Esta página apresenta a dissertação de Mestrado em Administração de Cidades,
cursado na East Tennessee State University, em Johnson City, Tennessee, nos Estados
Unidos, de Kassandra Saraiva de Lima. A dissertação foi orientada pelo Prof. Dr. Lon
Slone Felker, e defendida em novembro de 2003, perante uma banca formada pelos
orientadores Prof. Dr. Michael Marchioni e Prof. Dr. Wendell Hester, com a assistência
do Diretor do Programa Prof. Dr. Paul Trogen.
Kassandra Lima – Auditora Fiscal de Controle Externo desta Corte de Contas
Brazilian Fiscal responsibility Law’s Impact in the financial
Situation of Rio de Janeiro and Teresina
Kassandra Saraiva de Lima
East Tennessee State University
Keywords: Fiscal Responsibility, Transparency, Control, Planning, Fiscal Equilibrium
1
ABSTRACT
Brazilian Fiscal responsibility Law’s Impact in the Financial Situation
of Rio de Janeiro and Teresina
by
Kassandra Saraiva de Lima
The Brazilian federal government enacted The Fiscal Responsibility Law in 2000 in order
to conform to the Public Finance Chapter of its 1988 constitution. Based on the principles
of fiscal responsibility and transparency, this law has as its main objective the
implementation of stability in the public finance at federal, state, and local levels of
government. The present report analyzes the impacts of this law in the financial situation
of the cities of Rio de Janeiro, RJ – Southeast Brazil, and Teresina, PI – Northeast Brazil.
The Primary Results, Net Consolidated Debts, Net Current Revenues, and Personnel
Payrolls from 2000 to 2001 are the analyzed economic indicators. The data demonstrated
that the Fiscal Responsility Law provided significant changes in the fiscal responsibility
and transparency of Rio de Janeiro’s finances. Teresina’s account balances demonstrated
fiscal equilibrium. However, these account balances are not available to the citizens.
2
ACKNOWLEDGMENTS
I appreciate the guidance and patience I received from the committee chair, Dr.
Lon S. Felker and my sister Kalina, not only for their collaboration in the writing of this
report, but also for their invaluable support and continuing encouragement throughout
the completion of my education. I am also grateful for the assistance and insight of The
Writing and Communication Center through the Director, Rob Russell. A special thanks
goes to the Professor Lino Martins da Silva and Firmino da Silveira Filho for the
information provided to write this report. I would like to also thank the members of my
graduate committee: Dr Michael P. Marchioni and Dr. Wendell Hester.
I am grateful to the Graduate Faculty of the College of Business of East
Tennessee State University for the unique opportunity to augment my educational and
professional career and to get acquainted with my classmates, who have all been helpful
and friendly to me. Finally, I want to express my thanks to those members of my family,
my son, Joaquim, my mother, Benilde, my father, Joaquim Mamede, my brothers,
Venício and Rui, with a special in memoriam mention to my brother, Henrique, and my
sister, Kátia. I also want to thank all of my friends and relatives who have been
personally connected to my projects, my life, and my success: Alberto, Anâtonia, Gary,
Janaína, Manuela, Maria Aparecida, Marilé, Rosa, and my cousins José Eduardo e
Silvana.
3
TABLE OF CONTENTS
Page
APPROVAL…………………………………………………………………………
i
TITLE PAGE………………………………………………………………………..
ii
ABSTRACT…………………………………………………………………………
iii
ACKNOWLEDMENTS……………………………………………………………..
iv
LIST OF TABLES…………………………………………………………………...
vii
Chapter
1.
INTRODUCTION ……………………………………………………
1
2.
BACKGROUND
Brazilian Public Accounts before the Adoption of the Fiscal Responsibility
Law…………………………………………………………………..
3
Local Governments in Brazil ……………………………………….
8
3.
BRAZILIAN FISCAL RESPONSIBILITY LAW …………………
12
4.
BRAZILIAN BUDGETARY PROCESS …………………………..
16
Multiyear Plan ………………………………………………………
17
Budget Directive Law ………………………………………………
17
Annual Budget Law …………………………………………………
18
PARAMETERS OF FISCAL RESPONSIBILITY …………………
20
Local Public Revenues……………………………………………….
20
Local Public Expenditures …………………………………………..
22
5.
4
6.
DATA ANALYSIS ……………………………………………........
26
Rio de Janeiro .....................................................................................
26
Teresina…………………………………………………………........
32
CONCLUSION………………………………………………….........
38
REFERENCES.................................................................................................
42
ENDNOTES.....................................................................................................
44
APPENDIX Brazilian Fiscal Responsibility Law...………………………….
47
VITA..................................................................................................................
88
7.
5
LIST OF TABLES
Page
Table 1
Brazilian Municipalities Fiscal Situation 1996-2001
11
Table 2
Rio de Janeiro’s Personnel Expenditures
27
Table 3
Demonstrative of the Net Consolidated Debt
27
Table 4
Demonstrative of the Primary Results
28
Table 5
Demonstrative of the Net Current Revenue
28
Table 6
Summary of Rio de Janeiro Fiscal Situation
29
Table 7
Teresina’s Personnel Expenditures
32
Table 8
Demonstrative of the Net Consolidated Debt
33
Table 9
Demonstrative of the Primary Results
33
Table 10 Demonstrative of the Net Current Revenue
34
Table 11 Summary of Teresina Fiscal Situation
34
6
CHAPTER 1
INTRODUCTION
An efficient public administration implies primarily the observance of fiscal
balance. Contradicting this premise, fiscal imbalance has been prevailing in Brazilian
public administration for the last three decades. Generally speaking, fiscal imbalance
occurs when the expenses are systematically higher than the revenues, resulting in a
budget deficit. Public deficit is one of the most serious problems contributing to
economic difficulties for the Union, State, and Municipal Brazilian governments.
The need to implement fiscal discipline concerning the administration of the
public financial resources has lead the Brazilian federal government to adopt, in May 4th,
2000, the Complementary Law no. 101, referred to as Fiscal Responsibility. This law
establishes targets, limits, and conditions related to the administration of the revenues
collection and limits of expenditures. Moreover, it sets up an innovative path of fiscal
behavior to be implemented at the federal, state and municipal governmental levels.
Through a set of clear and accurate rules this law emphasizes the planning, control,
transparency and responsibility in public finance administration.
The Fiscal Responsibility Law has instituted an institutional and cultural change
in the way Brazilian public administrators should deal with public money. Changing
attitudes of the Brazilian politicians towards the administration of public resources has
been a challenge. Brazil is a country which has been victim to dishonest and corrupt
administrations, where most politicians, in the course of their mandate become wealthier,
7
whereas the basic needs of its people such as health, education, housing, and sanitation,
are either neglected or not a priority.
The present paper intends to evaluate the impacts of the Law of Fiscal
Responsibility in the financial situation of the cities of Rio de Janeiro, RJ – Southeast
Brazil, and Teresina, PI – Northeast Brazil. The Primary Result, the Net Consolidated
Debt, the Net Current Revenue, and the total Personnel Payroll are the financial
indicators selected to show the financial situation of both cities. Such indicators mirror
reality, and are the most relevant aspects pertaining to the Law, since they play a crucial
role in the financial balance of the administration of these cities.
The city of Rio de Janeiro, which is the capital city of the state that possesses the
same name - Rio de Janeiro, has been chosen for this study due to the fact that it is the
capital city of the second richest Brazilian state. For this reason, Rio de Janeiro
encompasses an ample and complex administration. Additionally, the inauguration of its
current mayor, Cesar Maia, was in January of 2001, ten months after the adoption of the
Fiscal Responsibility Law.
