Report by the Free State of Bavaria confirms significant underfunding of independent cities

Municipal financial equalization: Free State report confirms significant underfunding of independent cities

Gera. On March 25, 2021, the state government and the state parliament were presented with a report commissioned by the Thuringian Ministry of the Interior and Local Government to review the vertical and horizontal financial equalization system. The Financial Research Institute of the University of Cologne (FiFo Köln) clearly states that the financial resources of the municipalities, especially the independent cities in Thuringia, do not meet the constitutional requirements and shows that the independent cities in particular have been the worst financed in comparison to the administrative levels "Free State of Thuringia" and "districts".

According to this report, the independent cities must be provided with a total of at least €70 million more per year to compensate for these disadvantages, based on the key amount for 2019. As an increase in the key mass has already taken place in 2020/2021, no further significant increases are to be expected when applying the calculation methods of the report.

For the individual independent cities, the following picture emerges for the priority allocations in the form of key allocations plus the cultural burden equalization:

Source: FiFo report

The amended financial equalization model presented in the report is expressly welcomed, as it basically points in the right direction for the independent cities. Nevertheless, it cannot be supported unconditionally, as the planned higher allocations will still not be sufficient to cover the financial requirements in all municipalities. It even shows that some municipalities will receive lower allocations in future than they currently do.

The aim of the reorganization of the municipal financial equalization system must be to ensure that all Thuringian cities, municipalities and districts are able to set up balanced budgets in the long term with appropriate financial resources from the state.

Some of the factors used in the report to determine the financial requirements do not appear to be fully appropriate in that, for example, the number of inhabitants is used as the factor determining requirements for many municipal areas of responsibility instead of, for example, the area. Significant special needs of individual municipalities, which result from atypical features (e.g. the size of an urban area, special topography or financing obligations for facilities of a supra-regional nature assumed from historical development) and which cannot be financed from their own resources, must also be taken into account in municipal financial equalization.

The report calls on the state government and the legislature (state parliament) to significantly better reflect and weight the actual expenditure in the social and youth welfare sector when calculating the amount of financial equalization payments from the state to the municipalities in the future, especially to the independent cities. The fact that case numbers are insufficiently taken into account when assessing needs is explicitly criticized. For years now, the massive cost increases in the social and youth welfare sector have led to an imbalance in municipal budgets, with the result that necessary maintenance measures and investments in infrastructure such as schools, roads and paths, buildings, investments in environmental and climate protection, but also in voluntary services, have to be cut back more and more.

The independent cities are calling on the state government and the parliamentary groups in the state parliament to implement their announcement of a restructuring of the municipal financial equalization system as quickly as possible, with the first step being as early as 2022.

The corona-related special payments from the federal government and the state in 2020 and 2021 conceal the existing structural dilemma of all independent cities. The expiry of these special payments will result in massive funding shortfalls for the independent cities, which have already existed and been discussed to varying degrees in individual cities such as Eisenach, Gera and Suhl for years.

The preparation of the budgets and thus the ability of the independent cities to act is in concrete danger.

Andreas Bausewein, Lord Mayor of the state capital Erfurt:

"The study by the Ministry of the Interior proves what we have known for years. The independent cities are grossly underfunded. We don't want any extra sausages. We just want what we are entitled to."

Gera's Lord Mayor Julian Vonarb emphasized: "The city of Gera welcomes the report commissioned by the state, as it shows that the municipalities have been the worst financed compared to the state and the districts. However, we cannot follow the report in its entirety in its present form, as Gera would be the only independent city to receive lower key allocations for district tasks. As a first step, the state government should have the figures on which the report is based updated so that the calculations can be redone. With the aim of creating balanced budgets in the future and remaining able to act, I am calling for significant changes to the financial equalization system."

"The report addresses an extremely important issue of fairness: connectivity. The financial resources of the municipalities are only appropriate if they are in line with the tasks that the municipalities are responsible for. The report shows that there are clear imbalances, both in the comparison of the municipal level with that of the federal state and within the municipal family in the comparison between the municipalities and the districts. Now that this is so clearly evident, it is no longer politically justifiable if this is not corrected." Dr. Thomas Nitzsche, Lord Mayor of the City of Jena.

Weimar's Lord Mayor Peter Kleine is pleasantly surprised that a report commissioned by the state government itself has come to such clear conclusions: "Even though municipal financial equalization is a very difficult and dry subject, adequate and needs-based funding is vital for the survival of local authorities. With the rapid implementation of the expert findings, planning certainty can finally be created for the coming years in the interests of a fair distribution of funds based on partnership."

Katja Wolf, Lord Mayor of the city of Eisenach , emphasizes: "The report underlines the need for adequate funding for local authorities, which I welcome. It is precisely those municipalities that have an important urban-rural function as medium-sized centers with upper-central functions that must be adequately financed via the municipal financial equalization system so that they can perform the various tasks incumbent upon them - also for the surrounding area - in line with demand."

Suhl's Lord Mayor André Knapp explained: "The city of Suhl welcomes the report in principle, but cannot agree with it unconditionally. It will still not be possible to balance the budget despite increasing key allocations. As part of the general financial resources requirement, the state must ensure that the municipalities can fulfill their tasks as self-governing bodies. For this reason, a proper and transparent determination of the actual financial requirements and their weighting must be carried out to an even greater extent than has already been done with this report. As a result of the calculation carried out in the report, the independent cities in the category of medium-sized center with partial function of a regional center are placed in a worse position than municipalities belonging to the district that are medium-sized centers with partial function of a regional center. In addition, regulations for financing existing "special needs" that result from the history of a city and are important for an entire region, such as museums, zoos or cultural and congress centers, must be supplemented in order to compensate for budget deficits that the municipalities cannot compensate for on their own, even with the greatest consolidation efforts."