President Peña Nieto proposes caps on state debt

President Enrique Peña Nieto sent a bill to Congress that will set some limits on state debt and require local governments to report all types of debt.

The legislation aims to prevent states from getting too far into debt while also helping local governments with solid finances get better market rates for loans, Finance Minister Luis Videgaray said at an event in Mexico City.

Under the reform, states will need two-third majorities from local legislatures to approve debt financing plans, as opposed to a simple majority that has been needed in the past. The law also sets up a framework where states can get a federal guarantee of their new debt as long as they agree to increased supervision of their finances by the federal government and a congressional committee. Under the voluntary framework, states will be subject to debt ceilings based on the amount of debt they already have and their disposable income.

The government will not guarantee a total amount of debt that exceeds 3.5 percent of the country's gross domestic product, according to the bill. The legislation will establish a comprehensive database of state debts as well as an alert system to identify when local government obligations are exceeding their revenues. Previously, states have not reported all their short-term loans, saddling incoming administrations with debt. 

The proposal includes measures to balance the income and expenditures of the states, suggests using income surpluses to pay debt off as well as the creation of trust funds to respond to natural disasters. 

It also states that debt should only be used for public investments or to improve the credit profile of the local government and that short-term debt should be paid off at least three months before the end of the administration.

Finance Minister Luis Videgaray said that the debt of the states and municipalities equals to 2.9% of Mexico's gross domestic product, compared to 1.7% in 2008. 

The bill fleshes out a constitutional reform enacted in May that gives the federal government and lawmakers some limited powers in overseeing local government debt. The initiative had to walk a fine line to not step on states' autonomy while still attempting to shine a light on murky local finances, which are not subject to the same transparency laws as the federal government.

(With information from Reuters)