The other city to be analyzed is Teresina, which dramatically contrasts with Rio
de Janeiro by being the capital of the least resourceful state of the nation. The mayor of
Teresina, Firmino da Silveira Filho, had his inauguration in January of 1997, and was
relected in 2000 for another four-year term.
8
CHAPTER 2
BACKGROUND
Brazilian Public Accounts before the Adoption of the Fiscal Responsibility Law
In the 1980s the level of Brazilian indebtedness reached limits in the economic
history of the country which had never been observed before. At that time, the Brazilian
government managed its chaotic situation of both internal and external public debt by
issuing more debt, generating a primary surplus (holding spending other than interests
payments below fiscal revenues), or issuing more currency. The country defaulted on its
debt and experienced an endless debt renegotiation and an overwhelming hyperinflation.
Between 1981 and 1984, the government’s budget deficit exceeded 5% of the Gross
Domestic Product (GDP), while foreign indebtedness had climbed to 95 billion American
dollars. By 1985, inflation ran at over 220% (Roett, 1999).
In spite of the economic problems the country was going through, Brazil’s
economy experienced some growth during the 1980s. For instance, the years of 1984 and
1985 had a trade surplus of $13.1 billion and $12.45 respectively. In the latter, Brazil had
grown 8%, the highest growth rate in the world at that time, and it was current on its
interest payments to both the multilaterals and the commercial banks (Roett, 1999).
Nevertheless, high inflation and uncontrolled public debt were still present in the life of
the country.
After thirty years of militarism, the new democratic government took office in
1985, and inherited an inflation of 20% a month. Under the José Sarney presidency,
1985-1989, three major economic plans were put into practice to overcome the high
9
inflation. The Cruzado Plan was implemented in February of 1986. Different from what
the International Monetary Fund (IMF) expected, it was a heterodox shock package.
Wages, prices, and the exchange rate were frozen. The old currency, cruzeiro was
replaced by cruzado at 1:1.00 ratio. During the first months the Cruzado Plan was very
successful in controlling the inflation. It failed not only because it was unable to eradicate
the inflation, but also because it provoked deep instabilities and a sharp financial and
economic crisis (Roett, 1999).
By April of 1987, the inflation rate was around 50% a month. The former minister
of finance was then replaced by Luiz Carlos Bresser Pereira. He is a political economist
and a social theorist whose influences came from Marx, Weber, Keynes, and from Latin
American Struturalism. On June 12, the new minister announced a new economic plan,
named after him, the Bresser Plan. The prices had been frozen for three months; the
wages and the trigger mechanism for automatic wage increase had also been frozen. The
currency was devalued by 7.6% (Roett, 1999). The president Sarney, however, was not
willing to raise taxes, a measure that was essential for the success of the plan.
The Bresser Plan also failed, and the inflation reached 600% a year (Susan &
Roett, 1997). Under social pressure, minister Bresser resigned in December 1987.
Maílson Ferreira da Nóbrega, an eminent Brazilian economist who had already exercised
important positions in the federal government, was the new minister of finance.
From 1987 to 1989, Sarney implemented several less ambitious plans, most of
which contained some combination of more orthodox elements, along with a wage and
price freezes. In January 1989, the government announced the Summer Plan, which also
temporarily froze wages and the exchange rate. With this plan the cruzado was replaced
10
by a new currency, named the cruzado novo. All of Sarney’s plans were fated to failure
for they did not present any structural reforms. The inflation rate announced in 1989 was
1,765% (Roett, 1999).
On March 16th of 1990, the new president Fernando Collor de Mello, the first
president elected by popular vote since 1964, promulgated the fourth major economic
plan since 1986. This plan was known as the Collor Plan. The Collor Plan team was
commanded by the minister of economy Zélia Cardoso de Melo, the first woman to hold
that post in the country’s history. With this plan a fourth currency replacing the cruzado
was implemented in the country, and received the name of cruzeiro, which had in the
distant past been the name of Brazilian currency, with a conversion of 1:1. All but modest
banks deposits were frozen for eighteen months, as were wages and prices. This indeed
reduced the inflation, but the society and economic activities immediately reacted
adversely. Structural reforms again did not take place. By the middle of 1991 it was clear
that the Collor Plan was another failure.
In April of 1992, President Collor de Mello was accused by his brother Pedro
Augusto de Mello of misuse of private funds. Long investigations were initiated, and a
series of campaign financing scandals emerged. The Chamber of Deputies voted to
remove Collor from office on September 29. On October 2, Vice President Itamar Franco
was sworn in as Acting President. The secluded president Collor could not prove his
innocence, and on December 29, 1992 the Senate voted for his impeachment.
The fifth, and finally successful economic plan, took place during Itamar Franco’s
presidency. In March of 1994, the finance minister Fernando Henrique Cardoso, a
leading Latin American sociologist and a vocal opponent of Brazil’s military dictators,
11
announced the Real Plan. The Plan achieved remarkable short-term results with a
colossal fall in the rates of inflation, which fell down from 80% to 1% a month (Roett,
1999). Decisive for its success was the transparency with which it was discussed and put
into practice. There was no wage or price control, no indexation schemes that actually
nurtured inflation. The first currency of the Real Plan was the Unit of Real Value (URV),
which was related at a rate of 1:1 with the U.S. dollar.
At the same time, the cruzeiro remained as currency and continued to circulate.
The market was then used as a mechanism for the monetary conversion rather than the
obligatory fixing of wages and prices. On July 1, 1994, the URV was translated into the
new currency, the real was converted at a 1:1 exchange rate with the US dollar (Susan
and Roett, 1997).
The success of the Real Plan led Cardoso to win the presidential election in
November of 1994. The inauguration of president Cardoso, on January 1st of 1995,
represented a turning point in the Brazilian economy. The team which created the Real
plan was immediately appointed to key economic positions in order to give continuity to
pertinent economic policies. At that time, inflation was under control and the cost of
living was stable. In 1998 President Cardoso was easily reelected in the first term due to
the Real Plan’s obvious success. However, the problem of public debt remained and
represented a threat to the success of the plan. It was then necessary to adopt structural
reforms to refrain public administrators from assuming more debts.
Until 1994, when the Economic Real Plan was implemented, the federal, state and
municipal governments could balance their accounts more easily with extra gain provided
by the inflation. A good example of that is the civil servants’ payroll. At that time, most
12
of the budget was allocated for the remunerations of civil servants, with public
administrators saving a lot of money by simply postponing the pay-day and investing in
the financial market. As inflation ended, all public entities lost their “ease gain” from the
financial market. As a consequence, states and municipalities could no longer hide their
debts and had to face their financial collapse.
From then until 1997, the Brazilian public debt rose significantly. States and
municipalities started to ask continuously for federal financial aid. The federal
government always went to their aid, and charged them a generous interest rate between
6% and 7% per year, whereas it paid the banks a rate of 29% per year (Schimitt, 1999).
This federal mercifulness encouraged further borrowings, especially during electoral
periods when the temptation to run more debts is highest. During this time, public
administrators were using their influence to exchange votes for more money to be applied
in their governments.
Besides central government generosity, states and municipalities counted on the
help from the federal senate that always authorized postponement on the payments of
principal of the debts and their interest rates (Raul Velloso, 2001). By 1998 the total debt
of states and municipalities was at R$110.6 billion (Schimitt, 1999). This situation also
became unbearable for the federal government, which had appealed for external loans. In
March of 1998, the federal government refinanced, for the last time, the state and
municipal public debt, and imposed rigid rules for the payments.
