The impact of the pandemic on Municipalities and local finance

The crisis following the Covid emergency had a profound impact on the economic and social system.

This completely new situation has increased the number of poor households and individuals in our country. In the year of the pandemic, the number of people in absolute poverty rose from about 4.6 million in 2019 to 5.6 million. Before Covid, 7.7% of the population could not meet the essential needs for an acceptable standard of living (such as housing, health care and clothing). In 2020 this share rose to 9.4%.

There are more than 5.6 million individuals in absolute poverty in Italy

Development in the number of people in absolute poverty in Italy (2005-2020)

SOURCE: elaboration by openpolis and #conibambini Observatory on Istat data (last updated on Thursday 4 March 2021)

THINGS TO KNOW

A person is in absolute poverty when he cannot afford all the goods and services that, in the Italian context, are considered essential for a minimally acceptable standard of living.

The pandemic has tested the ability of administrations, from the central government to local authorities, to react to the crisis.

This unprecedented situation significantly impacted people's lives and represented a considerable challenge for public administrations. On the one hand, it was necessary to tackle the problem supporting the numerous people in difficulty due to the loss of their jobs or the temporary closure of their business. On the other hand, the lower revenues due to the economic and consumption crisis impacted the ordinary activities of public authorities facing the emergency, particularly municipalities and other local institutions closer to citizens.

In March 2020, € 400 million were allocated to municipalities for shopping vouchers to families in the greatest difficulty. Others followed this first intervention to compensate local authorities for the loss in revenues and support higher expenses due to the emergency.

The allocation of resources raised the problem of how to distribute them correctly.

After this first allocation, ordered by the “Protezione Civile” (Civil Protection) in March 2020 for food solidarity (ordinance 658/2020), the decree-law 34/2020 (art.106) provided for additional resources, such as the fund to support local authorities in the exercise of fundamental functions: 3.5 billion euros, 3 for municipalities and 500 million for provinces and metropolitan cities, in 2020.

Subsequently, the resources allocated to municipalities for families in difficulty was doubled to 800 million euros (legislative decree 154/2020, art.2) and the 2021 budget law (law 178/2020, art.1 paragraph 822) followed by the decree 41/2021 (art.23) provided for the refinancing of the fund for the provision of basic functions.

In 2021 the fund for the exercise of municipalities' functions amounts to € 1.15 billion.

The resources were significant, but how to allocate them properly on the territory? As we shall see below, the work and methodologies developed for standard expenditure needs proved helpful for this purpose.

Standard expenditure needs are indicators that estimate municipalities' financial needs necessary to carry out their basic functions. From public transport to social services, from nursery schools to the local police.

The importance of data for planning emergency interventions

In such a situation, updated data and information on the condition of households and the services provided in the area becomes crucial to direct efforts and resources based on the actual needs of each municipality, neighbourhood by linking interventions to objective parameters.

The lack of data at the municipal level does not allow effective interventions.

However, it is easier said than done. The available data generally lack the granularity needed in these cases at municipal and even sub-municipal levels for the major cities.

As often highlighted, data concerning households' economic and social conditions, such as poverty, are collected every year, but with national or regional breakdown. Collecting more disaggregated data is very expensive and is possible only through general censuses every 10 years. According to the "permanent census" promoted by Istat, this approach will be progressively overcome in the future. However, today, it limits the possibilities of analysis and intervention.

The importance of accessing data during the pandemic

The data collected for standard expenditure needs have become a useful information asset during the pandemic emergency. In this context, the municipal data collected every year to define standard expenditure needs has proved particularly important, demonstrating that accessing updated information in the world we live in is fundamental. Moreover, data collected for a purpose can be helpful for a different one or to define public policies.

From the first weeks of the crisis, the need has arisen to estimate the variations in income and expenditure of the Italian local authorities affected by the pandemic. Let's analyse the method and the results of this activity on local finance.

A method to estimate the effects of the pandemic.

Measuring the impact of the Covid emergency on Italian municipalities' financial resources means estimating three different types of interlinked effects. The socio-health impact, to understand the consequences for the territorial social system; the economic impact, starting from the effects on companies' and individuals' income.; and, subsequently, the financial impact, concerning Italian municipalities' revenues and expenses.

The local Income Tax on Natural Persons decreased on average by 5,43% at the national level.

Regarding the socio-health impact, the spread of infections on the territory (actual cases per 10 thousand inhabitants) and the health burden index were estimated based on the share of Covid hospitalizations compared to ordinary beds. This method provided a snapshot of the areas most exposed to the emergency.

