Local Governments in Chile[*]
Leonardo Letelier S.[**]
Abstract
This paper examines the structure, functions and sources of funding of Chilean sub national governments. Whilst all these aspects of local governments are addressed comprehensively, the emphasis is put on the type of grants being transferred from high to low levels of governments. They can be classified into three categories. The first one refers to those resources being assigned to the funding of public school level education and primary health, which have been known as “delegated functions” since the significant fiscal decentralization process implemented by the beginning of the 80s . The second group is made up of a myriad of specific funds on which municipalities have a rather limited degree of maneuver. They clearly fall into the general frame of categorical grants, being mostly assigned to “Social Aid and Local development”. The third group is that given by the central government to the intermidium (regional) level of government in the form of investment grants. Approximately 50% of these funds are non categorical in the sense of being autonomously assigned by the regional governments. It is concluded that the Chilean structure of funding of sub national governments is still very centralized. The permission to issue debt on the part of municipalities and the consolidation of categorical grants into block grants are two clearly Pareto improving reforms for the current structure.
1. Introduction: An overview of the current local government system.
A Brief Historical Review.
The Chilean version of the lowest level of government (municipality), was originated in the colonial town councils[1], which came into existence in Santiago right after the foundation of the capital city in 1541. They represented the last chain in the colonial administrative structure. The functions they performed included the maintenance and improvement of public facilities and hospitals, the adornment and decoration of public spaces, the control of the artisans union, the administration of justice and the local militia. Similarly to other Spanish colonies at the time, these functions were rather broad. However, they were substantially curtailed as far as the administration of justice is concerned as a result of the creation of the “Real Audiencia” in 1606. This was the tribunal that administered justice in the Spanish colonies before they became independent.
A significant landmark in the development of the Chilean municipal system was the impulse given to it by the constitution of 1833, which explicitly established that “there should be one municipality in all departments´ capitals and in those settlements in which the President so decides” (Martner, 1993). Whilst municipalities were assigned very specific functions, they were subject to the governor’s authority. Such a centralist tendency experienced an important revision in a new municipal organic law enacted in 1887. This law deprived the central government and its representatives from most of the attributions in the municipal field. Nevertheless, the central government continued to intervene in the municipal elections until 1891 when the “Law of the Autonomous Community” was passed. The constitution enacted in 1925 established that municipalities were subject to the surveillance of the provincial assemblies. Moreover, although the municipal mayor would be freely elected by the local residents, mayors of highly populated cities could be assigned by the president of the country.
The next breakthrough in the history of Chilean Sub National Governments was the establishment of twelve “Regions” and one Metropolitan Area in 1994. Although at that time all sub national governments’ authorities were appointed by the central government in a fully discretionary way[2], this administrative reform came to be the starting point of a deep process of fiscal decentralization in the years to come. As far as municipalities are concerned, they were delegated important new functions in 1980. That was the case of the of primary health and school level education as well as the administration of important social subsidies intended to target the poor through a “focalized” approach immersed in the spirit of the subsidiary role of the State. Municipal governments were seen closer to the population in need and more able to identify the type of local public goods they would require.
Both in the case of health as well as in education, municipalities were empowered to chose among two alternative administration structures. The first one consisted in the direct administration through administrative departments of health and education. The second alternative consisted in leaving the administration of schools, primary health centers and commentaries in the hands of a private corporation. They would be non profit organizations being run by a board headed by the local mayor. The remaining members would be representatives of other local state organizations and the private sector. The advantage of the corporation lies in its more flexible legal status which avoids the control being made by the treasury inspector's office. The only formal control on it is made by the municipal council on account of the contributions made by the municipality in addition to the funds being directly transferred to the corporation from the central government. The corporation option was only taken by 53 municipalities before the constitutional court decided in 1981 that municipal competencies being held since 1980 could not be performed by private organisms.
As far as regions are concerned, they are headed by a centrally appointed regional governor, who is advised by the remaining members of the Regional Council (CORE). With the exception of the governor himself, all members are indirectly elected through the municipal councils. Each province is given the benefit of choosing two advisers, with a maximum of ten representatives in provinces with less than 1.000.000 inhabitants and 14 advisers in provinces with a higher population. Municipalities have a mayor who is the head of the Municipal Council, all of them elected by the local constituency. Although Provinces were maintained as a reminiscence of the old – pre regions – structure, they are just coordinating offices of central government’s deconcentrated services. Chile is formally a unitary country organized into 12 regions and one metropolitan area, 51 provinces and 341 municipalities.
2. Local governments responsibilities.
Chilean regional governments have multiple functions. All of them may be considered as agent tasks of the central government. Every region is meant to design its own long run development plan, which has to be compatible with the guidelines being given by the central government. From the view point of regions’ fiscal autonomy, their most important function is the making of a ranking of feasible regional investments projects. This is assumed to capture local preferences as far as new public infrastructure is concerned. Selected projects are funded through various decentralized funds made available by the central government. This process is technically supported by the Regional Undersecretary of Planning (SERPLAC), which is a deconcentrated branch of the Ministry of Planning (MIDEPLAN), and the CORE itself. Regional governments should also look after the well functioning of local public services, the promotion of local economic activities, the correct implementation of norms related to the environment and the public transportation and the encouragement of culture and social development. In all functions other than defining the final destiny of decentralized investment funds, the regional government coordinates and goes deeply into the implementation of national policies at the regional level. In the promotion of local economic activities, the regional government defines priorities in terms of sectors being favored, stimulates regional tourism and encourages scientific research in its territory. As far as the social and cultural areas are concerned, the regional government defines the aims in a wide set of issues, which includes poverty reduction plans, inter municipal distribution of funds and encouragement of regional-related cultural activities. Whist the provincial level just coordinates delegated services of the central government, its supervising power and degree of influence on the allocation of regionally decided investment funds were significantly expanded in 2002.
