percent of total revenue for states in the Northeast and North regions, respectively.
  - Specific regions and figures (2017):
    - NE: GDP per capita 16,400 (reais); Transfers 41; Taxes and contributions 52; Other 7 (percent of total revenue).
    - N: GDP per capita 19,657 (reais); Transfers 51; Taxes and contributions 40; Other 9.
    - S: GDP per capita 37,630 (reais); Transfers 16; Taxes and contributions 73; Other 11.
    - SE: GDP per capita 40,067 (reais); Transfers 17; Taxes and contributions 71; Other 12.
    - CW: GDP per capita 41,680 (reais); Transfers 20; Taxes and contributions 69; Other 11.
    - Total: GDP per capita 31,554 (reais); Transfers 22; Taxes and contributions 67; Other 11.

*Preface and Executive Summary, Fiscal Affairs Department mission report.*

### 4.      The management of subnational debt has defined intergovernmental relations over

### 4.      The management of subnational debt has defined intergovernmental relations over

### Historical bailouts and their scale
- After the introduction of the 1988 Constitution, the federal government bailed out subnational governments several times.
- The combined amount refinanced by the major bailouts is estimated at about 11 percent of 2017 GDP.
- Brazil had the costliest subnational bailouts among advanced and emerging market economies between 1990-2014.
- Lessons from the large bailouts in 1989-2001:
  - Fiscal crises and overborrowing occurred despite an array of controls that were undermined by loopholes or bad incentives.
  - Initial measures included refinancing and rescheduling of external debt in 1989, applying favorable federal external debt conditions to subnational entities in 1991, and rescheduling subnational debts with federal institutions in 1993 (including a limit on debt service of 11 percent of revenue).
  - Limits to bond issuances were introduced in 1993, but subnational debt continued to increase throughout the 1990s.
  - A comprehensive refinancing framework in 1997-2001 included maturity up to 30 years and a real interest rate of 6 percent (compared with original real rates of 15-25 percent). The framework included a limit on debt service increasing to 13 percent of revenue, with the difference capitalized in debt.
  - Renegotiation extended to about 180 municipalities, with real rates varying from 38 to 9 percent.
  - Counterparts to refinancing: states required to implement fiscal adjustment programs (PAF) and numerical fiscal targets, solidified by the Fiscal Responsibility Law (2001), including limits to debt and personnel expenditure.
  - The reforms increased central controls but did not address political economy constraints and incentives for soft budget constraints, allowing similar problems to re-emerge.

### Concentration and indicators of subnational debt (2017)
- Subnational debt is concentrated in the Southeast region.
- Two-thirds of state debt is owned by Minas Gerais, Rio de Janeiro, and São Paulo, which are home to over 40 percent of the population and 50 percent of the national GDP.
- On average debt in these states relative to the net revenue limit in the FRL:
  - Minas Gerais: 199 percent of the net revenue limit.
  - Rio de Janeiro: 288 percent of the net revenue limit.
  - São Paulo: 202 percent of the net revenue limit.
- Share of subnational debt in Minas Gerais, Rio de Janeiro, Rio Grande do Sul, and São Paulo increased from 60 percent in 2000 to 75 percent today.

### Current framework for subnational borrowing and oversight
- The current framework combines credit restrictions, shared responsibilities through credit guarantees, and fiscal rules.
- Key features:
  - States are not allowed to issue bonds, but can borrow from banks.
  - Federal guarantees allow subnational governments to borrow at rates comparable to those prevailing for federal debt; guarantees are allocated based on a grading system and annual global limits for guarantees are approved by the senate, with separate limits for external and domestic debt.
  - The Fiscal Responsibility Law (FRL) includes limits set by the senate for debt, debt issuance, personnel expenditure, and debt service. States breaching limits are forbidden from further credit operations and prevented from receiving new voluntary transfers from the federal government.
  - The Fiscal Recovery Regime (Regime de Recuperação Fiscal—FRR), introduced in 2017, provides financial alleviation to states that meet conditions and agree on a fiscal adjustment plan; measures include reprogramming of debt service payments, guaranteeing all credit operations agreed in the program, and allowing for new voluntary federal transfers.

### Weaknesses and emerging risks in the framework
- After the FRL the decline in subnational debt reversed:
  - Decline of 0.8 percentage points of GDP per year over 2002-2014.
  - Increase of 0.5 percentage points of GDP per year in 2014-2018, even after the 2014 debt relief.
- Identified weaknesses:
  - Conflict of interest and weakened credibility of the federal government to enforce discipline:
    - The federal government is the main creditor, the direct and indirect lender of first and last instance (via guarantees and public banks), sets many rules and supervises application, creating an expectation of bailouts.
    - The federal government was involved in weakening some rules (e.g., excluding certain types of debts from the limits).
  - Procyclical design of FRL limits:
    - Limits on debt and personnel expenditure are ratios to revenue, so temporary revenue increases can enable states to boost expenditure.
    - Example: Rio de Janeiro used oil revenue windfalls (2009-2014) to provide generous wage increases that became unaffordable after oil prices collapsed.
  - Weak fiscal reporting and enforcement:
    - Reporting of key fiscal variables has important weaknesses with divergent interpretations and non-standardized auditing practices.
    - In 2017, Rio Grande do Norte, Rio Grande do Sul, and Sergipe appear within the personnel limit under state methodology but above the limit under a standard definition.
    - Judicial decisions have prevented application of sanctions, including suspension of transfers.
  - High risks associated with federal guarantees:
    - Federal government can provide guarantees only when backed by counter guarantees (e.g., state resources distributed in FPE or FPM or ICMS collection), but courts may prevent execution of these counter guarantees.
    - Outstanding guarantees to state and municipalities reached R217 billion (3.2 percent of GDP) in 2018, equivalent to near 25 percent of total state and municipal gross debt.
    - In 2018, the federal government covered R4.8 billion in guarantees (0.1 percent of GDP). All counter guarantees but the ones corresponding to the state of Rio de Janeiro are being executed.
  - Budget rigidities constrain adjustment:
    - In 2017, between 51 and 67 percent of state governments expenditure was devoted to salaries, pensions, or debt service.
    - Legal constraints limit short-term cuts to salaries, pensions, and public employment.
    - Over 55 percent of subnational employment is in health, education, and security.
  - Use of alternative low-quality financing:
    - Growing accounts payable (Restos a Pagar) increased by 0.3 percent of GDP between 2015 and 2017, concentrated in the Southeast, including Minas Gerais and Rio de Janeiro.
    - Congress is considering allowing subnational governments to commit future resources to access private credit, including borrowing backed by future collection of debt arrears; legality is debatable and some states have already used such mechanisms.