Subsequently, experts estimated the impact on companies and workers' incomes, recording a national (annual) average decrease of 18.92% in businesses' and self-employed workers' revenues. Then, they estimated the disposable income in the territories and the relationship between the decline in income and the increase in poverty.

+1,.09% was the estimated incidence of absolute poverty for each percentage point of decline in income

This estimate also allows evaluating the impact of the extraordinary support measures for households and businesses and the reduction in tax revenues on the public coffers. This evaluation weighs the potential cost increase and the potential cost reduction for each service offered.

For example, in the education sector, the municipalities incurred higher costs to sanitise schools (estimated by defining an average cost compared to the size of the buildings and the number of pupils). In this case, the mapping carried out annually through the fiscal federalism questionnaires and, in general, the methodology developed in this area proved extremely helpful.

The size of school buildings in Italian municipalities

Square meters in municipal and state school complexes per inhabitant between 3 and 14 years (2017)

 

SOURCE: elaboration by openpolis on Sose database (last updated in March 2021)

Municipalities spent € 28 million to sanitise school buildings in the school year 2020/21.

The methodology and data collected for fiscal federalism also allowed estimating the potential expenditure reductions deriving from the lockdown. In education, for example, the early closure of schools has reduced utility and cleaning costs. This method used to assess the impact of the Covid-19 crisis can and must also be used for other purposes, from mapping land to define public policies to the ex-post evaluation of their effects.

The effects of support measures on municipalities

This methodology proved useful, for example, to allocate the 2021 fund of 1.15 billion euros, to municipalities.

Linking the distribution of resources to objective parameters is fundamental.

For a fair allocation of resources, it was essential to estimate citizens' income changes during the emergency, a prerequisite for assessing the reduction in the municipal income tax revenues.

At the same time, it was crucial to evaluate the financial resources necessary for the recovery (from education to transport) and understand to what extent the pandemic had affected each municipality.

This information, elaborated with the technical support of Sose and based on the results of the working table established by the law decree 34/2020, led to the methodology established by the decree of the Ministry of Interior on last 30 July.

In particular, it was helpful to quantify municipalities' losses due to the pandemic and essentially caused by two factors. Firstly, the lower revenues deriving from unpaid services due to Covid (for example, transport), partially offset by lower expenses. Secondly, the loss of local personal income tax revenue due to the decline in income.

The municipal personal income tax revenue decrease by € 150 mln.

Considering a series of corrective measures, in 2021, Milan recorded the lowest municipal revenue (net of minor expenses), almost 194 million euros less (137.93 per inhabitant) compared to the ten most populous cities. The Lombard capital also recorded the highest loss in per capita municipal personal income tax revenue: 7.21 euros. It ranks second in absolute terms: about 10 million euros, after Rome with 13.35 million.

Milan recorded the highest loss in per capita income and municipal personal income tax revenue due to Covid

Decreases in municipal income and per capita municipal personal income tax revenue (2021)

SOURCE: elaboration by openpolis on data from the Ministry of the Interior (Department for internal and territorial affairs) (last updated in July 2021).

In brief, after Milan, Florence (78.19 euros p.c.), Palermo (65.84), Bologna (56.61) and Turin (54.57) recorded the lowest per capita revenues. The decrease in per capita municipal personal income tax revenue was more severe, after Milan, in Rome (4.76 euros p.c.), Bologna (4.48), Turin (3.56) and Genoa (3.54).

In southern cities, where the municipal personal income tax revenue was lower even before the pandemic, the Covid impact appears more moderate: 2.05 euros per capita in Bari and less than 2 euros per capita in Naples, Palermo and Catania. The per capita municipal personal income tax revenue in the municipality of Catania decreased by € 1,38 in 2021.

This information, along with other data, was processed in a 5-step process. € 1,150 million were allocated to municipalities and unions of municipalities based on this algorithm.

But which was the effect on each municipality? In the sample of the ten major cities, Milan (184.47 million euros), Rome (90.8), Palermo (54.5) and Turin (54) received the most significant resources in absolute terms for 2021.

Resources allocated to the 10 major cities following the Covid emergency

Allocation of the fund for the exercise of the functions by local authorities during the crisis (2020 and 2021)

SOURCE: elaboration by openpolis on data from the Ministry of the Interior (Department for internal and territorial affairs) (last updated in July 2021).

Excluding the capital (which recorded a positive balance in both years), the 2020 balance of all other cities influenced the resources disbursed for 2021. The second step of the process provided additional resources to the local authorities that in 2020 had certified financial needs exceeding the assigned resources.