As far as municipalities are concerned, they have six exclusive and thirteen non exclusive functions. Local governments are allowed to execute complementary activities with other levels of government and public or private external organisms (ANNEX 1). With the exception of points 3 and 6 in ANNEX 1, the municipal level has an important role in the enforcement of general norms on the construction industry, urbanization and transportation. It is however among the non exclusive functions in which municipalities find wider and a more flexible range of potential activities to develop. Two functions being delegated to municipalities in 1980 are the administration of school level education and primary health centers. On account of them, municipalities are assigned significant categorical grants. Municipalities are also a fundamental part of the State social welfare net. Although they do not finance social benefits, they play a fundamental role in the administration of funds and the identification of beneficiaries.
3. Local governments’ own taxes and charges.
Chilean municipalities are the only tier of sub national government allowed to tax its residents and also charge for the services they provide. It should be said that the normative power they have to define on rates and introduce new taxes is very limited. The most important municipal tax revenue in Chile is the Property Tax. This is applicable at a fixed rate that ranges between 1.2 and 2.0 % on the fiscal value of rural and urban properties. Nevertheless, the law establishes numerous tax rebates and overcharges. A second important local tax is the one on car licenses. Since this is payable in any municipality regardless of the car’s owner resident, municipal governments actively compete to .attract potential tax payers. The tax rate in this case is uniform across the country and it depends on the car value.
Regarding local charges, there exists a business license being paid on commercial activities undertaken in the municipal area. In this case, municipalities have an important degree of maneuver in the establishment of the rate being paid. Organizations related to charity, religion, culture, self assistance, fine arts, non professional sports and promotion of community interests are exempted from this payment. Other municipal charges are the ones on garbage collection, urbanization and construction permissions, occupation of public spaces by private activities, removal of street debris, installation and construction of various kinds of local public spaces, street publicity, drivers´ license delivery, transfer of vehicles and mobile street traders. In some cases, water supply resources belong the municipality, in which case this is also locally charged. Whilst the law establishes some limits and exceptions to the payment of these duties, municipalities have a rather wide range of maneuver to fix the rates they charge. In a third category of revenues we find a myriad of small sources. This includes traffic fines, payments for commutation of sentences, interests and rents on assets being owned by municipalities, income from the sale of confiscated goods and other similar items. Also in this category is included the revenue from privately administered municipal real state, as it is the case of municipal beaches and other recreation areas.
Concerning borrowing, local governments are not allowed to get loans of any kind. The reason for this probably lies in the deep concern to keep control on the national fiscal balance in light of the long and dramatic period of fiscal adjustment over the second half of the 70s. Despite this being a long past historical episode, it certainly remains a factor worth considering in the current administration of the State. Interestingly enough, municipal governments do borrow in practice. In the fist place, they very often delay the payment of wages and other labor related benefits to schools teacher and primary health centers´ officers. Secondly, payment of contracts and other inputs currently purchased by local governments have been also postponed in some cases. Last but not least, leasing type of contracts abound between municipal governments and private providers[3]. All this has made such a prohibition a rather inapplicable norm. Some future, albeit still shy reforms in this regard are now being considered.
Whilst regions have no taxes of their own, the law explicitly assigns them an “equivalent amount” to the revenues being collected from regional mining licenses. By saying that, the law circumvents the constitutional prohibition of having hypothecated taxes that fund specific geographical areas or particular activities[4]. As opposed to local business licenses being charged by municipal governments, of which all revenues are left for the corresponding municipality, the law on mining licenses establishes that 70% of the total being collected should be added to the share of National Fund of Regional Development (see below) assigned to that region where the tax was generated. The remaining 30% is given to those municipalities where the specific mining activity is located.
4. The structure of sub national governments financing. An overview.
Table 1 provides an overview of the current structure of financing. Since only municipalities have revenues of their own, this is the only tier explicitly referred to. Regions’ share is being captured through their participation on decentralized public investment grants. As regards municipalities themselves, their net of grants budget is in the range of 8.5% of general governments revenues, of which 70% comes from local taxes. Municipal taxes occupy more of the 75% of the total budget. When all grants are considered, a measurement of total decentralized funds (TDF) shows that roughly 30% of the general government’s budget is transferred to lower tiers of governments.
Three types of grants are clearly identified. A first type is meant to cover the expenses from publicly supported schools and primary health municipal centers. As it was referred to above, these two areas of State action were handed over to the municipal level in 1980 and they may be gathered into the label of “delegated functions”. It should be said though, that more than 40% of the educational subvention is given to publicly supported private schools. This is pointed out in Figure 1 by showing that regardless of the decentralized nature of the public school level subvention, not all of it goes through the municipal administrative structure, being partially granted to private school “sustainers”[5]. A myriad of complementary categorical grants to which schools should apply on a competitive basis are also available (see section 6.2). As regards primary health, its funding is made up of two parts. One is a population based grant (see section 6.2), and the second one is a supplement to attend idiosyncratic health characteristics of each municipal area. While education and health related transfers represent about 62% of all grants (Table 1), school subvention itself occupies – on average- more than 75% of the resources on account of these two delegated functions.