COSTA RICA

The Republic of Costa Rica is a unitary and democratic country with a presidential and representative regime. According to the 1949 Constitution, executive power is held by the President of the Republic, elected by universal suffrage for a period of four years, with no direct re-election. The legislative branch consists of 57 national deputies elected in the provinces for a period of four years with no continuous re-election. Judicial power is exercised by the Supreme Court of Justice and its courts.

At subnational level, the territory is administratively divided into provinces, municipalities/cantons, and administrative districts at the sub-municipal level. The seven provinces are deconcentrated units headed by a Governor appointed by central authorities. Municipalities (or cantons) are the only level of local self-government in the country (art 170 of the Constitution), responsible for the administration of local interests and services. Municipal governments are led by a mayor and a municipal council elected by universal suffrage every four years (Municipal Code, Law no 7794, 30 April 1998). Each municipality is divided into districts, which are administrative units with their own functional autonomy, although the direct administration of the district falls to the municipality. The District Municipal Councils Law (Law no 8173, 7 December 2001) stipulates that each district council is made up of five councillors (síndicos) who are elected by popular vote for a four-year term.

As a result of reforms of the electoral chapter of the Municipal Code (in November 2007 and September 2009), from 2016 onwards, municipal elections at municipal/canton and district levels are unified and are held two years after those of the Presidency and Vice-Presidencies of the Republic and members of the Legislative Assembly (art. 14 of the Municipal Code).

In 2012, the National Territorial Planning Policy (2012-2040) was launched, presenting guidelines on three principles of territorial development that seek to strengthen “the value of the common good over private interest”. In addition to the principle on Quality of Housing and Environmental Protection and Management, the principle of Territorial Competitiveness stands out, based on the strengthening of local capacities, the promotion of technology in the subnational layers of government and an agile and modern territorial management. This policy seeks to integrate a framework of common objectives between a series of institutional actors and, at the same time, constitute a guide for the strategic planning of the Costa Rican territory, with a long-term perspective.

In 2021, after a regional development process led by the Ministry of National Planning and Economic Policy, with the support of the European Commission, the Regional Development Law (N 22.363) was adopted, establishing the National Policy for Regional Development. The law transforms the current Regional Development Councils into Regional Development Agencies, made up of representatives from the business sector, civil society, academia, municipalities, public institutions and territorial councils. It also led to the creation of a Regional Development Fund (FONADER), which will be in charge of allocating resources to promote regional development and reducing interregional and intraregional socio-economic asymmetries. Another novelty that it incorporates is the obligation of the Central Bank of Costa Rica to calculate a regional Gross Domestic Product (GDP), which enables the analysis of the economic situation in each of the regions.

TERRITORIAL ORGANISATION
Municipal Level [1]	INTERMEDIATE LEVEL	REGIONAL LEVEL	TOTAL NUMBER OF SNGs (2020)
82 Municipalities (Municipios – cantones)
Average municipal size: 62 123 inh.
82			82

[1] Name and number of sub-municipal entities: 484 administrative districts

OVERALL DESCRIPTION: In accordance with the Political Constitution of 1949 and the law on Territorial Administrative Division of the State in Costa Rica, the country is divided into 82 municipalities or cantons and these, in turn, into 484 administrative districts (art.168).

In addition, Costa Rica is divided into seven provinces for statistical purpose only.

MUNICIPAL LEVEL: Municipalities are headed by a mayor and a municipal council, composed of councillors (regidores). The number of municipal councillors varies according to the population of the municipality: the least populated municipalities have 5 councillors, and the ones that comprise more than 8% of the total population have 13 councillors. The main cities are San José (347 398), Alajuela (314 209), Desamparados (245 208), San Carlos (200 151), Cartago (164 121) and Pococí (150 664). The 11 largest municipalities are home to 41% of the population. The creation of new municipalities must be approved by the Legislative Assembly, by at least two-thirds of its members

The municipal council can act together with Cantonal Institutional Coordination Councils (CCCI) to facilitate co-ordination and integration of work done by different stakeholders and public entities (e.g. public companies) involved at the municipal level. CCIs were created by Act No. 8801 of 2010, as formal co-ordination mechanism between the central and local level of government. In municipalities where CCCIs exist, they are responsible for coordinating the development, implementation and supervision of local public policies. They are chaired by the mayor of each municipality, and municipalities are responsible for CCCIs' operating expenses.

