Definition and Significance of Municipal Finances
The term ‘municipal finances’ refers to the totality of a municipality’s financial transactions, including the regulations, principles, and legal foundations for the collection of revenues, the expenditure of funds, as well as the budget management and accounting. Municipal finances play a key role in the context of local self-government under the Basic Law, as well as within the principle of connexity, the fiscal constitution of the Federal Republic of Germany, and the respective state law. The objective of municipal finances is to ensure a permanently efficient provision of municipal services.
Constitutional Principles
Local Self-Government and Fiscal Sovereignty
The legal foundation for municipal finances is the constitutionally guaranteed right of self-government for municipalities pursuant to Art. 28 sec. 2 Basic Law (GG). In addition to organizational sovereignty, this includes, in particular, fiscal sovereignty. Municipalities have the right, within the framework of the law, to raise revenues and make expenditures on their own responsibility, in order to fulfill their tasks.
Connection to the Connexity Principle
Within the framework of transferring state responsibilities to the local level, the connexity principle (‘He who orders the music must pay for it’) guarantees financial resources in case of new or extended financial obligations. The specific arrangements are determined by the respective state constitutions and municipal levy laws.
Fiscal Constitution and Financial Equalization
The federal fiscal constitution, in Articles 104a to 108 of the Basic Law (GG), sets out the allocation of revenues and responsibilities among the federal government, the states, and the municipalities as well as among the different municipal levels. The municipal financial equalization system serves to balance differences in financial strength and to finance public duties.
Revenues of Municipalities
Tax Revenues
Taxes regularly represent the most important source of income for municipalities. The key municipal taxes are:
- Trade tax (Trade Tax Act, GewStG): Municipalities are entitled to levy trade tax. Most of the revenue remains with the municipality.
- Property tax (Property Tax Act, GrStG): Property tax is a permanent, original revenue of municipalities.
- Municipal Shares in Joint Taxes: In particular, the municipal share of income tax and partly of value-added tax are allocated through financial equalization.
Fees and Contributions
In addition to taxes, municipalities may levy charges in the form of fees and contributions in accordance with the municipal levy law of the respective federal state and relevant special laws:
- Fees: For specific services, such as waste disposal, wastewater disposal, or administrative services (cost-covering principle required).
- Contributions: Mainly development contributions and improvement contributions in connection with the provision of public facilities and infrastructure.
Allocations and Grants
Municipalities receive allocations to ensure the fulfillment of their responsibilities through the municipal financial equalization scheme (general and earmarked allocations) as well as project-related grants from the federal government, the states, or the EU.
Income from Asset Management
Additional revenues come from leasing, renting municipal properties, shareholdings, and economic activities under the municipal code (commercial enterprises, utility services).
Loans and Borrowing
Borrowing is permissible under the respective municipal code (e.g., Art. 71 GO Bavaria) to finance investments. However, there is a general prohibition on debt for ongoing expenditures.
Expenditures and Budget Management
Budgetary Principles
Certain budgetary principles apply in dealing with municipal finances:
- Annuality: The budget applies to one fiscal year.
- Totality: All revenues and expenditures must be included in the budget.
- Gross Principle: Revenues and expenditures may generally not be netted against each other.
- Priority: The budget must be adopted before the start of the fiscal year.
Mandatory and Voluntary Expenditures
Municipal finances distinguish between mandatory tasks (required by law, e.g., education, public transport) and voluntary tasks (e.g., cultural promotion, sports facilities). In times of financial constraints, mandatory tasks always take precedence.
Investments and Operating Expenditures
Investments, for example in infrastructure, are generally financed by loans, while current expenditures such as personnel costs must be covered from ongoing revenues.
Legal Regulation of Municipal Finances
Budget Law and Budget Plan
Budget law obligates the municipality to prepare an annual or multi-year budget plan (accrual accounting or cameralistics). Here, all expected revenues and planned expenditures are set out in detail.
After approval by the municipal council and, depending on the federal state, also by the supervisory authority, the budget is enacted.
Audit and Municipal Supervision
Proper use of municipal finances is monitored by the local audit office and external audit bodies, such as the municipal audit association or state audit offices. In cases of budgetary hardship, the municipal supervisory authority can intervene directly and order financial measures.
Debt Brake and Budget Balancing
Municipal codes and budget rules require budget balancing. In many states, there are more stringent rules regarding borrowing (municipal ‘debt brake’) and budget consolidation (e.g., budget consolidation concepts in case of over-indebtedness or impending insolvency).
Special Aspects and Developments
Municipal Indebtedness
Furthermore, municipal codes and budget law regulate under which conditions borrowing for investment is permissible. The supervisory authority examines compliance with the requirements (avoidance of structural debt, approval requirement).
Effects of State and Federal Law
Since the fiscal constitution distributes competencies, municipal budgets are subject to federal and state law, in particular through municipal codes (GO), municipal budget regulations (KommHV), and municipal levy laws (KAG).
Digitalization and Controlling
Recent developments include the digitalization of budget management, the introduction of controlling instruments, and a result-oriented approach to budget planning (product budgeting).
Literature and Further Regulations
- Basic Law for the Federal Republic of Germany (GG), especially Arts. 28 and 106ff.
