Fiscal balance: how Paraty overcame the economic crisis and dependency on oil and resumes investment

                                                              

Fiscal balance: how Paraty overcame the economic crisis and dependency on oil and resumes investment

Comunitas
Solution proposed by: 
Comunitas, City Hall of Paraty and Falconi Consultores de Resultados
In a Nutshell: 
The fiscal balance project in the city of Paraty resulted in justice of taxes collection and contributed to overcome their financial dependence on oil royalties. From these and other adjustments, the city now has clean water service and took up investment in public services such as in health care.
Where and When: 
The solution was implemented in Paraty Municipality in partnership with program Juntos since 2014. The program is lead by Comunitas and was replicated to other cities as Campinas, Santos, Curitiba, Teresina and Juiz de Fora. Paraty is located in Rio de Janeiro and has more than 37 thousand inhabitants.
Challenges: 
In 2013, the city of Paraty, state of Rio de Janeiro, presented a severe financial dependence on oil royalties that began to show a rapidly downward trend. Moreover, its tax revenues showed no significant growth, the government spending increased and the local tourism potential did not generate the expected return for the municipality administration. This scenario became highly damaging to public services, especially in public health. The challenges were, therefore, to overcome the dependence on oil royalties, raising the collection of their taxes and better managing the revenues, and thus create financial capacity for investment and improving public services.
Innovation: 
From 2013, the oil sector began to show signs of weakening. Dozens of municipalities in the state of Rio de Janeiro have a strong dependence of this economic activity, affected by the variation of its international value, governance problems at Petrobras and subsequently by the economic crisis faced in Brazil. By opening their public accounts, analyzing each of the revenue and expense items, and identifying opportunities for improvement in public finances through tax justice, Paraty was able to be economically prepared for a time when the Brazilian public sector had successive deficit at all levels of government
Concept: 
The program Juntos pelo Desenvolvimento Sustentável (Together for Sustainable Development) is lead by Comunitas and was created and focused on municipal governments, the administrative scopes that are closest to the population. One of its main pillars is management improvement, which directs its actions to fiscal balance, focused on increasing revenue (without raising taxes) and reduce costs (without prejudice public services). This model was firstly successfully implemented in Campinas, state of São Paulo, avoiding financial deficit after two decades of negative balance. The methodology that establishes a governance system involving servers, managers and mayor, management training, strategies and goals to fiscal improvement, has then been replicated to Paraty. Specifically in this case, the proposal was to reduce dependence on oil royalties and improve investment capacity, creating a sustainable model for development. Through these efforts, the city has the potential to deliver better quality public services to the population; especially those used by the poorest people, such as health and education, and plan their own urban development.
Description: 
After the municipal financial analysis, the program Juntos and Paraty municipality developed series of actions to optimize expenditures as improvement of inventory control, revision of outsourced services contracts as urban cleaning and setting limits for telephone expenses. In revenues, tax justice was promoted by creating mechanisms to end the payment default and correct distortions in charges. An example is the georeferencing performed to validate the actual footage of properties, constructions not reported to the government and omissions in tax payments. Serious distortions and irregularities were identified in a 15,000 properties database. It was verified that 30% had not reported expansions to the city hall and 3,000 units had never collected property taxes. Still, there were guesthouses that remained registered as residences. From these data, the collection of property tax was adjusted resulting in 50% percent increase, and the tax over services grew 60% after updating guesthouses registration and implementing electronic invoicing, which had accession of 80% of local commerce. The dependence on oil royalties, which previously represented 60 % of municipal revenues was reduced to 40 % . At the end of 2015, the National Treasury of Brazilian Government recognized Paraty as one of the 11 municipalities in Rio de Janeiro with regularized fiscal situation allowed to receive voluntary transfers from the Union.
Impacts: 
While cities and states suffer to meet the requirements of the Fiscal Responsibility Law, Paraty improved its financial statement despite of the impact of economic crises and decrease in oil royalties. It increased its investment capacity enabling the construction of a new emergency room in the local hospital and providing access to treated water to all urban population, through partnerships with the private sector. The city is also deploying cameras and a video surveillance system to enhance public safety and reassure the tourism sector. In education, the city has shown improvements presenting growth by 10% in Portuguese external evaluations from students from the 5th grade.

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Credit: City Hall of Paraty
Credit: City Hall of Paraty
Credit: City Hall of Paraty