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Credit FAQ: French LRGs Start The COVID Recovery On Solid Footing

This report does not constitute a rating action.

In 2020, the COVID-19 pandemic prompted governments to enact lockdowns and other health risk mitigation measures. These actions had profound economic and financial consequences: in France, real output dropped by 8.3%, while the general government deficit ballooned to 9.2% of GDP, up 6.1 percentage points from 2019. Local and regional governments (LRGs) were not spared, as the pandemic negatively affected revenue and gave rise to additional spending and borrowing needs.

The three tiers of local administration (municipalities, departments, and regions) were affected differently, reflecting variations in the structure of their revenue and expenditure. Overall, densely populated areas and entities relying on tourism revenue seem to have been affected disproportionately. While these differences could affect the speed of an entity's recovery, S&P Global Ratings expects that average financial metrics for the French local public sector will start improving from 2022, reflecting robust fundamentals and supportive institutional arrangements. Overall, the combined deterioration of French LRGs' financial metrics in 2020 was more moderate than feared, in part thanks to timely central government support.

As a result, the COVID-19 pandemic has not led to weaker credit quality among the 14 French LRGs that we rate. The average long-term rating remains firmly situated between 'AA-' and 'AA', with no downgrade because of the pandemic. Our outlooks also point to broad stability: Only one rated entity carries a negative outlook, while the other 13 carry a stable outlook.

In this report, we answer some frequently asked questions on the outlook of French local and regional governments, and how the pandemic has been affecting this sector.

Frequently Asked Questions

How did the COVID-19 pandemic affect local public finances in 2020?

The pandemic brought a five-year period of gradual improvements in local government finances to an abrupt end. The Observatory of Local Finance, a public monitoring body, estimates the financial impact of COVID-19 in 2020 across all local authorities at just over €5 billion, comprising a €4.1 billion combined revenue loss and about €900 million in net additional spending.

As a result, the total operating surplus for the French local public sector declined for the first time since 2014. Excluding tax revenue lost by the regions as of Jan. 1, 2020, as part of the apprenticeship reform, the operating surplus decreased by 10.2% in 2020:

  • Operating revenue declined by about 0.6% year-on-year (compared with annual average growth of 1.3% in 2015-2019), reflecting lower tax intakes and fees.
  • Operating expenditure increased by 1.3%, a rate comparable with that of previous years. Unexpected COVID-19-related spending was partly mitigated by savings on goods and services and, in some cases, operating subsidies, given the cancellation of events and the closure of public services during lockdowns.

Meanwhile, local authorities' capital expenditure (capex) decreased by over 6% to €54 billion. This was not unexpected because municipal investment activities typically slow in election years. However, the pandemic exacerbated this, with lockdowns delaying elections and the execution of investment projects. Lower capex helped limit overall financing needs to about €490 million for 2020, or 0.2% of total revenue--compared with surpluses after-capital accounts averaging 0.5% of total revenue in 2015-2019. Net new borrowings of €4 billion suggest that local authorities took advantage of favorable financing conditions to strengthen their liquidity position, while prefunding upcoming investment projects. As a result, the total debt of French LRGs increased to €155 billion, or 75.3% of operating revenue, a 3.6 percentage point increase from 2019.

Which levels of French LRGs have been the most affected by the pandemic?

The structure of revenue and expenditure vary across the three tiers of French local administration. It is therefore not surprising that the COVID-19 pandemic affected regions, departments, and municipalities differently.

Regions:   Overall, the regions in 2020 were the most affected tier, with the combined operating balance declining by 17.5%, about 7 percentage points higher than the variation for all French local authorities. The regional tier's tax revenue is more correlated with the immediate economic conditions than that of other tiers. The domestic consumption tax on energy products (TICPE), the vehicle registration tax (cartes grises), and the regional share of national value-added tax (VAT), which together make up nearly half of regional tax revenue, decreased sharply. Regions also sought to support their local economy, which translated into higher capex, in part through their €500 million contribution to the national solidarity fund for small and midsize enterprises, but also through regional emergency funds, which provided loans to cash-strapped firms. These factors help explain why regional borrowing needs in 2020 jumped more than that of other local authorities: the regions' total debt represented close to 114% of their operating revenue at year-end 2020, up 17 percentage points from 2019.

