Germany, States Agree on Financial Reform to Aid Municipalities

Germany's federal and state leaders have reached a landmark agreement on a financial reform designed to ease the burden on municipalities. The deal, struck at the Chancellery, follows the principle "whoever orders, pays," ensuring federal laws that impose costs on local governments are largely funded by the federal level.

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Whoever orders, pays.

Under the new mechanism, set to take effect September 1, the federal government will cover 80% of the financial costs for municipalities if new federal laws or amendments result in additional expenses exceeding 200 million euros for both states and local authorities combined. This principle of "veranlassungskonnexität" (causal connection) was a key promise in the coalition agreement of the federal government's parties.

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We are talking about a relief potential for municipalities of three billion next year, and that will grow over the coming years.

Niedersachsen's Minister-President Olaf Lies (SPD) described the agreement as a "fair compromise." He anticipates the reform will provide significant relief, potentially saving municipalities billions of euros starting as early as 2027. "We are talking about a relief potential for municipalities of three billion next year, and that will grow over the coming years," said Rhineland-Palatinate's Minister-President Gordon Schnieder (CDU). Both leaders expressed gratitude for the "unanimity" shown in reaching the decision.

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We have also opened a new chapter in the relationship between the federal government and the states of federal, collegial, cooperative collaboration.

Chancellor Friedrich Merz (CDU) hailed the agreement as opening "a new chapter of federal, collegial, cooperative collaboration" between the federal government and the states. The reform specifically targets costs arising from "Leistungsgesetze" (performance laws) at the federal level, which have increasingly strained municipal budgets. Examples include laws related to child and youth welfare and support for people with disabilities. The agreement also includes a symmetrical clause, ensuring that if federal decisions lead to cost reductions, funds will be returned accordingly.

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If the federal government makes decisions that also lead to a reduction in costs, then there must also be a return of funds.