### Recent support measures and their consequences
- New wave of bailouts started in 2014:
  - A retroactive debt relief in 2014 with the loss for the federal government estimated at about 100 billion reais, or 1½ percent of GDP.
  - In 2016, debt service payments were temporarily reduced for 24 months (difference capitalized) and the repayment schedule was extended for another 20 years.
  - The main counterpart was requiring states to adopt an expenditure ceiling for two years; preliminary evaluations suggest many states did not comply.
  - The 2016 measure is estimated to have reduced the debt service to the federal government by 50 billion.
- Additional support options under discussion (Box 1.2):
  - A temporary fiscal plan (Plano de Equilíbrio Fiscal, PEF) to help states with relatively bad credit ratings by allowing federal guarantees conditional on fiscal adjustment measures.
  - Sharing a one-off bonus from oil auctions and future oil royalties allocated to the federal government with subnational governments.
  - Risks: PEF may create perception of another bailout, weakening incentives for fiscal discipline; sharing volatile oil revenues could create moral hazard and procyclical policies without smoothing mechanisms.
  - Recommendation: Accompany short- and medium-term support with reforms to change borrowing framework and incentives toward greater fiscal discipline over time.

### Medium- and long-term fiscal pressures and reforms
- Subnational pension systems:
  - Aggregate deficit reached 1.4 percent of GDP in 2017.
  - Absent a pension reform, projected increase to 2.9 percent of GDP by 2030, partly driven by population aging.
  - South and South East regions expected to age faster; between 2015 and 2030, the ratio of the population age 65 and older to the population 15-64 is projected to increase by a factor of 1.8 in the South and 1.7 in the South East, relative to 1.6 in the rest of the regions.
  - Estimates suggest an important portion of the projected increase would be offset by the pension reform under consideration, but large share of subnational employment in special regimes (education and security) may retain privileges, limiting reform impact.
- Revenue-side issues:
  - Scope exists to increase subnational tax revenue, but a comprehensive reform at the national level would be preferable.
  - Federal-level tax exemptions reduce constitutional transfers to subnational governments.
  - States provide tax exemptions on their own, including related to the ICMS (a mixed origin/destination-based VAT and the largest revenue source for states).
  - Predatory tax competition among states results in revenue losses of at least 1.2 percent of national GDP per year, with large variations across states.

### Policy direction: rethinking the subnational borrowing framework
- Need for comprehensive reform addressing system weaknesses and realigning incentives toward hard budget constraints.
- Proposed approach builds on recent steps (including the Fiscal Recovery Regime) and emphasizes:
  - Simpler framework with less administrative controls and more market-induced fiscal discipline.
  - Greater focus on borrowers’ incentives and transparency.
  - Addressing fiscal pressures from rising budget rigidities (including pensions) and excessive tax incentives (the “tax wars”)—noted as critical but beyond the scope of the report.

*Source: IMF staff summary of chapter 4 from 1braea2019003.*

### 12.      The proposed strategy requires advancing simultaneously on the different reform

### 12.      The proposed strategy requires advancing simultaneously on the different reform areas to ensure appropriate incentives and controls

### A. Reduce Dependence on Federal Guarantees and Public Banks
- Finding: Loans from or guaranteed by the Union represent 90 percent of the total debt of the states.
- Finding: Federally owned banks account for a large share of the loans not guaranteed by the Union; in the period 2009-2019 there were only two private financing transactions (from MLW Intermed in the form of long-term financing for medical equipment) without security or a union guarantee.
- Finding: Concentration of risk in the Union has led to moral hazard due to the history of bailouts; states with lowest credit ratings have at times received the largest share of authorized guarantees (Figure 2.2: Higher credit rating, 43%; Lower credit ratings 57%).
- Finding: Court injunctions have been used by states to prevent enforcement of collateral or guarantees, providing temporary relief from servicing debt; states have consistently managed to avoid sanctions for non-compliance with the fiscal responsibility legislation by initiating injunctions against the Union (Figure 2.3).
- Finding: The Brazilian system does not clarify what are the essential public services, resulting in debt service being subordinated to all other state spending and contributing to strategic default incentives.
- Finding: There have been periods when federal guarantees have been very low (Figure 2.4).
- Recommendation: Significantly reduce the use of federal guarantees to exceptional cases (e.g. for projects in the national interest) or even eliminate them.
- Recommendation: Reduce exposure to public banks.
- Policy note: Any reduction in federal guarantees should be accompanied by greater flexibility to access private credit markets, strengthening transparency and subnational fiscal rules, and an effective framework to share risk across states and address highly indebted subnationals.

