How can poor cities generate income

German Trade Union Confederation

Rainer Sturm / pixelio

How do you recognize a mercilessly underfunded municipality? The high number of non-swimmer children - because the local outdoor pool was closed and swimming lessons were canceled in the school. Or the many citizens with legs in plaster - they fell into a pothole on a pitch-dark street at night. Admittedly, one shouldn't joke with bitter realities. The fact is that in 2010 the municipal deficits amounted to 7.7 billion euros, after a minus of 7.2 billion in the previous year. And things don't look much brighter for 2011 either.

According to a representative survey1 In February 2011, among 300 municipalities, 54 percent rate their financial situation as bad or very bad, although trade tax receipts and the municipal income tax share have increased compared to 2010. The situation remains tense, with the eastern German federal states suffering from particular revenue losses - their households will shrink by around a quarter by 2019. The reasons for this are the planned decline in Solidarity Pact funds, falling income from the state financial equalization due to the population decline and the downgrading of EU funding. The cuts are directly at the expense of the municipalities.

The municipalities react to this by increasing taxes and fees (property tax, daycare fees), restructuring (including job cuts, job freezes), fewer public offers, inter-municipal cooperation (synergies) or with privatizations. When it comes to power cuts, savings in street lighting are at the top of the list, followed by cuts in youth care and senior work and the closure of swimming pools.

The investment backlog continues to grow. The economic stimulus packages from 2008 and 2009 with a volume of 9.3 billion euros for the municipalities did little to change this. Smaller cities in particular invest more than 100 euros per capita - mainly in education and infrastructure. In 2009 and 2010, every sixth euro came from funds from the economic stimulus packages! But with an investment backlog of around 700 to 1300 euros per capita (depending on the size of the community), this was just a drop in the ocean. (KFW Research 2)

Some municipalities get creative when it comes to new sources of income. In 2009 the city of Quickborn borrowed money from its citizens. After the veto of the financial regulator Bafin a bank was intervened for legal reasons. Now the residents of the city can grant a loan under the title “Heimatinvest” at standard bank interest rates. Still cheaper for the city than a standard loan. Inspired by an idea from the USA, the municipality of Niederzimmer in Thuringia offered its 1,063 residents potholes for a purchase price of 50 euros in 2010. According to the motto "Do good and talk about it", plaques with the names of all noble buyers were placed on a board at the entrance to the village at the end of the "Tar must be here" campaign.

The local financial crisis threatens democracy on various levels

Necessity is inventive, but most attempts to get by in debt-ridden times without too hard cuts are in vain. This debt crisis is deeply affecting the life, culture and politics of this country and with serious consequences for citizens, employees and decision-makers. The local self-government anchored in the Basic Law Art. 28 is seriously damaged. In many places the money is just enough for the communal compulsory tasks (costs of accommodation, roads, paths, squares, childcare, schools, garbage disposal, etc.). Voluntary tasks of the municipality such as public transport, culture, prevention and advice are neglected until nothing can be managed by oneself. City treasurers have less and less leeway, which disappears completely when their municipality is under municipal supervision. In North Rhine-Westphalia, for example, 143 of the 359 member municipalities put together a budget security concept in 2010, 115 were subject to the emergency budget.

When politicians and citizens in their municipality can no longer have a say in decisions and control, the citizens' trust in the state and democracy dwindles. When services are discontinued or become more expensive, many wonder why they are actually paying taxes. This mood can prepare the ground for privatization, which deprives the state of further income and organizational possibilities. A vicious circle in which the constitutional goal of creating equal living conditions throughout Germany falls by the wayside.

Reactions of the municipalities to the financial crisis: remunicipalise or privatize

The municipalities react differently to the financial crisis. Some continue to rely on the sale of silverware, others - who have already had bad experiences with privatizations - want to turn back the wheel and remunicipalise. According to Ernst & Young, more and more municipalities want to privatize urban property in order to plug budget holes. In 2010, 37 percent of the municipalities surveyed planned privatization, in 2011 it was as much as 43 percent. This applies in particular to the municipal real estate portfolio, IT / EDP, sewage disposal and energy supply. The rampant privatization, however, weakens the planning sovereignty as a core area of ​​local self-government. 3

Municipalities that had already (partially) privatized their communal services are following a different trend. Disenchantment has spread here. After the one-time financial boon for the household, the hoped-for efficiency gains often failed to materialize. Citizens complain about poorer services and higher fees. In July 2011, the University of Leipzig found out that 48.5 percent of the 102 participating municipalities with budget deficits and privatization experience are planning remunicipalisation because they hope for increased income and more municipal influence in these companies. According to this study, privatization efforts play no role at 2.6 percent. 4

Most citizens cannot afford a poor state

The privatizations do not remain administratively abstract, they affect the citizens very directly. Because they have to pay higher fees and charges, and yet the offers are thinned out. Numerous services are also completely eliminated and are no longer financed by solidarity through taxes, but have to be "bought" privately by each individual. The citizens of all people who depend on functioning public services now have to dig deeper into their pockets in order to maintain their standard of living. Because only those who have money can buy the books in the bookstore that were previously in the library. Or organize the music teacher for the next generation privately when the music schools thin out their offerings.

