Every Treasurer currently wishes he would manage the cash registers of the city of Mainz. The Rhineland-Palatinate capital benefits greatly from the billions in profits made by the vaccine pioneer Biontech. Thanks to the trade tax revenue, Mainz expects to become debt-free in the current year.
Other municipalities are not so lucky. 160 kilometers north of Mainz, in Wuppertal, the situation is much more uncomfortable. “In my 24 years as treasurer of the city of Wuppertal, I have never had such a stressful situation as now,” treasurer Johannes Slawig told the “Welt“.
Like Mainz, Wuppertal is heavily indebted. The city’s liabilities at the end of 2020, when the last complete budget was closed, amounted to around 2.1 billion euros. Around one billion euros of this are cash advances, now also often referred to as liquidity loans.
Unlike investment loans, these loans only bridge short-term payment bottlenecks in the communities, for example because tax revenue has not yet flowed but salaries or social benefits are due. Hence the name Kassenkredit – it is simply a matter of the municipalities having money in their tills in order to remain solvent.
“A memory of the deficits of the past”
“Cash advances are actually only intended for financing during the year,” explains Cologne’s treasurer, Dörte Diemert. If more liquidity is needed permanently, these liabilities can pile up dangerously high. “These loans are therefore an indicator of structural underfunding by municipalities,” says Diemert, “a reminder of past deficits.”
That’s why it’s not good news when these loans, sometimes called “municipal overdrafts,” pile up into mountains. In part, explains Wuppertal’s chamberlain Slawig when asked by FOCUS online, the city even had to pay the interest on cash advances with other cash advances.
The comparison with the overdraft facility of a private consumer still doesn’t fit, says Slawig. “The bank charges quite high interest rates for the overdraft facility. So far, this has not applied to cash advances. On average, the interest on these loans is currently around one percent. In the years with negative interest rates, we even made small profits with it,” Slawig continues.
But because the European Central Bank (ECB) now wants to curb runaway inflation with higher interest rates, that’s over – and municipalities like Wuppertal or Pirmasens near Kaiserslautern are having problems. Nowhere in Germany are cash advances per capita as high as in Pirmasens.
The rise in interest costs Wuppertal 4.5 million euros per year
Wuppertal is even lucky. “Only a third of our liquidity loans have short terms of a few weeks or months. Municipalities feel the rise in interest rates immediately. Wuppertal, on the other hand, is heading for massive problems in the medium term,” says Slawig, and calculates: “The last interest rate hike by the ECB from 50 basis points to 0.5 percent will cost me around 4.5 million euros in additional interest costs a year.”
How did municipalities accumulate this debt in the first place? Accusing the city administrators of bad management falls far short of the mark. The origin of the over-indebtedness was decades ago, describes the action alliance “For the dignity of our cities“, in which indebted municipalities like Wuppertal want to make themselves heard.
“As early as the 1970s and 1980s, it could be observed that social spending was increasing massively. The cities and districts had to make these expenses because the federal and state governments have assigned these tasks to them. Revenue from taxes and key allocations did not grow to the same extent,” the alliance said.
This led to a financial imbalance. Income, for example from property and trade tax, no longer financed the rising costs. That’s why the communities cut spending or just used loans to stay liquid. Either way, however, this meant that the already structurally weak municipalities became even less attractive for companies and employees – “and the spiral continued to turn downwards”.
Despite the debt, there is no threat of a German Detroit
It is therefore not surprising that most of the heavily indebted cities are to be found in the areas where structural change was particularly strong, in North Rhine-Westphalia and Rhineland-Palatinate. Communities that had subsisted on coal mining and the steel industry for decades were hit twice as hard by the decline of these industries – less tax revenue on the one hand, and higher costs on the other, such as higher unemployment.
Aside from the structural change, there were also a few boosts that caused the cash loan liabilities to skyrocket, notes Slawig. “The corporate tax reform of 2001 alone brought Wuppertal an unforeseen loss of 50 million euros.”
After all: A similar fate as the US metropolis Detroit does not threaten the municipalities in this country. The structural change and the demographic development in the former car stronghold of the USA led to the declaration of bankruptcy in 2013. Detroit’s debt at that time: Over 18 billion US dollars.
In Germany, public authorities cannot go bankrupt. Insolvency is ruled out by law, in case of doubt the “national liability community” intervenes – the federal states stand in for the municipalities, the federal government for the federal states.
What a way out of debt could look like
Nonetheless, the problem of debt is getting bigger due to rising interest rates and must therefore be tackled. Otherwise there will be no investment and structurally weak communities will only fall further behind – because there is simply no money left for new roads or day-care centers.
Efforts are being made at the federal level to help the municipalities. However, this requires a change in the Basic Law, according to Finance Minister Christian Lindner (FDP). However, both the federal states and the opposition from the CDU/CSU would have to go along with it. As the “Welt” reports, states such as Bavaria or Baden-Württemberg are blocking this with reference to the state financial equalization. Instead, state politicians are calling for more budgetary discipline.
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There are alternatives to this. Federal states such as Hesse or recently Rhineland-Palatinate have set up funds for the cash advances. “One model, for example, is that the cash advances remain with the respective city, but are pooled in a fund, and the federal and state governments help to finance the interest expenses. The fund would then have the task of repaying the debt over 30 to 50 years,” says Slawig.
Municipalities like Wuppertal would of course do their part and “participate with a certain share of 25 or 30 percent in the financing of interest and repayment”. The big advantage of such a fund: Thanks to the support of the federal government, the fund could be financed more cheaply, above all it would give the cities interest rate security in the longer term.
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