### B. Strengthen the CAPAG as a Risk Management Tool
- Overview: Subnational entities applying for credit guarantees from the National Treasury are subject to an internal credit rating system (Capacidade de Pagamento—CAPAG). The modern CAPAG (introduced in 2012 and updated in November 2017) ranks subnational entities into four categories: A, B (good fiscal position) and C, D (weak fiscal situation).
- Eligibility: To be eligible to receive a Treasury guarantee, a subnational must have at least an overall B rating.
- CAPAG methodology: Overall ratings are determined according to three indicators:
  - (i) overall gross debt levels;
  - (ii) current savings;
  - (iii) liquidity.
- Indicator definitions (as used by CAPAG):
  - Overall indebtedness: ratio of gross consolidated debt to net current revenues;
  - Current savings: ratio of current expenditures to adjusted current revenues;
  - Liquidity: ratio of financial obligations to gross disposable cash balances. Financial obligations include the stock of payables (“Restos a Pagar”).
- Partial-rating thresholds (as presented in the text table):
  - Debt-to-net current revenue: Less than 60% → A; Between 60% and 150% → B; Equal or more than 150% → C.
  - Current savings: Less than 90% → A; Between 90% and 95% → B; Equal or more than 95% → C.
  - Liquidity: Less than 100% → A; Equal or more than 100% → C.
- Finding: Historical distribution shows a steady decline in the number of Brazilian states rated A and B and a substantial rise in states rated C and D (Figure 2.5).
- Finding: The CAPAG may place too little weight on the level of indebtedness; subnational entities with debt levels of up to 150 percent of net current revenues can be rated as B despite high debt service and inability to generate primary surpluses.
- Finding: Gross financing needs are an important predictor of fiscal distress; example: Rio de Janeiro’s gross financing needs were above 30 percent of its net current revenues in 2014 (Table 2.1).
- Finding: Debt relief measures granted by the Union (2014 interest relief and a 20-year extension in 2016) substantially reduced service on subnational debt held by the Union.
- Finding: CAPAG analysis does not cover all debt-related flows; some states have securitized tax arrears and future tax receipts which may not be reported in consolidated balance sheets and could artificially boost CAPAG’s liquidity indicator.
- Recommendation: Give more prominence to debt levels and debt service in the credit analysis.
- Recommendation: Elaborate prospective analysis of subnational capacity to repay their debt, including using a “Capacity to Repay” matrix.
- Recommendation: Consider a risk-based framework, like the debt sustainability analysis, that covers alternative scenarios and stress tests.
- Policy tools suggested:
  - Use prospective analysis (e.g., “Capacity to Repay” matrix) to project debt stocks and debt service flows in proportion to subnational net current revenues and expected proceeds from asset sales to identify “pressure points” over the next 10 years.
  - Develop a rigorous debt sustainability analysis (DSA) anchored in a medium-term fiscal framework to assess debt profile elements (maturity, currency denomination, indexation, term structure of interest rates, residence of debt holders) and realism of projected fiscal adjustment, and to run stress tests (growth, interest and exchange rates, primary balance, revenue, commodity price shocks).
  - Use improved CAPAG and the National Treasury report on subnational finances as enhanced monitoring and transparency tools; National Treasury regulation allows review of CAPAG ratings when there is evidence of noticeable deterioration in subnational fiscal accounts.

### C. More Emphasis on Market-Induced Fiscal Discipline
- (Content for this subsection was not included in the supplied text.)

*Italic: Source: 1braea2019003 - 12. The proposed strategy requires advancing simultaneously on the different reform areas to ensure appropriate incentives and controls (PDF chapter/section).*

### 29.      Subnational governments’ reliance on private sector borrowing has been very

### Subnational governments’ reliance on private sector borrowing has been very limited

### Legal and administrative framework for subnational borrowing
- Senate (1998) prevented states from issuing new bonds until 2010; the prohibition was made permanent in 2014.
- Subnational governments are only allowed to borrow from banks.
- The FRL imposed administrative controls on subnational borrowing covering a wide range of operations, including restrictions on accessing capital markets, inter-entity borrowing, and debt levels.
- Example of federal intervention: National Treasury granted Rio de Janeiro authorization for new credit operations amounting to R$2.0 billion during 2016 when the state’s wage bill surpassed FRL limits.

### Distortions, overborrowing, and opaque practices
- Administrative controls did not prevent overborrowing and led to distortions in the pricing of risk and untransparent borrowing operations:
  - The cost of borrowing does not reflect the financial situation of the state; states with worse credit rating (CAPAG) tend to have lower borrowing costs (Figure 2.7).
  - Highly indebted states were granted waivers of compliance with the FRL, while other states faced liquidity crunches with low debt but high current expenditures.
  - As a result, states started to accumulate large amounts of arrears to suppliers and, in some cases, civil servants.
  - Some subnational governments are using special purpose vehicles to borrow from the market (and in some cases by using future revenues as collateral), even if the legality of these practices is not clear.

### Potential role of private funding and required safeguards
- Further reliance on capital markets could help promote fiscal discipline among the entities if borrowing occurs without federal guarantees; borrowing costs could provide an incentive for greater fiscal discipline than the existing system.
- Preconditions for effectiveness:
  - High fiscal transparency standards and an effective legal framework.
  - Several tools could need to be put in place to increase transparency and promote fiscal discipline, including:
    - (i) expanded coverage of privately-issued credit ratings for state and municipalities;
    - (ii) enhanced monitoring of entities’ ability to repay encompassing the CAPAG, additional early warning indicators of fiscal distress, and a full-fledged debt sustainability analysis;
    - (iii) comprehensive reporting system; and
    - (iv) implementation of a national registry of subnational bond issuances, accessible to the general public.
- Barriers to deeper capital markets: excessively lengthy approval process, high cost of compliance, lack of standardized financial information from states, and legal uncertainty about collateral and enforcement.
- Capacity constraints:
  - Capital market transactions require scale and technical skills that may not be available to every state.
  - Instruments allowing states to pool together or provision of technical support to states and large municipalities could address scale and skill gaps.

### Recommendations on market access and transparency
- Allow more flexibility for subnational governments to access private financing (private banks and issuing bonds), while strengthening transparency and reporting standards.
- Improve the quality of information provided to the markets, including through privately-issued subnational credit ratings, CAPAG, early warning indicators, and a full-fledged debt sustainability analysis.

### Fiscal Recovery Regime (FRR): purpose and design
- FRR launched in 2017 as a subnational insolvency framework for the most indebted states (response to distress in Rio de Janeiro (RJ), Rio Grande do Sul (RS), and Minas Gerais (MG)); at the time of writing only RJ has entered the regime, while MG and RS are still negotiating.
- Main goal: stabilize debt at the end of the program.
- A state that adheres is granted a suspension of (i) the service on its debt with the federal government and (ii) the enforcement of federal guarantees.
- In exchange, the state commits to a 3-year fiscal adjustment plan that can be extended for another three years if necessary.
- Typical measures in the plan: privatizing state-owned enterprises, suspending wage increases and new hires, reducing tax expenditures, and reforming the state pension scheme.

