Municipal financial equalization; general information

Financial equalization in the broader sense refers to the sum of all regulations relating to the distribution of tasks, expenditure and revenue between local authorities. The Bavarian law on financial equalization between the state, municipalities and municipal associations (Bayerisches Finanzausgleichsgesetz - BayFAG) regulates which tax revenues from the state are shared with the municipalities and to what extent, and how the funds provided by the Free State are distributed. Municipal financial equalization in the narrower sense deals with financial relationships between local authorities.

Within the framework of municipal financial equalization

• the state improves the financial resources of the three municipal levels (municipalities, counties and districts) so that they have sufficient funds to fulfill their tasks;
• the state regulates the financing of the counties and districts via the county and district levy;
• the different revenue possibilities of the individual municipalities are equalized to a high degree according to their needs;
• municipal investment measures are specifically supported and
• the municipalities are relieved of the burden of financing current tasks through state benefits.

Objectives of municipal financial equalization

Municipal financial equalization has two main objectives, one fiscal and one distributive:

• On the one hand, state allocations supplement the municipalities' own revenues. The municipalities are supported so that they can fulfill their tasks appropriately.
• Secondly, financial equalization is intended to ensure an appropriate distribution of funding between the municipal levels and the individual municipalities.
  
  Municipal financial equalization thus contributes to the creation of equal living conditions throughout the country. However, the principle of equal treatment and the constitutional guarantee of municipal self-government draw a line here: the different financial strength of the municipalities must not be completely leveled or even over-leveled.
  
  Both objectives correspond to the role of the state as guarantor of local self-government. The self-governing bodies' ability to act on their own responsibility presupposes their financial capacity. The state is therefore constitutionally obliged to ensure the financial viability of its municipalities within the scope of its own capacity.
  
  Key features of the current equalization system
  
  The system of municipal financial equalization is characterized by several structural features, two of which are particularly characteristic.
  
  The first characteristic feature is the so-called tax groups. Through them, the municipalities share a percentage of certain state tax revenues. The state and municipalities form a kind of "community of fate" in this area.
  
  The second defining feature is the apportionments between the individual municipal levels and between the state and municipalities. As a result, the financial flows not only run "from top to bottom", but also "from bottom to top".
  
  Sources of municipal financial equalization (Where do the funds come from?)
  
  Funds from the Free State of Bavaria
  
  The financial equalization payments of the state are financed by the tax associations and from other general budget funds.
  In Bavaria, the municipalities are involved in four different tax associations:
  
• General tax grouping (Art. 1 of the Bavarian Fiscal Equalization Act - BayFAG)
  As part of the general tax system, the Free State of Bavaria grants the municipalities and districts a share of 12.75% of its income from income tax, corporation tax, VAT (excluding those shares that are distributed to the municipalities under special regulations or that are transferred to the state by the federal government for special purposes) and the trade tax levy. The municipal share of the general tax system is primarily used to finance the key allocations (see below for more details).
  
• Motor vehicle tax substitute system (Art. 13 to 14 BayFAG)
  The Free State originally transferred part of its revenue from motor vehicle tax to the municipalities via the motor vehicle tax network. On July 1, 2009, the revenue sovereignty for vehicle tax was transferred to the federal government. As compensation, the federal states receive a non-dynamized fixed amount from the federal government (motor vehicle tax substitute association). The Free State shares 70 percent of this amount with the municipalities (municipal share).
  
  The funds are primarily intended to promote the construction, expansion and maintenance of municipal roads as well as the construction or expansion of local public transport infrastructure.
  
• Income tax substitute (Art. 1b BayFAG)
  The change in the calculation of child benefit as a result of the reorganization of the equalization of family benefits from 1996 and changes to tax law as a result of the 2011 Tax Simplification Act lead to a reduction in income tax revenue for the federal states and local authorities. To compensate for this, the federal government is giving the federal states a higher share of the sales tax revenue. The Free State passes on the full amount of the compensation due to the municipalities in proportion to their share of income tax (26.08%).
  
• Real estate transfer tax association (Art. 8 BayFAG)
  The municipalities and rural districts share 8/21 (municipal share) of the land transfer tax revenue. The municipal share is distributed to the municipalities according to the respective local revenue. Municipalities and large district towns receive the municipal share in full, the other municipalities belonging to districts receive three-sevenths of the municipal share themselves and their rural districts receive four-sevenths. The tax offices transfer the municipal share to the municipalities on a monthly basis. The funds are freely available as so-called general cover funds.
  
• General budget funds
  In addition to the combined services, the municipalities receive additional budget funds from the state budget. These are used, for example, to finance financial allocations and the state's share of hospital funding as well as partial needs-based allocations and stabilization aid, allocations for municipal building construction measures and allocations to the districts.

