MEXICO

Mexico, officially the “United Mexican States”, is a federal presidential representative democratic republic in a multiparty system, composed of 32 federal states. The Political Constitution of the United Mexican States, approved in 1917 and revised several times since, defines the federal system.

At the federal level, the head of the executive branch is the President of the Republic, directly elected for a six-year term, who is both head of state and head of government. The bicameral parliament, the Congress of the Union, is composed of an upper chamber, the Senate (Cámara de Senadores), and a lower house, the Chamber of Deputies (Cámara de Diputados), with 500 members elected for three-year terms. State governments are represented in the Senate. Two senators for each state are elected under the principle of relative majority and one senator for each state is assigned under the principle of first minority. The 128 Senators are elected for six-year terms, concurrently with the term of the President of Mexico.

The country is divided into states and municipalities. The states are defined in the Constitution as being free, sovereign, autonomous and independent from one another. Each state has its own constitution, and can enact its own laws, as long as they do not contradict the national constitution. They also have their own judiciary branch, as well as civil and penal codes. The division of powers in states is similar to that of the national level, but with a unicameral legislature, i.e. the state congress (Congreso del Estado) which is composed of deputies, elected by universal suffrage for a three-year mandate. The state governor or gobernadores (except for Mexico City, which has a head of government) is directly elected by universal suffrage for a single six-year term as head of the executive branch.

At the local level, municipal autonomy was recognised by the constitutional reforms of 1983 and 1993. It is now enshrined in Article 115 of the federal Constitution as well as in the constitutions and legislation of each state. Each municipality is headed by a mayor (presidente municipal) elected by direct universal suffrage, with the support of the municipal council (ayuntamientos). The municipal council consists of a cabildo (chairman) with a síndico and several regidores. Councillors are elected every three years while the mayor’s mandate may vary across states.

Mexico has experienced several phases of federalisation and decentralisation. The country was established as a federal government in 1857, yet the fiscal agreements enacted in the 1920s and 1930s - and the rise of the Institutional Revolutionary Party - steered the country towards a highly-centralised political and fiscal model. Then in the 1980s, a series of reforms put the topic of decentralisation back on the agenda. First, the introduction of the National System of Fiscal Coordination (Sistema Nacional de Coordinación Fiscal, SNCF) in 1980 reorganised the whole intergovernmental fiscal system. It was followed by constitutional changes in 1983 that further decentralised functions and resources to subnational governments. In this respect, new responsibilities were transferred to the states, such as basic education in 1992 and healthcare in 1996. An important reform of the National System of Fiscal Co-ordination was carried out in 1998 to strengthen fiscal decentralisation. Almost 10 years after, in 2007, a new fiscal reform provided the states with more taxing powers and simplified the formulas for the distribution of federal transfers. Over the current decade, important changes were made to the Mexican multi-level governance system, related to the election of governors, state deputies, municipal councillors and mayors, and to the legal status of the federal District of Mexico.

Since 2014 (the year in which the electoral code was reformed), elected officials are allowed to serve consecutive terms in office for the first time since the establishment of democracy in Mexico. The National Electoral Institute coordinates the alignment of state and local elections with federal elections for the presidency and Congress. At the end of April 2022, President Andrés Manuel López Obrador presented an electoral reform for the National Electoral Institute to become the National Institute of Elections and Consultations, and the only electoral body in charge of organizing elections at the state and federal levels. The reform also includes reducing electoral councillors from eleven to seven, as well as eliminating the so-called plurinominal legislators, that is, the 200 deputies (of a total of 500) who are elected through a proportional electoral system in each district, as opposed to the 300 deputies who are elected using a majority uninominal system.

Vertical coordination across levels of government is ensured by the Parliament, in particular through the role of the Senate. However, the power of the Senate remains limited: its consent is not necessary for the approval of federal laws and it cannot veto federal laws. In addition, the two chambers do not have the same power over budgetary discussions: revenue is approved by both chambers, while expenditure is approved only by the Chamber of Deputies. There are few other vertical coordination mechanisms. The National Institute for Federalism and Municipal Development (INAFED), within the Ministry of Interior (Secretaría de Gobernación, SEGOB), aims to co-ordinate the actions of the three levels of government to design and implement public policies and programmes to strengthen intergovernmental relations, and contribute to the development of states and municipalities. It provides technical advice to local governments, training to local public employees and serves as a source of information on municipal finance. There are also numerous sectoral councils imposed by sectoral laws (health, education, sport, etc.) involving representatives of the federation and states.

At the state level, horizontal coordination takes place through the National Conference of Governors (Conferencia Nacional de Gobernadores, CONAGO). This forum for governors is responsible for defining a common agenda, fostering dialogue and strengthening the federal pact. At the local level, the National Conference of Municipalities of Mexico (Conferencia Nacional de Municipios de México, CONAMM) serves as a national forum for dialogue among municipalities and groups the three main municipal associations in the country: the National Association of Mayors (Asociación Nacional de Alcaldes, ANAC); the National Federation of Municipalities of Mexico (Federación Nacional de Municipios de México, FENAMM); and the Association of Local Authorities of Mexico (Asociación de Autoridades Locales de México, AALMAC).