President Cardoso did not implement the administrative and taxation reforms that
he wanted. However, he adopted a number of measures in order to overcome many
structural factors which were responsible for increasing the public nominal debt. Among
13
such measures were: constitutional and legal reforms of economic order that allowed the
privatization of state corporations; privatization of public banks; and implementation of
the controlling mechanism concerning the states, municipalities and public enterprises
indebtedness.
In May, 2000, President Cardoso enacted the Fiscal Responsibility Law (FRL), in
order to regulate the chapter of Public Finances, Article 163, of the Federal Constitution.
The FRL can be considered one of the most detailed instruments of fiscal management in
the world. It was influenced by the IMF through the Code of Good Fiscal Practices on
Fiscal Transparency and also from the American Budget Enforcement Act, adopted in
1990, that proclaims the policy “pay as you go”, and New Zealand’s fiscal transparency
model, which defends the publication of simplified fiscal statements and involves the
public’s participation through definition of public policies and fiscal control.
Local Governments in Brazil
With the adoption of the Federal Constitution of 1988 that coincided with the
consolidation of the democracy in the country, the Brazilian municipalities acquired the
status of federal entity. Article 1 of this constitution confers to the local government
administrative, political, legislative, and financial autonomy. The local executive branch,
along with the legislative then had power to adopt the local constitution, define policies,
and propose the annual budget.
In the 1988 constitution, Brazilian legislators showed more concern with fiscal
responsibility and discussed the issue thoroughly. With the end of the military
dictatorship, Brazilian public opinion started to demand a more ethical and professional
14
posture on the part of public administrators. The interest of the citizens in the
implementation of rules that discipline the posture and acts of all governmental officials
leads to one obvious conclusion: the efficacy of the government, with the consequent
social benefit, is directly related to its compliance with the legal mandates.
The FRL came to give more acquiescence to fiscal legal mandates. Before the
Law, the customary practice in the scope of the Brazilian public budgetary process was a
deficit between revenues and expenditures; in other words, creating a negative primary
result1 (Khair, 2000). The common procedure was to first determine the expenses, and
then to foresee the revenue, with no real budgetary parameters. The results of such
practice were an artificial and unreal budget, which always created a series of problems
in the public administration context.
The greatest problem was that during the execution of the budget the collection of
revenues was much less than had been foreseen. Therefore, there were no financial
resources to pay for the planned activities and projects. Internal governmental argument
over financial resources as well as disagreement of the legislative branch and the society
with the executive branch occurred when they concluded that their proposal was not
capable of being accomplished due to the frequent lack of the required resources.
Brazilian local administrators have seen the creation of taxes as controversial and
unpopular, for it alienates voters. It was commonly said in Brazil that the best way for
politicians to become popular and successful was to spend public money, especially in
capital projects. “Tax reduction and increases in expenditures will both generally
strengthen a politician’s base of support. In contrast, tax increases and reductions in
15
expenditures will tend to weaken that base.”(Wagner, Tolisson, Rabushka, & Noonan,
1982, p. 11).
The adoption of a taxation code represents another concern for mayors,
particularly those from small municipalities. Administration of small municipalities lacks
proficient public personnel to implement such codes. Moreover, their population is
usually compounded by low-income families, which compromises the relation costbenefit of the taxation system. Lino (2001), states that regarding the small communities,
it is likely that at least during the first years, the collected revenue will be lower than the
expense involved with the collection process.
In 1997, the Brazilian Development Bank (BDB), a federal public enterprise that
has as its objective to finance, in long terms, the investments that contribute to the
economic development of the country, implemented the Modernization of Tax and Basic
Social Sectors Administration Program (PMAT) in order to minimize such problems. The
purpose of this program is to increase the municipal capacity of collecting revenues and
to improve the quality of the services provided to the community.
In fact, a positive primary result of the municipal public accounts has been noticed
even before the adoption of the FRL. The fiscal situation of the Brazilian municipalities
has improved considerably since 1996. A study conducted in 4,000 municipalities, 75%
of the total, shows a positive evolution of the primary results. The following table
illustrates a positive growing and relation to GDP of the primary results, in the period of
1996-2001 (Nascimento & Debus, 2002).
16
Table 1
Brazilian Municipalities Fiscal Situation
Year
Primary Result (PR)
PR/GDP
1996
-10.254
-1.32%
1997
-3.309
-0.38%
1998
-1.591
-0.17%
1999
2.837
0.29%
2000
3.457
0.32%
2001
4.689
0.40%
From Nascimento & Debus, 2002.
The table shows that the fiscal situation of the municipalities began to have a
positive result in 1999. Considering that the great majority of the local revenues come
from federal and state transfers, the study also concluded that such fiscal performance of
the municipalities is directly related to the performance of federal and State government.
However, as this paper concluded, the city of Rio de Janeiro has weakened significantly
its financial dependency from the state and federal transfers. Such independency
represents a significant step, especially in the Brazilian political environment, for it
lessens the chain of symbiosis and corruption, so common to Brazilian culture, which has
caused a great deal of the problems the country has experienced in its history.
17
CHAPTER 3
BRAZILIAN FISCAL RESPONSIBILITY LAW
The Brazilian Fiscal Responsibility Law establishes public finance rules that
enforce planning, responsibility, control, and transparency at all levels of public
administration. The provisions of the Brazilian Fiscal Law are applied to the Federal
Government, the States, the Federal District, and the Municipalities, encompassing the
Executive, Legislative, and Judiciary branches. The Attorney General’s Office, the
respective direct administrations, funds, government agencies, foundations, and stateowned enterprises are subjected to the law as well. Fiscal responsibility is well defined in
§1, Article 1of the Law, which states:
Responsibility in fiscal management presupposes well-planned and transparent actions to
prevent risks and correct deviations that may affect the equilibrium of public accounts, by
compliance with revenue and expenditure results targets, observing limits and satisfying
conditions regarding tax breaks, generation of personnel and social security expenditures,
among others, consolidated and debenture debt, credit operations, including those
involving revenue anticipation, guarantees issued and outstanding liabilities (p. 1).
The Fiscal Responsibility Law defines concepts and norms of Planning,
Budgetary Execution, and Fiscal discipline with no precedent in the Brazilian history.
The FRL is a code of administrative conduct that establishes targets, limits and controls
mechanisms for the public revenues and expenses. It aims to promote through its tools a
drastic and fast reduction of the public debt and definitely establish the equilibrium of the
Brazilian public accounts (Martins & Nascimento, 2001).
18
Among the set of rules and principles set forth in the FRL, some of them must be
emphasized as they are strictly connected to the Law’s primary goals (Cruz, Viccari,
Glock, Herzmann & Tremel, 2002):
• prevention of immoderate and reiterated deficits;
• limitation of the public debt to prudent levels: The Federal Senate Resolution 40
establishes a limit of 120% percent of the Net Current Revenue for the municipalities. If
the limit had been surpassed, all voluntary transfers2 are automatically discontinued, and
new credit operations are forbidden;
• preservation of the net public assets;
• establishment of several mechanisms and concepts aimed at ensuring ample
access to reliable and updated information concerning to the application of the public
budget;
• limitation of expenses of a continuing nature (especially personnel and social
security expenses);
• determine institutional penalties for fiscal administrations and to attribute
personal responsibility whether previously established rules and regulations were
contravened;
• establish long-term objectives as well as annual targets. The Budget Directive
Law should include an appendix containing fiscal targets set up for the pertinent year as
well as for the two subsequent fiscal years.