### Shortcomings and recommended improvements to FRR
- Inconsistencies and trigger issues:
  - Insolvency triggers under the FRR are inconsistent with debt limits under the FRL:
    - The 70-percent limit for the ratio of personnel expenditure, interest and amortization over net current revenue is likely to apply before the limit under the FRL.
    - The 100-percent limit of debt over net current revenue is triggered well before the absolute debt limit under the FRL, which is 200 percent.
    - There is no liquidity requirement under the FRL like the liquidity ratio required under the FRR.
    - The FRL’s limit on the ratio of debt service to net current revenue is 11.5 percent, which the FRR does not explicitly regard.
  - Fiscal constraints and limits should be consistent and serve as early warning indicators of distress.
- Upfront debt relief and incentives:
  - Immediate debt service relief upon entering the program (and sometimes during negotiations) reduces incentives for swift fiscal adjustment and can encourage postponement of adherence while benefitting from relief.
  - Suggestion: phase debt relief and condition it on satisfactory performance under the adjustment plan.
- Monitoring and conditionality:
  - Monitoring framework could be strengthened with periodic (e.g., quarterly or semi-annual) reviews against quantitative and measurable performance criteria, indicative targets, and benchmarks for structural reforms with well-defined timelines.
  - Debt relief and provision of new federal guarantees could be split in tranches tied to pre-specified conditionality; waivers could be provided with corrective actions.
  - Prior actions (legislation or court clearance) could be required before concluding reviews to correct deviations.
- Fiscal sustainability and explicit targets:
  - The FRR’s main operational target, the overall fiscal balance, may not ensure fiscal sustainability at the end of the adjustment period, particularly in highly indebted states where debt may remain at high levels despite large adjustments.
  - The program may need an explicit approach to bring outstanding stock of debt and debt service burden to sustainable levels and in line with fiscal rules.
  - Currently any restructuring of debt is done ad-hoc and outside of the FRR; the law lacks explicit goals (e.g., returning indebtedness within legal limits).
- Credibility of adjustment plans:
  - Plans should be credible and realistic—based on examining proposed effort against distribution of historical outcomes and structural changes (e.g., demographic features).
  - Example: a debt sustainability analysis for Rio de Janeiro suggests that, even under the scenario of the FRR adjustment, the projected ratio of net debt to net current revenue at the end of the 6-year FRR plan remains well above the prudential limit established by the FRL.
- Debt overhang and renegotiation:
  - The FRR does not sufficiently address debt overhang or private creditors’ claims; there is no provision for debt renegotiation with private creditors.
  - The auction mechanism is currently the sole tool to address private debt burdens.
  - Clear and predictable rules should guide the order of priority of payments and protect equal treatment of creditors of the same rank and contractual rights.
  - If debt restructuring is part of the regime, a court should be involved to ensure procedural and substantive fairness.
- Essential public services and priorities:
  - The law lacks a clear definition of essential public services that should be protected in insolvency.
  - An explicit list or clearer guidance on essential services would improve clarity when revenue is insufficient to meet all obligations and would allow better pricing of default risk by private investors.
  - Only a limited rule exists: the FRL exempts transfers relating to health, education and social assistance from penalties applicable to voluntary transfers (article 25).
- Legal uncertainty and ad-hoc bailouts:
  - FRR is undermined by legal uncertainty and ad-hoc bailouts outside the regime (e.g., Supreme Court injunctive relief, discretionary guarantees by the Union for CAPAG-rated C and D states).
  - Such practices can lead states to hold out from adhering to the FRR waiting for a better deal.
- Sanctions and enforcement:
  - Current sanctions for non-compliance are: (i) end of suspension of debt service to the Union and (ii) inability to borrow under exemptions in article 11 of the FRR law.
  - A non-compliant state could also be freed of the agreed fiscal adjustment plan and the prohibitions in the law, potentially weakening enforcement.
  - Possible enhancements: delay reviews/disbursements until compensatory measures are taken; penalties for officials; temporary loss of fiscal autonomy (intervention); and declaring actions breaching the adjustment plan (e.g., granting a tax exemption) null and void.

*Source: 1braea2019003 - 29.*

### 47.      The FRR could be expanded to apply to municipalities, at least the largest one, with

### 47.      The FRR could be expanded to apply to municipalities, at least the largest one, with 

### Expansion of FRR to municipalities
- The FRR could be expanded to apply to municipalities, at least the largest one, with the necessary adjustments. Further analysis is required to better determine the current situation of municipalities.
- The legal framework does not currently set an ex-post insolvency regime for municipalities.
- Possible approaches:
  - Extend the FRR regime to large municipalities.
  - Introduce an insolvency or bankruptcy legal framework for municipalities as in other countries (see Annex 2).

### Recommendations on FRR/FRL interaction and program design
- The limits under the FRL and the insolvency triggers under the FRR could be harmonized, although the current indebtedness limits set by the Senate Resolution are too lax.
- The term of the FRR programs should be more flexible. The FRR provides that its adjustment programs should have a 3-year term, which may be extended once. This maximum 6-year period may not be enough to ensure a state returns to a sustainable fiscal path.
- Debt relief should be phased in tranches and conditional on satisfactory performance under the adjustment plan.
- The FRR should provide more clarity as to what happens if debt service with private creditors is unsustainable.
- The legal framework should be more explicit on what constitutes essential public services that the different levels of governments have to provide. This would help when designing the FRR program (and when applying the sanctions on the FRL as discussed above).
- The legal environment lacks certainty and should be improved. One possible way to provide more legal certainty cold [could] be to submit the plan to judicial review before final approval.

### Introducing a Debt Fund for States — Rationale
- A risk sharing mechanism between states may create better incentives for maintaining fiscal discipline.
- A mechanism (fund) by which states have a direct economic interest in subnational debt could realign incentives toward greater fiscal discipline: states would benefit if all preserve sound finances and no state defaults.
- Under such mechanism, states would decide whether to support a state facing financial distress and under what conditions.
- Risk sharing would provide incentives for cooperative approaches and stronger enforcement of fiscal rules, counteracting current incentives for states to seek larger federal bailouts (e.g. via Congress).

### Introducing a Debt Fund for States — Functions and effects
- A fund that acts as a lender of last resort, in case of financial distress, could better manage the risk of strategic default and promote effective fiscal adjustment programs.
- States would have a share of the capital of the Fund and receive dividends from the loans granted by the Fund.
- The Fund could provide liquidity under the FRR, imposing conditionality and monitoring fiscal adjustment.
- Putting states’ resources at risk under the fund could lead to more balanced negotiations of adjustment programs under the FRR; recent experience shows the federal government has limited leverage in imposing conditionality when bailing out states.
- It would be important to establish legally that this would be the only mechanism to grant debt relief or liquidity, eliminating the possibility of bailouts by the federal government.
- An effective FRR and well-designed debt fund would help make the no bailout commitment more credible—reinforcing each other.

### Design issues if moving ahead with a fund
- Choice of roles for the fund, its capitalization, and the framework under which it acts need to be considered.
- The design should include careful consideration of initial capitalization, governance, and scope of powers.
- Similar mechanisms have been implemented in other countries with positive results (see Box 2.2 and Annex 1).