TERRITORIAL ORGANISATION
MUNICIPAL LEVEL	INTERMEDIATE LEVEL	STATE LEVEL	TOTAL NUMBER OF SNGs (2021)
2 481 municipalities (municipios)		32 States (estados)
Average municipal size: 51 968
2 481		32	2 513

OVERALL DESCRIPTION: Mexico is a federal country that includes 32 federal states and 2 481 municipalities. Following the transformation of the Federal District of Mexico into an autonomous entity in 2016, the 16 boroughs (delegaciones) of the new State became municipalities in July 2018, date of the local elections.

STATE LEVEL: The upper level of subnational government in Mexico consists of 32 states. Mexico City (also called CDMX), previously considered a Federal District, became the 32^nd state of the federation in January 2016. Mexico City has its own constitution, enacted in 2017, and it now has autonomy in terms of its political and administrative structure. Its executive power is exercised by the head of government, who is elected by universal suffrage, while the legislative branch is in the hands of the Congress of Mexico City.

Mexican states are very diverse. While the average population size is around 4.03 million inhabitants (as of 2020), the least populated state counts 732 000 inhabitants (Colima) and the most populated 16.99 million inhabitants (state of Mexico). GDP per capita in Mexico City – the country’s second richest region after Campeche (where natural resources significantly contribute to the economy) – was more than seven times higher than in Chiapas in 2019. Even when resource-rich regions such as Campeche or Tabasco are excluded, regional economic disparities in Mexico remain larger than in any other OECD country.

MUNICIPAL LEVEL: The lower-tier of subnational government in Mexico comprises 2 481 municipalities (municipios), including the 16 boroughs (delegaciones) in Mexico City. Municipalities vary greatly in terms of size and capacity, and in particular staff capacity. The biggest gap is between rural and urban municipalities (of which there are 236), with the latter concentrating the largest share of the population. Urbanisation in most states took off during the 1960s and 1970s, yet there remain some states with low levels of urbanisation. The average size of Mexican municipalities is among the largest within the OECD (above 50 000 inhabitants vs 10 331 on average in the OECD). The median size (15 044 inhabitants) is also large by international comparison. In 2020, only 22% of municipalities have fewer than 5 000 inhabitants (vs 41% in the OECD), while 44% have more than 20 000 inhabitants (vs 33% in the OECD). This situation is, however, quite common in Latin America where municipalities are quite large on average.

Large municipalities are sub-divided into smaller sub-municipal entities (approx. 200 000 as of 2020), called urban or rural localities (localidades). Although they can have an auxiliary presidency and council (presidencia auxiliar and junta auxiliary) they are not self-governing entities but depend on the municipality in which they are located. Some municipalities also have an internal administration called boroughs, or delegaciones, whose leaders are appointed by the municipal president.

HORIZONTAL COOPERATION: Municipalities have had the right to enter into inter-municipal associations since 1999. Around one-quarter of municipalities have formalised inter-municipal agreements for the joint supply of public services such as water and sewage, public security and public transport.

In addition, there are in total 39 metropolitan areas with more than 500 000 inhabitants in Mexico. They have 54% of the national population (in line with the OECD average of 60%) and account for 63% of national GDP. The General Law on Human Settlements (LGAH) has been the main regulation governing the management of metropolitan areas in Mexico since the mid-1970s. It provides the legal basis for the establishment of institutions of inter-municipal and inter-regional cooperation and enables the creation of metropolitan agencies and urban metropolitan commissions for cooperation and coordination, which are policy and financial coordination agreements between the three levels of government (federal, state and municipal).

Most metropolitan areas in Mexico are governed with metropolitan arrangements. They were created in response to financial incentives from the federal government, which since 2008 allocates special funds through the Metropolitan Fund for officially-recognised metropolitan areas (with a “Metropolitan Development Council). Some metropolitan areas have metropolitan commissions that include the three levels of government and broader civil society. States can also be involved in the promotion of metropolitan governance arrangements, which is the case for the state of Jalisco with the Guadalajara metropolitan area, or the state of Nuevo León with the Monterrey metropolitan area.

Article 124 of the Constitution establishes that: “The powers that are not expressly given by this Constitution to federal functionaries are understood as reserved to the States”. The reality is however more complex and powers are defined and divided as follows: powers given to the federation (money, foreign affairs, defence, tax, macroeconomic policy, research and development, control of natural resources, etc.), powers given to states in an explicit or tacit way, powers prohibited to the federation, powers prohibited both absolutely (art. 117) or relatively (art. 118) to states; coincident powers, coexisting powers, aid powers and finally, powers given by the jurisprudence of the Nation’s Supreme Court of Justice. Given this, the federation’s remit seems considerably vast. The allocation of responsibilities across levels of government in Mexico is blurry, resulting in overlap between federal and state responsibilities. This poses several multi-level governance challenges.