This Law represents the implementation of a new fiscal regime, based on the
permanent equilibrium of the public accounts, and on the responsibility and transparency
of the public expenses (Severo, 2002). It is the consequence of a long process of
19
evolution of Brazilian budgetary institutions, which was also a consequence of the
society’s awareness that public administrators should not spend more than what is
collected. Furthermore, public administrators are expected to manage responsibly the
scarce public resources.
The responsibility and transparency are fundamental points making all the
difference on the efficacy of the Brazilian public administration. From the time of the
adoption of the law on, Brazilian government may only spend what it collects or take in
debt just what it can pay (Motta, Santana, Fernandes, & Aves, 2000). Public
administrators are expected to look after public funds as they look after their own
finances. They ought to display a transparent administration; in others words, to turn
public what is public.
Transparency in fiscal administration is the main instrument for social control.
Under the FRL, public entities are required to follow the main principle of making public
all their acts and documents concerning accounting, budget and fiscal managerial reports,
through the press and electronic media. They are also compelled to send monthly that
information to the Federal Treasure Department where they are consolidated and
published. Cities that do not comply with the deadlines are not eligible to receive
voluntary transfers and to apply for credit operations.
Rio de Janeiro has demonstrated commitment to the transparency of governmental
actions. Account reports released by the information management system are published in
the local official press, and they are also available at the website of the General
Controlling Department (http://www2.rio.rj.gov.br/cgm/site.asp). In addition, the general
controller presents the city’s results to the council chamber once a year; and whenever it
20
is requested, to elucidate any inquiry regarding the financial situation of the city of Rio de
Janeiro.
By contrast, Teresina is moving slowly in applying transparency to its actions.
The city hall has neither published the account balances nor has it held public hearings at
the council chamber. The head of the Accounting Department informed me in July 17,
2003 that the city hall’s website was being enhanced in order to present the financial
information concerning to the FRL mandates. The transparency in fiscal management is
foreseen in the Articles 48 and 49, of the FRL.
21
CHAPTER 4
BRAZILIAN BUDGETARY PROCESS
The logic of responsible fiscal management resides in the budget planning
process. The Brazilian Federal Constitution in its Article 165 establishes three integrated
instruments of the public administration planning, which are: The Multiyear Planning
(MP), The Budget Directive Law (BDL), and The Annual Budget Law (ABL). The
planning process is the starting point of compliance with the FRL rules. These three
instruments encompass all future actions pertaining to the public administration.
The FRL enhances the former functions of the Budget Directive Law and of The
Annual Budget Law. These two planning instruments should introduce on their context
new information, targets, limits, and conditions to the revenue waiver, as well as
expenses generation, public debt, credit operations3, and the concession of guarantees.
The purpose of this Law is to strengthen the budgetary process as a planning tool,
avoiding undesirable fiscal imbalances.
Although the FRL incorporates all three instruments mentioned above, the
President Cardoso vetoed the Multiyear Planning in its propositions of change. He
wanted to preserve the former structure foreseen in the federal constitution. As a
consequence of this veto, the constitutional directions given to this planning instrument
are still applicable.
22
Multiyear Plan
The Multiyear Plan proposal, issued by the municipal executive power, should
establish the directives, objectives, and targets of the capital expenditures and other
expenditures resulting from them and for those regarding continuous programs.
Approved by the legislative power, the law has a four-year period of validation. It is,
therefore, a medium term plan that covers the last three of the current mayor mandate and
the first year of the subsequent mandate. According to Villaça & Campus (2001), the
main objectives of the Multiyear Plan are:
• define targets and priorities, as well as the estimated results;
• organize, through programs, the governmental actions that result in the increase
in assets and services that meet the society demands;
• establish the needed relation between the actions to be developed and the
strategic orientation of the government;
• facilitate the governmental administration, defining the responsibility for the
results and the assessment of the programs performance;
• stimulate partnerships between public and private entities seeking funds for
financing the programs;
• provide transparency to the funds application and to the expected results.
Budget Directive Law
The BDL must specify the targets and priorities of the public administration,
encompass the capital expenses for the following fiscal year, guide the preparation of the
Budget of the next year, and provide orientation for changes in the fiscal legislation. It is
23
annually prepared; the executive branch should send the bill to the legislative branch
eight and a half months before the end of the current fiscal year, normally April 15th, and
be enacted no later than the end of the first legislative session, June 30th.
The main objective of the BDL is to discipline the planning of the Annual Budget
of the following fiscal period. Such discipline seeks the adequacy of the Annual Budget
objectives and goals with those established on the capital projects of the Multiyear Plan.
This instrument of planning provides the discussion concerning the principles of the
Annual Budget, attempting to respond to the particular demands of the community.
According Article 4, of the FRL, the BDL must establish:
• the equilibrium between revenues and expenditures;
• criteria and restrictions of expenditures to be assumed;
• rules and cost control and assessment of results of programs financed with
budget funds;
• conditions and requirements for the transfer of funds to public and private
entities;
• a Fiscal Target Appendix4;
• a Fiscal Risk Appendix5.
Annual Budget Law
The Annual Budget Law is an instrument that makes viable the implementation of
all planned governmental actions. It is through this fiscal instrument that the government
acquires the necessary financial resources to carry out its governmental activities.
24
Therefore, this instrument represents the financial authorization that grants the
implementation of the governmental projects.
The bill of the Annual Budget proposal is to be prepared in conformity with the
guidelines and priorities set forth in the Multiyear Plan, the Budget Directive Law.
According Article 35 of the FRL, the Annual Budget Law has to demonstrate strict
coherence with the Fiscal Target Appendix foreseen in the BDL. The purpose of the
mandate is to strengthen the budgetary process as a planning tool, avoiding undesirable
contradiction and incoherence. The following should be included in the annual budget
law:
• statement of consistency between the budget programming and the objectives
and targets included in the Fiscal Targets Appendix of the BDL:
• statement of the impacts over the revenues and expenditures derived of
relief, redemption, estimated credit, and the measures of compensation of waiver of
revenue and increase in continuing mandatory expenditure;
• contingency reserve necessary to cover contingent liabilities and other
unforeseen risks and fiscal events, defined in the budget framework law;
• all expenses relating to public debt and all corresponding revenues;
• refinancing of public debt, which should be included separately.
25
CHAPTER 5
PARAMETERS OF FISCAL GOVERNMENT ACTIVITIES
Local Public Revenues
According to Article 11 of the FRL the creation, forecast, and effective collection
of all taxes levied by the federation entity pursued to the Constitution are basic
requirements for a responsible fiscal administration. The three spheres of government are,
therefore, responsible for implementing, stipulating, and effectively collecting all the
taxes under their constitutional competence.
The Union shall provide technical and financial assistance to Municipalities for
the modernization of the respective tax, financial, asset, and social security
administrations (FRL, Article 64). The technical assistance consists of training and
development of human resources and transfer of technology, as well as support in the
disclosure of budget and accounting reports, even in electronic public media. The
financial assistance comprises the granting of goods and resources, financing through
federal financial institutions, and the transfer of funds from external operations.