SUB-MUNICIPAL LEVEL: Municipalities are subdivided into districts. Districts are administered by district councils responsible for managing local affairs as closely as possible to the people and contributing to the work of municipal councils at the municipal level. There are as many district councils as there are districts in the corresponding municipality. Each district is represented in the municipal council by a district councillor (síndico titular) with an advisory voice but without voting rights.

STATE TERRITORIAL ADMINISTRATION: In 1970, the national territory was divided into six planning regions for administrative purposes, namely the Central, Chorotega, Brunca, Huetar Caribe, Huetar Norte and Central Pacific regions. Each region was administered by a regional development council, formed by representatives of the central government, and whose role was to manage regional development and reduce inequality gaps. In 2021, with the enactment of the Regional Development law (N 22.363), these regional development councils were transformed into regional development agencies, whose membership encompasses a larger range of local stakeholders, including representatives from the business sector, civil society, municipalities and other public institutions.

Municipalities have both exclusive and shared competences. Article 170 of the Constitution, Law no 8801 on transfer of competences and resources adopted in 2010, as well as article 74 of the Municipal Code provide that the following areas are solely the responsibility of subnational governments: urban planning, treatment and adequate final disposal of ordinary waste, maintenance of parks and green areas, public lighting, street cleaning, land valuation, municipal police, libraries, sports and recreational facilities, and new municipal services to be established by law. The 2010 Law further states that the transfer of resources corresponding to transferred competences “shall be carried out gradually, at a rate of 1.5% of the ordinary revenue of the State budget according to special laws and cumulatively until completing at least 10%”. In 2015, Special Law No. 9329 transferred "full and exclusive responsibility for the cantonal road network" to the municipalities, the first of the corresponding new competences and resources to be transferred up to 10% of the state's budget.

Subnational governments also have shared competences, which include participation to national health programmes, environmental protection, management of social subventions, public order and local economic development.

On the other hand, responsibilities for the education and health sector are centralised. For instance, education is the responsibility of the Ministry of Education, which implements decisions through Regional Education Directorates (28 as of 2021).

Main responsibility sectors and sub-sectors
SECTORS AND SUB-SECTORS	Municipal level
1. General public services (administration)	Buildings and public facilities
2. Public order and safety	Security, surveillance and monitoring, through the municipal police
3. Economic affairs / transports	Maintenance of cantonal roads; Construction and maintenance of public parks; Regulatory plan to organize the development of the canton; Local tourism
4. Environment protection	Maintenance of municipal forest areas, parks and green spaces; Management and disposal of waste; Cleaning of public roads
5. Housing and community amenities	Municipal aqueducts (drinking water); Public lighting; Urban and land use planning
6. Health	Participation in National Health Programme
7. Culture & Recreation	Cantonal Committees for sports and recreation; Cultural centre; Municipal libraries
8. Education
9. Social Welfare	Social protection for children and young people; Family support services

Scope of fiscal data: Municipalities

SNA 2008

Availability of fiscal data: Medium

Quality/reliability of fiscal data: Medium

GENERAL INTRODUCTION: The municipal financing system is governed by the following laws and financial provisions: General Law no 6627 on Public Administration; Law no 8131 on Public and Financial Administration of the Republic and Public Budget; Law no 7494 on Administrative Contracting; Law no 7755 on Control of Specific Items Charged to the National Budget; General Law no 8292 on Internal Control; Organic Law no 6815 on the Office of the Attorney General of the Republic; and Organic Law no 7428 on the Office of the Comptroller General of the Republic.

Municipalities in Costa Rica, unlike the local governments of most of the countries in the region, are mainly financed by own-source revenue, both tax and non-tax. Among the most important local collection mechanisms are the property tax and the special fuel tax, of which municipalities cannot set rates; however, they can propose tax exemptions to the Legislative Assembly, and set rates and fees for municipal services.

Regarding transfers by the central government, it transfers 10% of its ordinary income to local governments, which are assigned to specific expenditure items, in particular investment projects or programs of social interest, according to Law No. 7755. Additionally, municipal governments have access to external financing mechanisms such as internal and external indebtedness and issuance of municipal bonds under the parameters established by law, financing from the private sector (PPP) and International Cooperation funds.

