Mexico: Decree That Reforms, Supplements And Derogates Certain Dispositions Of The Constitution Of The United Mexican States, In Financial Discipline Matters Of States And Municipalities

Last Updated: 3 July 2015
Article by Galicia Abogados
  • The Permanent Commission issued the declaration of constitutionality of the reform in financial discipline matters of states and municipalities on May 6, 2015.

On May 26, 2015, the Decree that reforms, supplements and derogates certain dispositions of the Constitution of the United Mexican States (the "Constitution"), in financial discipline matters of states and municipalities was published (the "Decree") in the Official Gazette of the Federation ("DOF"), which entered into force on May 27, 2015. Herein we present a brief summary of such publication.

I. Background

The legislative process for the approval of the Decree lasted more than 2 years and had its origin in the debts contracted by several states of Mexico. The initiative was originated by the Chamber of Deputies in 2013 and concluded with the approval of 24 states: Aguascalientes, Baja California, Campeche, Chiapas, Chihuahua, Coahuila, Colima, Durango, Guanajuato, Hidalgo, Jalisco, México, Morelos, Nayarit, Nuevo León, Puebla, Querétaro, Quintana Roo, San Luis Potosí, Sinaloa, Sonora, Tamaulipas, Veracruz and Zacatecas. Notwithstanding, the approval and enactment of secondary laws will be pending. There is a time limit of 90 days to issue the Regulatory Law in Fiscal Accountability matters (the "Regulatory Law") and 180 days starting after the Regulatory Law enters into force, for the states to amend the state laws.

II. Principle of stability of the public finances

Pursuant to the Decree, the principle of stability of the public finances is incorporated in the Constitution and its consideration in the system of planning of democratic development.

III. Powers of the Congress

The powers of the Congress in public finances matters are strengthened under the argument that public indebtedness of the states is of national interest. The Congress shall be in charge of issuing the terms and conditions of loans or guarantees over the credit of the Nation. It is also in charge of approving such loans and, in its case, of paying the public debt.

Each year, the Congress shall approve the maximal amount of indebtedness, which will be included in the Income Law and will set forth the general terms for the indebtedness of states, municipalities and the Federal District.

Finally, the Congress will set a bicameral commission to analyse the agreements that the states and municipalities desire to execute with the Federal Government to obtain guarantees. In the case of states and municipalities with a high level of indebtedness this commission shall have 15 days to issue its observations.

IV. Restrictions to loans

Public borrowing shall be restricted to (i) the execution of works that directly produce an increase in the public revenues; (ii) loans with purposes of monetary regulation; (iii) loans obtained during an emergency declared by the President pursuant to Article 29 of the Constitution; and (iv) refinancing or restructuring debts, which shall be performed under better market conditions.

The Regulatory Law shall include the terms and conditions of public borrowing that shall be contracted by public bidding, as well as the mechanisms to assure obtaining better market conditions.

For purposes of local governments, the maximal amount of public borrowing shall be approved by two thirds vote of local deputies and it is strictly prohibited to use such public borrowing as current expenditure.

V. Public Registry, reports and sanctions

The Decree sets forth the creation of a public registry in which the states, the Federal District and the municipalities shall publish all its loans and payment obligations. The registry shall include at least the following information: debtor, lender, amount, interest rate, term, type of guarantee or source of payment, as well as any other information deemed necessary.

During the period prior to the establishment of the aforementioned registry, the obligors shall send to the competent commissions of the Congress, (i) a report about their obligations and loans pursuant to article 9 of the Tax Coordination Law (Ley de Coordinación Fiscal) in a term not exceeding 30 days (before June 26, 2015) and (ii) a quarterly report with the information about their registered loans and obligations, including the information regarding if such loans were used to refinance or restructure existing debts.

Local Congresses shall conduct and audit about the obligations of the public sector and make the results available in a term not exceeding 90 days (before August 25, 2015).

The Congress shall set an alarm system about the debt management and shall establish in the regulations the sanctions to public servants that do not fulfill such dispositions.

VI. Short-term obligations

The reform sets forth that the states and municipalities may contract short-term obligations without requiring the approval of local congresses if they do not exceed the limits and fulfil the conditions determined by the regulations to be approved. Such obligations should be fulfilled and terminated at least 3 months before ending the governmental term. During the last 3 months of the governmental term, no loan shall be contracted.

VII. Conclusions

One of the benefits of the reform is the transparency in the management of public finances. The lenders of public entities will be certain about the term in which they will recover their credit. This could generate lower interest rates in the future.

The reform strengthens the constitutional provision about the inspection activities in contracting and application of resources from public borrowing in the state, local and federal levels.

The due issuance and respect of the Regulatory Law in treasury matters, as well as the local legislation is still pending.

Finally, the obligations acquired by the states and municipalities with third parties prior to entering into force of the Decree, shall be deemed valid in the terms of the applicable dispositions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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