Supreme Court Revisits Public Finance Principles of Mexican States

Holland & Knight LLP

Holland & Knight LLP

Mexico had midterm elections in June 2021 at the federal level (House of Representatives), and state and municipal elections for several entities (representatives, governors and majors). The dates for changes of administration vary, and will be done through this year.

As mandated by law, entering administrations perform "handoff" audits to learn, among other matters, about the financial situation of the state and municipal entities. A highly reviewed item is public debt loans and projects, as that could restrain the new administration from completing its government plan.

In a series of recent resolutions from the Mexican Supreme Court, the constitutionality of public finance principles was revisited for a number of state and municipal entities. The rulings relate to debt structures or agreements already in place, as well as to projects used as a source of income from street lighting services. In particular:

  • Municipalities may not charge fees for street lighting based on volume of energy, type of user or rely on the data of the electricity bill issued by the Federal Electric Commission (Comisión Federal de Electricidad or CFE). In most cases, such income is used as a guarantee or source of payment.
  • Legal and legislative formalities are constitutional requirements having an enforceable debt, refinancing or restructuring. For example, the approval majority of the state or municipal congress or deadlines to be presented for approval are required.

These resolutions affect specific states and municipalities. However, debt structures could be subject to constitutional scrutiny from the Supreme Court through controversies on federal, state and municipal laws. Considering the dynamics of the new administration, it is recommended to confirm that debt, refinancing or restructuring documents and agreements comply with the constitutional and legal requirements to be enforceable, in order to preserve the sources of income for the benefit of the entities and the rights of the creditors.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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