Subnational government expenditure by economic classification
2020	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total expenditure	378	1.8%	3.9%	100%
Inc. current expenditure	262	1.2%	3.0%	69.2%
Compensation of employees	137	0.7%	4.6%	36.2%
Intermediate consumption	87	0.4%	11.3%	23.0%
Social expenditure	5	0.0%	0.4%	1.3%
Subsidies and current transfers	29	0.1%	1.0%	7.6%
Financial charges	3	0.0%	0.3%	0.9%
Others	1	0.0%	2.8%	0.2%
Incl. capital expenditure	117	0.6%	12.3%	30.8%
Capital transfers	2	0.0%	0.6%	0.6%
Direct investment (or GFCF)	115	0.5%	21.8%	30.2%

EXPENDITURE: Overall, subnational expenditures remain low in comparison to other OECD countries: in relation to GDP, total subnational government expenditure represents only 1.8% of GDP, well lower than the average of OECD countries in 2020 (12.7%). Current expenditure accounts for most of subnational government expenditure (69%) in 2020. Wages and salaries represent the largest share of current municipal expenditure (36%), followed by spending on goods and services (intermediate consumption).

Subnational governments’ spending on subsidies and current transfers is particularly significant, with high municipal contributions to the Costa Rican Social Security Fund and the Popular and Municipal Development Bank (BPDC) and, to a lesser extent, to the Joint Institute for Social Assistance (IMAS), the Fund for Social Development and Family Allowances (FODESAF) and the National Training Institute (INA).

DIRECT INVESTMENT: In 2020, subnational government investment represented 21.8% of total public investment and 0.5% of GDP, which is well below the OECD average (respectively 54.6% and 1.9%). Nevertheless, investment is a key function of subnational governments, accounting for 30.2% of subnational government total expenditures in 2020, above the OECD average (11.3%). The share of subnational governments in total public investment has significantly increased in recent years, from 11.5% in 2016 up to 26.4% in 2019, although it decreased in 2020 due to the COVID-19 crisis.

Despite having access to private financing through PPPs, no subnational investment projects have been carried out using this mechanism recently. The last one dates back to the construction of a container terminal in the port of Moin in 2015.

ⓘ No detailed data available for this country

Municipal expenditure is directed to the following sectors, which are assigned by law to municipalities: improvement of aqueducts and sewers, maintenance of cantonal roads, waste collection and transfers to other administrative entities, such as sports committees and education boards, among others. According to the 2020 Public Budget Report, in 2020, municipalities spent 36.2% of their total expenditure on general public (municipal) services, 23.8% on housing and community amenities (in particular, residue recollection), 10% on social protection and 8.5% on security and public order.

Subnational government revenue by category
2020	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total revenue	376	1.8%	4.5%	100%
Tax revenue	149	0.7%	4.2%	39.5%
Grants and subsidies	90	0.4%	-	24.0%
Tariffs and fees	123	0.6%	-	32.6%
Income from assets	10	0.1%	-	2.6%
Other revenues	5	0.0%	-	1.3%

OVERALL DESCRIPTION: Costa Rica has among the lowest share of grants in total subnational government revenue among Central America. Most grants are capital grants, dedicated to investment projects. In parallel, the country has one of the highest percentages of own revenue (including tax revenue and tariffs and fees) in total subnational government revenue.

Tax revenue, tariffs, fees, and property income perceived by municipalities remained stable as a percentage of GDP between 2016 and 2020 (considering that GDP fell by 4.1% in 2020). However, the share of tax revenue in total subnational government has fell by 13.8 percentage points between 2016 and 2020.

TAX REVENUE: Municipal taxes include the recurrent property tax and the excise tax, which each account for around half of municipal tax revenue. Municipal revenue from the property tax account for 19% of total municipal revenue in 2020, and 0.3% of GDP (below the OECD average of 1.0% of GDP in 2020). Municipalities have been in charge of collecting property tax since 1995. The annual property tax to be applied throughout the Costa Rican territory corresponds to 0.25% of the appraised value, registered in the respective municipality where the tax liability originates. Tax rates are set by central authorities. Municipalities can propose new types of tax to the Legislative Assembly. Municipalities also receive revenue from an excise tax that accounts for 15% of total municipal revenue, and 0.3% of GDP.

