With respect to the Law of Financial Discipline of the States and Municipalities (hereinafter the “Law”), we consider it important to know the short-term obligations established therein. On April 27, 2016 this Law was published in the Official Federal Gazette in order to establish the general criteria for treasury and financial responsibility that will govern:
States,
Municipalities, and
Public Entities for a sustainable management of their public finances.
This Law amends provisions of the Fiscal Coordination Law, General Public Debt Law and General Governmental Accounting Law.
I. RELEVANT PROVISIONS OF THE LAW
GENERAL PROVISIONS
For purposes of interpretation of the Law, the following definitions should be considered among other things: Public Entities are considered as the Executive, Legislative and Judicial Branch, the autonomous bodies of the States; the Municipalities, the decentralized bodies, companies with majority state participation and trusts of the States and Municipalities, as well as any other entity over which the States and Municipalities have control over their decisions or actions. Public Debt is understood as any financing contracted by the Public Entities. Finally, Financing will be understood as any operation constituting a liability, direct or contingent, of short, medium or long term, to the Public Entities, arising from a credit, debenture or loan, including leases and financial factoring or production chains, regardless of the form in which they are implemented.
RULES OF FINANCIAL DISCIPLINE
STATES The Revenue Law and the Expenditures Budget of the States should be drafted according to:
Applicable Local Law,
The General Law of Governmental Accountability, and
The Standards issued by the National Accounting Harmonization Council.
The total proposed expenditure in the draft Expenditure Budget should contribute to a Sustainable Budgetary Balance; in the understanding that this premise is complied with when:
at the end of the fiscal year and under the accrued accounting method, such balance is greater than or equal to zero, or
at the end of the fiscal year and under the accrued accounting method, such balance is greater than or equal to zero.
The bills of Revenue Law and Spending Budget may provide for a Negative Budgetary Balance under the following circumstances:
A fall occurs in the national Gross Domestic Product in real terms;
It is necessary to cover the cost of reconstruction provoked by natural disasters
Declared in terms of the General Civil Protection Law, or
It is necessary to provide for a cost greater than 2% of the unlabeled Spending observed in
the Spending Budget of the immediately previous tax year.
As part of the Treasury Responsibility it is provided that any proposal for change in expenses of the Spending Budget must be accompanied by:
The Revenues bill, or
Be offset with reductions in other spending provisions. In the understanding that no payment will be valid that is not included in: the Spending Budget, subsequent Law, or charged to Revenue.
SURPLUSES. In this respect, the State must reveal in:
The Public Account, and
The reports they deliver to the Local Legislature, the source of revenue from which the new expense has been paid, distinguishing the type of expense in question.
This above is not to mention that the Spending Budget must provide resources for supervening natural disasters. With respect to Personal Services, the Spending Budget must have in a specific section the expenditures corresponding to the expenditure in personal services, which must establish at least
The remunerations of the public officials, and
The salary and economic provisions to cover salary increases.
With respect to Compliance with Payment Obligations it establishes that the States must consider in their Spending Budgets the spending provisions relative to compliance with the payment commitments derived from the Public Private Partnership Contracts entered into or to be entered during the next fiscal year. The resources to cover debts of the prior fiscal year, established in the draft Spending Budget may be up to 2% of the total income of the State.
The Law establishes several specific provisions that the States must observe once their Spending Budgets have been approved for the Fiscal Year of the expense. Similarly it establishes a regulatory hypothesis for the use of Surplus Revenue, provided the State is classified in a sustainable level of debt according to the Alert System established in the Law. It may be used, among other things, to pay early amortization of the Public Debt, payment of debts of prior fiscal years, etc.
If during the fiscal year the revenues anticipated in the Revenues Law decrease, the State must apply adjustments to the Spending Budget in the cost items in the following order:
Social communication expenses,
Current spending that does not constitute a subsidy delivered directly to the people, and
Spending on personal services.
It is provided that the States, no later than January 15th of each year, shall return to the Federal Treasury the labeled Federal Transfers that, as of December 31st of the prior fiscal year have not been spent by their Public Entities.
MUNICIPALITIES
The Revenues Law and the Spending Budget of the Municipalities must be drafted in accordance with:
Applicable Local Law,
The General Law of Government Accounting, and
The Standards issued by the National Accounting Harmonization Council.
