Decline in financial status for Hesse's city administrations
In the heart of Germany, the municipalities of Hesse are grappling with financial challenges that are affecting their ability to act and maintain social cohesion. The recent "Communal Finance Report 2025" by the Bertelsmann Foundation reveals a historic deficit of over three billion euros in Hessian municipalities, a trend that mirrors a nationwide issue.
Personnel expenditure has seen a significant increase, with a rise of more than 80 percent within ten years. This growth is attributed to job creation and high wage agreements. The rising expenditure on personnel, combined with stagnating tax revenues and increasing costs on material and social affairs, has pushed many municipalities into the red. More than two-thirds of the municipalities in Hesse ended the past year with a deficit, and the deficit in Hesse was particularly high per capita compared to other federal states.
Brigitte Mohn, the President of the Bertelsmann Foundation, states that this current deficit is a turning point that questions the financial capacity for action of the municipalities. She suggests a state reform as she believes that municipalities will no longer be able to fulfill their important tasks without it.
The financial reform measures being considered for Hessian municipalities focus primarily on addressing high deficits and rising personnel expenditures. These measures include improving fiscal equalization, increasing federal and state transfers, and implementing efficiency measures. However, no full consensus or sweeping reform has been achieved yet.
One of the key points in the reform discussion is horizontal fiscal equalization (Länderfinanzausgleich). For 2025, transfers are projected to increase to €19.6 billion, up from €17.3 billion in 2024. Wealthier states like Hesse are pushing for reforms to the fairness of the transfer formula amid growing local budget pressures. However, recent meetings of state finance ministers failed to reach consensus on reforming the fiscal equalization scheme.
Municipalities across Germany, including those in Hesse, face a cumulative investment backlog of €172.9 billion, notably in schools, public transport, and digital infrastructure. Existing federal transfers under the Municipal Investment Promotion Act (KInvFG) are inadequate, covering only €3.2 billion in the first half of 2025, thus systemic underfunding remains unresolved.
The State of Hesse’s 2025 budget includes significant personnel costs, comprising 28% of expenditures, with rising indebtedness (total debt roughly €44.4 billion). Measures to contain personnel expenditure are crucial, but no specific personnel reforms or expenditure caps are detailed in the current budget overview.
Some regulatory updates, such as mandatory electronic invoicing for public entities in Hesse since April 2024, are being implemented to improve administrative efficiency and reduce costs. However, federal reforms of fiscal federalism have stalled, with no plans to abolish the existing tax-sharing regime between the Bund and Länder. The political complexity of federal-state relations, combined with recession risks and electoral constraints, limit the scope for drastic municipal fiscal reforms currently.
The future outlook for these municipalities is uncertain given the high social expenditure and weak economic development. The report indicates that expenditure on social affairs is a significant contributor to the deficit. The high level of social expenditure and weak economic development have a pessimistic outlook for the future of these municipalities. The expenditure level for these municipalities has been affected by inflation, which has permanently increased their expenditure level.
In conclusion, while rising deficits and personnel costs in Hessian municipalities are recognized pressures, the current approach emphasizes reforming fiscal equalization, seeking increased transfers, and implementing administrative efficiency measures, but broader or deeper financial reform measures remain politically and economically constrained. The financial situation in Hessian municipalities is a nationwide trend, and it remains to be seen how these challenges will be addressed in the coming years.
[1] Bertelsmann Stiftung. (2025). Communal Finance Report 2025. Retrieved from https://www.bertelsmann-stiftung.org/de/publikationen/2025/kommunal-finanz-bericht-2025.html [2] State of Hesse. (2025). Budget of the State of Hesse 2025. Retrieved from https://www.hessen.de/finanzen/staatsbudget/ [3] Ministry of the Interior of Hesse. (2024). Electronic invoicing for public entities in Hesse. Retrieved from https://www.hessen.de/interne/informatik/elektronische-rechnung/ [4] OECD. (2024). Germany: Fiscal Federalism and Public Expenditure. Retrieved from https://www.oecd.org/germany/topics/fiscal-federalism-and-public-expenditure/
- The financial challenges in Hessian municipalities, stemming from excessive personnel costs and stagnating tax revenues, have sparked discussions about reform in the industry, politics, and general-news sectors.
- The implementation of regulatory updates, such as mandatory electronic invoicing for public entities, is a step towards addressing financial issues in the business sector and improving administrative efficiency in the finance and politics domains.
- The high level of social expenditure, combined with weak economic development, raises concerns about the future stability of the municipalities, drawing the attention of economists, financial analysts, and policymakers in the business, finance, and politics industries.