### Box 2.2 — Risk-Sharing Mechanism and Debt Redemption (summary)
- Examples of related arrangements:
  - Budget stabilization funds or rainy-day funds of the US, Canada, Mexico and Sweden (state-level funds).
  - One-off debt redemption funds in Germany and Spain.
  - Permanent financial assistance fund in Portugal.
- Key functions:
  - Change incentive structure of subnational debt framework to lend credibility to fiscal controls and subnational distress frameworks.
  - Lend credibility to a no bailout commitment from the central government and promote cooperation at subnational level in the enforcement of fiscal rules.
- Evidence: cooperative controls, with administrative and financial sanctions among subnational governments, tend to achieve better outcomes than centralized administrative controls (Singh and Plekhanov, 2005).

### Box 2.2 — Design choices for the fund (enumerated)
- The governance structure of the fund, which could be comprised of a board where all states and, possibly, the Union are present, and a management committee with a technical focus. This includes deciding how to allocate shares of the Fund across states (e.g. all states could have similar shares or could be based on existing rules for the FPE).
- The functions to be performed by the fund: redemption of existing debt stocks, providing liquidity to distressed states, providing technical assistance in debt renegotiations and fiscal adjustment.
- The capitalization of the fund (which could be done over several years). The initial capital could include:
  - part of existing debt stock that states have with the federal government,
  - revenue from other sources, such as oil royalties.
  - Future, regular contributions would come from the general budget of the states. States would receive dividends from the Fund.
- The temporary or permanent nature of the fund.
- The role of the fund and its coordination with the FRR framework, for example providing liquidity and funding under Article 11 FRR law.
- Rules for cash calls and dividends, to maintain sound prudential limits.
- The role of the fund in enforcing fiscal rules and applying penalties for breaches.

### Enhancing fiscal responsibility and transparency — Overview
- Brazil’s fiscal responsibility framework for subnationals has been under distress in recent years, undermining its credibility.
- The report discusses elements of the fiscal rules and transparency that should be revised and improved to promote greater fiscal discipline and accountability among states and municipalities.

### Subnational fiscal rules — Key findings
- Subnational fiscal rules have been ignored or circumvented in recent years.
- Brazil has several subnational fiscal rules set by the FRL, including rules regarding debt (stock and debt service) and limits on wage bill (wages and pensions).
- Rules were circumvented via exemptions and creative accounting; many states have breached wage bill limits.
- The design of quantitative rules as ratios to revenues can be procyclical: in booms rules allow large spending and debt increases that are hard to undo in downturns.
- This is especially problematic for states and municipalities highly dependent on commodity revenues, which are highly volatile.

### Subnational fiscal rules — Specific recommendations
- There could be gains from moving to an expenditure rule for total spending if well calibrated:
  - Apply the rule to the growth rate of expenditure and set the limit equal to the potential or trend pace of revenue growth, proxied by the average pace of revenue or nominal GDP growth over the recent past (Eyraud and others, 2018).
  - Such an expenditure growth limit would prevent procyclical spending increases and cover both recurrent and capital spending to contain excessive deficits and avoid creative accounting.
- There could also be consideration to reduce the debt limit. Key numeric observations:
  - The 200 percent of revenue debt limit appears too high.
  - Among OECD countries, the debt ceiling varies between 60 to 150 percent of revenues, while debt services limits range between 12 to 25 percent of revenues.
  - The Brazilian experience suggests that a limit of debt at 200 percent of revenues (RCL) seems too high as states are already under debt distress at lower levels.
  - Example calculation: assuming a maturity of 20 years and an interest rate of 7 percent, the debt service would be close to 25 percent of revenue (Figure 3.1).
  - It would be safer to adopt a more prudent level, for example a limit between 100 or 150 percent of revenues, which would imply more manageable debt services.

### Recommendations (summarized)
- Strengthen fiscal rules by:
  - Creating an independent fiscal council that monitors fiscal performance and compliance with fiscal rules by subnationals. One possible alternative is to add this mandate to the IFI, while strengthening its independence by establishing it by law.
  - Moving to an expenditure rule that would constrain and stabilize total expenditure growth.
  - Reducing the debt limit to a more prudent level. International and Brazilian experience suggest that a limit of debt at 200 percent of revenues is high and increases the risk of financial distress.

### Transparency and enforcement — Key findings
- Disclosure of subnational financial information improved after the Fiscal Responsibility Law (FRL) requiring publication of information three times a year (Articles 54-55).
- Major weaknesses persist in the quality of fiscal reporting:
  - Key fiscal indicators are not reported according to standards and in a timely fashion. Spending with personnel is difficult to assess due to different methods used in calculating the wage bill, including: (i) exclusion of social security and pensions expenditures, (ii) recording wages and salaries on a net basis excluding income tax, and (iii) exclusion of in-kind benefits to employees and outsourcing.
  - Very unequal quality of the data reflects diverse and non-standard practices of the States Court of Accounts (SCU). Currently 33 regional and municipal courts of accounts are responsible for monitoring public finances of states and municipalities, leading to divergences in practices and interpretations.
  - Absence of standardized concepts in compiling financial information. In 2014, the Manual of Applied Accounting for the Public Sector (MACSP) and a standard chart of accounts (CoA) were issued, updated yearly to converge with IPSAS and GFSM 2014, but application varied among states and municipalities.
  - The fiscal management council foreseen in Article 67 of the FRL has yet to be created; it was intended to adopt accounting standards for consolidation and standardization of accounts and reports.
  - There are no reconciliation notes on various fiscal indicators for states and municipalities. The Treasury computes the above-the-line fiscal balance and the Central Bank the below-the-line; these are reconciled for the central government but not for states and municipalities. Table 3.2 shows differences: Primary balance - Above the line (2015: (1,763); 2016: (2,827); 2017: (13,873)) and Primary balance - Below the line (2015: 7,135; 2016: 4,519; 2017: 8,812).
- Weaknesses in public finance management (PFM) systems exacerbate challenges: lack of credible budget, absence of proper commitment control system, ineffective cash management, or lack of a robust IFMIS can lead to weak budget execution, deterioration in financial information, liquidity constraints, or buildup of arrears.

