Local authorities shall be entitled, within national economic policy, to adequate financial resources of their own, of which they may dispose freely within the framework of their powers.
As a longstanding effect of the world economic and financial crisis, it is usual nowadays almost in every member state that financing is the most crucial part of the local government system. And so it is in Germany too. During the visit, the current system of local finance was heavily criticized by some mayors and councillors. As one of them claimed, the existing system undermines the financial stability of municipalities. Some of them held that the current tendencies in local government finance are unsustainable.
The Congress delegation has become aware of the danger the indebtedness of a number of municipalities represents. Although the total deficit of the whole local government sector has been below of that of the other levels of government, it seems vital to stop the trend towards debt accumulation. The world economic and financial crisis contributed naturally to this process, narrowing not only the local tax revenue base, but also reducing the capital resources of local authorities. The social cost of the economic depression has also increased the financial burdens of local governments, as the rising costs of unemployment and social services have burdened local budgets. Although these problems, because of the significant regional disparities, have affected local authorities in different ways, a growing number of municipalities are now in a serious fiscal situation.
The 1999 report of the Congress had taken note of similar problems and difficulties. It might therefore be interesting to see what kinds of recommendations were adopted on the basis of that report and how those proposals were followed and implemented.
In relation to Article 9 para. 1 of the Charter, the Congress recommended that the federal authorities consider reforming local taxation with two aims: firstly, to restore strong local taxation in application of Article 28 (2) of the Constitution, particularly bolstering those local taxes the rate of which can still be set by local authorities, and, secondly, to revise the arrangements for the transfer of resources for compulsory spending linked to the implementation of federal and Land legislation. In addition, the Congress encouraged an extended financial contribution from the federal government to strengthen local finances. It was suggested to examine the possibility of introducing the principle of concomitance at federal level, as well as a mechanism to evaluate the actual costs incurred through implementation of federal legislation at local level. The German authorities were invited to consider the possibility of federal financial participation in those welfare services which require nation-wide harmonisation, with local authorities and the Länder taking responsibility only for supplementary local or regional services.
As to the reform of local taxation, the German authorities chose another way to strengthen the financial capacity of local governments, through two reforms of federal−Land relations, in 2006 and 2009. These changes did not establish new local taxes in a strict sense, the rate of which the local councils could decide themselves. Rather, the major direction of these measures was to stabilise or raise the share of local authorities in tax revenues, imposed both at federal or Land levels. In fact, this progress is not in contrast with the particular Congress recommendation, since in the case of business and land taxes, local authorities have, within the limits set by federal law, the power to set the rate of the tax (Hebesatzrecht). Similarly, the direct role of the Federation in local government finance has not been strengthened; to the contrary, it has been weakened. As we saw above, the Federation is no longer empowered to transfer mandatory tasks directly to local authorities or to finance them, since the constitutional amendment of 2006.
The Congress also recommended the setting-up of an Institutional Committee which brings together the representatives of the Bundestag and the Bundesrat and the representatives of municipalities, towns and Landkreise to review local authorities’ financial situation, to propose new ways of improving it and to assess the situation on a permanent basis. An additional proposal was that the Committee examine the possibility of the introduction of the principle of concomitance at federal level as well as a mechanism for the evaluation of the actual costs incurred through implementation of federal legislation at local level.
In line with the former recommendation, in 2010, the federal government set up the Municipality Finance Commission to elaborate proposals to restructure local government finance. The Commission was composed of the representatives of the federal and Land governments and of the national local government associations. The key areas of the Commission’s activity were the rationalisation of the tasks and powers of local authorities, reconsideration of the relevant “standards”, the review of the role and position of local government interests in the legislative process, and the replacement of the business tax in local budgets. While the Commission was able to make proposals in the first two issues, no agreement had been reached on business tax revenues when it ended its work in June 2011.
The proposal to abolish the business tax was initiated by the federal government. The major argument for this idea was the need to provide incentives for the economy in order to promote economic recovery. Moreover, the business tax revenue was said to be too susceptible to short-term economic trends, which, during an economic recession, might endanger the financial balance of local authorities. The Congress delegation found that, in contrast to the leading representatives of the Federation, all local politicians and officials the rapporteurs met with during the visit rejected the federal government plan to abolish the business tax. They argued that any other proposed tax would yield less revenue for municipalities than the business tax, and would shift the burden from the economic sector to the local citizens. Business tax is an important link between the municipalities and local enterprises, providing means and instruments for local authorities to encourage local investments. This means that until 2014, which is during the current mandate of the federal parliament, no change should be expected in this field.
