The turn of the 21st century saw two important pieces of legislation introduced in Brazil: the Law of Fiscal Responsibility or LFR (2000) and the City Statute (2001). While each law has been celebrated, this article argues that a perversion of their intentions is emerging in practice. The scale and scope of municipal budget composition and allocations in the period studied (1995–2010) give reason to question how these landmark laws are being locally interpreted. Evidence details a disproportionate rise in current expenditures in all state capitals in Brazil since the introduction of the LFR. Further, among state capitals with the largest number of ‘sub-normal agglomerations’, a few key cities show a peculiarly stagnant proportion of expenditures directed towards housing and urbanisation. A case study of São Paulo is presented to explore explanations for these trends and understand what they mean for the direction and control over upgrading investments in that city.