KfW Municipal Panel 2021: Too soon to sound the all-clear – municipal finances may be in for a ‘long Covid’

• Great uncertainty over further development of municipal finances
• Backlog of municipal investment has grown slightly to EUR 149 billion
• Municipalities believe short- and long-term support measures will be necessary to maintain capacity to act

In financial terms, German municipalities so far have survived the crisis better than expected. Although the highest funding shortfall in a long time loomed in the first three quarters of 2020, municipalities were able to close the previous year with a small surplus thanks to the support measures from the federal and state governments. But as the findings of the current KfW Municipal Panel 2021 reveal, it is to soon to sound the all-clear. The surveyed treasurers provided significantly poorer assessments of the financial situation, particularly with a view to the uncertain outlook for the year 2021 and beyond. Eighty-five per cent of the surveyed cities, regional districts and municipalities expect lower revenues and 52% anticipate higher expenditures as a result of the crisis.

The crisis so far has hardly affected municipalities’ investments and investment planning. According to the survey conducted by the German Institute for Urban Affairs on behalf of KfW Research, municipalities actually anticipate new record high investment expenditure of EUR 39.2 billion in their planning for 2021. This is due to the long lead times involved in public investments, which means that these are not immediately modified even when revenues drop. At the same time, 57% of municipalities believe they will have to cut their investment expenditure if their revenues decrease this year as well. “Municipal finances face the prospect of a long Covid”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW. “Cutting necessary municipal infrastructure investments has significant long-term consequences, since we need effective municipalities that perform their tasks efficiently to meet major challenges such as climate change and digitalisation in the public sector.”

Although investment expenditure increased in the past years, it was often not sufficient to even maintain the substance of existing municipal infrastructure. The perceived backlog of municipal investment for the survey year 2020 grew to EUR 149 billion in total, EUR 2 billion more than in the previous year. A major driver is inadequate maintenance, which is leading to a growing investment backlog particularly in financially weak municipalities. Municipalities have the greatest need for investment in school buildings (EUR 46.5 billion/previous year EUR 44.2 billion), roads (EUR 33.6 billion/PY EUR 37.1 billion) and administrative buildings (EUR 16.4 billion/PY EUR 12.9 billion).

Municipalities mainly use their own funds (36% in total) for the various infrastructure investment sectors. These sources have come under particular pressure as a result of the crisis. Allocations under the municipal financial equalisation system (16%) and promotional funds (20%) are further important funding sources, although it is not yet clear what medium-term consequences the crisis will have on these either. So far, municipalities have been responding by selling more assets. In addition, 55% of treasurers reported that they will take up more loans in the future, which currently make up 14% of the funding mix. “We will most likely see another significant rise in municipal debt, to be sure. But most municipalities have sufficient scope for this thanks to the positive development in the previous years. What is now important is that municipalities permanently retain their ability to operate during and after the crisis and efficiently perform their tasks”, added Köhler-Geib. Most municipalities have reported favourable lending conditions and expect that to remain largely unchanged in the near future.

In order to maintain municipalities’ ability to continue operating in the further course of the crisis, the surveyed treasuries believe that offsetting tax revenue losses would be helpful in the short term, as was done in 2020. In the long term, however, structural adjustments to the distribution of funds between the federal levels will gain more importance. “It is understandable that during the crisis, our measures to stabilise municipal budgets will focus on the immediate future for the time being. But this crisis will hopefully soon be over, and strengthening municipal finances from the ground up will then be back on the political agenda. That is a good thing because the importance of having strong municipalities cannot be rated highly enough for Germany”, Köhler-Geib concluded.

The current KfW Municipal Panel 2021 can be downloaded from:
www.kfw.de/kommunalpanel

The database:
The KfW Municipal Panel is an annual survey conducted by the German Institute for Urban Affairs (Difu) on behalf of KfW Group since 2009. The representative survey is directed at the municipal treasuries of cities with district status, regional districts and district towns with more than 2,000 inhabitants and covers the core areas of municipal finances, investment activity and its funding. The main survey for the KfW Municipal Panel ran from September to December 2020, with 765 municipalities participating.