Municipal finance equalization: 137 communities challenge preferential treatment for central municipalities

For the third time in ten years, Schleswig-Holstein’s state constitutional court is examining the politically contentious system used to distribute state money among municipalities. At the center of the latest proceedings are constitutional complaints filed by 137 mostly non-independent municipalities, which say they are being disadvantaged compared with designated central municipalities.

Central municipalities receive special allocations because they provide services not only to their own residents but also to people from surrounding communities. The government describes this broader regional supply function as the defining feature of such places. The municipalities challenging the system argue that lawmakers have not properly assessed their needs and that some places have been wrongly classified as central municipalities.

One complainant told the court that the system holds on to central municipalities more or less blindly. The challengers say those municipalities receive preferential treatment without sufficient justification, while the needs of municipalities belonging to administrative districts are systematically underestimated.

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That means these places provide services not only to their own population, but also to residents of surrounding municipalities.

As of May 2025, Schleswig-Holstein had 134 cities and municipalities classified as central municipalities or urban fringe centers. Under the state’s municipal finance equalization law, 18.33 percent of state tax revenue is distributed to districts and municipalities. About €2.5 billion is available for distribution in 2026. The money is divided into two broad pools: fixed deductions for specific tasks and a remaining pool distributed according to formulas, including the special allocations for central municipalities.

The complainants are also challenging the treatment of urban development funding. Before the system was reorganized on January 1, 2025, that funding stood outside the equalization scheme. It is now deducted in advance from the money available to municipalities, leaving about €20 million less for formula-based allocations. The municipalities call that approach structurally flawed because they believe they are effectively paying for state funds provided in addition to federal financial assistance. The court plans to issue its ruling at noon on October 30.

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More or less blindly, central municipalities are being held on to.