The Revision of the Inter-Municipal Equalization Mechanism in Trentino

Alice Valdesalici, Eurac Research

Relevance of the Practice

In the Autonomous Province of Trento there are altogether 166 municipalities. The territory is almost entirely mountainous, except for small flat areas located in the valleys crossed by the major rivers of the province. These circumstances have had profound consequences in the uneven distribution of the population: the highest population density is found in the lower districts, such as the Adige Valley, Vallagarina, Alta Valsugana and Alto Garda e Ledro, which have a density of over 100 inhabitants/km². 49.5 per cent of the provincial population lives in these areas. The major urban areas, Trento, Rovereto, Pergine Valsugana, Arco and Riva del Garda, are the only five municipalities with more than 10,000 inhabitants. By contrast, the alpine valleys at higher altitudes have a much lower population ratio. It is not by chance then that the population density in the provincial territory ranges from 789 and 6 inhabitants per km2. Only 7 per cent of the overall population lives in the areas between 1,000-2,000 meters above sea level and only 12 per cent in territories between 750 and 1,000 meters. 87,95 per cent of the 166 municipalities are tiny municipalities with less than 5,000 inhabitants and most of the entities over 500 meters are tiny municipalities. As such there exists a strong divide between (the few) urban municipalities and the many rural municipalities regarding both revenues and expenditure needs which the Province attempts to overcome through an equalization scheme.

Description of the Practice

The existing discrepancies within the territory justify the establishment of an inter-municipal equalization fund to correct the imbalances and ensure a comparable level of services throughout the provincial territory. The general rules thereof are provided in the Provincial Law no 36/1993, whereas in the annual arrangement on local finance the province and the local entities agree on the detailed regulations. By virtue of the exclusive legislative competence over local finance attributed by the Statute to the Autonomous Province of Trento, the latter has adopted the above-mentioned Provincial Law no 36/1993. Among other things, this law regulates the procedures and contents of the annual agreement on local finance, which establishes both the amount of financial resources to be transferred to municipalities and other local entities, as well as the measures necessary to guarantee the coordination of municipal and provincial finance, with particular reference to the measures for the pursuit of provincial finance objectives.

As to the procedure for adopting the annual arrangement on local finance, the proposal is drafted by the Province, however an agreement has to be reached with the representatives of the local entities that sit in the Council of Local Autonomies (Article 81 of the Autonomy Statute and Article 3 of the provincial law). The basic rules governing the equalization fund are contained in Article 6 of the provincial law. The provision sets as the general objective of the fund that of rebalancing the financial endowments of the municipalities and the level of services offered to the population. As for the distribution among the municipalities, it is foreseen that this will be determined annually by the provincial executive with a resolution adopted on the basis of the criteria and parameters set forth in the annual agreement and with the ultimate aim of guaranteeing: (i) the rebalancing of the level of services offered with respect to average provincial standards; and (ii) efficiency in the use of the transferred resources.

In addition, the distribution of the fund is carried out based on a standardized level of expenditure that is assessed, for each municipality, also taking into account the following variables:

  • the differentials in the costs to deliver services in relation to the different environmental and demographic context;
  • the imbalances in the territorial distribution of the taxable bases and of the revenues from municipal assets;
  • the weight of actual revenues deriving from taxes, duties and tariffs with respect to the standard values;
  • the exercise of functions connected with the provision of specific services characterized by a non-homogeneous distribution throughout the provincial territory and pertaining to singular municipal socio-economic situations;
  • the financial effects on the expenditures of the municipalities resulting from policies of interest to the province in matters of municipal competence.

In light of this legal framework, on 8 November 2019, the annual agreement on local finance has been reached. With reference to the equalization mechanism, at first, the agreement stipulates that the fund has a twofold dimension: vertical and horizontal. While the provincial level grants 61 million euros, approximately 14 million euros derive from the municipalities with greater tax-revenues and assets (solidarity quota). Second, for 2020 the interested parties have agreed to change the distribution criteria.

On top of that, with the agreement for 2020 the provincial executive and the representatives of local authorities agree on the revision of equalization system with the aim to update the evaluations of the standard expenditure of municipalities taken as benchmark, as well as to introduce among the equalization criteria also the value of the municipalities’ own current revenues (as a measure of existing differences in terms of fiscal capacity).

To pursue this objective, an analysis of the financial situation of municipalities at the end of 2017 was conducted, with reference to those entities with less than 15,000 inhabitants so as to highlight strengths and weaknesses of the system. The analysis has revealed anomalies in the current equalization system. On the one hand, there are municipalities that after the equalization transfers are able to achieve a positive current balance, on the other hand, with the present level of transfers some other municipalities permanently experience a negative (or otherwise unstable) current balance.

Therefore, the need has emerged to revise the equalization mechanism having regard to the municipalities with a population of less than 15,000 inhabitants. As such the agreement for 2020 integrates the distribution criteria basing, on one hand, on a standard level of expenditure, estimated per each municipality taking into account demographic, socio-economic and geographical characteristics; and, on the other hand, on the level of own revenues, so as to also take into account the ability of each municipality to independently finance the standardized level of expenditure. Standard expenditures are estimated through an econometric model that takes into account the following variables: number of inhabitants; growth rate (or decrease) of the resident population; share of population from 1 to 5 years; share of population over 65 years; altitude; area (territorial dimension/size of the municipality); population density; number of tourist presences; number of local units (enterprises). Own revenue capacity is defined by taking into account two criteria:

  • the level of tax revenues with respect to a standard calculated on an econometric basis, taking into account the demographic dynamics, the number of tourists, the presence of companies, the number of houses and the number of local units (businesses), the number of houses and the taxable IRPEF income;
  • the level of revenues of non-tax nature with respect to a standard calculated as the average of the demographic class of belonging.

