Highlights

In our view, French departments benefit from a broadly balanced and supportive institutional framework.  The fiscal policy framework for French departments is common to all government tiers. It combines the flexibility to accommodate individual choices with a set of rules to enforce balanced budgetary outcomes. Unlike other European countries, French local and regional governments (LRGs) do not require state preclearance to incur debt. S&P Global Ratings considers the system to be beneficial for LRGs. There are no strict bail-out procedures, but largely institutionalized mechanisms of support. We understand that there are ongoing discussions about how to improve the financial equilibrium between departments' revenue and spending, and about how to enhance their fiscal flexibility.

However, we believe that departments will remain the layer of French LRGs most vulnerable to macroeconomic conditions.  Constraints on fiscal autonomy leave departments particularly exposed to economic fluctuations, as evident from a significant decline in operating revenue in 2023-2024 that coincided with a downturn in the property market. Additionally, demographic aging, population growth, and a slight rise in unemployment are placing further pressure on social spending, which constitutes over half of departments' operating expenses.

We think that the implementation of the single financial account system (CFU) will enhance the transparency and readability of French LRGs' financial information.  French LRGs are required to use the CFU from 2026. This will improve their accounting methods because it will see the merger of two sets of financial accounts. We continue to view government-related entities' (GREs') accountability as somewhat weak because LRGs do not consolidate most GREs in their annual accounts. This is particularly true of French departments, because they tend to have a high number of GREs that operate in various sectors, mainly social housing.

Trend: Stable

We do not foresee any developments that would lead to a significant change in our assessment of the institutional framework for French departments. We do not expect any major revisions to the scope of responsibilities or territorial organization at the departmental level that could either strain or enhance the departments' institutional framework. Likewise, we do not expect the structure of departments' spending and revenue and their sensitivity to economic cycles to change in the coming years.

We could lower our assessment if we perceived a lower likelihood of the central government providing necessary system-wide support. Conversely, we could raise our assessment if we viewed a gradual de-coupling of income and expenditure from economic and real estate cycles through the recovery of rate-setting power. Similarly, if the state assumed a larger share of social spending, departments could benefit from greater budgetary flexibility.

Predictability Of The Framework

Reforms are generally rare and limited

In our view, the framework for departments will remain relatively predictable, as institutional system reforms in France are infrequent and limited. We don't expect any significant reshuffling of responsibilities between different layers of LRGs. More than a decade has passed between major reforms in 2004 and 2015, and neither of these triggered a system overhaul.

The institutional system has undergone a few taxation adjustments in recent years. Departments now receive two tranches of national value-added tax in lieu of:

• The ability to set property tax rates, which was transferred to municipalities in 2021; and
• The local corporate value-added contribution, which was abolished.

On average, these reforms were financially neutral for departments and occurred in consultation with local authorities several years prior to implementation.

As for departmental syndicates, we anticipate that if new reforms were to be introduced, they would be incremental rather than comprehensive system overhauls. Departmental syndicates are public entities that one or more LRGs have established to manage essential services like fire protection and water treatment. They operate under French LRG law, but with significant operational autonomy, and so are less vulnerable to the central government's decisions. Their revenue primarily comes from self-levied taxes, fees, and member subsidies. Consequently, there is little room for the central government to pass its financial stress on to the syndicates, unless it is in an indirect way through their member governments.

French departments have a limited ability to influence or oppose reforms

French departments can modestly influence, but not oppose, reforms. French LRGs' representatives elect the members of the Senate, the upper chamber of the bicameral French parliament. Yet the law limiting the number of terms that local elected officials can serve has reduced departments' influence on the national political system.

Proposals to revise the constitution, including those that could affect LRGs' institutional framework, are submitted to a referendum or to parliament, although both the National Assembly and Senate need to approve the exact same bill. Consequently, both chambers hold veto power over constitutional changes that could affect LRGs.

Constitutional guarantees allow departments to challenge decisions that could impair their self-governance and autonomy in the national constitutional court. While this encourages some consensus on matters pertaining to decentralization, the central government usually has the last word. For example, despite strong departmental opposition to structural changes to the local taxation system, the central government transferred its share of property tax to municipalities in its 2019 reform.

Departmental syndicates do not exert any direct influence on the central government's policymaking process. However, they have some political leverage through their LRG members and their representatives on the national stage.

French departments have a weak revenue-to-expenditure balance

French departments' budgetary performance is highly sensitive to economic cycles. The uncertain evolution of their main sources of revenue--VAT transfers and property transfer fees--creates volatility. This rigid revenue structure also prevents departments from rapidly adjusting their income streams when economic conditions deteriorate.

On the spending side, departments' flexibility remains limited, since most of their expenditure--particularly for personnel and social services--is mandated by the central government and therefore rigid and procyclical.

Overall, weak budgetary flexibility and high exposure to the economic environment create imbalances during downturns. This produces a challenging counter cyclical dynamic whereby demands for social spending increase while tax revenues decline.

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Due to their limited fiscal flexibility on the revenue side, we think that departments will likely implement measures to control spending and adopt a more cautious approach to managing their finances to curb growth in operating expenses. At the same time, they will restrict capital spending to preserve borrowing capacity for potential economic downturns.

