Objective: Municipality sustainability is crucial for promoting the country's wealth and the citizens' well-being. Therefore, understanding municipalities' indebtedness is relevant to avoid situations of severe financial constraints. This work aims to understand the determinants that explain Portuguese municipalities' debt levels (both total and excess of debt), after the introduction of the Regime Financeiro das Autarquias Locais e Entidades Intermunicipais (RFALEI) published in 2013 (Law no. 73/2013).
Theoretical Framework: In this work, the indebtedness of Portuguese municipalities is studied, from the perspective of net debt and excess indebtedness in order to give a broader picture of this topic and to be able to characterize the main determinants that explain debt in Portuguese municipalities.
Method: Municipalities' debt is measured using not only the net debt ratio (as most of the works) but also the excess of municipalities' indebtedness. Institutional, political, and financial-economic variables are analyzed to explain debt using a linear regression model with fixed effects. The sample includes all Portuguese municipalities for the period from 2014 to 2017.
Results and Discussion: Results show that only institutional and financial-economic determinants are relevant to explain municipalities’ indebtedness. Municipalities with less tourism, less State transfers, and with more capital revenues are the ones more indebtedness. Beyond these factors, municipalities with more investments and less tax revenue tend to present more excess debt.
Research Implications: The results of this work are useful to a group of users of the information provided by municipalities: By knowing the main reasons that lead to debt, municipal managers can somehow reduce debt; Regulatory entities can create laws to limit debt and citizens know how public money is being managed.
Originality/Value: This work analyzed all Portuguese municipalities, during four years, a larger sample than used in previous works. Moreover, institutional, and financial-economic determinants are also used, in addition to political variables, and these determinants show relevance to explain municipalities' debt. Finally, we focus not only on the debt ratio but also on excess of debt which was the main concern of RFALEI.
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