Given these benchmarks, the equalization transfers attributed to each municipality are therefore calculated starting from the municipality’s standard expenditure figure and deducting:

  • a share of the actual extra-tax revenues;
  • the standardized tax revenues and considering a share equal to 80 per cent of the difference between actual and standardized revenues. This share reduces the allocation on the equalization fund in cases where actual revenues are higher than standard revenues and, conversely, increases them in cases where actual revenues are lower than standard revenues. In this way, municipalities with a higher fiscal capacity than the standard revenues ‘give up’ a share of the greater resources in favor of municipalities with a fiscal capacity below the standard.

As a result the degree of equalization of the differences in terms of fiscal capacity is high, though not complete, so as not to discourage the effort of each municipality to raise its own revenues.

Assessment of the Practice

Compared to the national equalization system, inter-municipal equalization in Trentino has been regarded as more evolved and complete.[1] Of course, it is difficult for any mechanism with the aim of sharing financial resources in a fair way to overcome the key challenge of avoiding overly complex calculation which inevitably results in a lack of transparency. This is arguably one of the main limitations of the national system.[2]

Compared to its preceding system of 2018, the application of Trentino’s new model of 2020 entails significant changes in the allocations to each single municipality. As such, a gradual transition to the new system has been planned, providing for its full operation only in 2024. It is therefore too early to assess the impact of the new mechanism on the functioning of local system. Nonetheless, it reflects a clear political signal towards the valorization of even the smallest municipalities with a view to keeping all public services as closest as possible to the citizens. This runs contrary to the approach of the former provincial governments, which had instead put in place both measures to encourage mergers between small municipalities and compulsory forms of inter-municipal cooperation. Indeed, it is important to note in this context that equalization schemes are linked with such cooperation in various ways. For one, these schemes may disincentivize collaboration because they remove part of the financial pressure to work together. But also issues of electoral accountability and public satisfaction with services need to be taken into account, besides financial issues, when evaluating the link between these two instruments.[3]

Anyway, although each political majority that has governed the Autonomous Province of Trento has in any case worked to enhance local autonomy, in the last decade evaluations of efficiency and cost-effectiveness have also been introduced.  This outcome has been prompted by the overall reduction of resources due to the economic and financial crisis as well as by the need to comply with the EU ever more stringent obligation on public finance. From a legal perspective a significant role in this respect has been played also by the principles inspiring the national reform of fiscal federalism (law no 42/2009) and the provincial competence on the financial coordination of so-called ‘integrated territorial system’ that includes all entities located in the provincial territory.

However, as efficiency arguments frequently come along with expenditure cuts, they do not necessarily lead to an increase in popular support, but rather the opposite. Read in this context, then, the changes under consideration embody a different vision put forward by the current provincial government and characterized by the desire to enhance the local dimension at all costs. One can hardly deny the central position of the municipal authorities for sustainable living in a territory like the one of the Autonomous Province of Trento which is characterized by significant portions of rural areas at medium-high altitudes. Small municipalities in these areas suffer from significant diseconomies of scale with many public services being very expensive. As the traditional market logic is has negative effects in such local governments, public policy interventions are needed if people shall be incentivized to stay in in small mountainous villages.[4] Action is necessary not only to avoid depopulation of these areas but also the related risk of (harmful) abandonment of the territory. The question that arises is whether we can still afford a local financing scheme in which efficiency plays a far too marginal role.

Looking at Trentino’s inter-municipal equalization not from the perspective of its effectiveness but that of autonomy (both local and regional), it is important to note that Italy’s ‘Alpine’ special regions play through their integrated territorial system concerning public finance a sort of Janus-faced role. They coordinate local finance inside their territory and effectively replace through the direct management of the equalization mechanism the national government. As some observers highlight, Trentino’s system of inter-municipal equalization could thereby serve as an example for other territories because it would be desirable that regional administrations should take over responsibility in this area.[5]

References to Scientific and Non-Scientific Publications

Legal Documents:

Autonomy Statute of Trentino-South Tyrol, Decree of the President of the Republic no 670/1972 (Article 81)

Provincial Law on Local Finance, Provincial Law no 36/1993 (Articles 3 and 6)

Agreement on Local Finance for the year 2020, November 2019,   <>

[1] Interview with Maria Teresa Nardo, Associate Professor, Department of Political and Social Sciences, University of Calabria (17 May 2021).

[2] Interview with Giorgio Brosio, Professor, Department of Economics and Statistics, University of Turin (17 May 2021).

[3] Statement by Federico Boffa, Professor, Faculty of Economics and Managements, Free University of Bolzano/Bozen (LoGov Country Workshop, Local Financial Arrangements, 14 April 2021).

[4] Interview with Gianfranco Postal, Magistrate, Court of Auditors of Trento, (25 May 2021).

[5] Interview with Elena D’Orlando, Head of Department of Legal Studies, University of Udine (13 May 2021).