The local councils that are running the risk of bankruptcy

Monasterio de la Sierra, in Burgos province, is the most-indebted community per capita in Spain. Its 48 inhabitants would each have to put up 8,520 euros to cancel out the debt accumulated during the mandate of their former mayor, Jesús María Esteban, of the Popular Party.

Esteban set in motion a project to attract visitors to Monasterio de la Sierra: the construction of a small hotel that would overlook a proposed reservoir in nearby Castrovido.

But the reservoir, which was to be created by damming the Arlanza river, was never completed, with funds drying up at the beginning of the financial crisis in 2008. Nevertheless, it was decided to go ahead with the hotel. The problem was that without a reservoir to attract visitors, there was no way that the local council could cover the 400,000-euro construction cost.

“This village is dependent on livestock farming. There are already six farms; one local has decided to start bee farming, but not everybody can set up that kind of initiative. What were we supposed to do? The money is there, nobody has stolen it,” says Esteban, defending the decision to diversify Monasterio’s local economy.

Monasterio’s case differs from the financial problems that have hit so many of Spain’s towns and cities. The community has around 221,000 euros in the bank, which offers a better return than the interest it has to pay on the 15-year loan it took out to pay for its still-unoccupied hotel. Despite illustrating the spendthrift practices so many local councils indulged in during Spain’s construction boom, Monasterio hopes to hang in there until the reservoir is finally completed and the visitors arrive, and thus avoid having to sign up to the government’s rescue plan for the country’s 500 or so broke towns and cities.

The majority of Spain’s bankrupt local councils are to be found along the Mediterranean coast, particularly in Andalusia and Valencia, which were badly hit by the collapse of the construction and property-development market.

The Economy Ministry says that in 2012, Spain’s 8,116 city, town and village councils registered two-percent growth in income, while spending fell by 5.6 percent. The victims were the 75,000 people laid off between January 2011 and July 2012. Municipal investment over the same period fell by 20 percent.

In places such as Torrevieja, a coastal resort in Alicante, or Elche, in the interior of the province, councilors have had their pay cut by up to 30 percent, while reducing full-time jobs by around 40 percent. The story is the same throughout the country, with local councils looking to make savings across the board. Contracts with suppliers have been renegotiated, and councils have united to make further savings when buying in equipment and supplies.

But José Ramón Pin, a lecturer at the IESE business school in Madrid, plays down the crisis. “The debts accumulated by local councils are not that serious,” he argues. “There has been a serious effort in recent years to reduce spending because the income of the councils has fallen drastically following the collapse of the property market. But to compensate, they have hiked taxes; they have no choice but to cut back on spending. The problem is that during the good times they expanded the range of services, and now they can no longer afford to pay for them.”

In 2012, 3,457 local councils were in the black. The Federation of Municipalities and Provinces, backed by the government, has told them to invest in sustainable projects that will not generate future debts. The challenge they face is developing strategies to keep their heads above water while trying to save jobs and services.

Rafael García, the Socialist Party (PSOE) mayor of Noia, in A Coruña, Galicia, saved money by standing in for the janitor at the local school. For three hours each afternoon, he combined municipal business with watching over schoolchildren. Now that the term is over, he has been able to dedicate all his time to council business. “It wasn’t about saving money; I did it to draw attention to the fact that we are not allowed to replace positions when they fall vacant,” he says. When he was elected mayor in 1999, aged just 25, the town’s debt “had soared by 110 percent.” Noia now has a 300,000-euro surplus, which he wants to invest in programs to boost the local economy.

About an hour-and-a-half’s drive inland is the village of Piñor, in Ourense province. With a population of around 1,400 people scattered around more than 60 tiny communities, Piñor’s council provides physiotherapy, a clothes-washing service for the elderly and disabled, a special-needs teacher, alcoholism programs, a book club, help for its school children, and a range of other services. At the same time, it has managed to reduce its outgoings by introducing a waste-recycling program.

The majority of bankrupt councils are to be found along the Mediterranean

Piñor’s mayor, Francisco Fraga, of the Socialist Party, says the local council is providing residents with special containers to separate their garbage. He says the initiative is reducing the amount of trash that needs to be collected. “We give them coded labels that they stick on their trash bags to measure our efficiency. In 2007, we sent 343,800 kilograms of waste to the region’s central treatment plant. This year we have already reduced the amount of trash we collect by 9,300 kilograms each month. As we have to pay for each kilogram of rubbish that is processed, we are making big savings,” he says. Fraga opposes the government’s initiative to force councils such as Piñor’s to save a total of eight billion euros, which is due to come into effect on January 1, 2014.