### Ongoing reforms and initiatives
- The National Treasury, in absence of the FMC, assumed responsibility on accounting and reporting reforms and created eight sub-working groups to enhance transparency through:
  - Implementation of a detailed matrix of fiscal accounts (matriz de saldos contábeis) to be reported by states and municipalities. Complementary law 156/2016 requires reporting of accounting, budgetary and fiscal information according to the periodicity, format and system established by the central accounting body of the Federation. Starting January 2019, states and municipalities are obliged to report monthly data using this matrix or risk withholding of voluntary transfers by the National Treasury.
  - Setting a platform whereby subnational accounts can be consulted and shared with various technical partners, including the SCUs, allowing all public entities access to the same accounting data and enabling state auditors to share inconsistencies with the Treasury to enhance data quality.

*Source: 1braea2019003 - 47. The FRR could be expanded to apply to municipalities, at least the largest one, with — IMF PDF content unit.*

### 62.      These initiatives are positive and should be accelerated. The project of implementing

### 1braea2019003 - 62.      These initiatives are positive and should be accelerated. The project of implementing

### Implementation of the matrix of accounts, platform, and access
- Projected completion: expected to be completed by 2022-23 or later.
- Priority: give priority to the transition work because greater transparency is critical for the success of reforms.
- Recommended actions:
  - Accelerate the implementation of the matrix of accounts and the platform for generating reports and enhancing the analysis.
  - Pilot two case studies (reporting and analysis) to showcase benefits and encourage states and municipalities to fulfill matrix requirements; this might require an increase of resources to provide needed support to states and municipalities.
  - Provide access to this database for the SCUs; highlight the pilot exercise led by the National Treasury with the court of accounts of the state of Espírito Santo to encourage other SCUs to join the database and collaborate with the National Treasury to enhance fiscal information quality.

### Fiscal Management Council (FMC) and accounting convergence
- Rationale:
  - Creation of the FMC, as required by the FRL, is described as a necessity due to divergences in application of accounting norms that hinder comparative evaluations and prevent presentation of the true fiscal situation.
  - High-quality accounting standards contribute to transparent and accountable public information and quality financial information to support decision making.
- Potential FMC responsibilities (examples):
  - (i) adoption of standards for consolidation of public accounts, standardization of accounts and fiscal reports;
  - (ii) dissemination of analyzes, studies and diagnoses.
- Composition guidance:
  - Having the right composition is essential; international overseeing accounting bodies mix technical and political civil servants, academia, and experts representing professional bodies (see Box 3.1 examples).
- Role in convergence with international standards:
  - FMC could encourage dialogue with SCUs towards convergence with international standards in compiling and reporting data.
  - Although ISSAI does not adopt a standard for financial reporting, it encourages use of international accounting standards such as the International Public Sector Accounting Standards (IPSASs).
  - ISSAI 210, Article 8 indicates examples of international standards for financial reporting including: (i) International Financial Reporting Standards (IFRSs), (ii) IPSASs, and (iii) accounting principles promulgated by an authorized or recognized standards-setting organization provided it follows an established and transparent process involving deliberation and consideration of views of a wide range of stakeholders.
- Institutional question:
  - Debate exists on whether the Federal court of accounts (TCU) would have the mandate to set jurisprudence over any doubts regarding decisions by SCUs.

### Publication, reconciliation, and explanatory notes
- Need identified:
  - Improve publication of data by disclosing explanatory notes on differences in fiscal statistics published by various agencies.
  - Treasury already reproduces this exercise for the federal government; a similar reproduction for states and municipalities can highlight quality issues and educate the population to avoid confusion.
- Explanatory notes can include information on discrepancies due to:
  - methodological issues,
  - a weak reporting system,
  - different sources of data,
  - inconsistencies in institutional coverage.
- Example referenced: Table 3.3 shows Finland – Reconciliation of National Balance and Net Borrowing/Lending According to ESA 2010 – Percent of GDP (data reproduced exactly below):
  - 2010: Working Balance in the government accounts (National Definition) (a) -4.0; Total Adjustments, of which (b) 1.4; Financial transactions included in the working balance -0.2; Tax adjustments 0.1; Investments of muncipalities not included in the working balance -1.4; Holding gains/losses -0.7; Net change in technical reserves 1.9; Deferrable budgetary appropriations 0.9; Net borrowing (-)/lending(+)  (a)- (b) -2.6
  - 2011: Working Balance in the government accounts (National Definition) (a) -2.4; Total Adjustments, of which (b) 1.3; Financial transactions included in the working balance 0.0; Tax adjustments 0.2; Investments of muncipalities not included in the working balance -1.5; Holding gains/losses 1.4; Net change in technical reserves -0.2; Deferrable budgetary appropriations 0.4; Net borrowing (-)/lending(+)  (a)- (b) -1.0
  - 2012: Working Balance in the government accounts (National Definition) (a) -2.9; Total Adjustments, of which (b) 0.8; Financial transactions included in the working balance 0.7; Tax adjustments 0.0; Investments of muncipalities not included in the working balance -1.6; Holding gains/losses -0.5; Net change in technical reserves 1.6; Deferrable budgetary appropriations -0.2; Net borrowing (-)/lending(+)  (a)- (b) -2.1
  - 2013: Working Balance in the government accounts (National Definition) (a) -2.8; Total Adjustments, of which (b) 0.4; Financial transactions included in the working balance 0.2; Tax adjustments 0.1; Investments of muncipalities not included in the working balance -1.6; Holding gains/losses -1.1; Net change in technical reserves 1.9; Deferrable budgetary appropriations 0.5; Net borrowing (-)/lending(+)  (a)- (b) -2.4

### Public Financial Management (PFM) systems: key weaknesses and focal areas
- Overall point:
  - Weak PFM systems, enforcement, and capacity have contributed to liquidity constraints, buildup of arrears, and breach of fiscal rules in some jurisdictions.
- Three areas for states and municipalities to strengthen:
  - Credible budgets:
    - Issues: budget rigidities (earmarked revenue and mandatory expenditures), overoptimistic revenue forecasts, inability to scale down operations when revenues fall.
    - Recommendation: strengthen budget preparation procedure and enhance medium-term budget framework to minimize disruptive effects.
  - Commitment controls:
    - Objective: manage initial incurrence of obligations to better enforce expenditure ceilings and avoid expenditure arrears.
    - Controls can be based on budget appropriations or on cash plans; ideally regulated by annual budget appropriations but may be insufficient during revenue shortfalls.
    - Commitment controls based on expenditure ceilings or cash limits reconcile available resources with commitments; expenditure ceilings should be guided by a well-functioning cash management system.
    - Box 3.2 highlights design and operational arrangements for decentralized agencies, including roles for commitment control officers (CCOs), quarterly expenditure plans, quarterly expenditure ceilings, and restrictions that no commitment exceed the uncommitted balance.
  - Cash management:
    - Proper cash management ensures enough funds are available when needed.
    - Key element: establishment of a Treasury Single Account (TSA).
    - Many states still lack a TSA or have incomplete coverage, undermining effective cash management and exacerbating liquidity pressures and buildup of payment arrears.
    - Figure 3.4 lists main features of cash management (verbatim elements preserved): Timely information sharing; Adequate infrastructure; No need of a single bank account; Consolidated view of cash position; Avoid delays in payments; Avoid borrowing with high costs; Establish effective channels for exchange of information; Essential for supporting the cash management; Centralization of government cash balances - TSA; Projection of short-term cash inflows and outflows – cash forecasting.