Municipal funds

The main source of income for the districts, the district levy, is provided by the municipalities belonging to the respective district. The main source of income for the districts, the district levy, is collected by the districts from the rural districts and independent municipalities in the area of the respective district. The counties and districts participate indirectly in the tax revenue of the municipalities via the county and district levy.

The rural districts and independent municipalities contribute half of the hospital financing via the hospital levy.

Federal funds

The federal government provides funding for investments in local public transport that are eligible for funding under the Municipal Transport Financing Act (GVFG) (see below for more details). In 2023, the Free State of Bavaria is expected to receive 55 million euros.

The Free State of Bavaria can also draw a total of around EUR 295 million from the hospital structural fund provided by the federal government from the liquidity reserve of the healthcare fund in accordance with Section 12a KHG in the years 2019 to 2024 to co-finance certain projects to improve the structure of hospital care.

Municipal financial equalization benefits (where do the funds go?)

The main areas of municipal financial equalization are

• Key allocations (Art. 2 to 6 BayFAG)
  The key allocations are used to supplement the tax revenues of the municipalities and the apportionment revenues of the administrative districts in line with their tasks. Certain special burdens, such as social charges, are taken into account. The funds for the key allocations are taken from the local authority share of the general tax base. From the key allocation, 64% goes to the municipalities and 36% to the rural districts.
  
  When determining the key allocations, a municipality's burden of tasks is compared with its revenue potential using objective indicators. A fictitious burden of tasks is determined on the basis of several approaches (number of inhabitants, district independence, structural weakness, social burdens, childcare) and compared with the municipality's standardized tax capacity, which is determined in part - e.g. for trade tax and property tax using "levelling assessment rates". The higher the difference between the tax burden and tax capacity, the higher the respective key allocation to the municipality.
  
  This means that if the revenue situation of the individual municipality is too weak in relation to the respective tax burden, this is partially offset by higher key allocations.
  
  If a municipality's tax capacity exceeds its tax burden, it does not receive any key allocations. Such an efficient municipality is referred to as "abundant".
  
  The key allocations are granted "automatically", i.e. without an application.
  
• Financial allocations (Art. 7, 9 BayFAG)
  Municipalities, administrative communities and rural districts receive lump-sum financial allocations as compensation for the administrative expenses for the tasks of the transferred sphere of activity, the rural districts also as compensation for the administrative expenses for the state authority Landratsamt. The allocations are granted "automatically", i.e. without the need to submit an application.
  
• Municipal building construction (Art. 10 BayFAG)
  The allocations for municipal building construction measures are primarily intended to ensure that a roughly equivalent infrastructure can be provided to the necessary extent in all regions of Bavaria, particularly in the areas of public schools and child daycare facilities. In principle, new construction, conversion and extension as well as general and partial refurbishment of public schools (including school sports facilities), school dormitories and child daycare facilities are eligible for allocation. In addition, construction investments for professional municipal theaters and concert halls are eligible under certain conditions.

• Allocations for the costs of school transportation (Art. 10a BayFAG)
  The state grants lump-sum allocations to the responsible bodies for the costs of the necessary transportation of pupils at certain types of schools (e.g. public primary, secondary and special schools, public or state-approved secondary schools, grammar schools, full-time vocational schools). On average, these cover at least 60% of the school transport costs of the responsible bodies.
  
  The calculation of the individual annual allocation is based on the number of pupils entitled to transport on October 1 of the respective previous year (for vocational schools on October 20) and on the costs for the necessary school transport in the previous year as recorded in the municipal accounting statistics. The number of pupils entitled to transportation must be reported annually by the municipalities to the Bavarian State Office for Statistics. Otherwise, no application is required. The allocations are granted "automatically", i.e. without an application.
  
• Needs-based allocations and stabilization aid (Art. 11 BayFAG)
  Traditional needs-based allocations in accordance with Art. 11 BayFAG take account of the exceptional situation and the special burdens and expenditure of municipalities or districts in individual cases. They are subject to a strict subsidiarity principle and may not be granted for the direct or indirect financing of investments and their subsequent costs.
  
  
  Municipalities and rural districts only receive traditional needs-based grants if they are no longer able to balance their administrative budget and/or generate the minimum allocation to the capital budget due to events for which they are not responsible and despite exhausting all of their own revenue options. Under double-entry budget management, a negative balance from current administrative activities is required.
  
  
  Since 2012, structurally weak municipalities or municipalities particularly affected by demographic developments that are in financial difficulties or whose financial capacity is at risk have been able to receive support for their budget consolidation through so-called stabilization aid, a special form of needs-based grants (= "state aid for self-help"). Since 2019, stabilization aid to municipalities has been designed as a two-pillar model - stabilization aid for the repayment of old debt (pillar 1) and/or investment aid (pillar 2).
  
