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Based on the regulation about the compensatory payment for using the water resources and land flooding for the generation of electric power, this study was carried out to evaluate the effect of the "extra" financial resource – financial compensations and hydroelectric royalties – in budget revenue formation and in the public expenses determination of the receiving municipalities in Minas Gerais. From the discussions about the determinants of the government expenses the public county accounts were estimated regressions with data panel for each of the municipal expenses under consideration (investment, housing and urbanization, health and sanitation, education and culture), and proportion indexes and growth rates of expenses and incomes were calculated. The main sources of municipal income (compensatory resources, Municipal Participation Fund – FPM, Taxes on Circulation of Goods and Services – ICMS, Urban Territorial Property Tax – IPTU, Any nature Service Tax – ISS, and county taxes) served as explanatory variables. The results showed the budget revenue availability is significant to determining the county public expenses, and confirmed the power of the financial payoffs and hydroelectric royalties on expansion of the county expense in local infrastructure. This was apprehended mainly by the elasticities of the functions estimated for the investment, housing, urbanization, health and sanitation expenses.


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