### Recommendations (from section "Recommendations")
- Enhance transparency by:
  - Set up the Fiscal Management Council as envisaged in the FRL.
  - Pilot two states and municipalities by calculating the fiscal indicators set by the FRL and for CAPAG using the different sources of data to highlight the differences and provide an analyses of the differences and the quality of the data. This would also help highlight the benefits of such exercise in strengthening PFM systems at the regional level.
  - Establish TSA at state level.
  - Develop a system to coordinate actions of the different state courts of accounts.
  - Publish explanatory notes on the reconciliation and differences between various fiscal indicators.

### Annex I — Portugal: Financial Support Fund for Municipalities (FAM) — key points and outcomes
- Context:
  - Following the sovereign debt crisis in 2011 and an IMF financial assistance program, Portugal adopted laws to address municipal arrears, a new municipal finance law tightening fiscal rules, and a municipal financial recovery law for over-indebted municipalities.
- FAM functions:
  - Negotiate fiscal adjustment programs for municipalities under distress;
  - Assist in debt renegotiation;
  - Provide financial assistance as conditional loans and guarantees under a fiscal adjustment program;
  - Monitor compliance with the program.
- Institutional features:
  - FAM instituted by a 2014 law with capital divided between central government (50 percent) and municipalities (50 percent).
  - Initial capitalization: loan from central government repaid by municipalities; local governments’ contribution made over seven years.
  - Shareholders received dividends based on FAM financial investments and interests on loans under fiscal programs.
- Eligibility and uptake:
  - Financial recovery is mandatory for municipalities with a debt to revenue ratio of 3 times revenues and optional for municipalities with a debt to revenue ration of 2.25.
  - As of 31 December 2018, 12 municipalities had accessed a fiscal adjustment program, out of approximately 30 that were eligible at the time the law was enacted.
- Outcomes:
  - Since the law’s introduction, municipalities in Portugal have significantly reduced their debt levels.
  - Change in gross debt, 2014-2017; Change in Revenue, 2014 - 2017; Change in Current expenditure, 2014-2017 (table of changes reproduced exactly):
    - Eligible Municipalities that did not Enter a Program: -20% 6% -9%
    - Municipalities that Adhered to a Program: -17% 16% 31%
    - All other Municipalities: -29% 15% 6%
  - Narrative: the largest cuts in current expenditure came from municipalities at risk of being forced into the regime; governance structure has been effective to address and contain high debt levels though longer-term effects remain to be fully assessed.
- Source cited in annex: Direção Geral das Autarquias Locais.

### Annex II — Selected Insolvency Frameworks — comparative highlights (summary table items)
- Switzerland, USA, Colombia — selected framework features (summarized):
  - Type of entities covered: cantonal public law entities; municipalities and political subdivisions; departments, municipalities, districts, decentralized service delivery sector parts.
  - Procedure type: Administrative (Switzerland), Hybrid (USA), Administrative (Colombia).
  - Role of authorities: cantonal bankruptcy authority / supervisory commission; supervisory commission intervenes in fiscal policy; bankruptcy court approves petition, confirms plan of debt adjustment and ensures implementation; Superintendency of Corporations exercises jurisdictional functions; Ministry of Finance and Public Credit confirms filing and supervises debt negotiation.
  - Trigger/eligibility requirements (verbatim excerpts preserved):
    - Switzerland: Mun is unable to meet its bond obligations in time. - Fiscal crisis of the debtor cannot be solved by other means or at another time - Debt restructuring measure can only be applied, when all other reasonable measures are exploited and have been failed to avoid bankruptcy
    - USA: Mun must be insolvent: Debtor generally not paying due debts. Inability to pay its debts as they become due Mun must be authorized to be a debtor by state law (allowed in 27 states) Mun must desire to effect a plan to adjust its debts Mun has shown pre-filing efforts to work out financial difficulties and negotiate in good faith and to obtain an agreement with creditor or these negotiations were impraticable
    - Colombia: Mun is overdue on payments for at least 90 days or there are at least two payment lawsuits in court The accumulated value of the obligations in arrears must represent at least 5% of total obligations (fall due in < 1year)
  - Filing: Voluntary (all three).
  - Stay on enforcement/cessation of payments: Bankruptcy authority can mandate a temporary cessation of debt enforcement (Switzerland); Creditor can request to continue debt enforcement (USA); Automatic (Colombia).
  - Cram down/Ability to impose restructuring on dissenting creditors: Yes (all three).
  - Priority of claims notes: Debt restructuring applies only for bond holders (Switzerland); Statutory liabilities, pensions, salaries, insurance contributions, and other liabilities that are not seizable are exempted from restructuring (Switzerland); Defined by “fair and equitable” treatment (USA); Specified by law (Colombia).

*Source: Excerpt from 1braea2019003 PDF chapter/section.*

### 1. pension contributions

### 1. pension contributions

### Summary of Selected Insolvency Frameworks
- Table compares insolvency frameworks for sub-national governments across multiple jurisdictions, including Hungary, South Africa, Portugal, and brief notes referencing Switzerland, USA, Colombia.
- Key dimensions covered: Insolvency framework scope, type of procedure, role of authorities, trigger/eligibility requirements, filing for bankruptcy, stay on enforcement/cessation of payments, cram down/ability to impose restructuring on dissenting creditors, priority of claims, essential services, fiscal adjustment.