Brazil is a country of continental dimensions, with a population characterized by a
diversity of races, customs, and cultures. It has 5,561 municipalities, 90% of which have
less than 50,000 inhabitants, and 10% representing a business metropolis area (Motta,
Santana, Fernandes & Alves, 2000). In this scenario, the assistance from the federal
government is fundamental. After the adoption of the FRL, the Brazilian Development
Bank expanded the Tax and Basic Social Sectors Administration Program (PMAT).
26
The municipality that fails in the implementation or modernization of its tributary
code will not be eligible to receive voluntary transfers from the federal and state
governments. This study could confirm that Rio de Janeiro and Teresina are collecting all
taxes under their constitutional competence. According Article 156 of the federal
constitution, the municipality can institute taxes on:
• Urban Property Tax- UPT;
• Inter Vivos Transfer of Property Tax- ITPT;
• Services of Any Nature Tax- ST.
The local government may also establish fees, by virtue of the exercise of police
power or for the use of public services provided to the taxpayer, and benefit charges
resulting from public works.
In addition to the assignment of the taxes above, the municipalities also secured a
fixed share of federal and state taxes (Federal Constitution, articles 158-159). Until
December 2000, federal government keeps 58% of all its collected taxes, and transfers
25% to the states and 17% to the municipalities (Vedana, 2002).
The federal tax governmental transfers are:
• 22.5% of the Federal Income Tax (FIT) and Industrial Product Taxes (IPT),
channeled through the Municipal Participation Fund (MPF);
• 50% of Federal Tax on Rural Property (FTRP), concerning real property located
in the municipalities;
• the totality of the local civil servants income taxes.
States are required to transfer to municipalities the following taxes:
• 25% of transactions regarding the circulation of goods and services (CGS);
27
• 50% of tax on ownerships of automotive vehicles licensed in the municipalities
(VLT).
The following figure summarizes the federal and states transfers:
Figure 1


22.50% of FIT and IPT
50% of FTRP

Municipal civil servant’s
Income Tax


25% of CGS
50% of VLT
MUNICIPALITY
STATE
FEDERAL
The federal and state transfers
From the Federal Constitution, articles 158-159.
Local Public Expenditures
A responsible public administration depends not only on its maintaining expenses
within the revenues limits, but mainly on avoiding expenses that are not well-planned or
that come to compromise the municipality’s financial health. The creation, expansion, or
improvement of the governmental action that accrues in increments of expenses, must be
accompanied by an estimation of the budgetary-financial impact in the year it becomes
effective and in the two subsequent years. If any expenditure generated or any liability
assumed does not comply with this condition it is considered unauthorized, irregular, and
harmful to the public finances (LRF, Article 15).
28
The creation of a mandatory continuing expense should be compensated by
permanent revenue increments or permanent reduction of other expenses. The statement
of measures adopted to compensate the mandatory continuing expense has to be included
in the Annual Budget Law.
Personnel expenditures
The personnel expenditures represent the main item among the public
expenditures at all levels of Brazilian public administration. Between 1996 and 2000,
states and municipalities spent together an average of 67% of their Net Current Revenues
with payroll (Martins & Nascimento, 2002). It is easy to conclude that other sectors of
the public administration, such as education, health, sanitation, and security were being
neglected. Article 18 of the FRL defines the total of personnel expense as:
The sum of expenditures incurred by the member of the Federation with active and
inactive workers, and retirees, in connection with elective mandates, positions, functions
or jobs; civil and military personnel and members of the Branches of the government,
with any kind of remuneration, such as wages and fixed and variable benefits, subsidies,
pensions, including any additional payments, bonuses, overtime and fringe benefits of
any kind, as well as social security charges and contributions withheld by the member of
the Federation on behalf of the social security agencies (p. 11).
The total value of personnel expenses will not consider:
• indemnity pay for dismissal of servants or employees;
• voluntary separation incentives;
• those expenditures resulting from the judicial decision and relating to a period
prior to the determination period;
29
• expense with inactive workers, even by means of a specific fund, financed by
funds from the inactive worker contribution, and other funds directly collected by the
specific fund.
The FRL establishes two limits to be observed with personnel expenses, expressed
as a percentage of the Current Net Revenue: 50% at the Federal level and 60% at the
State and Municipal levels.
In the federal sphere, the maximum limits to be spent with personnel are
distributed as follows:
• 2.5% to the Legislative Branch, including the Federal Audit Court;
• 6% to the Judiciary Branch;
• 0.6% to the Federal Public Prosecution;
• 3% to bear expenses of the Federal District and ex-territories;
• 37.9% to the Executive Branch.
In the state sphere, the maximum limits to be spent with personnel are distributed
as follows:
• 3% to the Legislative Branch, including the Audit Court;
• 6% to the Judiciary Branch;
• 2% to the Public Prosecution;
• 49% to the Executive Branch.
In the municipal sphere, the maximum limits to be spent with personnel are
distributed as follows:
• 6% to the Legislative Branch, including the Audit Court, if any;
• 54% to the Executive Branch.
30
The compliance with these limits should be evaluated at the end of each 4-month
period. If the maximum limit is surpassed, the excess must be reduced in the two
subsequent 4-months period. The limitation of the personnel expenditures in percentage
of the NCR aims to keep the public sector with the necessary financial resources to its
maintenance and to supply the social demands.
Limits on public debt and credit operations
As mentioned earlier, the Brazilian public debt grew significantly in the last two
decades. In the context of the states and municipalities, there was no rational planning of
the governmental actions. The expenditures practiced by these levels of government have
successively exceeded the revenues causing budget deficit. At that time, public
administrators dealt public debt by contracting credit operations without any control. The
limitation on public debt and credit operations is one of the most important lines of
reasoning of the FRL. This law defines concepts and rules to be observed by all
governmental entities. The debt limits are determined in relation to the NCR, and the
percentage is defined in the Resolution 40, of the Federal Senate (FRL, Article 30). The
maximum limit for the municipalities is 120%.
31
CHAPTER 6
DATA ANALYSIS
The impacts of the Fiscal Responsibility Law in the financial situation of the cities
of Rio de Janeiro and Teresina are evaluated taking into consideration the following
indicators: (1) Personnel Expenses7, (2) Net Consolidated Debt8, (3) Net Current
Revenue9, and (4) Primary Results. The analysis of these indicators is equivalent to a
check-up that the society and the public administrators can make of the public entities
financial health. In fact, one of the great merits of the FLR is to make it possible for the
public to know, through easily understandable indicators, how governments are
administering the public resources. It is important to point out that all values expressed in
these analyses are in reais, the Brazilian currency since 1994.
Rio de Janeiro
The city of Rio de Janeiro is located in southeast Brazil. From 1763
until 1960 Rio de Janeiro was the capital of the country. In 1808 with the transfer of the
Portuguese Royal Family to Brazil, Rio de Janeiro strengthened its political and
administrative position, an event that had great importance to the economic future of the
city.
Rio de Janeiro is the second largest city in Brazil. Its population is 5,857,000
inhabitants, 64.57% of which is between 15 and 59 years of age. The mayor Cesar Maia
is now serving his second term. On his first term, 1993-1996, he created the General
Controlling Department which is in charge of coordinating the internal control system.
32
This department is paramount in the fiscal responsibility and transparency of the
municipal administration.
