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Viewing cable 06MEXICO4020, REVIEW OF MEXICAN STATE DEPENDENCE ON

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Reference ID Created Released Classification Origin
06MEXICO4020 2006-07-19 22:49 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Mexico
VZCZCXRO5634
RR RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #4020/01 2002249
ZNR UUUUU ZZH
R 192249Z JUL 06
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC 2256
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
UNCLAS SECTION 01 OF 02 MEXICO 004020 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/MEX, WHA/EPSC, AND EB/IFD 
STATE PASS USAID FOR LAC:MARK CARRATO 
USTR FOR JOHN MELLE 
TREASURY FOR IA MEXICO DESK:JASPER HOEK 
COMMERCE FOR ITA/MAC/NAFTA:ANDREW RUDMAN 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ELAB ENRG PGOV MX
SUBJECT: REVIEW OF MEXICAN STATE DEPENDENCE ON 
FEDERALLY-COLLECTED FUNDS (THIRD OF THREE-PART SERIES ON 
MEXICAN FEDERAL-STATE RELATIONS) 
 
REF: A. A. MEXICO 3961 
     B. B. MEXICO 3962 
     C. C. MEXICO 4019 
 
------- 
Summary 
------- 
 
1. (SBU) States and municipalities depend for the vast 
majority of their revenue on federally collected value-added 
tax and petroleum revenue funds, but the Fiscal Coordination 
Law prohibits the GOM from conditioning transfers.  On 
average, 90 percent of state revenue and nearly 75 percent of 
municipal revenue (which is channeled through the state) come 
from federal transfers, although the exact amount varies 
considerably by state and municipality.  "Participaciones" 
and "aportaciones" are the mechanisms for federal transfers. 
Participaciones are unconditional and comprise each 
underlying entity's share of oil and VAT revenues according 
to a national formula that factors in population and poverty 
level.  Aportaciones are earmarked funds that cover the costs 
of public services such as education and health care. 
Specific federal budget lines are determined by an opaque 
annual budget process that originates with Hacienda (Mexico's 
national treasury), and works its way through Congress before 
funds are distributed to the states.  End summary. 
 
----------------------------------------- 
Feds Lack Fiscal Leverage Over the States 
----------------------------------------- 
 
2. (SBU) The Fiscal Coordination Law prevents the federal 
government from conditioning transfers based on state support 
for federal initiatives.  Consequently, our contacts told us 
that states do not have to bow to the national government 
because of funding needs.  The president has little 
discretionary maneuver through this part of the budget 
process, and no margin once Congress allocates the funds. 
However, he may have an opportunity to influence governors 
through the federal budget process during which the GOM 
prioritizes national programs and releases technical studies 
that impact the implementation of regional infrastructure 
projects.  As a senior official at Hacienda told us, if the 
next president were to reverse President Fox's decision that 
made the public safety ministry an independent entity (and 
return it to sub-ministry status), then he would have an 
additional pool of millions of pesos to leverage with the 
states. 
 
3. (SBU) States have their own revenue-generating 
capabilities.  They have become more adept at accessing the 
domestic capital market as a consequence of macroeconomic 
policies (designed to rebuild the banking system and restore 
sovereign credit) following the 1994-95 peso crisis.  The 
constitution also gives them the right to levy state-wide 
taxes, although their tax systems are generally weak. 
Increases in oil revenues have reduced their incentive to 
improve tax collection; however some states, such as 
Michoacan, have implemented new taxes in order to diversify 
their revenues and make themselves more attractive to 
potential investors. 
 
4. (SBU) Although states have no independent means to 
influence national macroeconomic initiatives, they engage in 
regular dialogue with Hacienda and have lobbied for and 
against policy changes that affect the state share of 
federally-collected revenues.  States are able to finance 
infrastructure by accessing bank loans or by issuing 
"certificados bursatiles" in the capital market.  Mexico's 
sub-national bond market emerged in 2001 and has yielded  $13 
billion in financing to states and municipalities.  By 
contrast, NAD bank has financed just under $105 million in 
loans to Mexico since 1994 and there remains an enormous 
backlog in requests for project financing.  Under Mexican 
law, states may only borrow in the national currency; any 
dollar-denominated loans from multilateral development banks 
must be funneled through the federal government. 
 
5. (SBU) As reported ref B, a Bank of Mexico concern is the 
ability of states to make long-term employment and other 
commitments based on petroleum-related revenues that may go 
up and down based on oil prices and the national formula 
 
MEXICO 00004020  002 OF 002 
 
 
described above.  A senior Bank of Mexico official saw the 
issue of long-term state spending commitments not being tied 
to guaranteed revenue flows as a major federal/state issue 
and financial challenge for Mexico. 
 
 
Visit Mexico City's Classified Web Site at 
http://www.state.sgov.gov/p/wha/mexicocity 
 
BASSETT