States are devolved shared responsibilities with the federal government in several areas, i.e. primary education since 1992, and healthcare since 1996. Other joint responsibilities with the federal government including poverty alleviation, social protection and water management (since 1983), and in the field of economic affairs. States have a predominant role in spatial planning, the territorial coordination of urban areas, regional transport, municipal affairs, etc.

In the case of municipalities, the Constitution explicitly defines their functions and powers. The Constitution empowers them with responsibilities related to local matters, including the delivery of public services such as local roads and transport, urban planning and development, public safety, and utilities. Municipalities are jointly responsible, with the federal and state governments, for school buildings and implementation of social programmes, and the Constitution enables them to develop, adopt, and manage zoning and municipal urban development plans. Municipalities can delegate some responsibilities to the federated states by agreement (e.g. water, urbanism, road, tax collection).

Main responsibility sectors and sub-sectors
SECTORS AND SUB-SECTORS	State level	Municipal level
1. General public services (administration )	Supervision of municipal affairs	Construction permits, cadastres
2. Public order and safety	State public order and safety (state and special police)	Local order and safety (municipal police); Emergency fire
3. Economic affairs / transports	Roads (state roads, rural road development, maintenance of federal secondary roads); Regional transport and transit; Some airports; Agriculture, rural development and tourism (shared); Economic affairs and industrial policies (shared)	Local roads and public transport; Municipal transit; Local markets; Slaughterhouses; Local fairs
4. Environment protection	Protection of environment (shared); National parks (shared); Own state environmental standards	Waste management; Drainage; Waste water; public Parks and gardens; Protection of environment (shared); Local parks; Local use permits
5. Housing and community amenities	Spatial planning; Water management and co-financing of water infrastructure (shared)	Urban development plans; Water distribution; Street lighting; Cemeteries
6. Health	Healthcare (shared): organisation and operation of healthcare services for the uninsured population; Primary care for the rural and urban poor; Health services; Administration and maintenance of hospitals for primary care; Preventive and reproductive care
7. Culture & Recreation	Culture (public libraries) and recreation	Culture and recreation; Local exhibitions and festivals; Maintenance of monuments
8. Education	Primary and secondary education (shared); State universities; Adult education programmes; Indigenous and special education; School-lunch programmes	School buildings construction and maintenance (shared)
9. Social Welfare	Poverty alleviation (shared); Social protection (shared) including food assistance for the poor	Implementation of social infrastructure programmes (shared)

Scope of fiscal data: At the regional level, states, including Mexico City; at the municipal level, municipalities.

SNA 2008

Availability of fiscal data: Medium

Quality/reliability of fiscal data: Medium

GENERAL INTRODUCTION: Despite its federal structure and the strong decentralisation process, Mexico remains a centralised country in many respects, and decentralisation at the local level is very limited. Large spending areas are delegated and controlled by the federal government, which takes most of the strategic decisions regarding the country’s development.

The National Fiscal Coordination System (SNCF), created in 1980, defines and regulates the country’s intergovernmental fiscal relations. Under this system, states accept to yield part of their tax powers to the federation, through a Coordination Convention with the federal government. In exchange, they receive a share of federal taxes. The Fiscal Coordination Law (Ley de Coordinacion Fiscal) as well as the Laws on General Public Debt and on General Government Accounting set the framework for subnational finance. The 1997 Fiscal Coordination Law determines the distribution of the General Participation Fund among the 32 states and the municipalities, based on several criteria. It was revised in 2007 and 2013 to strengthen fiscal decentralisation. The Fiscal Coordination Law also created the National Reunion of Fiscal Civil Servants, which includes the Treasury and Public Credit Secretariat and the Treasury head of the states’ governments. The Reunion is required by law to meet at least once a year to consider how to improve the national fiscal coordination system. The Centro de Estudios de las Finanzas Públicas (CEFP), established in 1998, also provides non-partisan and timely analysis to Congress on public finances, including intergovernmental transfers from the federal budget to states.

In 2014-2015, a new fiscal reform, part of Pacto Por Mexico, aimed to improve the tax system, strengthen the fiscal responsibility framework and overhaul rules for states and municipal debt. Later, a 2015 Constitutional Reform gave the federal government the obligation to ensure the stability of public finances in the country, including its states and municipalities, as well as Mexico City. With this constitutional modification, Mexico established the Federal Financial Discipline Law for States and Municipalities (Ley de Disciplina Financiera de las Entidades Federativas y los Municipios). This legislative and regulatory framework aims to ensure sustainable public finances of state and municipal governments, promote greater transparency and accountability in subnational public finance, as well as help lower costs in contracting debt. However, as the COVID-19 crisis has posed challenges for subnational public finances, the federal government has recently made adjustments to the law to increase flexibility, without putting their subnational governments’ fiscal sustainability at risk.