- Municipal Levy Law (KAG) of the respective federal state
- Municipal Code (GO) and Municipal Budget Regulation (KommHV)
- Trade Tax Act (GewStG), Property Tax Act (GrStG)
- State Provisions on Municipal Financial Equalization
Conclusion
The term ‘municipal finances’ encompasses a wide range of legal aspects, covering matters such as constitutionally established fiscal sovereignty, budget law, revenue generation, expenditure management, as well as auditing and oversight. The aim of the legal provisions is to ensure a proper, transparent, and sustainable financial management at the municipal level that meets both democratic principles and economic requirements.
Frequently Asked Questions
Who is legally responsible for preparing the municipal budget plan?
The legal responsibility for preparing a municipality’s budget plan in Germany, according to the respective municipal constitutions, usually lies with the chief administrative officer, i.e., the mayor or lord mayor. According to the municipal code (§ 80 GO NRW, § 78 GemO BW, § 94 GO BY and similar regulations in other federal states), he or she must prepare the draft budget plan and submit it to the municipal council (city council, municipal council) for discussion and adoption. The municipal council has the right to make decisions on the budget (budgetary right), thus making the final decision on the budget. The legislative procedure for adoption is also legally regulated and includes requirements regarding deadlines, publication, and public participation. In addition, there are legal requirements for the transparency and traceability of budget items, as well as for proper accounting and control.
How is the legal oversight of municipal finances by the supervisory authority regulated?
The municipal supervisory authority, usually the district administration or regional government, is responsible for the legal supervision of municipalities and thus also oversees the regularity of municipal budget management. Its right to intervene arises from the relevant municipal legal provisions (e.g., §§ 102 ff. GO NRW, § 115 GemO BW). The annual budget plan is often to be submitted to the supervisory authority for approval or, for certain reasons such as significant shortfalls or borrowing, for express permission. The supervisory authority can also issue instructions in the event of violations of budget law, especially to ensure financial capacity or require budgetary stabilization measures. Regular audits, for example by the municipal audit institution or the municipal audit service, are also legally anchored.
What are the legal requirements for municipalities to take out loans?
The legal regulations for borrowing are firmly anchored in the municipal codes and budget regulations of the federal states (e.g., § 82 GO NRW, § 87 GemO BW, § 93 GO BY). Municipalities may only take out loans for investments and investment support measures, not for financing ongoing expenditures. The prerequisite is always the formal inclusion in the budget plan and its approval by the supervisory authority if certain thresholds are exceeded or if the budget is subject to stabilization. In addition, the municipality must demonstrate that financing via other revenues (e.g., grants, fees, sales revenues) is impossible and that its long-term financial capacity is not put at risk. So-called cash loans for the permanent coverage of deficits, outside of temporary liquidity shortages, are not permitted.
Under what legal framework may municipalities levy their own taxes?
The levying of municipal taxes is governed by the Basic Law (Art. 28 sec. 2 GG – guarantee of municipal self-government) and the municipal levy laws of the federal states. Municipalities may, according to the provisions of the Basic Law, levy their own taxes (e.g., property tax, trade tax, dog tax) as long as the right to do so has been granted by federal or state law. The tax rates are generally set autonomously by the municipal councils (multiplier right). However, municipal statutes are subject to formal and substantive legal requirements: in particular, they must comply with the principle of equality, the prohibition of arbitrariness, and the prohibition of retroactivity. Supra-local requirements, such as tax caps or tax ordinances, as well as judicial review of legality by tax courts in the event of disputes, represent additional legal restrictions.
What legal requirements exist for inter-municipal cooperation in the financial sector?
Inter-municipal cooperation in financial matters, such as joint treasury offices or special-purpose associations, is regulated by the relevant municipal codes (§ 1 sec. 1 GO NRW, § 19 GemO BW, special-purpose association laws). The prerequisite is usually a public-law agreement that specifies the content and scope of the cooperation in detail. The contractual provisions must, in particular, clarify issues of responsibility, liability, funding, and budget balancing. The conclusion of such agreements must be reported to the relevant supervisory authority and, in certain cases, require its approval. Regulated bookkeeping, cash, and accounting as well as the statutory obligation to audit the joint bodies are further legal requirements.
How are citizens legally involved in municipal financial decisions?
The legal basis for citizen participation in municipal financial decisions is essentially anchored in the municipal codes and the relevant municipal law of the federal states. In principle, budget planning is a representative process involving the elected council members; mandatory referendums are largely excluded in budget law in order to ensure financial policy guidance. However, many municipal codes provide for hearing and publication rights (e.g., public display of the budget draft, opportunity for comments by residents and taxpayers). In addition, citizen budgets or referendums on individual projects may be provided for, their legal effectiveness depending on the binding force of the council’s resolution and not affecting municipal and budgetary safeguards. As a rule, financial participation procedures must be compliant with the law and free from discrimination.
What significance and legal binding effect do budgetary principles have for municipal finances?
Budgetary principles are bindingly established in the budget law of the states (e.g., § 77 GO NRW, § 77 GemO BW, § 82 GO BY) and constitute mandatory guidelines for all municipal actions in the financial area. These particularly include the principles of truth, clarity, completeness, annuality, and unity of the budget, as well as the requirements for economy and efficiency. Compliance with these principles is monitored by the supervisory authority and audit offices. Violations, such as taking on unauthorized commitments or concealing budget deficits, may result in objections to the budget and lead to political as well as disciplinary consequences. The principles thus serve as a central legal instrument for ensuring sustainable and lawful budget management.