The total Spending proposed by the City Hall of the Municipality in the Draft Spending Budget, the amount approved and what is exercised in the fiscal year, must contribute to the Sustainable Budget Balance.
Notwithstanding the above, the legislative inititive for Revenues Law and Spending Budget may provide for a Negative Budgetary Balance under the same exceptions established for the States, the municipal treasurer or its equivalent shall comply with the same information obligations as the Secretary of Finances or its equivalent in the case of States.
It is provided that the resources to cover debts of the prior fiscal year, established in the draft
Spending Budget, may be up to 2.5% of the total Revenue of the Municipality.
In the same manner as the States, the Municipalities are obligated to comply with the above referred obligations in relation to Treasury Responsibility, Personal Services, Compliance with Payment Obligations, Use of Surplus Revenue, as well as the Return of Federal Transfers.
THE PUBLIC DEBT AND OBLIGATIONS
Public Entities may not contract, directly or indirectly, Financing or Obligations with:
Governments of other nations,
Foreign companies or individuals, or
When they must be paid in foreign currency or outside of national territory.
They may only undertake Obligations or Financing when:
They are used for productive public investments,
Refinancing, or
Restructuring.
The Local Legislature, by the vote of two-thirds of its members present, will authorize the maximum amounts for the contracting of Financing and Obligations. For the granting of such authorization, the local Legislature must previously do an analysis that includes the following items:
The payment capacity of the Public Entity that will be responsible for the Public Debt or Obligations,
The use of the Financing or Obligations and, if applicable,
The granting of resources as Source or Guarantee of payment.
The Refinancing or Restructuring operations will not require specific authorization of the local Legislature, as long as they comply with various conditions. The authorization of the Financing and Obligations by the local Legislature must consider the following:
Authorized amount of the Public Debt or Obligation to incur;
Maximum period authorized for the payment;
The destination of the resources;
If applicable, the Source of payment or the contracting of a Guarantee of payment of the Public Debt or Obligation, and
In case of specific authorizations, establish the duration of the authorization, in which case it may not exceed the next fiscal year. If a duration is not established, it will be understood that it can only be exercised in the fiscal year in which it was approved.
Public Entities will be obligated to contract Financing and Obligations under the best market conditions. The Secretary of Finance, Municipal Treasurer or the equivalent of each Public Entity will be responsible for confirming that the financing was contracted under those conditions.
To evidence the above, the Public Entity must implement a competitive process with at least two financial institutions and obtain just one irrevocable offer.
As an exception, when the State or its Public Entities request Financing for an amount greater than or equal to 40’000,000.00 Investment Units or its equivalent, or the Municipality or its Public Entities request Financing for an amount greater than 10’000,000.00 Investment Units or its equivalent and, in both cases, at a payment term greater than 1 year, several other requirements established in the Law must also be complied with, among which include implementing a competitive process with at least five different financial institutions, from which it obtains at least two irrevocable offers of Financing.
Financing can be found through the Stock Market but the Public Entity must express the reasons the stock market is a better option than the bank market. Now, when the authorization by the Local Legislature of Financing exceeds 100’000,000.00 Investment Units, such contracting process will be carried out in a Public Invitation to Bid.
This Law has a specific section on Financing contracted by Mexico City in which it describes the rules to which its contracting will be subject.
With respect to the Guaranteed State Debt the Law authorizes the Federal Executive, through the SHCP, to grant the guarantee of the Federal Government for the Obligations constituting Public Debt of the States and Municipalities, provided they comply with several rules, which include, (i) having executed an Agreement with the SHCP in terms of the Law, and (ii) conveying sufficient federal participations according to the Fiscal Coordination Law, under a specific payment vehicle and in the terms agreed with the SHCP.
If the State or Municipality defaults on the respective Agreement:
It may not contract additional Guaranteed State Debt,
Depending on the degree of default, it must pay to the Federal Government the cost associated with the Guaranteed State Debt or accelerate the payment of the respective Financing, according to the conditions established in the Agreement. Notwithstanding the above, the SHCP may terminate the Agreement at any time if the State or Municipality defaults on the agreement.