### Country-specific procedures and features
- Hungary
  - Insolvency framework: Local governments companies owned by municipality or guarantees rule under corporate insolvency law.
  - Type of procedure: Judicial.
  - Role of authorities: Court decides on filing and crisis budget, appoints trustee, and if no agreement is reached decides on debt settlement. Trustee leads and supervises debt settlement and financial reorganization procedure.
  - Filing for bankruptcy: Voluntary or mandatory if requested by debtor.
  - Stay on enforcement/cessation of payments: Automatic.
  - Cram down/Ability to impose restructuring on dissenting creditors: Yes.
  - Priority of claims: Stipulated by Act: 1. regular wages, salary, Severance 2. mortgage backed assets 3. dues to state government 4. social security debts, taxes 5. other claims (e.g. loans, bonds, arrears to suppliers) 6. interest, default penalties, fees on claims. Trustee can ask the court to nullify contracts and transactions stipulated up to one year before filing, if they are grossly disadvantageous to the mun.
  - Essential services: Clear definition of basic residential services (27 items). Emergency budget adopted to service these tasks.
  - Fiscal Adjustment: MUN adopts emergency budget servicing only mandatory tasks. Trustee reviews financial management of local government – must approve all payments.

- South Africa
  - Insolvency framework: Only municipalities, not provinces.
  - Type of procedure: Hybrid.
  - Role of authorities: Court approves stay, debt restructuring and discharge – approves debt distribution scheme developed by trustee.
  - Trigger/eligibility requirements: Invoice is not disputed or paid within 60 days of the due day; Recognized debt not paid within 60 days; early warning system; fiscal intervention by government; debt restructuring; Mun has shown serious financial problems and States may apply for financial support if Consolidated debt over Current Revenue exceeds 2.25 and states must apply for financial support if the above ratio exceeds 3.
  - Filing for bankruptcy: Voluntary.
  - Stay on enforcement/cessation of payments: Applicable under request of municipality.
  - Cram down/Ability to impose restructuring on dissenting creditors: Yes.
  - Priority of claims: Specified by the act: 1. secured claims 2. preferences provided in Insolvency Act 1936 (e.g. salary/wages, tax income) 3. non-preferential (unsecured) claims be settled in proportion to the amount of different claims.
  - Essential services: Emergency budget adopted to service these tasks; Term not defined, suspension of financial obligations only after provision for basic municipal services.
  - Fiscal Adjustment: Ex ante efforts before filing: Discretionary provincial intervention by provincial executives and Mandatory provincial intervention: provincial executive seeks support by Municipal Financial Recovery service.

- Portugal
  - Insolvency framework: Municipalities.
  - Type of procedure: Administrative.
  - Role of authorities: Administrative intervention by provincial authority, elaborates detailed financial recovery plan. Municipal Support Fund approves financial recovery plan.
  - Trigger/eligibility requirements: - Recognized debt not paid within 60 days. - early warning system - fiscal intervention by government - debt restructuring - Mun has shown serious financial problems and persistent material breach (indicated by several factors) - Mun is unable to meet its financial commitments now and in the future - Assets not necessary for effective administration or provide minimum level of basic services are liquidated according to approved recovery plan (set up during mandatory provincial intervention) - Employees discharged (except those affordable according to financial plan)
  - Filing for bankruptcy: Mandatory.
  - Stay on enforcement/cessation of payments: Automatic.
  - Cram down/Ability to impose restructuring on dissenting creditors: No.
  - Priority of claims: Not specified by law. Claims are settled against the amount realized through liquidation as outlined in recovery plan.
  - Essential services: Set out in the law: - civil protection and public safety - sanitation and water - waste disposal - road maintenance if necessary for the safety of persons and goods - regular operation of schools - social assistance - cemeteries - urgent situations.
  - Fiscal Adjustment: The Municipality must enter a fiscal adjustment plan agreed to with the fund. The fund may provide financial assistance to the municipality in the form of loans. Mun must implement financial recovery plan.

- Notes on Switzerland, USA, Colombia (fragmented in source)
  - Commission can intervene into MUN policy for max. 3 years with the option of extension by further 3 years.
  - Authorized by the MFPC.
  - Insolvency framework is complemented by a law providing a fiscal adjustment framework and regulating central government assistance.
  - Determined on a case by case basis by the debtor, overseen by a judge.
  - Any operation involving expenditures need to be authorized by the MFPC.

### Triggers, thresholds, and timeframes
- Invoice or recognized debt not paid within 60 days of the due day triggers certain procedures (South Africa; Portugal lists recognized debt not paid within 60 days).
- Consolidated debt over Current Revenue exceeds 2.25 triggers application for financial support in some states; states must apply for financial support if the above ratio exceeds 3.
- Trustee can ask court to nullify disadvantageous contracts up to one year before filing (Hungary).
- Commission/authority intervention duration referenced: max. 3 years with option of extension by further 3 years (Switzerland/USA/Colombia fragment).

### Priority of claims and creditor treatment
- Hungary specifies a detailed statutory priority ordering of claims in six categories, including wages, mortgage-backed assets, dues to state government, social security debts and taxes, other claims, and interest/default penalties/fees.
- South Africa prioritizes secured claims first, then preferences in Insolvency Act 1936 (e.g., salary/wages, tax income), then non-preferential unsecured claims prorated.
- Portugal: priority not specified by law; claims settled against amounts realized via liquidation per recovery plan.
- Cram down treatment varies: Hungary and South Africa allow imposing restructuring on dissenting creditors; Portugal does not.

### Essential services and protection measures
- Hungary: Clear definition of basic residential services (27 items); emergency budget to service these tasks.
- South Africa: Emergency budget adopted; suspension of financial obligations only after provision for basic municipal services.
- Portugal: Law specifies essential functions including civil protection, sanitation and water, waste disposal, certain road maintenance, regular operation of schools, social assistance, cemeteries, and urgent situations.

### Fiscal adjustment mechanisms
- Hungary: MUN adopts emergency budget servicing only mandatory tasks; trustee must approve all payments and reviews financial management.
- South Africa: Ex ante provincial interventions (discretionary and mandatory) and support via Municipal Financial Recovery service.
- Portugal: Municipality must enter fiscal adjustment plan agreed with the Municipal Support Fund; the fund may provide loans; municipality must implement financial recovery plan.
- Insolvency frameworks may be complemented by fiscal adjustment frameworks and central government assistance laws (referenced in source).

*Source: K. Herold, 2018, Insolvency Frameworks for Sub-national Governments.*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2019/1braea2019003.pdf_