Rio de Janeiro’s fiscal situation from 2000 to 2002
All information pertaining to these tables was provided by the General Controling
Department of the city of Rio de janeiro, and is available at the website:
http://www2.rio.rj.gov.br/cgm/site.asp
Table 2
Personnel Expenditures
In thousands
2000
2001
2002
Executive Branch
1,749,155
2,165,282
2,518,714
Legislative Branch
180,.739
189,910
159,494
Total
1,929,894
2,355,193
2,678,208
From http://www2.rio.rj.gov.br/cgm/site.asp
Table 3
Demonstrative of the Net Consolidated Debt
Debt Classification
In thousands
2000
2001
2002
Consolidated Debt
4,737,103
5,450,756
7,038,189
(-) Financial Available Resources
1,139,374
2,457,395
2,393,605
Net Consolidated Debt
3,597,729
2,993,361
4,644,584
Limit defined by Federal Senate (1,2 x NCR)
5,018,739
5,927,584
6,535,108
From http://www2.rio.rj.gov.br/cgm/site.asp
33
Table 4
Demonstrative of the Primary Results
In thousands
2000
Consolidated Collected Revenue
2001
2002
4,823,859
5,460,333
6,336,107
(398,071)
(797,081)
808,652
Net Revenue
4,425,787
4,663,252
5,527,546
Consolidated Realized Expenses
4,467,375
4,452,162
6,415,051
(-) Interests Expenses
(292,501)
(250,830)
(382,601)
(-) Amortization Debt
(75,657)
(122,738)
(164,576)
(8,932)
(9,224)
-
4,090,285
4,069,370
5,867,874
335,503
593,882
(340,328)
(-) Finance Revenues
(-) Granting of Credit Operations
Net Expenses
Primary Results
From http://www2.rio.rj.gov.br/cgm/site.asp
Table 5
Demonstrative of the Net Current Revenue
In thousands
Taxes
Contributions
Current Transfers
Others Current Revenues
(-) Plena Administration
2000
2001
2002
1,770,128
1,933,491
2,149,332
170,837
110,560
322,190
2,115,663
2,443,267
2,626,469
533,751
991,982
1,111,424
(237,260)
(280,211)
(285,746)
(148,875)
(154,813)
-
(1,743)
(-) Transfers Deduction to FUNDEF
(-) Compensation among Social Sec. Systems
(-) Contribution for Retirement purposes
(170,837)
(110,560)
(322,190)
Current Net Revenue
4,182,282
4,939,654
5,445,923
From http://www2.rio.rj.gov.br/cgm/site.asp
34
Table 6
Summary of Rio de Janeiro Fiscal Situation
Total
Personnel
Net Consolidated
Debt (NCD)
In thousands
Primary Results Net Current
Personnel/NCR
Revenue (NCR)
NCD/NCR
2000 1,929,894
3,597,729
335,503
4,182,282
46%
86%
2001 2,355,193
2,993,361
593,882
4,939,654
48%
61%
2002 2,678,208
4,644,584
(340,327)
5,445,923
49%
85%
The annual payroll had a nominal increment of 22.03% in 2001, and 13.71% in
2002. The City Hall granted the employees a wage raise of 5% in 2001 and another 5% in
2002 to compensate for the inflation during the period 2000-2001. The City Hall also
expanded the services provided by the project slum-district6 that benefits more than
600,000 people. The remaining increment is related to the Brazilian public employee’s
personal year advantages that raise an average of 5% a year. The nominal increment of
the municipal payroll requires a meticulous fiscal policy from the public administrators to
avoid further increase.
In spite of the nominal increment of the payroll, its percentage in relation to the
NCR had a total increase of only 3% (2% in 2001 and 1% in 2002). It can be concluded
that the increase of the NCR exceeded the nominal increment of the payroll. Such
performance of NCR was fundamental to the compliance of the incise III, article 19 of
the FRL, which establishes a maximum limit of 54% to the executive branch, and 6% to
the legislative branch of the NCR.
In nominal terms the Net Consolidated Debt (consolidated debt amount less
available finances) had a decrease of 20.10% in 2001 and an increase of 55.16% in 2002.
Besides the increment of the NCR, in 2001 the state government transferred to the
35
municipality R$150 million related to oil royalties. Both facts contributed significantly to
the decrease of the NCD.
The inflation and the exchange rate were mainly responsible for the NCD increase
in 2002. The inflation rate in 2002 was expected not to exceed 5%, however it reached
12.17%. The exchange rate was estimated as 2.54 for $1.00 and in December, it was at
3.98. In fact, during the period analyzed, the NCD had an increase of only 1% in
proportion to NCR. Therefore, Rio de Janeiro is still complying with the limits
establishes by the Federal Senate. The fiscal discipline adopted by Rio de Janeiro
lessened the vulnerability of its finances to atypical situations.
The primary results had a positive variation of R$258 million in 2001. Here the
NCR increment had an important role. Another fact was the decrease in interest expenses
that varied from R$290 million to R$250 million.
In 2002 the primary results presented a result which was much lower than what
was foreseen in the Fiscal Target Appendix. While the estimated primary result was
R$706 million it reached a negative value of R$340 million. The unexpected high
inflation and the increased exchange rate were again the main cause of the negative
results. However, taking into consideration the entire analyzed period, the municipality
has a reserve of R$589 million. The negative primary result presented this year is a
consequence of the flaws in the FRL, which requires the administration to consider only
the last twelve months, masking the real financial situation of the municipality.
The Net Current Revenue had an increment of 18.10% in 2001, and 10.24% in
2002. The municipality received financial resources from BNDES with the objective to
modernize its system of tax collection through the Modernization of Tax and Basic Social
36
Sectors Administration Program (PMAT). The modernization process was put into action
in January of 2001. Besides the increment of the revenues collection, the PMAT also
modernized the operational system, making it easier to prepare the accounting entries,
and improving the internal control.
In 2002, the NCR grew less than 7.86% in relation to 2001 because of the period
of recession that the Brazilian economy went through in 2002. In spite of that, Table 3
reveals that Rio de Janeiro is becoming more financially independent from others
governmental transfers. In the period analyzed (2000-2002), the percentage of local
revenues in relation to the total current revenues is 53.91%, 55.90%, and 57.70%
respectively.
According to Rio de Janeiro´s general controller Lino Martins da Silva, after the
adoption of the FRL, the city hall implemented the General Coordination of Norms and
Management Information System. This system aids to capture all data through
multidimensional structure which facilitates the continuum observance of the FRL
parameters. This technological advantage also helped in defining governmental priorities.
Da Silva affirmed that in the three years of the FRL, the local departments of
education, health, and social service went through progressive improvements. In the
educational sector it was possible to expand the pre-school assistance to more 10,000
children between 2 and 6 years of age. The public health provided in the west area of the
city, where there is a high public demand, had a significant improvement with the
construction of 5 new clinics, and the employment of new phisicians. Finally, the slumdistrict project that before the FRL was assisting only an average of 400,000 people now
is assisting 600,000.
37
Teresina
Teresina is located in Northeast Brazil. Its population is 715,360 inhabitants,
62.23% of which are between 15 and 60 years of age. Capital of the poorest state and the
first planned Brazilian capital, Teresina was built at the junction of two rivers- Poti and
Parnaíba, occupying an area of 1,672,5 km2. Firmino Filho is the mayor since January 1,
1997. Before being mayor, Firmino occupied the position of municipal finance secretary
in the period of 1993-1996.
The city hall does not have an information management system. All account
balances required by the FRL do not have any elucidation for the presented results. The
head of the accounting department stated that the pertaining explanations were not being
released because they were having problems with the implementation of the new
accounting system.
Teresina’s fiscal situation from 2000 to 2002
All information provided by this table is available in accounting balances given to
me by the City Hall Accounting Department on August 14, 2003.
