The criteria for financing municipalities, from historical expenditure to standard expenditure needs

The paradigm shift of fiscal federalism

Until the early 2000s, state government transfers to local authorities were based on the Stammati decrees of 1977 (decree-law 2/1977 and decree-law 946/1977). They aimed to contain local authorities' debt and new hires by introducing the principle of historical expenditure and replacing local public revenues. The resources were allocated to regions, provinces and municipalities based on the expenses incurred by the local authority in a certain period. Transfers were increased or decreased based on fixed percentages for all the bodies according to the economic trends over the past few years.

The local authorities that spent more received more resources.

Therefore, the mechanism rewarded local authorities with high spending, penalizing those with high income and a developed service system. However, the risk of potential distorting effects was high. The administrations could have a more considerable fiscal capacity due to high local taxes or more significant local resources deriving, for example, from residents' above-average incomes or assets. In other cases, high spending did not guarantee adequate services.

In 2001, the reform of Title V of the Constitution introduced an equalization fund for entities with lower self-financing capacity aiming to guarantee essential services and reduce territorial disparities. Hence the need to overcome the historical expenditure criterion by introducing a new indicator: the standard expenditure needs, defined by law 42 of 2009.

The "Standard expenditure needs" estimate local authorities' financial needs to provide essential services, from public transport to social services, nursery schools, and local police.

In addition to the historical expenditure, these indicators consider other variables, including demographic, socio-economic and morphological characteristics.

However, to fully realize this paradigm shift in the Italian local financial system, it is necessary to define the basic levels of services, "Livelli essenziali delle prestazione" - LEP in Italian. The definition refers to the minimum civil and social rights guaranteed throughout the country, without disparity under Article 117 of the Constitution. As reported by the parliamentary commission for the implementation of fiscal federalism, the state law should define them, but this is not yet happening.

Historical expenditure vs standard expenditure

The standard expenditure results from applying the allocation coefficients of standard expenditure needs to the total historical expenditure. It differs from the standard financial needs used for the equalization mechanism. It is calculated by multiplying the sum of the fiscal capacity of the municipalities in Regions with Ordinary Statute and the State's compensatory transfers by the allocation coefficients of the standard expenditure needs excluding the waste component.

Comparing the historical expenditure with the standard one can be helpful to understand how a local authority is positioned among others with similar demographic and territorial characteristics:

• a historical expenditure higher than the standard one means that the expenses incurred by a local authority exceed those estimated based on the territorial and socio-demographic characteristics of the population.
• a historical expenditure lower than the standard one can have different meanings. On the one hand, the local authority could spend less due to greater efficiency; on the other, it could not have the necessary resources to increase its spending and ensure adequate services. The 2017 data on standard expenditure, reported on the OpenCivitas web portal, also include the additional resources provided by the 2021 budget law for the social sector amounting to € 650 million per year.

In almost 7 municipalities out of 10 the standard expenditure is higher than historical expenditure

Comparison between historical and standard expenditure of municipalities in Regions with Ordinary Statute (2017)

SOURCE: Openpolis elaboration on SOSE database

As the map clearly shows, the data concerns more municipalities in northern and southern Italy than in the centre, where half of the cities have a historical expenditure higher than the standard one.

46% of the municipalities in central Italy have a historical expenditure higher than their standard expenditure.

Analysing the data, municipality by municipality, the scenario repeats in some of the most populated cities in Italy, such as Rome, where the difference between historical and standard expenditure is over 220 million euros, Milan (€ 126.9 million) and Venice (€ 101.2 million).

Most Italian municipalities spend less than their standard expenditure.

Based on this data, we could think that a historical expenditure higher than the standard one is due to a waste of resources by local administrations. Although this hypothesis is not to be excluded, an administration could offer its citizens additional or higher quality services by investing resources exceeding its revenues, including local taxes, that could be raised for this purpose.

Standard expenditure and historical expenditure in Italian municipalities

Standard expenditure and historical expenditure of the municipalities in the regions with ordinary statute (2017)

DESCRIPTION

To find out the historical expenditure and the standard expenditure of your municipality, click on Search ... and write the name of your municipality. You can change the order of the table by clicking on the column header.

SOURCE: Openpolis elaboration on SOSE database

Performance analysis

Sose elaborated the "performance analysis" to assess the level of services an administration offers in relation to the expenditure incurred. This method allows verifying for each municipality if the historical expenditure is higher or lower than the standard expenditure and if the level of services offered is higher or lower than the average of the municipalities in the same population group.

The levels of expenditure and services in the most densely populated cities

The levels of expenditure and services in the 10 most populated Italian municipalities in the ordinary statute regions. (2017)

SOURCE: Openpolis elaboration on SOSE database

THINGS TO KNOW

Municipalities are positioned into four quadrants based on the level of expenditure and the number of services offered, estimated on a 1 to 10 scale.

• The municipalities in the bottom right quadrant show a historical expenditure higher than the standard one and provide fewer services than the average of the municipalities in the same population group.
• The municipalities in the upper left quadrant show a historical expenditure lower than the standard one and a level of services higher than the average of the municipalities in the same population group.
• The municipalities in the bottom left quadrant show a historical expenditure lower than the standard one and provide fewer services than the average of the municipalities in the same population group.
• The municipalities in the top right quadrant show a historical expenditure higher than the standard one and a level of services higher than the average of the municipalities in the same population group.

Most of the analysed municipalities are positioned in the upper right quadrant. These administrations spend more than their standard needs (historical expenditure higher than standard expenditure) but offer more services (level of services higher than the average of the municipalities with the same number of inhabitants). This is the case of Venice, which obtained the highest score both in the level of expenditure (10) and of services (10), Bologna (8; 10), Milan (8; 9), Florence (7; 9), Rome (7; 6) and Turin (6; 6).

Verona and Genoa obtained 5 for the expenditure level, which indicates a historical expenditure approximately equal to the standard one. The Ligurian capital also has a level of services (5) which is also in line with the average of municipalities in the same population group. In comparison, the capital of Piedmont has a slightly higher score (6).

Bari is the only large city showing a historical expenditure lower than the standard expenditure.

Finally, in the lower quadrants, we find only two large southern cities. Naples shows a historical expenditure substantially in line with the standard one (5), but a level of services well below the average of the municipalities in the same population group (1). Bari has the same level of services as the Campania capital (1) and a historical expenditure lower than the standard one (4). The latter condition is presumably one of the causes of the first and a symptom of a revenue shortage in the Apulian capital.