Municipal finances | Municipalities in financial distress

The cities and municipalities in Germany slipped deep into the red in 2024. Their expenditures exceeded their revenues by 24.8 billion euros. Such a high deficit is "unprecedented in its dimensions" and represents a "watershed in the history of municipal finances," according to the Bertelsmann Foundation's Municipal Finance Report. Its board member, Brigitte Mohn, spoke of a "turning point." The ability of the municipal level to act is at risk. Burkhard Jung (SPD), President of the German Association of Cities and Towns and Mayor of Leipzig, spoke of the "largest municipal financial crisis in post-war Germany." In cities, "the only decisions that can be made are those of deficit."

The report, published every two years since 2013, shows that between 2015 and 2022, municipalities consistently recorded surpluses totaling almost €44 billion. This was true even during the coronavirus pandemic, when extensive federal aid helped ensure a positive balance. In 2023, a deficit of €6.8 billion was recorded for the first time in a long time. This was already considered "historic." A slightly larger deficit had only occurred during the financial crisis of 2009 and 2010, the report states.

In 2024, the figures plummeted; the deficit rose to three and a half times the previous year's figure. However, "unlike before," this was not due to a decline in revenue, even though tax revenues had stagnated, effectively leading to a loss of purchasing power due to inflation.

In fact, however, cities and municipalities were struggling with sharply rising expenditures. At €106 billion, personnel expenses are twice as high as they were ten years ago. Material expenses, such as costs for building management or services, rose by a quarter within two years. Social spending has increased from €50 billion to €85 billion since 2014. The report states that "demographic reasons" have recently led to significant increases, for example, due to higher spending on basic old-age security and long-term care assistance.

In general, the foundation concludes, municipalities bear a wide range of social responsibilities, which are "largely regulated by federal law, but often not adequately funded by the federal government." The German Association of Local Authorities (Deutscher Landkreistag) called for immediate "restrictions on services." Chief Executive Hans-Günter Henneke (CDU) demanded that social benefits be cut if "offers are not accepted without good reason."

"We are experiencing the largest municipal financial crisis in post-war Germany."

Burkhard Jung President of the German Association of Cities

No region in Germany has been spared from the slump in municipal finances. Twelve of Germany's 13 federal states recorded deficits, with only the municipalities in Thuringia recording a slight surplus in 2024. The deficits were particularly high in the populous states of North Rhine-Westphalia (minus €6.8 billion), Bavaria (€5.2 billion), and Lower Saxony (€3.7 billion). The deficit per capita is highest in Hesse, at €499; the national average is €321.

The report points to the consequences of the difficult financial situation for the investment activity of cities and municipalities. Although they spent a record amount of €52 billion in 2024, the investment backlog continues to grow, and this spending is being overshadowed by particularly high inflation rates in the construction industry. Municipalities in Bavaria continue to make by far the highest investments. In contrast, there are regions such as Saarland, Saxony-Anhalt, Rhineland-Palatinate, and North Rhine-Westphalia that are "falling further and further behind" in terms of infrastructure. The report notes that the lack of investment due to a lack of funds is a significant political problem. For example, "the experience of dilapidated infrastructure can promote disenchantment with the state and populist voting behavior among citizens."

Municipal representatives like Mischa Woitscheck, Managing Director of the Saxon Association of Towns and Municipalities (SSG), are "disillusioned, but by no means surprised" by the figures. He points to far too low allocations from the federal and state governments. In Saxony, these have increased by only 62.8 percent within ten years, the second-lowest rate among all non-federal states. Municipalities in the Free State, which until a few years ago generated budget surpluses and made significant investments due to their frugal performance of their tasks, are now reporting deficits that are higher than in any other eastern federal state . Woitscheck described the report as a "document of neglect at the municipal level."

Both the report and the leading municipal representatives hope that adequate funding for cities and municipalities by the federal and state governments will provide a remedy. These municipalities must commit to a "lasting improvement in the municipal situation," Mohn said; "clear federal responsibility for financing is needed." Jung insisted on a higher share of municipalities in sales tax, for example, of which municipalities currently receive 3.7 percent, the federal government 45.1 percent, and the states 51.2 percent. Ralph Spiegler, President of the German Association of Towns and Municipalities, called for an immediate program to ensure municipal capacity to act. This, he said, is an "urgently needed investment in trust in the state and in our democracy."

Whether such demands will be met with open ears remains to be seen. The Bertelsmann report points to a weak economy, persistently rising prices due to inflation, and unresolved questions regarding the structure of social spending. The outlook, says board member Brigitte Mohn, is "pessimistic for the coming years."