Subnational, state and local government expenditure by economic classification
2020	Dollars PPP / inhabitant			% GDP			% general government			% subnational, state and local government
-	SNG	State	Local	SNG	State	Local	SNG	State	Local	SNG	State	Local
Total expenditure	2 466	2 068	398	13.1%	11.0%	2.1%	43.0%	36.1%	6.9%	100%	100%	100%
Inc. current expenditure	2 130	1 828	302	11.3%	9.7%	1.6%	42.0%	36.0%	6.0%	86.4%	88.4%	75.9%
Compensation of employees	1 123	973	150	6.0%	5.2%	0.8%	64.8%	56.1%	8.7%	45.6%	47.1%	37.8%
Intermediate consumption	354	248	106	1.9%	1.3%	0.6%	55.5%	39.0%	16.5%	14.4%	12.0%	26.5%
Social expenditure	9	8	1	0.1%	0.1%	0.0%	1.4%	1.3%	0.1%	0.4%	0.4%	0.2%
Subsidies and current transfers	596	554	42	3.2%	3.0%	0.2%	40.0%	37.2%	2.8%	24.2%	26.8%	10.6%
Financial charges	31	31	0	0.2%	0.2%	0.0%	5.7%	5.6%	0.1%	1.3%	1.5%	0.1%
Others	15	13	2	0.1%	0.1%	0.0%	66.1%	54.7%	11.4%	0.6%	0.6%	0.7%
Incl. capital expenditure	336	240	96	1.8%	1.3%	0.5%	51.6%	36.9%	14.7%	13.6%	11.6%	24.1%
Capital transfers	112	112	0	0.6%	0.6%	0.0%	33.9%	33.9%	0.0%	4.5%	5.4%	0.0%
Direct investment (or GFCF)	225	128	97	1.2%	0.7%	0.5%	69.7%	39.9%	29.8%	9.1%	6.2%	24.1%

EXPENDITURE: Mexico’s subnational governments are responsible for a significant share of public expenditure compared to their limited own-source revenue and low fiscal autonomy. The share of subnational governments in total public spending increased sharply from 10% of public spending in 1990 to 50.6% in 2013, then decreased to reach 43% in 2020 (in par with the OECD average for federal countries of 43.5%). The share of Mexican subnational government expenditure in GDP is below the OECD average for federal countries (13.1% vs 20.6%), and municipalities in particular have a quite limited spending role: 84% of subnational government expenditures originated from the state governments in 2020, compared to 16% from the municipal level, and the share of municipal expenditure in total public spending (6.9%) is among the lowest of OECD federal countries.

The largest part of subnational government spending is allocated to staff expenditure. Subnational governments are key public employers at the national level and are responsible for 64.8% of public staff expenditure. This is particularly the case for states, which accounted for 56.1% of total public staff spending, while municipalities accounted for less than 8.7%. Staff expenditure accounted for 47% of total state expenditure, which is high by international comparison. Finally, in 2020, there was a significant increase in spending on subsidies and direct transfers from the states (from 2.3% of GDP in 2015 to 3%), due to economic measures in the face of the health crisis.

DIRECT INVESTMENT: Mexican subnational governments account for a big share of total public investment (69.7%), above the OECD average for federal countries (61.5% in 2020). In 2020, state governments were responsible for 57% of subnational government investment, against 43% for municipalities. However, direct investment represents a much larger share of local expenditure for municipalities (24.1% of municipal expenditure) than for state governments (6.2% of state expenditure). Remit overlap between the three levels of government undermines the effectiveness of public investment. Indeed, investments at the metropolitan and municipal scales are often decided at the state level, and as a result, many local government projects are discarded. Due to vertical fiscal imbalances, states have contracted significant amounts of subnational debt in recent years to finance public investments and infrastructure.

Mexico’s National Development Plan 2019-2024 indicates that private investment, both national and foreign, will be encouraged, and a framework of legal certainty, transparency and clear rules will be established. The federal government also announced that it will respect the bidding or concession contracts signed by previous administrations, unless it is proven that they were obtained through corrupt practices. There are a few regional infrastructure projects funded through Public-Private Partnerships (PPPs), mainly in the transport sector, such as the Mayan Train and the Transisthmian Corridor. Starting in 2007, the Multilateral Investment Fund (MIF) of the Inter-American Development Bank (IDB) launched the Program for the Promotion of Public-Private Partnerships in Mexican States (PIAPPEM), which until 2015 was dedicated to supporting subnational entities in Mexico to create the conditions that would allow them to develop investment initiatives using PPPs. In October 2015, PIAPPEM evolved into PIAPPEM A.C., an autonomous think tank with its own legal personality.

Finally, some local investment initiatives stand out for the use of green bonds for the development of green infrastructure. For instance, Mexico City issued USD 50 million worth of green bonds in 2017 to finance its Climate Action Program 2014-2020, including investments in new rapid transit lines (bus) and an LED street lighting project.

