Government Proposes Absorption of Small Municipalities with Revenue Difficulties

RIO DE JANEIRO, BRAZIL – The measure is included in the Proposed Amendment to the Constitution (PEC) of the Federative Pact, submitted to the Senate by the government yesterday, November 5th.

The rule would affect approximately one in every four municipalities in Brazil.

According to the special Secretary for  Finance, Waldery Rodrigues, the measure could affect up to 1,254 municipalities. Inclusions will be valid as from 2025, and it will be up to a statute to define which neighboring municipality will absorb the failed prefecture.

The federal constitution now requires a complementary law (one which requires a special quorum) to regulate the establishment and division of municipalities.

The PEC also extends the implementation rules of the Federal Budget to states and municipalities. The golden rule (public debt ceiling) and the spending ceiling would be extended to local governments.

Municipalities and state governments may also block part of the budgets of local legislative, judicial and prosecutorial branches. Currently, only the federal government may limit funds from all  government powers. Local governments can only block resources from their municipal executive.

According to the Ministry of Economy, the Federative Pact PEC will put an end to the judicial dispute over the Kandir Law, by extending the transfer of petroleum royalties and participation shares, to all states and municipalities.

Currently, the states negotiate transfers from the Kandir Law annually with the federal government, which must offset the exemption for exported products from the state Tax on the Circulation of Goods and Services (ICMS) normally imposed on all primary and semi-finished commodities.

The PEC also precludes states and municipalities from using resources from pension funds and judicial deposits involving private individuals to pay expenses.

Source: Agência Brasil