The components and objectives of the municipal solidarity fund

#LeParoleDiOpenCivitas is a communication campaign by SOSE and openpolis to explain the key concepts of fiscal federalism through the publication of podcasts and in-depth articles.

Our country is historically characterized by deep territorial economic and social disparities, which affect the provision of services by local governments depending on the availability of resources. Therefore, our Constitution provides for an equalization fund to reduce territorial gaps, a mechanism regulating the allocation of resources among municipalities. The Municipal Solidarity Fund ( MSF) responds to these needs.

The components of the Municipal Solidarity Fund

MSF (Italian acronym FSC) is a fundamental tool of fiscal federalism to allocateresources to the municipalities of the regions with ordinary statutes (Italian acronym RSO), Sicily and Sardinia. It should be noted that the two islands have a different legislation, which exclude the application of equalization criteria.

As explained in a previous article, the Municipal Solidarity Fund currently consists of 3 main components:

• a component aimed to compensate for the lower revenues deriving from the Imu and Tasi reductions.

• a traditional component, aimed at rebalancing historical resources. Its allocation is based on the compensation of historical expenditure and, only for the municipalities of RSOs, on equalization criteria;

• the third component is linked to service objectives, aiming to develop municipal social services and strengthen nursery schools.

In addition to the resources mentioned above, the Fund provides additional corrective contributions which are explained in detail on the Opencivitas platform by SOSE.

 

The resources determining the Municipal Solidarity Fund

The components of MSF for the regions with ordinary statutes (2017-2021)

 

SOURCE: Openpolis elaboration on Opencivitas database

 

The MSF resources amount to about 6 billion (only for the regions with ordinary statutes). However, as can be seen from the graph, their total amounts and composition have changed over time. For regions with ordinary statutes, the resources went from 5

and a half billion in 2017 to almost 6 billion in 2021. Regarding its composition a new component, amounting to approximately € 216 million, was introduced to support the development of social services.

It is worth underscoring the increase in the resources allocated based on standard expenditure needs and fiscal capacity, compared to the decrease of those allocated based on the historical expenditure. As we will explain hereafter, this trend derives from the lawmakers' choice to promote the criterion based on standard expenditure needs compared to the compensation of historical resources.

Finally, it is important to underline that a large part of MSF consists of the resources compensating for the lower Imu and Tasi revenues reduced by Law 228/2012, which excluded the main house from these taxes.

Over the years, many legislative interventions changed the composition of MSF and the allocation criteria. Therefore, it is important to illustrate the legal framework to understand fiscal federalism and its objectives in our country.

From compensation to equalization

Introduced in 2013 by the stability law, the MSF initially envisaged only the historical component, which aimed to rebalance municipalities' resources following the transition from Ici to Imu. Therefore, MSC aimed to mitigate the effects deriving from the new real estate tax, avoiding any advantages or disadvantages to individual bodies in relation to the resources guaranteed by ICI and state transfers.

Since 2015, a component of the fund has been allocated according to equalization criteria, aiming to fill the economic gaps between local authorities. More specifically, this method estimates and compares municipalities' standard expenditure needs and fiscal capacity.

Standard expenditure needs are indicators that assess municipalities' financial needs to provide essential functions, from public transport to social services, from nursery schools to local police.

A municipality's fiscal capacity measures the resources deriving from local tax revenues based on the same level of taxation.

The fiscal gap is the difference between standard expenditure needs and fiscal capacity.

A negative fiscal gap means that a municipality has the fiscal capacity to cover the estimated standard needs and finance essential services on its territory. In this case, the local authority will have to transfer part of its revenue to other municipalities.

When the difference between standard expenditure needs and fiscal capacity is positive, the municipality cannot independently finance the provision of fundamental functions. In this case, it receives the additional resources established by law.

It should be specified that Local authorities do not pay or receive the entire amount resulting from the difference between standard expenditure needs and fiscal capacity, but only a part. According to the 2019 budget law and the legislative decree 124/2019, this share will increase each year and reach 100% in 2030. As the component assigned according the historical method decreases, the component based on the difference between standard expenditure needs and fiscal capacity increases within the MSF, as we can see in the graph.

Through this system, lawmakers intend to improve the equalization part of MSF, which, differently from the historical expenditure criterion, aims to reduce territorial gaps.

The allocation of the equalization fund to municipalities

In 2021, 4,635 municipalities showed a positive fiscal gap, compared to 1,930 with a negative fiscal gap.

The first condition concerned almost all the municipalities in the south, where 94% have an insufficient fiscal capacity to cover the standard needs. In the centre, most municipalities (82%) also have a positive fiscal gap, and the same happens in northern Italy, even if with the share slightly higher than half.

57% of the municipalities in northern Italy have a fiscal capacity lower than the standard expenditure needs, against 43% who have a negative fiscal gap.

 

70% of municipalities have a positive fiscal gap

The difference between standard needs and fiscal capacity, the fiscal gap, in the municipalities of Regions with ordinary statutes (2021)

 

 

 

SOURCE: openpolis elaboration on OpenCivitas.it data

 

Analysing the data of each local government, the municipalities with the most significant negative fiscal gaps are Milan (€ -192.7 million), Rome (€ -96.6 million) and Bologna (€ -30, 4 million). On the contrary, those with the most significant positive fiscal gaps are Naples (€ 170.4 million), Turin (€ 37.4 million) and Reggio di Calabria (€ 22.2 million). Considering per capita data and the cities with more than 100 thousand inhabitants, Milan is the administration, where the fiscal capacity most largely exceeds the standard needs (€ -138 per inhabitant), and Naples is the one where standard expenditure needs most largely exceeds the fiscal capacity ( € 177).

It is essential to remember that these figures refer only to the equalization fund, not to the total solidarity fund intended for the various municipalities. As discussed above, the MSF includes several other resources.

The resources of the Municipal Solidarity Fund for the municipalities of the Regions with ordinary statutes (2021)

 

 

SOURCE: openpolis elaboration on OpenCivitas.it data (last updated March 2021)

 

A new component in 2021

The 2021 budget law introduced a significant increase in the MSF resources with a component linked to the service objectives, already discussed in detail in a previous article.

In brief, these resources are financed directly by the central government. They are allocated according to standard expenditure needs to strengthen the social services of the municipalities of ROSs and the nursery services in the municipalities of RSOs and Sicily and Sardinia.

Regarding social services, on 22 June 2021, the state-city conference adopted the draft decree of the president of the council of ministers defining the service objectives and monitoring methods based on the methodological note approved by the technical committee for standard expenditure needs. The resources for nursery scholls, which will be allocated from 2022, are expressly linked to the increase in full-time places available compared to residents between 0 and 2 years, in municipalities where this ratio is lower than the average of territories with a similar number of 0-2-aged children.

It is essential to underline that the component linked to the service objectives represents a fundamental step towards a more equitable distribution of the MSF resources on the path towards fiscal federalism and the introduction of the Basic levels of service (Italian acronym LEPs).