Municipalities in debt: Why citizen participation is a win-win solution
Roads, schools, sports fields: German municipalities need a lot of money to maintain or improve the infrastructure. But in view of the economic downturn, many cities and municipalities are short of money. That is why it is now a matter of improving liquidity and preventing municipalities from taking out expensive cash loans. In part, the federal government is looking for solutions, but in some cases private investors are also in demand.
Crisis sentiment among German municipalities
Germany's municipalities are in a deep financial crisis. Show that Headlines in the local press: In Kiel, the Lord Mayor has imposed a budget lock. Leipzig has announced savings of 27.5 million euros. Karlsruhe wants to cut 400 administrative jobs. And even the rich people of Munich are canceling investment projects.
Municipalities across Germany recorded 2024, with a deficit of almost 25 billion euros, is the biggest minus since the existence of the Federal Republic. As a result, the budget gap has quadrupled compared to the previous year. The reasons for this are manifold and worrying: Expenditure on social benefits such as citizen benefits, integration assistance or youth welfare has risen particularly sharply. There are also rising personnel costs due to wage increases and additional jobs. At the same time, revenue is stagnating, for example due to weakening business taxes or lower federal allocations. The income of municipalities, on the other hand, remained largely the same. They rose by 3.5 percent. In contrast to previous years, tax revenue grew only slightly by 1.5 percent to 132 billion euros, primarily due to a weak increase in business tax revenue of 0.3 percent. The investment backlog, such as in schools, digitization or public infrastructure, continues to grow in this way, although municipalities would actually have to invest heavily to remain viable for the future.
But it is not just short-term developments that are affecting budgets. Structural factors are also aggravating the situation. These include climate protection laws, energy requirements and new administrative tasks that result in permanent additional expenditure. At the same time, many municipalities are sitting on their costs because funding through state tax equalization or federal programs is often inadequate. The imbalance is particularly dramatic in structurally weak regions, where income is low anyway and social burdens are particularly high. As a result, there is a dangerous vicious circle of rising debt, shrinking room for manoeuvre and growing frustration among citizens and local politics.
This increasing pessimism is confirmed by Survey of 100 members of the German Association of Cities: 95 percent of the tax departments surveyed assessed the budget situation in the next five years as “rather poor” or “poor.” On the other hand, only two percent of participants expect a “rather good” or “balanced” forecast.
Policy measures are not enough
After all, the federal and state governments have recognized the problem and have taken initial measures. Additional funds from the 500 billion special fund, protective shields for particularly burdened municipalities or increased investment programs should provide relief in the short term. In practice, however, this aid often does not arrive to the extent required or too late. In many places, there is therefore a lack of money as well as planning capacity and implementation expertise. Smaller municipalities in particular are quickly reaching their limits here, and the demand for a fundamental realignment of municipal finances is getting louder and louder.
But even if there is political will to reform, many challenges cannot be solved with public funding alone. The debt brake, economic uncertainties and rising global financing costs place tight limits on the state. That is why new, flexible solutions are needed to be able to implement important projects despite empty funds.
Citizen participation as part of the solution
In this tense situation, alternative forms of financing, such as Citizen participation models, more in focus. This is because they offer an opportunity to mobilize private capital for public purposes and at the same time strengthen the bond between citizens and their communities. Whether through citizen loans, cooperative models or crowd investments: More and more cities are discovering these instruments as a pragmatic addition to traditional household financing. Private equity can also be used sensibly if projects are economically viable and create added value for society.
The major advantage is that citizens become both financial supporters and active co-designers of their living and living environment. Ideally, they benefit in two ways: from attractive returns and from improving local infrastructure. At the same time, projects are made possible that would not be feasible for years to come without additional capital.
Right here puts FINEXITY to: As a platform for digitized tangible asset investments, FINEXITY brings private investors together with sustainable, locally based projects — for example in the areas of residential construction, energy transition or municipal infrastructure. In this way, citizens can invest directly in projects that affect them — transparently, digitally and with manageable risk. Instead of focusing on returns at any price, these investments are also about responsibility, trust and shaping a future worth living together.