Table 7
Personnel Expenditures
In thousands
2000
2001
2002
Executive and Legislative Branches
109,070
134,374
149,283
Total
109,070
134,374
149,283
From Teresina’s City Hall
38
Table 8
Demonstrative of the Net Consolidated Debt
In thousands
2000
Consolidated Debt
(-) Financial Available Resources
Net Consolidated Debt
Limit defined by Federal Senate (1,2 x NCR)
2001
2002
50,441
51,930
69,747
6,682
15,775
50,032
43,758
36,155
19,715
335,671
379,718
452,328
From Teresina’s City Hall
Table 9
Demonstrative of the Primary Results
In thousands
2000
Consolidated Collected Revenue
2001
2002
294,372
338,334
387,857
16,169
5,867
6,832
Net Revenue
278,202
332,466
381,025
Consolidated Realized Expenses
287,881
312,638
383,656
(-) Interests Expenses
2,898
3,318
3,071
(-) Amortization Debt
2,865
4,441
7,142
-
-
-
282,117
304,877
373,443
(3,915)
27,589
7,584
(-) Finance Revenues
(-) Granting of Credit Operations
Net Expenses
Primary Results
From Teresina’s City Hall
39
Table 10
Demonstrative of the Net Current Revenue
In thousands
2000
Taxes and Fees
Assets
Current Transfers
Others Current Revenues
2001
2002
34,958
33,288
43,404
2,652
1,900
6,261
234,167
260,328
210,798
7,948
20,912
140,625
(-) Transfers Deduction to FUNDEF
-
(24,148)
(-) Compensation among Social Sec. Systems
-
-
(-) Contribution for Retirement purposes
-
-
Current Net Revenue
279,726
316,432
376,940
From Teresina’s City Hall
Table 11
Summary of Teresina Fiscal Situation
Year
Total
Personnel
Net Consolidated
Debt (NCD)
In thousands
Primary Results Net Current
Personnel/NCR
Revenue (NCR)
NCD/NCR
2000
109,070
43,758
(3,915)
279,726
39%
16%
2001
134,374
36,155
27,589
316,432
42%
11%
2002
149,283
19,715
7,584
376,940
40%
5%
The annual payroll had a nominal increment of 19% in 2001 and 10% in 2002. As
in the example of Rio de Janeiro, the City Hall also granted the employees a wage raise
of 5% in 2001 and another 5% in 2002 in order to compensate for the inflation during the
period 2000-2001. As mentioned before, the Brazilian public employee’s personal year
advantages are responsible for an average of a 5% increase in payroll at yearly
40
increments. The accounting balances do not provide explanation for the remaining
percentage of the increase, which was 14% in 2001 and 5% in 2002.
Teresina is expending an average of 41% of NCR with personnel expenditures,
19% below of the legal maximum limit. However, I have no access to the percentage
spent by the executive and legislative branches separately. The mayor Firmino give me
an explanation by saying that he was having problems with these percentages due to the
fact that the legislative power was receiving more than the amount allowed by the FRL.
According to Firmino, if the percentage spent by the legislative branch be reduced
immediately to the legal limit, the city hall could face some political problems. He also
said that, “The solution was to make an agreement with the State Court of Accounts to
have a transition period of three years, when the legal limit will be conformed.”
The Net Consolidated Debt had, in nominal terms, a decrease of 17.40% in 2001
and 44.50% in 2002. According to information provided by the head of the Accounting
Department, the Debt Amount of the city of Teresina is composed only of national loans;
therefore, it does not suffer any influence from changes at the exchange rate. According
to the mayor, the only new credit operation contracted during the analyzed period was
with the BDB, and it was to be applied in modernization of the revenue collection
system. Teresina is in compliance with the limits established by the Federal Senate
Resolution.
The primary results changed from a negative to a positive value in 2001. The year
2002 also presented a positive result, although it is R$20 million less than the previous
year. A positive primary result means that the municipality has better conditions to pay
its debts.
41
The Net Current Revenue had an increase of 11.60% in 2001 and 16% in 2002.
The municipality received financial resources from BDB with the purpose of
modernizing its tax collection system through the PMAT. The new system is being
implemented in the current fiscal year. In the period analyzed (2000-2002), the
percentage of local revenues in relation to the total current revenues is 19.45%, 21.54%,
and 90.21% respectively. The extraordinary performance of the local revenues collection
in the year 2002 is not explained in any of the accounting balances.
Actually, the municipal government expects that the current collection of the local
taxes will result in a positive impact by the end of this 2003 fiscal year. The mayor
Firmino said that for this year, after 15 years with no changes, the basis of the property
tax rate was updated by roughly 30%. He also expects a higher collection of service tax
because the city hall strengthens the audit in its collection. The mayor said, “Since the
adoption of the FRL, my main concern is to increase the collection of taxes. The
reduction of expenditures is complicated because the Brazilian legislation establishes
minimum limits to be spent in certain governmental functions, such as 25% of all taxes in
elementary education, and 15% in health.
In our interview, the mayor Firmino complained that the federal government likes
to create laws without regard to local peculiarities. He went on asserting that the FRL is
more likely a punishable law because “it treats the public administrators as non-trustful
people requiring a great number of new budgetary and account balances.” He also said
that the administration is working hard to become more efficient.
Until this point, all improvements brought by FRL in Teresina were internal to the
administration. Concerning social programs, Firmino said that for more than 5 years the
42
administration reserves 20% of the capital projects to be applied in accordance with the
district association’s requests. This form of action is known as a “participative budget.”
The mayor showed some resentment towards the FRL. Nonetheless, he recognized the
long term benefits that the FRL can bring.
43
CONCLUSIONS
The Fiscal Responsibility Law has been considered a milestone in Brazilian
public administration because it proposes a new pattern of fiscal behavior, requiring new
forms of planning, transparency and public expenses control. Due to the relatively short
time since its introduction, implementation in 2000, it might be too early to assess the
impacts of FRL on the country’s economy and on the public administration at all levels,
especially because it has proved difficult for some administrators to clearly understand
and follow. However, concerning the control of public indebtedness and equilibrium
between revenues and expenditures, it can be stated that the FRL mandates did induce a
new responsible fiscal culture in the country, as can be observed in the summary of Rio
de Janeiro and Teresina’s fiscal situation.
Brazilian government has taken effective procedures in order to mitigate its fiscal
and external vulnerability; an example of which is the fact the public administrators are
expected to spend only the amount of revenues that is collected. Maintaining and
reinforcing states and local governments’ responsible budgetary practices in Brazil has
required constant vigilance from both the federal government and the society. Since the
implementation of the FRL, the federal government has been faced with the challenge of
introducing the proposal of the law into the daily life of 27 Brazilian states with their
5,561 municipalities. In particular, for the less resourceful governments, there have been
agreements over a period of transition for a complete compliance with this law mandates,
for such governments have displayed particular difficulties in applying the law in various
44
levels, including technological, and of personnel properly qualified to work according to
the proceedings of the law.
The FRL represents a long term fiscal adjustment, for it proposes new political
and administrative ways of conducting the public adminstration which has for a long time
in its history been different from what the law proposes. The administrations of the cities
of Rio de Janeiro, Southeast Brazil and Teresina, Northeast Brazil, have presented
commitment in embracing a balanced fiscal conduct. The data gleaned from both
administrations reveal that the expenditures with public employees, the indebtedness, the
primary results, and the net revenue collection are quite positive. These financial
indicators are effortlessly understood for their precision and transparency, and are
equivalent to a check-up that the society and the public administrators can make of the
public entities financial health. A fiscally responsible administration represents more
independence for the public administrators to plan the governmental actions and therefore
concentrate on the local needs.