“It makes no sense; they haven’t thought this through — it’s like breaking a butterfly on the wheel,” he says. Piñor’s waste-collection bill is currently 35,000 euros a year; under the new proposals, the provincial government of Ourense would centralize waste collection, increasing the cost to Piñar to 52,000 euros. Fraga says the government has not done its homework, and that the proposals, far from saving money, will make life harder for small communities. “They have no idea about the reality on the ground: if the 85 million euros that the provincial government is budgeting was actually invested in local councils there would be no problem,” he argues.

Another local council that hopes to avoid having to sign up to the government’s rescue plan is the country’s second-most indebted on a per capita basis, at 8,344 euros for each inhabitant: Aguilar de Segarra, which is located close to Barcelona, and is run by the Convergence and Union grouping (CiU). The village, which has a population of 250, decided to invest 1.9 million euros in its own solar-energy plant in 2006. The community only employed a secretary and an administration officer, both of whom worked part time. Aguilar de Segarra says it is managing to keep costs to a minimum, avoiding further debt, and that when the solar-energy plant is paid for, it will generate sufficient resources to press ahead with a plan to create a sustainable tourism sector in the community.

Juan Alfonso Santamaría, a professor of administrative law at Madrid’s Complutense University, provides a key piece of data that sheds a great deal of light on the financial difficulties facing the country’s town halls: “Between 2001 and 2011, the total number of staff employed by local councils rose by 100,000 people.” Santamaría says many of these jobs provided assistance to the elderly and disabled: “They are necessary and very useful, but legally, they should not have been set up by local councils.”

In good times they expanded services, but now they can’t pay for them”

Santamaría does not believe that merging local councils in rural areas — a move that the government initially proposed but backed away from after mayors and local officials threatened rebellion — would have solved anything. “Going through the worst divorce you can imagine would be child’s play compared to the feelings of some communities facing death,” he says, adding that local councils are the “electoral base” of the political parties, and thus difficult structures for a party in power to dismantle.

But while the country’s elected representatives at all levels continue to discuss reform, the austerity virus continues to spread. The mayor of Higuera de Calatrava, in Jaén province in Andalusia, has decided to cut his own pay by half, reducing his monthly salary from 1,000 euros to 500 euros, giving the difference to local families facing hardship. This is a move that, in theory, he is not authorized to make. “Whatever happens, I will continue to work 24 hours a day,” he told local media.

Most local councils have already made deep spending cuts, reducing services and staff in the process; making further savings will be hard, and in many cases, say officials, will make little difference. Calviá, in Mallorca, has now all but closed its library service; the neighboring community of Sóller was no longer able to foot its photocopying bill when it went bankrupt. The mayor of Maderuelo, in Segovia, has broken zoning regulations by setting up a large restaurant on parkland, creating some jobs in the process, and disguising it as a nature center. He has been turning a deaf ear to the continued complaints made by a nearby restaurant owner, who claims that he is being put out of business.

Cándido Pérez Serrano of consultant KPMG says that in the long term, Spain’s city, town and village councils “will have to revise their budget strategies and manage their funding more efficiently. We are not talking about all services being of the same quality, but rather that they will have to adapt to the resources available, opening the way for integrated management with the goal of paying concessions on the basis of quality.” Serrano says that the growth of joint municipalities — there are now more than 1,000 throughout Spain — points the way for future models, allowing for economies of scale and greater savings. The government says that despite opposition, it is prepared to help small communities that want to band together.

Between 2001 and 2011, the staff employed by councils rose by 100,000”

The danger, says José Ramón Pin, “is that political and social rationales have gotten in the way of economic ones.” He says that any future reforms will be “administrative, rather than political,” adding: “There were only two major reforms in the last century: the 1957 Stabilization Plan, and, between 1980 and 1983, the legal statutes governing the devolution of power to the country’s regions.” He says that Spain should follow the lead of the United States and northern Europe by “introducing private-management techniques into the public sector.” He says that the Popular Party government has promised to “establish a series of requisites to guarantee the training and experience of people who are not politicians and who will be tasked with managing our institutions. But nothing happened.”