Departments:   The departments faced a sharp increase in social expenditure (4%) owing to an uptick in the number of social benefits recipients. At the same time, key revenue sources decreased, including the department share of TICPE. Property transfer fees (DMTOs), which make up a quarter of tax revenue at the department level, were also affected, but the decline (1.6% year-on-year) was more moderate than feared owing to a resilient real estate sector. The total operating balance of departments fell 14%. However, the tier's capex increased much more slowly than that of regions, leading to smaller financing needs and to a more modest rise in indebtedness.

Municipal sector:   Here, the picture is mixed. Local property and housing taxes, which are not immediately correlated to economic conditions, grew 2.4% year-on-year, thus mitigating the substantial drop in service and land occupancy fees levied by cities. At the same time, COVID-19-related exceptional expenditure was often more than offset by the savings made possible by the cancellation of events and the closure of public services during the first 2020 lockdown and subsequent restrictions. The pandemic also delayed the second round of municipal elections by several months, exacerbating the slump in capex typically seen in election years. In total, the decline in operating balances (5.5% on average) was more moderate for the municipal tier, which also posted a combined surplus after capital accounts.

Local demographic and economic factors also shaped the territorial impact of COVID-19. Densely populated urban municipalities spend proportionally more of their revenue toward building and maintaining infrastructure, while relying more upon service and land occupancy fees. Moreover, social expenditure make up a larger share of the total in most populated departments: Those with more than 1 million inhabitants have been more affected by the rise in the number of social benefit recipients. Meanwhile, intermunicipal structures in charge of urban transit have seen the dedicated tax (the mobility transfer) decrease sharply. Local authorities relying on revenue from the tourism sector have also faced harsher consequences from COVID-19.

Chart 1


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To what extent has the central government supported local authorities?

The impact of COVID-19 on French public finances was concentrated on the central government: The national court of auditors estimates the pandemic's budgetary cost at €93 billion, contributing to an unprecedented general government deficit of 9.2% of GDP last year. Nevertheless, the state's ongoing support to LRGs remained robust, with the main financial transfer to municipalities and departments stable at around €27 billion (13% of LRGs' operating revenue). LRGs also benefited from constitutionally guaranteed tax-revenue floors, meant to ensure that responsibilities transferred to the local administrative tiers remain adequately funded. The regional share of VAT, which replaced the financial transfer for regions in 2018, would have been lower in 2020 without such a floor. This speaks to the overall robustness of institutional arrangements governing the relationships between the central government and LRGs.

The central government also implemented budgetary measures aimed at cushioning the impact of COVID-19 on the most vulnerable local authorities. The third supplementary budget act for 2020 (July 2020) introduced a revenue backstop for municipalities, guaranteeing that a basket of selected tax revenue and land occupancy fees in 2020 would not dip below its 2017-2019 average. It also sought to smooth the anticipated decline in DMTOs by creating a repayable advances scheme for departments, and by contributing €200 million to the departments' equalization fund. A separate repayable advances scheme for transit authorities was introduced in December 2020, including a €1.45 billion advance payment to Île-de-France Mobilités.

The government also bolstered the existing fund for local investment by €1 billion. However, the disbursement under those schemes was lower than expected: €710 million was effectively spent in 2020, although this is less than 30% of budget appropriations. In particular, the eligibility conditions for the municipal backstop curtailed its take-up: The selected revenue basket was made more resilient by including increased local taxes, and excluding service fees. At any rate, some of this unspent budgetary allocation have been carried over to 2021, particularly the extra local investment grants. The municipal resources backstop was also extended to 2021.

The regional tier was subject to specific central government support measures, with a view to preserving its ability to invest in local economies. The main measure was an additional €600 million investment grant, the bulk of which will be disbursed in 2021.

Overall, extraordinary and direct budgetary central government support for French LRGs was relatively modest last year, with emergency measures covering only 17% of the excess 2020 deficit compared with the prepandemic average. In our view, the key support came from established instruments that are part of the institutional framework governing the relationships between the central government and LRGs.

How did the pandemic affect credit quality and what is the outlook for 2021-2023?

None of the ratings on the French LRGs has changed so far during the pandemic, reflecting the supportiveness of institutional framework and the pandemic's relatively modest impact on subnational governments' finances compared with that on the central government. Nevertheless, some downward pressure can be observed in the balance of outlooks. In March 2020, of 14 rated French local authorities, two had a positive outlook and 12 had a stable outlook; as of Sept. 1, 2021, there are 13 stable outlooks and one negative (the City of Paris). This is due to four outlook changes during this period: We revised two to stable from positive, and two to negative from stable, although we later revised one of those outlooks to stable.