But: if you have a house with a garden, you can do without a well-tended park. Anyone who has their own car remains mobile despite the reduced public transport. And if you have enough change, you will find it unfortunate when the local theater closes, but you can go to the next big city and visit the stages there. For many young and old people who are not a bed of roses, limited offers in youth and senior care mean that they are deprived of opportunities for social contact, participation or integration. The redistribution of wealth from the bottom up is exacerbated by the financial distress of the municipalities. According to the DIW, the five percent richest Germans have 46 percent of the national wealth, the bottom 70 percent combined only make up 9 percent. This shows: the vast majority cannot afford a poor state!

In addition, jobs are lost. The work of employees in the public service is massively increased and less is trained. According to the Federal Statistical Office, the number of employees at the federal, state and local levels rose by 0.8 percent in mid-2010 compared to the previous year. The new positions - many of them only temporary or part-time - were mainly created in the education and upbringing area (it is still uncertain whether the legal entitlement to a daycare place for every third child under 3 years of age can be fulfilled by 2013). Every second municipality is planning to cut jobs in 2011, and 43 percent want to block jobs. Thuringia wants to cut every 6th position in the public service by 2020. This further jeopardizes the efficiency of the public service - which is already suffering from an aging population.

What is actually supposed to save costs leads to further burdens. When the infrastructure of a municipality erodes, more and more young and qualified citizens will seek their happiness elsewhere. The population development of the city of Hagen has been consistently negative since 1994. Overall, the city lost 12.3 percent of its inhabitants between 1994 and 2010, with just under 64 percent attributable to negative population migration alone.5 Many who (have to) stay in the unattractive regions often no longer find employment. Companies, on the other hand, are increasingly settling where there are qualified personnel, an intact living environment with leisure opportunities and affluent demand. Municipalities without this profile are struggling with falling tax revenues and growing numbers of Hartz IV and basic security recipients. This accelerates the downward spiral of structural weakness and financial hardship.

Against this background, the work of the local staff councils is also changing. “Four out of five municipalities in North Rhine-Westphalia are securing their budgets. In fact, we're superfluous at the moment. We have no opponents because the mayor and his people are disempowered. The district government in Düsseldorf has long been deciding all the important questions about our city ... "6. The Essen staff council chairman Kai-Uwe Gaida does not accept this situation. He now presents his concerns directly to the district government and the state government.

The causes of financial distress

The municipal underfunding has not only been a complaint since the most recent economic and financial crisis. It is chronic and therefore structural. In the late 1990s, under red-green, direct corporate taxes were almost halved, wealth tax was abolished and the top rate of income tax was reduced. The federal, state and local governments would earn 51 billion euros more in taxes in 2011 if the tax laws of 1998 were still in force.7

But the black and yellow “Growth Acceleration Act” of 2010 is also a burden on public budgets. If one were to withdraw the relief for companies, the sales tax concessions for hotels and inheritance tax concessions, that would bring the state of North Rhine-Westphalia just under EUR 300 million more, and the municipalities in North Rhine-Westphalia around EUR 250 million more. 7 However, an unimaginable 40 billion euros would be necessary in NRW alone for the restoration of sustainable municipal finances (budget adjustment and reduction of liquidity credits) by 2020.8

Even if the economy is in good shape, one must assume that the municipal authority will be deliberately destroyed if further tax cuts are planned for the beginning of 2013. The population here is wider than black and yellow. A Forsa survey from December 2010 shows that 77 percent of those questioned do not want a tax cut, but rather a strengthening of municipal finances.

So what must be done so that cities can be governed again and the course can be set for the future for employment, integration, equal opportunities and the fight against poverty?

How can chronic municipal underfunding be permanently cured?

-          Strengthen the revenue base

a) Increase tax revenue. To this end, tax breaks have to be removed from the Growth Acceleration Act, the top tax rate for high incomes has to be raised and inheritance, corporation and real estate transfer taxes increased. In addition, the wealth tax must be revived and a financial transaction tax introduced. The trade tax can be expanded to a municipal business tax, which also includes self-employed persons such as lawyers or auditors.

b) Do a good job. If temporary work and mini-jobs are pushed back and minimum wages are introduced, this increases both contribution and tax revenues. The cost of social transfers would decrease. In addition, good jobs ensure a strengthening of the communal structure and thus the living conditions as a whole.

c) Stabilization of the investment programs. They were demonstrably able to alleviate the investment backlog during the economic and financial crisis (see above). Many benefit from investments: the local businesses through the contracts, the citizens who get a chance to work and find a better infrastructure, the municipal coffers through higher tax income and lower social expenditure. These programs could be used directly in the regions for the energy transition. Energetic building renovation and decentralized municipal utilities that offer citizens affordable energy from renewable sources and contact persons on site.

