Municipal finances: Huge investment gap in schools and administration

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The good news is: During the Corona crisis, the mayors and treasurers in the country were shown how far their schools are from modern teaching institutions.

They never assessed the need for renovation higher.

The current KfW municipal panel shows an investment requirement of 46.5 billion euros for schools - that is another two billion euros more than a year before, a new record.

The same goes for administration. Here, the investment requirements in Germany's municipalities are now estimated at 16.4 billion euros; before the pandemic, only a gap of 12.9 billion euros was assumed. After all, in road construction, the time could be used to push ahead with renovations. The investment backlog fell in the past twelve months from 37.1 billion euros to 33.6 billion euros.

"The challenges for many municipalities have become bigger rather than smaller due to the Corona crisis," said KfW chief economist Fritzi Köhler-Geib.

85 percent of the surveyed cities, districts and municipalities with more than 2000 inhabitants expect lower income due to the crisis, 52 percent see higher expenditure at the same time.

Although the municipalities were able to close the last year with a slight surplus thanks to aid measures, it was too early to give the all-clear, said Köhler-Geib.

Source: WORLD infographic

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765 municipalities took part in the survey carried out by the German Institute for Urban Studies (Difu) on behalf of KfW.

The panel has been created every year since 2009.

In 2020, the municipalities reached an investment high of 33.3 billion euros, and a further increase to 39.2 billion euros is expected for 2021.

According to Köhler-Geib, this can be explained by the long lead times for public investments.

The sobering thing is that despite increased investment spending, the level in many municipalities was not even enough to maintain the substance of the public infrastructure.

“We are seeing a consumption of assets,” she said.

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The outlook continues to deteriorate due to the corona crisis.

57 percent of the municipalities announced that they would have to reduce their investments because they would have less money available in the future.

Above all, voluntary services fall victim to this, for example cultural and leisure activities, but also economic development.

"Long-Covid threatens local finances", summarized the KfW chief economist strikingly the results of the survey.

For the major challenges such as climate protection or digitalization in the public sector, the state needs competent municipalities that can efficiently carry out their tasks.

Doubts that this will work better in the coming years not only arise from the poorer investment opportunities.

There is still a lack of staff to implement the projects.

The lush years before the crisis were not used in many cities and municipalities to rebuild the necessary positions in building authorities and planning staff.

Source: WORLD infographic

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In many places these ceased to exist during the austerity rounds in the 1990s and 2000s.

According to the KfW panel, 65 percent of the municipalities surveyed agreed with the statement that the “personnel situation in areas relevant to planning” continues to deteriorate.

When asked about the recommendations for action, the chief economist of the state development bank made surprisingly political statements.

She thinks it makes sense for the federal and state governments to compensate for the municipalities' loss of income this year as well.

After the crisis, the "fundamental strengthening of local finances will be back on the political agenda," she said.

A renewed compensation for the loss of income by the federal government is politically controversial.

In 2020, together with the federal states, he compensated for shortfalls in trade tax amounting to eleven billion euros.

In the end, the municipalities across Germany even reported a surplus of two billion euros thanks to the generous support.

Resistance to helping the municipalities in a similar form again this year is great within the grand coalition.

If at all, then the states would have to take over, it is said in Berlin, they are not only obliged to do so by constitution, but thanks to the expected higher tax revenues this year they are also better able to do so.

The managing director of the German Association of Cities, Helmut Dedy, confirmed his call for binding aid promises from both the federal and state governments for local budgets by the current KfW panel.

At the latest after the tax estimate in the spring, the federal and state governments should make concrete commitments for assistance, demanded Dedy.

The tax estimate is due next week.

How the investment gaps identified by mayors and treasurers can be closed in the medium term will be discussed during the upcoming federal election campaign.

There is no shortage of proposals in the election manifestos presented so far.

The Greens, for example, like the SPD, want to support the municipalities with their old debts.

The FDP wants to give cities and municipalities a higher share of sales tax and introduce a municipal surcharge on corporation tax.

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