The generally stable outlooks on the French LRG sector reflect our anticipation that the financial metrics of rated LRGs will start recovering gradually in 2021 and 2022, although unevenly. We expect local authorities will weather delayed shocks from the pandemic: these will mostly relate to local tax receipts, chiefly the corporate value-added tax (CVAE), which made up 13% of LRGs' total tax revenue in 2020. CVAE receipts in any given year come from local corporate earnings one-to-two years prior. Regions will not be affected because the regional CVAE was suppressed and replaced by a second share of national VAT as part of the 2021 local tax reform. Intercity structures and departments, however, will be affected by lower CVAE receipts in 2021 and 2022. This will weigh on the operating balances of departments, as will social expenditure above their prepandemic levels. Cities could benefit from robust real estate market trends and recovering service fees as soon as 2021.

Although we consider French departments more vulnerable than regions and the municipal sector, recent fiscal trends look positive. The value of real estate transactions--which form the basis of property transfer fees--was up nearly 30% in the first half of 2021 compared with the same period in 2020. On the expenditure side, the number of minimum welfare payments recipients has declined steadily since November 2020 and is now at its prepandemic level. Meanwhile, regions and intermunicipal structures should benefit from strong VAT collection at the national level. Gross VAT receipts (before refunds and rebates) amounted to €77.6 billion in first-half 2021, up 12% compared with first-half 2020. TICPE receipts also increased by 33% in the same period.

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Overall, we forecast that the average operating balance of rated entities will bounce back to 13% of their operating revenue in 2023 from 10% in 2020. Local authorities will also access more capital grants in the framework of the French recovery plan and the NextGenEU stimulus package, which will boost investment while limiting borrowing needs. We expect the tax-supported debt of our rated LRGs will moderately increase, to 92% of their consolidated operating revenue by 2023 from 88% in 2020. This trend should be driven by municipalities and departments, and the debt burden of regions should stabilize.

The quality of governance and financial management will be key in reversing the impact of COVID-19 over the next few years. There are new councils and executive teams at each administrative tier following the 2020 municipal elections and the 2021 departmental and regional polls. Prudent medium-term spending plans--including well-calibrated investment programs--will be needed if French LRGs are to return to their strong prepandemic budgetary trends, which would support or improve their creditworthiness. The central authorities' efforts to restore the overall public sector's budgetary sustainability might also have a delayed impact on the financial metrics of French LRGs. By way of example, the central government reduced its ordinary transfer to local authorities by about €9.1 billion (or 23%) from 2014-2017, which curtailed LRGs' operating surpluses and ability to invest. However, we do not assume that this will happen again because of the pandemic. Rather, we expect that the government will introduce a new generation of financial contracts, which will cap the year-on-year growth of local authorities' operating expenditure without impacting their revenue (similarly to the "Cahors contract" approach introduced in 2018).

List Of Rated French LRGs*
Local currency rating (long-term/short-term) Foreign currency rating: long-term/short-term Outlook

City of Marseille

A+/A-1 A+/A-1 Stable


A+/A-1 A+/A-1 Stable

Department of Essonne

AA-/A-1+ AA-/A-1+ Stable

Department of Gironde

AA-/A-1+ AA-/A-1+ Stable

Intercity of Saint-Quentin-en-Yvelines

AA-/A-1+ AA-/A-1+ Stable


AA-/A-1+ AA-/A-1+ Stable

Syndicat Mixte des Mobilites de l'Aire Grenobloise

AA-/A-1+ AA-/A-1+ Stable

City of Lyon

AA/A-1+ AA/A-1+ Stable

City of Paris

AA/A-1+ AA/A-1+ Negative

Department of Hauts-de-Seine

AA/A-1+ AA/A-1+ Stable

Department of Seine-et-Marne

AA/A-1+ AA/A-1+ Stable

Department of Yvelines

AA/A-1+ AA/A-1+ Stable

Region of Auvergne-Rhone-Alpes

AA/A-1+ AA/A-1+ Stable

Region of Pays de la Loire

AA/A-1+ AA/A-1+ Stable
*As of Sept. 2, 2021
Primary Credit Analysts:Etienne Polle, Paris (+33) 01 40 75 25 11;
Stephanie Mery, Paris + 0033144207344;
Hugo Soubrier, Paris +33 1 40 75 25 79;
Pierre Hollegien, Paris + 33 14 075 2513;

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