-          Prevent loss of income

a) Stop the debt brake. The debt brake will put the federal states in a fiscal stranglehold; the pressure to consolidate is likely to be passed on to the municipalities.

b) Prevent further privatizations and public private partnerships (PPP). Not an easy undertaking, especially since the Ministry of Finance intends to double the revenues from privatizations in 2012 to 5.1 billion euros compared to 2.6 billion euros in 2011. The federal government's current budget for 2010 to 2014 states: “Play with the modernization of the state at all levelsincreasingly Public-private partnerships play a role. " 9 The presidents of the German audit offices declared in their joint declaration in 2006: "PPP projects: Audit offices warn of long-term risks", that PPP is a dangerous path in the medium and long term because the financial burden will be postponed into the future. 10 Therefore, after a thorough examination, more emphasis should be placed on the remunicipalisation of public companies in order to generate permanent income for the municipality. However, remunicipalisation must not lead to a “poll tax” if local authorities use their influence on the formerly privatized companies in order to be able to collect high fees from the citizens themselves.

Involve citizens!

Because the citizens are suffering from the local financial crisis, they want to understand and have a say in what happens in their living environment. It is no coincidence that there are more and more citizens' plebiscites and referendums nationwide that want to prevent the privatization of parts of public services (Berlin, Hamburg, Stuttgart, Rottal-Inn, Quedlinburg, etc.). The President of the German Association of Cities and Mayor of Munich, Christian Ude, also recognized this and called at the Association of Cities in May 2011 to strengthen local democracy through improved citizen participation without weakening the political bodies. Ude demanded that there should not be any insurmountable hurdles when it came to the instruments of the referendum, referendum and referendum. "If we local politicians do not doubt our legitimacy, even with a devastatingly low turnout, we must not demand any higher percentages for individual decisions than are available to us as a basis for legitimation." lead political bodies.

The social psychologist Harald Welzer argues that the problems of economic and climatic changes are becoming more and more visible on site. There is a process of regionalization, which is why a local transformation is necessary. Therefore, the social potential of all citizens must be raised. 11 With the help of the instruments described above, such as referendums and referendums, remunicipalisation, but also cleverly implemented participatory budgeting, that would again be a way to more democracy and quality of life as well as equal living conditions.


1 Consulting company "Ernst & Young", "Municipalities in the Financial Crisis: Status Quo and Options for Action 2011", results of a survey of 300 German municipalities, February 2011

2 KFW-Research, Akzente No. 40: “Economic stimulus packages effectively support municipal investments”, March 2011

3 "Community finance reform - recommendations from a spatial science perspective" Results of the joint ad hoc working group of the Academy for Spatial Research and Regional Planning (ARL) and the German Academy for Urban Development and Regional Planning (DASL), Hanover 2010

4 “Renaissance of the Municipal Economy - Remunicipalisation of Public Services”, HypoVereinsbank in cooperation with the University of Leipzig and the Competence Center for Public Economy and Services of General Interest, July 2011

5 Own calculations based on data from the State Statistical Office of North Rhine-Westphalia

6 “Municipal shadow boxing” in: Magazin Mitbestimmen, 09/2010, Hans-Böckler-Stiftung

7 "Effects of the national political ideas on NRW and its municipalities", presentation at the ver.di-NRW workshop "Save our cities and municipalities in NRW", July 13, 2011, by Kai Eicker-Wolf (DGB district Hesse-Thuringia) and Dr. Achim Truger (IMK in the Hans Böckler Foundation)

8 Junckernheinrich and others, TU Kaiserslautern, University of Leipzig and Research Society for Spatial Finance Policy Bottrop (March 2011): Expert opinion “Budget balance and debt reduction - concept for regaining municipal financial autonomy in the state of North Rhine-Westphalia” on behalf of the North Rhine-Westphalian Ministry of the Interior and Finance http: // www.

9 Financial plan of the federal government 2010 to 2014 - information by the federal government, the public on 6.7. Introduced in 2011.

10 Press release from 05.05. 2006: "PPP projects: Audit offices warn of long-term risks", homepage of the Supreme Bavarian Audit Office, Internet access from July 27th. 2011

11 Video interview with Prof. Welzer from the Kulturwissenschaftliches Institut Essen (KWI) on the website of the German Association of Towns and Municipalities, internet access from July 26th. 2011