According to the Comptroller General of the Republic (CGR), tax revenue experienced a 5.1% drop in 2020 compared to 2019. In 2020, the 10 municipalities that presented the greatest impact on revenue collection were: Guatuso, Naranjo, Corredores, Jiménez, Zarcero, Flores, Turrubares, Bagaces, Quepos and León Cortés.

GRANTS AND SUBSIDIES: According to the Constitution (art.170), the central government must transfer 10% of its revenues to subnational governments. Central government’s transfers to municipalities are governed by several laws. Law No. 7755 of 1998 on the Control of Specific Items regulates the allocation, distribution and use of funds allocated each year to cover local, communal or regional public needs. Funding for specific items, such as investment projects or programs of social interest, is granted on the basis of three criteria: the number of inhabitants (25%); the geographical area (25%); and the poverty index (50%). In addition, Law No. 8801 of 2010 on the Transfer of Competences from Central Government to Municipalities determines the resources to be transferred to the municipalities corresponding to the powers devolved to them. The criteria for the distribution of funds have been established as follows: 30% distributed with equal amounts to each municipality; 20 % distributed according to the number of inhabitants; 40% according to the municipal area; and 10% based on the municipal poverty rate. Finally, the Law no 9329 on the Transfers of Competences for the maintenance of the cantonal road network, adopted in 2015, transferred full and exclusive responsibility as well as the funding regarding the management of cantonal road networks to municipalities. The specific grant for this service is financed with revenue from a central government tax on fuels (22.25% share of total public revenue) (law no 8114).

Most of transfers to subnational governments are capital grants: they represent nearly 60% of total subnational government grants and subsidies, and 14% of subnational government revenue. Capital grants decreased 19.3% in 2020 compared to 2019, according to the CGR. This situation is explained by the fact that local governments received fewer capital grants for infrastructure projects, as these grants are financed by the tax on fuels, which was affected by the deterioration in the economic conditions of the country following the COVID-19 crisis.

OTHER REVENUE: Other revenues primarily include fees for the use of municipal services, such as public lighting, public road cleaning, waste collection, transportation, park and green area maintenance, municipal police service, etc. Article 74 of the Municipal Code gives municipalities the capacity to charge service fees and rates considering their cost plus a 10% profit. Municipalities can also get revenue from property income (market stalls rents) and municipal stamps.

ⓘ No detailed data available for this country

FISCAL RULES: Every municipality must nominate an accountant or auditor who is responsible for overseeing the implementation of local government services or works and budgets, as well as the works assigned to them by the municipal council. The Office of the Comptroller General of the Republic is vested with the duty and power to examine, approve or disapprove the municipal budgets.

In May 2020, in the context of the COVID-19 pandemic, a temporary municipal public finance law was approved that exempts municipalities from complying with the fiscal rule and with the tool established in the Public Finance Strengthening Law to curb the growth in spending by state institutions.

DEBT: Municipalities can only borrow to finance investment projects (“golden rule”). They can contract debt through the national banking system and the Institute for Municipal Development and Assistance (IFAM). IFAM is a public organisation established in 1970 to support municipal development, providing, among other activities, loans to the municipalities at preferential rates. Moreover, according to the 1998 Municipal Code, debt service is limited to 19% of current municipal revenues when originated by projects that do not generate sufficient funds to finance them. Municipal borrowing needs approval from the national legislature.

Municipal borrowing has gained importance in recent years. During the period 2015-2019, according to the CGR, municipal indebtedness has increased by 91.7%, going from 0.15% of GDP in 2015 to 0.24% in 2019, year in which 83% of local governments (67 out of 81 municipalities) incorporated loan resources from financial entities for an amount of CRC 86.888 million (USD PPP 135 million). Of this amount, approximately 70% was granted by Public Financial Institutions and 30% by Decentralized Non-Business Institutions, including IFAM. According to the report of the CGR, in a given year the debt represents between 1% and 10% of municipal financing sources, and in some cases, it exceeds 20%.

TERRITORIAL MANAGEMENT OF THE CRISIS: In response to the COVID-19 pandemic, the country implemented a strategy called “Costa Rica trabaja y se cuida” (Costa Rica works and takes care of itself). Rather than strict lockdowns, the central government restricted vehicle mobility and limited business hours and capacity. The strategy included a Shared Responsibility Management Model between the national government and municipalities, with the aim to reactivate the economy by applying innovative measures to prevent the spread of COVID-19.