ⓘ No detailed data available for this country

Mexican states carry out the majority of subnational spending (83.9%) as compared with municipalities, and have responsibility over major areas of spending such as health and education. Most of the funds allocated to these sectors come from transfers from the federal government, calculated based on previous budgets, and are primarily earmarked for current and staff expenditure. Therefore, staff compensation makes 90% of states’ spending on education. In the health sector, state governments also contribute to the financing of public hospitals, together with the federal government, and allocate 50% of the total resources of the national health insurance programme (Seguro Popular, adopted in 2004).These resourcesare earmarked to salary payments, purchase of pharmaceuticals and outsourcing services.

Municipal spending (16% of total subnational government spending) is much more limited, and concentrated in the provision of local services, local equipment and maintenance of school buildings.

Subnational, state and local government revenue by category
2020	Dollars PPP / inhabitant			% GDP			% general government			% subnational, state and local government
-	SNG	State	Local	SNG	State	Local	SNG	State	Local	SNG	State	Local
Total revenue	2 482	2 072	410	13.2%	11.0%	2.2%	60.0%	50.1%	9.9%	100%	100%	100%
Tax revenue	183	127	56	1%	0.7%	0.3%	6.4%	4.4%	2.0%	7.4%	6.1%	13.7%
Grants and subsidies	2 289	1 938	351	12.2%	10.3%	1.9%	-	-	-	92.2%	93.5%	85.4%
Tariffs and fees	0	0	0	0.0%	0.0%	0.0%	-	-	-	0.0%	0.0%	0.0%
Income from assets	11	7	4	0.06%	0.04%	0.02%	-	-	-	0.4%	0.3%	0.9%
Other revenues	0	0	0	0.0%	0.0%	0.0 %	-	-	-	0.0%	0.0%	0.0%

OVERALL DESCRIPTION: The System of Fiscal Coordination determines the intergovernmental financing scheme and established the types of own resources that can be levied by state and municipal governments. The resources of subnational governments comprise earmarked transfers, tax revenues, and other own-source revenues.

Grants are the main source of revenue for Mexican subnational governments, both states and municipalities (92.2% of total subnational government revenue in 2020, the highest share among OECD countries), whereas the share of taxes in subnational government revenue is among the lowest of all OECD countries (except Estonia, Lithuania and Slovak Republic), reflecting strong fiscal imbalance. Municipal governments, which receive transfers from both the state and federal levels, are allowed to collect only minor taxes and small fees. The 2013 fiscal reform modified the guidelines on the Transfer Fund for Municipalities (FFM) to encourage municipalities to increase collection of property taxes in a more efficient way. This is to be done in collaboration with states by using economies of scale and the states’ existing tax collection capacities. However, Mexico’s National Development Plan 2019-2014 indicates that there will be no tax increases “in real terms” at both the federal and local levels, in order not to increase the tax burden on the middle class and not affect economic growth.

TAX REVENUE: Mexico has the smallest share of tax revenue in subnational government revenue and GDP within the OECD federal countries, well below the averages (45.8% of subnational government revenues and 9.3% of GDP on average). It also has the lowest share of subnational government tax revenue in public tax revenue within OECD federal countries (vs. 44.5% in OECD federations on average).

Reforms passed in 2007 and 2013 introduced new taxes for the states, transferred the power of the vehicle tax and increased incentives for subnational governments to increase tax revenues. States, and later municipalities, were allowed to charge income tax on the payrolls of their administrative staff. However, states and municipalities are reluctant to use their taxation power. Subnational governments are autonomous in setting their own tax rates and bases on the property tax, vehicle tax and payroll tax. Municipalities may propose changes to rates or bases or the introduction of new taxes, but this requires approval by the state congress. On 26 October 2021, the Congress of the Union approved various amendments to the Income Tax Law, the Value Added Tax Law, the Special Tax Law on Production and Services, the Fiscal Code of the Federation, the Federal Rights Law, as well as the Federal Income Law. Although the amendments do not propose the creation of new taxes or the increase in the rates of existing ones, they do incorporate measures that increase the tax base. Additionally, in 2021, various important tax reforms were presented to the State Treasury of various states of the country, most of which entered into force as of 1 January 2022, generally to increase the tax base, in particular with respect to digital activities and to produce greener incentives.

The major source of tax revenue for states comes from the payroll tax. The tax rate of the payroll tax varies from 1% to 3% in the state of Mexico. It is followed by the tax on motor vehicles (16% of state tax revenue), a share of the property tax (11.5%), and a tax on financial and capital transactions and property purchases (6.7%). Other minor taxes for state governments include a lodging tax, a tax on industrial activities, and a gambling tax. The collection rates vary across states, and can be hampered by high levels of informality, low institutional capacity coupled with a small tax base and low rates for taxes and fees. Due to low collection rates, some states have significant room to increase their fiscal revenues.

