Determinants of functional decentralization and their relation to debt: empirical evidence based on the analysis of Spanish municipalities

Abstract

Functional decentralization is aimed at increasing the efficiency, effectiveness and quality of public services, among other advantages, by simplifying the organizational structure and by achieving greater proximity to the end user. Nonetheless, the creation of these entities has been criticized because of the potential to make political use of them to avoid the debt limits imposed on sub-national administrations, as debt would then be transferred to the accounting statements of these agencies. The empirical evidence found in the current study shows that the use of these companies as a mechanism for obtaining external financing is determined by the accounting regulations applicable in relation to the consolidation of accounts. Decentralization processes oriented toward increasing debt are more common among left-wing local governments and are strongly linked to fiscal pressure. Points for practitioners Our results show that foundations are now displacing public companies in decentralization processes in order to obtain external funds, since these agencies are not included in the consolidated accounts. Thus, more rigorous regulation should be established in Spain. This opportunistic use of decentralized agencies is developed on the whole by left-leaning political ideologies as a means of incurring more debt that they need. Thus, it is necessary that external auditing offices ( Cámaras de Cuentas) reinforce the monitoring process over local governments in order to circumvent their managerial discretion.