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The fiscal policy framework is prudent and ensures stability

The fiscal policy framework for French departments is common to all government tiers and combines the flexibility to accommodate individual choices with a set of rules to enforce balanced budgetary outcomes. The existing framework does not require state preclearance to incur debt.

The framework aims to help LRGs prevent stressed financial situations through indirect constraints on their budgetary balances, debt, and guarantees. To preserve financial discipline, French LRGs must:

• Maintain balanced budgets for both operating and capital balances; and
• Keep any operating budgetary deficit below approximately 10% of operating revenue, with the exact threshold varying according to the LRG's size.

Should an LRG fail to meet these fiscal requirements, it becomes subject to state supervision. We take a positive view of rules that limit LRGs' refinancing needs and exposure to complex derivatives. While there is no direct limit on LRGs' indebtedness, debt can only finance investments, not operating budgets.

Moreover, LRGs have to repay their debt using their own resources. This excludes new borrowing and debt rollover. Complex derivatives face some usage limitations. In addition, LRGs must immediately swap all debt issued in foreign currency for debt in local currency.

The Galland law of 1998 sets limits on LRGs' debt guarantees to contain contingent risks. The annual amount of debt guarantees combined with LRGs' own debt cannot exceed 50% of operating revenue, and no single guarantee can exceed 5%.

In our assessment, while we exclude guarantees that LRGs extend to social housing institutions--which constitute most guarantees--we consider the risks associated with these guarantees to be low. This is primarily because the social housing sector operates within a supportive national financial and regulatory framework.

The state requires LRGs to deposit their cash every day in a noninterest-bearing account at the French Treasury, constraining cash management. This requirement also limits investment risks to some extent. Partly offsetting this requirement are state advances on tax proceeds and transfers paid in 12 monthly installments, which provide LRGs with a high share of safe and predictable revenue flows. Debt repayments are usually scheduled after the monthly payments of both taxes and grants, which allows for a largely predictable liquidity profile.

The framework is similar for departmental syndicates, except that they cannot extend debt guarantees.

The central government provides extraordinary support but has no bailout policies

We expect that the French institutional framework will provide substantial financial assistance to departments if needed. The system is supportive, with no strict bail-out procedures, but instead mechanisms of support that are largely institutionalized. For instance, the central government can provide liquidity support through Caisse des Dépôts et Consignations, its financial arm, to limit stress in case of constrained access to external funding.

We note a long and positive track record of adequate and timely support from the central government to French LRGs. For example, the 2025 finance bill has allowed departments to temporarily increase property transfer fees to 5.0% from 4.5% for three years, which could generate up to €1 billion in additional revenue.

French departments also benefited from an exceptional €106 million contribution to their safeguard funds in 2024 to partly compensate for a drop in property transfer fees, and from an extra €135 million in the VAT equalization fund in 2021.

Transparency And Accountability

French departments' budgetary process is transparent and institutionalized

In our view, the institutional framework for French departments and syndicates is transparent and provides for significant accountability of elected officials and financial managers. The roles and responsibilities of elected officials and managers are clear, defined, and unambiguous. The turnover of administrative staff is limited to a few high-ranking positions after elections, which favors management continuity.

French LRGs are required to publish their financial trajectory and all their ancillary budgets before adopting their annual budgets.

French departments have solid disclosure and accounting standards, but their amortization and provisioning requirements and practices are lacking

We take a positive view of the accounting standards and budgetary processes that the state has established and requires all French LRGs to follow. Accounting standards are moving toward full accrual and French LRGs publish annual financial statements.

However, we consider French LRGs' reporting practices to have several weaknesses. For example, French LRGs do not produce interim financial reports throughout the year, and their accounting approach does not consolidate the main budget with the ancillary budgets.

While French LRGs fully disclose all GREs, they do not consolidate these entities within their annual accounts. This transparency gap is particularly relevant for the French departments, as they oversee numerous GREs across sectors like social housing and fire brigades, whose liabilities they may ultimately have to bear.

In addition, French LRGs must provide a clear outline of their debt structure and categorize it according to the different risk levels defined by the "Charte Gissler", a charter of good conduct between French banks and associations of elected officers representing LRGs.

From 2026, LRGs will be required to use the CFU method to produce their annual accounts, replacing the two sets of financial accounts that the LRG and the state produce. In our view, this will enhance the transparency and readability of the financial information while improving the accounting methods.

The reliability of French departments' information remains high, with different levels of control

We take a favorable view of the oversight by the prefect and the regional court of audit. The oversight covers the whole budgetary process from elaboration to adoption and execution, and focuses on timeliness, prudential ratios, and proper accounting.

However, despite this close control, French LRGs do not need to be audited by independent auditors or the central government.

Related Criteria

• Criteria | Governments | International Public Finance: Methodology For Rating Local And Regional Governments Outside Of The U.S., July 15, 2019

Related Research

• Sector And Industry Variables: Institutional Framework Assessments For Local And Regional Governments Outside Of The U.S., March 22, 2023