Municipalities derive the bulk of their tax revenues from the property tax (impuesto predial), applied on the cadastral value of land and buildings. The Constitution states that the municipalities are in charge of administering the cadastre, collecting the tax, monitoring compliance and imposing sanctions. However, it also allows municipalities to devolve to the states some of the functions related to property tax administration, and many municipalities have opted to allow states to maintain control of the cadastre. On average, the property tax represents 5.2% of the total revenue of Mexican municipalities. Yet in practice only Mexico City and a few other big municipalities effectively collect the property tax, due to low enforcement in the update of cadastres and urban development plans in other municipalities. The property tax collected by both states and municipalities accounts for only 0.19% of GDP, one of the lowest levels in the OECD, and below the OECD average of 1.0% of GDP in 2020. In an effort to improve tax collection, the 2014 Fiscal Federalism law introduced an incentive for municipalities that transfer the administration of the property tax to the state government, in the form of access to special transfer funds (for municipalities and for states).

Other tax revenues for municipalities include a share of the tax on financial and capital transactions (24.6% of municipal revenue), a public entertainment tax, a lottery tax, and a tax on commercial activities.

GRANTS AND SUBSIDIES: Under the fiscal coordination system, states agree to yield part of their tax powers (on income, consumption, production and services) to the federation in exchange for contributions from the federal funds. As a result, Mexican states and municipalities are heavily dependent on federal transfers, well above the OECD average for federal countries (35.3% in 2020). Therefore, the system of intergovernmental transfers combines revenue sharing (non-earmarked) transfers (participaciones), a myriad of earmarked transfers (aportaciones), and matching transfers for co-financed projects (convenios). Both participaciones and aportaciones account for about 80% of total federal transfers (27% of the federal budget).

A public finance reform bill passed in 2007 ushered in a host of changes in the allocation formulas of transfers. According to the revenue-sharing grant scheme, called the General Participation Scheme (Fondo General de Participaciones), 20% of federal tax revenues are to be allocated to the states as unconditional transfers based on different demographic, fiscal and compensatory criteria, which are defined in the Fiscal Coordination Law (branch 28 of the Federal Expenditure Budget). The states are then required to transfer 20% of the Fund to municipalities, to be redistributed according to local criteria with substantial discretion (see below).

The second-largest category of transfers is comprised of the aportaciones (branch 33), including funds earmarked for financing basic education, healthcare services, public safety, adult and vocational education. Among the eight funds that are comprised in these transfers, the Social Infrastructure Fund (FAIS) has an ‘equalisation’ mission that seeks to improve services in the poorest states and municipalities. It is allocated to the various subnational governments based on multi-dimensional poverty indicators. However, these transfers remain, oftentimes, unpredictable and only a small share stays at the state government level (12% of the FAIS in 2022), which may lead to increasing disparities across regions, in particular in terms of quality of the health system. Similarly, difficulties in tax collection at the federal level may lead to delays in transfers to state governments and therefore to underspending of resources. Finally, states also receive matching transfers from federal ministries and agencies for co-financed projects (convenios).

Overall, most transfers to the states come from earmarked funds (approximately 62% of transfers), which limits their autonomy and the autonomy of municipal governments within their jurisdiction. Non-earmarked (28%) transfers are highly volatile. Regarding the fact that non-earmarked transfers may be subject to variations due to the economic situation at the national level, the Fondo de Estabilization de Ingresos de las Etidades Federativas (FEIEF) is also used to mitigate such fluctuations and provide additional revenues to federated entities when grants from the federal governments are reduced in times of fiscal stress.

At local level, since 2007, in addition to their share of 20% of FGP, municipalities receive, via the states, an additional share of federal revenue via the Municipal Support Fund (Fondo de Fomento Municipal). This is allocated on the basis of the collection of the municipal residential property tax and water fees. They also receive earmarked and non-earmarked grants from their state.

Federal government funding for metropolitan areas is channelled through a Metropolitan Fund (Fondo Metropolitano). The resources from the Fund are not earmarked, and are generally spent on investments in transport infrastructure, maintenance and expansion of sewage and parks, etc. For the Fund to be operational, it is required to create a Metropolitan Development Council that receives the funds.

OTHER REVENUE: Other sources of revenue received by Mexican subnational governments comprise charges for services such as civil registry, public property registry, certificates, construction licences and permits, and water services fees. Taken together, they generate relatively little revenue for municipalities. Other revenue sources include fines, penalties and donations.

Several states are considering the use of congestion charges to increase local revenue for infrastructure projects while dealing with traffic and environmental challenges. In the state of Tamaulipas, the obligation to pay for environmental pollution prevention and control services was introduced, in particular, charging for registration as a generator of special handling waste and for updating the registration as a generator of special handling waste. Overall, revenues derived from local public services and property income are very limited, and well below OECD averages.