  
  The aim is to reduce debt through consolidation and support with stabilization aid and to reduce interest and redemption payments in order to create more financial room for manoeuvre. The investment shares or investment aid serve to prevent an increase in or to reduce an investment backlog in basic municipal equipment.
  
  The State Ministries of Finance and Home Affairs and of the Interior, Sport and Integration decide on all applications for the granting of needs-based allocations or stabilization aid after consulting the municipal umbrella organizations at the annual distribution committee meeting.
• Investment lump sums (Art. 12 BayFAG)
  Municipalities and rural districts receive investment lump sums to finance investment, repair and modernization measures. The respective municipality itself decides which investments the funds are used for.
  
  The lump sums are granted "automatically", i.e. without the need to submit an application.

• Municipal road construction and maintenance (Art. 13a, b, c, f and h BayFAG)
  Funds are available from the motor vehicle tax compensation fund to promote the construction, expansion and maintenance of roads under municipal responsibility. The following are eligible for funding under certain conditions
  
• the construction, expansion and maintenance of district and municipal roads as well as local thoroughfares of federal, state and district roads for which municipalities are responsible,
• the construction and expansion of certain footpaths and cycle paths as well as high-speed cycle paths,
• the expansion of public field and forest roads, insofar as the mixed use of pedestrian and bicycle traffic with agricultural and forestry traffic makes the construction of a pedestrian and bicycle path necessary for traffic purposes unnecessary,
• the construction of local bypasses or relief roads in the course of state roads that are under special municipal responsibility, and
• the modification of junctions between state and municipal or district roads.

Funding for municipal road construction and maintenance takes the form of targeted allocations for construction measures, fixed lump sums for road construction and maintenance as well as road expansion lump sums.

• Local public transport (Art. 13c Para. 2 and Art. 13d BayFAG)
  In addition to state funds under the BayGVFG and BayFAG, federal funds under the GVFG and the Act on the Regionalization of Local Rail Passenger Transport are also available for the promotion of investments in local public transport (e.g. construction or expansion of streetcar, subway and suburban railroad transport routes as well as central bus stations and stops).
  
  The BayFAG funds are granted as complementary funding for the construction or expansion of transport facilities for general public transport or suburban railroads that are funded by the GVFG or the Bavarian Municipal Transport Financing Act (BayGVFG). The procurement of buses and underground and streetcar vehicles is funded exclusively under the BayGVFG. Funding from the GVFG federal program is only possible, among other things, if the eligible costs exceed 30 million euros (for measures included in the GVFG federal program by the end of 2020: 50 million euros).
  
  
  
  
  To co-finance maintenance costs from local transport services, to promote public services in local public transport and to cover cost recovery shortfalls in transport cooperations, the public transport authorities receive allocations in accordance with Art. 27 BayÖPNVG. These are granted from the funds of Art. 13d BayFAG, which are designed as a fixed amount. Around 66% of the funds are allocated to the area and 34% to the conurbations of the cities of Munich, Regensburg, Würzburg, Augsburg and the Nuremberg/Fürth/Erlangen urban axis.
• Allocation to the districts (Art. 15 BayFAG)
  The state grants the districts an allocation to cover the burdens they incur, in particular as providers of integration assistance and as supra-local providers of social assistance. The allocation is granted "automatically", i.e. without application.
  
• Hospital financing (Art. 10b BayFAG)
  Under the dual hospital financing system, the costs for the necessary acute inpatient investments of hospitals that are included in the hospital plan of the Free State of Bavaria are not covered by the revenues from the nursing rates or flat rates per case, but are covered by public funding. The funds for this are provided equally by the state and the municipalities. The municipal share is provided by a hospital levy to be paid by all districts and independent municipalities. In the years 2019 to 2024, in addition to the state funds, federal funds are also available from the Hospital Structural Fund in accordance with Section 12a KHG, which can be used to co-finance certain projects to improve the structure of hospital care.

Further information can be found under "Related topics".

The requirements for the numerous service areas of municipal financial equalization are very different, detailed and, in some cases, complex. It is therefore not possible to provide a comprehensive overview here. Therefore, please contact your district administration office or your (independent) city. If you have any questions about funding for municipal building and road construction measures, local public transport and hospital funding, please contact the relevant district government.

Further information can also be found under "Related topics".

You can also find out about any relevant dates and deadlines for municipal financial equalization from your district office or (independent) city or, in the case of funding for municipal building and road construction measures, local public transport and hospital funding, from the relevant district government.

Further information can also be found under "Related topics".