The Fiscal Responsibility Law had provided Rio de Janeiro’s administration with
favorable conditions and sufficient control to observe significant improvement in
educational, health, as well as in other social service sectors. The General Controlling
Department has played an important role on the equilibrium of the Rio de Janeiro’s
finances, for its personnel are efficiently qualified and have all the necessary support to
observe the law. Furthermore, the implementation of the General Coordination of Norms
and Management Information System facilitates the continuum observance of the FRL
parameters has represented technological advantage, which has come to aid the
administration delineate governmental priorities.
45
Rio de Janeiro, which has the finest financial performance and the highest
indicators for the municipal development, shows a higher level of indebtedness. The
major challenge of the mayor Cesar Maia has been to decrease the external vulnerability
of the local finances. The zoning process of the slums’ areas will signify the increase of
the local revenues collection in the future and, therefore, on the governmental financial
independence.
Due to the incipient level of economic development of the region and the low
capacity to generate revenues, Teresina is moving slowly to reach more financial
independency. The mayor Firmino Filho is seriously concerned in obeying to the FRL,
and at the same time, not decreasing the quality of the public services currently offered to
the citizens. Until this point, all improvements brought by the FRL in Teresina have been
internal to the administration. The implementation of the new account system and the
modernization of the revenue collection system are the most notorious improvements.
A top priority of Firmino’s administration has been to decrease local financial
dependence from the federal and state transfers, for which he has made constant effort to
in order to enhance the collection of revenues and to control the level of expenditures.
Firmino is confident that the implementation of the new accounting system and the
modernization of the revenue collection system will bring in short term, positive
outcomes for the municipality.
Fiscal responsibility as proposed by the Fiscal Responsibility Law has as its basic
principle the equilibrium between the society’s aspirations and needs and the available
public resources. The transparency in the public management is the key term in this
matter, for it contributes positively to the evolution of society, and reflects the best
46
economic results. Brazilian citizens have become more involved and participative in
government decisions that affect their lives. This partnership between government and
society is the most powerful and sound way to have a responsible and transparent public
administration in the country.
47
REFERENCES
Brazilian Federal Constitution. (1988). Retrieved April 22, 2003 from the World Wide
Web: http://www.senado.gov.br/bdtextual/const88/const88i.htm
Brazilian Development Bank (1997): http://www.bndes.gov.br/english/
Complementary Law 101, (2000). Retrieved April 22, 2003 from the World Wide Web:
http://www1.worldbank.org/wbiep/decentralization/laclib/Brazil_law.pdf
Controladoria Geral do Municipio do Rio de Janeiro. Retrieved May 06, 2003 from the
World Wide Web: http://www2.rio.rj.gov.br/cgm/publicacoes
/prestando_contas/37/3.asp
Cruz, F., Viccari, A., Glock, J. O., Herzmann, N., & Tremel, R. (2002). Lei de
responsabilidade fiscal comentada (3rd ed. ). São Paulo: Atlas.
Di Pietro, M. S. Z. (2000). Administração pública – legislação. São Paulo: Malheiros
Khair, A. A. (2000). Lei de responsabilidade fiscal- guia de orientação para as
prefeituras- Brazília: Brazilian National Development Bank.
Lino, P. (2001). Comentários à lei de responsabilidade fiscal. São Paulo: Atlas.
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49
ENDNOTES
1
The primary Result represents the difference between the non-financial revenues
and non- financial expenditures. It is considered one of the best indicators of the financial
health of any public entity. All assigned accord with the IMF invariable take into
consideration the primary result as a parameter of responsible fiscal administration. The
analysis of the primary results demonstrates how much a government can be selfsustainable or reliant on others’ financial resources to pay its expenditure. For instance, a
negative primary result implies the need to contract a new credit operation to compensate
for previous debts and consequent increase of public indebtedness.
2
Voluntary transfers are those current or capital revenues, for the purpose of
cooperation, aid or financial assistance, which do not arise from constitutional or legal
determination.
3
Financial obligation assumed resulting from a mutual loan, credit granting,
issuance and acceptance of security, financing for the acquisition of goods, anticipated
revenues from the term sale of goods and services, leasing and similar operations,
including the use of derivatives.
4
It refers to the annual targets to be achieved, in current and constant values for
revenues and expenditures, nominal and primary results, and the public debt, for the
current and for the two subsequent years.
5
This appendix contains the evaluation of contingent liabilities and other risks
that may affect public accounts, and also the detailed measures to be taken, should such
occur.
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6
Started in 1994, the Program "Slum-district" benefits about 600.000 people. The
program receives funds from the City hall of Rio de Janeiro, the Inter-American Bank of
Desenvolvimento (BID), and Europe Union (EU). Its goal is to integrate the slums to the
city, endowing them with all the infrastructure, public services, equipment and social
policies. The program involves the construction sewer draining systems, treated water,
paved streets, day-care centers, squares, areas of leisure and ginasiums. It also relocates
families which are living in risk areas.
7
At the municipal level, the maximum limits to be spent with personnel are 54%
to the Executive Branch, and 6% to the Legislative Branch, including the Audit Court, if
any, from the Net Current Revenue. If the total personnel expense exceeds 95% of the
limit, the branch responsible for the excess is prohibited from granting benefit, increase,
adjustment of remuneration for any reason; creating office, job, or function; changing
career structure that implies expense increase; and contracting overtime work, except in
the situations set forth in the Budget Directive Law.
8
The Consolidated Debt is the total amount, determined without duplicity, of
financial liabilities undertaken by the municipality, according to the terms of legal
contracts, agreements or treaties, generated by credit operations, for repayment at over
twelve months. To determine its total, it should include the debts of the direct
administration, autarchies, foundations, and dependent public companies. The Net
Consolidated Debt is determined by deducting the available financial resources from the
Consolidated Debt Amount. Article 3o, incise II, of the Federal Senate Resolution no 40,
establishes to the municipalities the maxim limit of 1.2 times of the Current Net Revenue.
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9
The Net Current Revenue (NCR) is certainly the most important indicator of
compliance with the FRL mandates for it serves as parameter of assessment of the main
limits to be observed by the public administrators. The NCR is the sum of revenues from
taxes, contributions, on assets, industrial and agricultural activities, services, current
transfers and on other current revenues. The public employee contributions toward their
social security and assistance system, and revenues from the financial compensation
among the various social security systems for reciprocal count of the time of contribution,
for retirement purposes, should be deducted from the Net Current Revenue. The Net
Current Revenue should be calculated by adding revenues collected in the reference
month and in the previous eleven months, excluding any duplicate inputs.
52
APPENDIX A
53
VITA
KASSANDRA SARAIVA DE LIMA
Personal Data:
Date of Birth: November 5, 1964.
Place of Birth: Campo Maior, Piauí – Brazil
Education:
UNIFOR – Universidade de Fortaleza,
Ceará, Brazil; Economics, B.S.,
1988.
UFPI – Universidade federal do Piauí – Brazil
Accouting, B. S. 1996
UFPI – Universidade federal do Piauí – Brazil
External Controle Specialization, 1998
ETSU - East Tennessee State University
Johnson City, Tennessee; Public Administration,
M.A., 2003.
Professional
Experience:
1989 – Present – Piauí State Court of Accounts. Fiscal
Auditor of External Control.
2001 – 2003 – ETSU – College of Business.
Graduate Assistant.
54