Subnational, state and local government fiscal rules and debt
2020	Dollars PPP / inh.			% GDP			% general government debt			% SNG debt			% SNG financial debt
-	SNG	State	Local	SNG	State	Local	SNG	State	Local	SNG	State	Local	SNG	State	Local
Total outstanding debt	462	405	57	2.5%	2.2%	0.3%	14.6%	12.8%	1.8%	100%	100%	100%	-	-	-
Financial debt	462	405	57	2.5%	2.2%	0.3%	43.4%	38.1%	5.3%	100%	100%	100%	100%	100%	100%
Currency and deposits	0	0	0	-	-	-	-	-	-	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%
Bonds / debt securities	0	0	0	-	-	-	-	-	-	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%
Loans	462	405	57	-	-	-	-	-	-	100%	100%	100%	100%	100%	100%
Insurance pensions	0	0	0	-	-	-	-	-	-	0.0%	0.0%	0.0%	-	-	-
Other accounts payable	0	0	0	-	-	-	-	-	-	0.0%	0.0%	0.0%	-	-	-

FISCAL RULES: The Federal Budget and Fiscal Responsibility Law (FRL), approved in 2013, strengthened Mexico’s fiscal rule by building a stronger, structural balance rule by adding a current expenditure cap to the previous fiscal rules. The Auditoria Superior de la Federación (ASF) was empowered to audit subnational governments in 2012. However, the ASF has low enforcement powers and limited capacity to apply sanctions. In May 2015, the Mexican Congress passed a series of governance reforms to enhance public sector accountability, integrity and transparency, which led to the creation of the National Anti-Corruption System and the National Transparency System. The reforms also provided a legislative foundation for a National Auditing System (Sistema Nacional de Fiscalización, or SNF). The Mexican auditing system for subnational government is complex compared to other countries’ “single audit” approach. There are also overlap risks, and the ASF’s findings are limited.

In 2022, the latest reform on the Law of Financial Discipline of the Federal Entities introduced the concept of “expenses and costs of contracting” with the aim of reinforcing subnational public finance transparency when undertaking investment. Under this new concept, subnational public entities may only allocate up to 0.15% of the amount of financing to cover expenses and costs related to contracting and obligations arising from public-private partnerships schemes.

DEBT: According to national sources, the debt levels of states and municipalities were low in 2020 as a share of GDP and of total public debt, well below the OECD average (27.9% and 20.2%, respectively) and the OECD average for federal countries (36.6% and 26.5%). The 2016 Law on Financial Discipline of the States and Municipalities made constitutional changes to impose stricter controls of subnational government debt (between 2008 and 2013, the real average growth rate of subnational debt was 14.5% per year), based on revenue and debt levels, and created a system of alerts as well as a single debt registry to monitor subnational government debt. Depending on the category assigned to its debt (“sustainable”, “under review” or “high”), each subnational government’s annual debt level is now limited to a percentage of the revenue available to it.

Mexican subnational governments can only borrow to finance productive investments (the “Golden Rule”). They have access to four sources of long-term financing: private commercial banks, the national development bank, loans guaranteed by own-source revenues or based on future transfers, and bonds issued on the Mexican securities market. Following the COVID-19 pandemic, in 2020, the federal government introduced a modification to the law that allows state governments to restructure financing (i.e. incur in a negative budget balance) without the need for authorisation from the local legislature in the event of extraordinary situations or health emergencies, in order to reactivate the country’s economy. The reform promotes investment in infrastructure and strengthen local public finances in times of crisis, by forcing subnational governments to make a public record of their indebtedness. In addition, a financial management control is established to centrally concentrate information on income, expenses, public debt spending and investment in infrastructure projects by the states.

Mexico’s National Development Plan 2019-2024 indicates that during this period, indebtedness should not be resorted to finance expenses for any purpose and that the resources destined to finance the social programs will come from what is saved from the fight against corruption and the elimination of sumptuary expenses, waste of resources and fuel theft.

All of the subnational government debt is composed of credit loans and is distributed heterogeneously among all subnational governments. As of June 2020, Mexico City’s debt was estimated at 60% of its GDP. While all municipalities account for approximately 12% of total subnational debt, state governments account for 88% of overall subnational government debt.

TERRITORIAL MANAGEMENT OF THE CRISIS: When the COVID-18 was first detected in Mexico in March 2020, the federal government implemented a "National Healthy Distance Program", which began on March 23 and ended on May 30, 2020. The country's first and only national lockdown, which suspended all non-essential activities as well as face-to-face education, occurred during that period. As of June 1, 2020, a “traffic light” alert system, that assigns a risk level to each of the 32 entities, replaced the national lockdown. Under this system, federal authorities estimated risks weekly, based on a set of indicators, and informed the public and state governments, which implemented the corresponding public health measures.

However, given the lack of coordination and guidance between the federal government and the federated entities, numerous subnational governments had to take their own measures, in many cases implementing state plans to deal with the pandemic, instead of federal measures. The majority of federal entities activated emergency numbers to provide ongoing assistance and information about COVID-19 to the population. In the states of Chihuahua, Nuevo León and Querétaro, apps were designed to inform, register and refer people with symptoms or already infected. In Mexico City, the “SMS COVID-19” system helped identify possible cases (acute or severe) of coronavirus.