This Law contains a chapter that refers to the Evaluation of Indebtedness of Public Entities through the Alert System. Thus, the SHCP must make an evaluation of the Public Entities that have contracted Financing and Obligations registered in the Single Public Registry, according to their level of indebtedness.
The evaluation will be done based on the following three indicators:
I. Indicator of Public Debt and Obligations on freely available Revenue, linked with the sustainability of the debt in a Public Entity.
II. Indicator of Service of the Debt and of Obligations on freely available Revenue, which is linked to payment capacity, and
III. Indicator of Short-Term Obligations and Suppliers and Contractors on total Revenue, which shows the financial availability of the Public Entity for covering its obligations contracted at terms less than 12 months in relation to total Revenue.
The Alert System published on the web page of the SHCP will classify each of the Public Entities according to the following levels:
Sustainable indebtedness;
Indebtedness in observation and High Indebtedness.
The SHCP will keep a Single Public Registry the purpose of which will be to register and make transparent all the Financing and Obligations of the Public Entities. The effects of the Single Public Registry are only declarative and informative.
The Financing and Obligations that must be registered are, without limitation: Credits, stock market issuances, financial lease contracts, factoring operations, guarantees, derivative instruments that carry a payment obligation greater than one year and Public Private Partnership Agreements.
REPORTING AND ACCOUNTABILITY
Compliance with Reporting and Accountability obligations of the Public Entities will be subject to the rules established in:
General Law of Governmental Accounting to present the financial information in the corresponding periodic reports and their respective Public Account.
Tax Coordination Law, Federal Budget and Treasury Responsibility Law,
Title Three Bis of the General Health Law, relative to labeled federal transfers.
The audit regarding the compliance of the established in this law shall correspond to the entities of high supervision of the Public Entities, as well to for the High Audit Office of the Federation.
SANCTIONS
The acts or omissions that involve non-compliance with the obligations under the Law and other applicable provisions will be sanctioned according to the administrative liability of public official legislation and other applicable provisions, in terms of Title Four of the Political Constitution of the United Mexican States.
Private individuals or entities will be jointly liable with the respective public officials if they have participated and cause liability.
II. CONTRACTING OF SHORT-TERM OBLIGATIONS (EXEMPT CREDITS)
The Law contains a special section dedicated to credits exempt from approval of the Local Legislature called Short-Term Obligations.
DEFINITION
Any obligation contracted with financial institutions at a term less than or equal to one year.
CONDITIONS FOR CONTRACTING
The Law establishes the possibility of the States and Municipalities contracting Short-Term Obligations without authorization of the Local Legislature, provided the following conditions are complied with:
The total unpaid balance of the principal amount of such Obligations does not exceed, at any time, 6% of the total Revenue approved in the respective Revenues Law, without including Net Financing, of the State or the Municipality during the corresponding fiscal year.
They are paid in full no later than three months before the end of the period of government of the corresponding administration; new short-term Obligations may not be contracted during those last three months;
The short-term Obligations must be unsecured, and
They must be registered in the Single Public Registry.
BEST MARKET CONDITIONS
Short-Term Obligations must be contracted under the best market conditions, for which a competitive process with at least 2 financial institutions must be implemented, and one irrevocable offer obtained, in the understanding that the time period of such proposals should not differ in more than 30 calendar days and they should have a minimum duration of 60 calendar days.
THE DESTINATION OF THE RESOURCES
The resources obtained from the Short-Term Obligations must be used exclusively to cover short-term needs, which are understood as temporary insufficiencies in liquidity.
PRESENTATION OF INFORMATION
The States and Municipalities will present in the periodic reports referred to in the General Law of Government Accounting and their respective Public Account, detailed information on the Short-Term Obligations, including at least:
Amount,
Rates,
Duration,
Commissions,
Effective Rate of the Short-Term Obligations, according to the methodology issued for that purpose by the SHCP, and
Any related cost.
RESTRUCTURING
The Short-Term Obligations may not be subject to Refinancing or Restructuring for periods greater than one year, except in the case of obligations destined to productive public investment. We hope the above information is useful.
If you would like to learn more about this Law please contact: Cristina Loera. Lic. César Chávez: cchavez@samanosc.com.mx
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