The Congress recommendation relating to the recognition of the principle of concomitant financing of transferred tasks has not been followed; the opposite has prevailed. Since the federal reform of 2006, the federal government has not been allowed to confer tasks directly on local authorities. Nevertheless, the principle of adequacy in local government finance is one of the guidelines of the financial equalisation in the whole country.
In relation to Article 9 para. 2, it was recommended that all Länder introduce in their constitutions provisions relating to the principle of concomitance, which was entrenched in only some Land constitutions. The expectation was that provisions for compensation which is “corresponding” or “appropriate” to the new tasks delegated to local authorities would be made explicit. At the same time, the Congress emphasised that the introduction of the principle of concomitance should not lead to a decrease in financial equalisation transfers to weaker municipalities.
This recommendation has been fully accepted and implemented, as the principle of concomitant financing for covering costs of tasks delegated by Land governments to local authorities. The relevant Land constitutions now guarantee local governments to obtain adequate financial means “at the same time” or “without delay” with the delegation of the tasks and functions. Nevertheless, the practice of the implementation of this principle was criticised by some interlocutors the delegation met, who claimed that, despite this constitutional guarantee, “additional statutory tasks are consistently transferred to municipalities without sufficient financing”. Recent examples of this shortcoming is the financing of the maintenance of kindergartens for children under the age of three, or the North Rhine Westphalia Land government’s project to provide “social tickets” for public transport to people in need, where the continuation of the programme is financially uncertain. The rapporteurs are of the opinion that while the concommittance principle has really been transplanted into Land constitutions, as recommended by the Congress in 1999, further guarantees to ensure the effective implementation of the principle – apart from some sporadic statutory regulations in some Länder − have not been established by the Länder. Under such circumstances, there is a risk for this achievement to become a dead letter without any real effect to secure the financial balance of local authorities. Thus, the principle cannot prevent the central government from transferring national financial burdens to local authorities.
With reference to Article 9 para. 3, the Congress recommended that federal and Land authorities consolidate the financial independence of local authorities and proposed some particular ways to do so: Firstly, to avoid any infringements of municipalities’ right to set the rates of their own taxes, especially in the context of the proposed reform of business tax, which might be replaced by proportions of VAT. Secondly, to restore minor local excise taxes, where they were greatly reduced in number. Then, to introduce, as allowed under Article 106 (5) of the federal Constitution, the provision that local authorities may take a higher proportion of income tax, and, finally, to amend the federal Constitution to make it possible for a local tax for the benefit of Landkreise to be introduced, so as to remove the relevant reservation expressed by Germany at the time of the ratification in relation to Article 9 para. 3 of the Charter.
All these recommendations were set to strengthen local governments’ financial capacity and autonomy. The redistribution of tax revenues between the levels of government has only slightly changed in the recent years.
According to the Charter, local resources must be sufficiently diversified to enable local authorities to keep pace (as far as practically possible) with the real evolution of the cost of carrying out their tasks. The self-evident intention of this principle is not only to enable local authorities to cover the rising costs of public service delivery, but also to secure some room to manoeuvre for them. Needless to say that the world economic and financial crisis beginning in 2008 has affected the financial strength of local authorities in a negative way. It was one of the reasons for setting up a committee for preparing proposals on the restructuring of local government finance with the participation of the federal government and all interested parties.
As to Article 9 para. 6, Recommendation 64 proposed that the Länder, which pursue the policy of special funds in excessive numbers, convert at least some of these into general investment grants for local authorities. This recommendation has not been followed; the total share of general (block) grants has not changed significantly. Conversely, an opposite trend has more chance to prevail, because nowadays Länder governments seem to be more willing to provide additional resources as special or subject-specific grants for municipalities.
In relation to Article 9 para. 8 of the Charter, Recommendation 64 suggested that the federal authorities and the Länder ease borrowing limits, especially at the time when numerous German local authorities were facing a local financing crisis. Paradoxically, as the overall financial situation has worsened in recent years, the significance of curtailing and limiting borrowing and establishing a debt ceiling (Schuldenbremse) in order to break and reduce indebtedness, has grown. The emergence of debt management funds in some Länder can provide effective financial assistance for local authorities, and is a step in the right direction in so far as it does not endanger the ultimate financial autonomy of the local authorities.