Different state governments implemented measures, in accordance or sometimes divergence with the guidelines of the federal government. In some cases, state governments broke with federal government policy and followed their own approach to managing the pandemic. In Jalisco and Michoacán, for example, a longer mandatory confinement was implemented, as well as prison sentences for not wearing face masks and the installation of police checkpoints. Notably, the state of Jalisco convened its state Epidemiological Surveillance Committee in January 2020 and closed schools and cancelled mass events before national authorities issued general orders.

EMERGENCY MEASURES TO COPE WITH THE CRISIS AT THE DIFFERENT LEVELS OF GOVERNMENT: From 11 March to 31 July 2020, the country’s 32 state governments announced 629 cumulative policy instruments, each differentiated by indicators such as transparency, coverage, scope and relevance, at the disposal of subnational governments. On average, it is estimated that 20 instruments were mobilised per state, with Zacatecas’ response being the most complete relative to the other state governments responses. Zacatecas announced the mobilisation of 50 instruments in a short period of time (of which 40 were completely new) mostly focused on social assistance for marginalized populations.

State government instruments were mostly directed to support the business sector (small, medium or large) and, secondly, to the growing population in conditions of poverty and social vulnerability. The state of Jalisco, with the Jalisco COVID-19 Plan, sought to support civil society organizations with resources to purchase essential items, such as basic medical equipment, food, cleaning and hygiene material, clothing, mattresses and bedding, up to MXN 200 000 (approx. USD 10 000). The Government of Mexico City, in coordination with 14 mayors, implemented the Market, Community, Food and Supply (Mercomuna) program, which consisted of issuing bills that functioned as vouchers to buy fruits, vegetables, and other types of products in local businesses. To a lesser extent, 19 state governments and 16 municipalities announced support measures for the economically active population within the informal and formal market.

At the federal level, the Revenue Stabilization Fund for Federated Entities (FEIEF) is a precautionary fund to support subnational government finances. For the concerned entities, it represents a source of additional income when the administration is forced to reduce its subsidies in times of budgetary tension. It is fueled by oil revenues and federal contributions, which fell sharply in 2020. The federal government took some additional measures to ease fiscal pressure on state governments and municipalities, including federal transfers and a change in some regulations to increase the possibilities of financing on the financial markets.

IMPACTS OF THE CRISIS ON SUBNATIONAL GOVERNMENT FINANCE: In aggregate terms, subnational finances were not strongly affected by the pandemic. While aggregate subnational revenues remained stable between 2019 and 2020, expenses only increased by 1%. The increase in the aggregate subnational debt was of the order of 2%, in real terms. However, when looking at individual federal entities and municipalities, some significant differences can be observed regarding the effects of the pandemic.

State entities registered a 1% decrease in their revenues in 2020, driven by a 6% drop in tax revenues and a 29% drop in asset revenues. Transfers, the main source of financing, remained stable, largely preserving the budget of state entities. As for expenses, a fall in capital expenses (-9%) has been observed, with a decrease of direct investment by 7% between 2019 and 2020. In terms of current spending, social spending increased the most (+117%), but this represents a relatively small part of the total expenses of the federated entities. Given this scenario, the federated entities resorted to loans, generating a 3% increase in debt in 2020.

At the municipal level, municipalities registered an increase in their income of 8% in 2020, mainly driven by the 9% growth in subsidies, and to a lesser extent by the 5% increase in tax revenue. Municipal expenses also grew in 2020, of the order of 5%, driven by both current expenses (+6%) and capital expenses (+2%). Within current expenses, the most notable increases are compensation of employees (+8%), intermediate consumption (+6%) and current transfers (+5%). For its part, municipal direct investment registered a slight increase of 2%. Given this scenario, the municipal debt contracted in 2020, registering a fall of 8%.

ECONOMIC AND SOCIAL STIMULUS PLANS: The draft federal state budget for 2021 (Proyecto de Presupuesto de Egresos de la Federación, PPEF) estimated public investment spending at some MXN 830 million (approx. USD 42 million). This amount breaks down as follows: 85% (MXN 707.7 million, approx. USD 35 million) corresponds to material investments; 2% (MXN 14.4 million, approx. USD 730 000) are grants for states and municipalities, social services and the private sector, as well; and the remaining 13% (MXN 107.2 million, approx. USD 5 million) is allocated to other investment projects. Planned investments include urban renewal operations as well as construction projects, such as the General Felipe Ángeles airport (already started), roads and the interurban rail line between Mexico City and Toluca.

In 2021, Mexico City created an integrated emergency aid and economic recovery program in the context of the COVID-19 crisis. The aim is to inject MXN 500 million (approx. USD 25 million) into the Social Development Fund so that 50 000 loans of MXN 10 000 can be granted to micro-enterprises.