This model entailed the application of a Cantonal Prevention Plan for COVID-19, through which Municipal Emergency Committee (CME) were set up. The CME were responsible for developing actions covering a territory subdivided into Health Governing Area (ARS). To perform analysis of epidemiological information on their territories, each CME had to consolidate information received from ARS. For instance, the CME of the Central Canton of San José encompasses five Health Governing Areas (ARS): Uruca-Carmen-Merced, Hatillo, Mata Redonda-Hospital, Pavas and Southeast Metropolitan. The information manager of the municipality integrated the information of the different districts and carried out thematic cartography about the vulnerable population.

Co-ordination between the municipalities and the state was ensured through inter-institutional coordination and joint work with the National Commission for Risk Prevention and Emergency Attention (CNE). In the first phase, each CME evaluated the degree of implementation of health preventive actions within its territory, and strengthened the area that were not yet ready for implementation. Action plans were reviewed every two weeks to adjust the processes. Overall, 71 CMEs did a self-assessment of the conditions of their local government. Municipal governments that complied with the local plan, as well as the self-assessment, were able to re-open public equipment such as gyms, theatres, beaches, and public parks.

EMERGENCY MEASURES TO COPE WITH THE CRISIS AT THE DIFFERENT LEVELS OF GOVERNMENT: Initially, in March 2020, the government applied a number of economic measures, including: (i) a three-month moratorium on the payment of value-added taxes, corporate income tax and customs duties, (ii) a significant reduction in the monetary policy rate to make loans cheaper, and (iii) insurance so that the tourism sector could face the quarantines imposed by COVID-19. In addition, national resources were also allocated to support the most vulnerable, through the “Bono Proteger” program that provided temporary subsidies to about 700 000 people economically affected by the crisis.

In September 2020, the government announced the "Plan to overcome the fiscal impact of the pandemic", a proposal to negotiate an agreement with the International Monetary Fund (IMF) to obtain a financing of USD 1.75 billion. The most important proposals included a temporary reduction in social charges for companies in order to encourage employment and the refund of VAT on the basic food basket for the poorest 20% of the population. In addition, nine temporary and exceptional tax measures were established, including an extraordinary surcharge on income and the tax on electronic transactions and checks. Added to this was the commitment to reduce public spending.

At the local level, the CMEs had to adjust the containment centers to support the vulnerable population i.e., those who, due to their socioeconomic conditions, do not have the capacity to maintain isolation or do not have the capacity to protect themselves against possible COVID-19 infection. An example of this were the shelters set up by the Turrialba CME for the indigenous population.

IMPACTS OF THE CRISIS ON SUBNATIONAL GOVERNMENT FINANCE: According to the CGR, the crisis had a direct impact on the budget approved for the municipalities for 2021, which was reduced by 27.7% compared to the final budget for the 2020 period. The decrease in revenue was mainly due to the fact that 61 local governments (74% of the total) were negatively impacted in their revenue collection during the 2020 period, as a result of the national health emergency. Tax revenues were slightly impacted between 2019 and 2020 (-1%), whereas revenues from assets fell by 6% and tariffs and fees by 3%. The compensation came on the side of grants and subsidies, that increased 8% as a result of the rise of current transfers from the central government.

On the spending side, the pandemic encouraged strongly local governments to reduce their level of expenditure, which fell by 5% in 2020. The expenditure items the most affected include intermediate consumption (-6%), subsidies and direct transfers (-5%) and direct investment (-11%).

ECONOMIC AND SOCIAL STIMULUS PLANS: In June 2020, the World Bank approved a USD 300 million loan, under the program “Fiscal and Decarbonisation Management Development Policy Loan”, to support Costa Rica’s program to protect people’s income and jobs from the impact of COVID-19, benefit small and medium enterprises (SMEs), reinforce fiscal sustainability in the aftermath of this health crisis, and to lay out the foundations for a strong post pandemic recovery by promoting green growth and low-carbon development. The program has three pillars that are mutually reinforcing: (i) supporting the COVID-19 crisis response; (ii) helping with implementation of fiscal reform while nurturing the economy with tax enhancing and expenditure reducing measures, together with the wage bill and debt management improvements.; and (iii) fostering the recovery of a steady growth trajectory post COVID-19, by strengthening the country’s foundations for green growth and low-carbon development. Measures part of the last component include accelerating the deployment of low-carbon technologies, and expanding resilience of the national energy system.