Distribution of federal financial assistance to the Länder for the promotion of investments by financially weak municipalities is compatible with the Basic Law

Press Release No. 117/2023 of 18 December 2023

Order of 29 November 2023 - 2 BvF 1/18

In an order published today, the Second Senate of the Federal Constitutional Court held that § 2 and § 11(1) of the Act to Promote Investments by Financially Weak Municipalities (Act to Promote Municipal Investments, Kommunalinvestitionsförderungsgesetz – KInvFG; hereinafter: the Act) are compatible with the Basic Law (Grundgesetz – GG).

The Federation provides financial assistance to the Länder (federal states) from the special fund for municipal investments to promote the investments of financially weak municipalities. The distribution of these funds among the individual Länder according to specified percentages is laid down in § 2 and § 11(1) of the Act, with the latter provision governing financial investments to improve school infrastructure. The distribution formula is based on three criteria of equal weight: population size, unemployment figures, and the amount of liquidity loans taken out by a Land and its municipalities. The applicant in the present proceedings, the Land Berlin, challenges the distribution criteria used to calculate the percentages and considers them to be unconstitutional.

§ 2 and § 11(1) of the Act to Promote Municipal Investments are compatible with the Basic Law. The constitutional standard for reviewing § 2 of the Act is derived from Art. 104b(1) first sentence no. 2 of the Basic Law (federal financial assistance for certain investments of the Länder and municipalities to equalise differing economic capacities within the federal territory); the standard for reviewing § 11(1) of the Act is based on Art. 104c first sentence of the Basic law (federal financial assistance to the Länder for investments of significance for the nation as a whole in municipal education infrastructure). Compliance with these standards is subject to limited review by the Federal Constitutional Court as to whether the legislation is arbitrary. On this basis, the distribution of financial assistance to the Länder provided for in § 2 and § 11(1) of the Act meets the applicable standards. The criteria of population size, unemployment figures, and amount of liquidity loans are not objectionable under constitutional law. § 2 and § 11(1) of the Act also do not violate the principle of equal treatment within the federal order.

Facts of the case:

The Federation provides financial assistance to the Länder to promote the investments of financially weak municipalities. Firstly, it provides funds totalling EUR 3.5 billion that are intended to equalise differing economic capacities between the Länder; § 2 of the Act sets out the specific percentages of these funds to be distributed to each Land. Secondly, the Federation provides funds totalling EUR 3.5 billion overall to improve the infrastructure of general and vocational schools; the specific percentage each Land receives from these funds is set out in § 11(1) of the Act. The distribution formula for both types of financial assistance is based on the total population of a Land as at 30 June of a given year, the amount of liquidity loans taken out by the Land and its municipalities as at 31 December of a given year and the yearly average of unemployed persons in a Land; each of these criteria counts for one third of the total assessment.

The Land Berlin contends that the distribution formula underlying §§ 2 and 11(1) of the Act results in an unequal, and therefore unconstitutional, distribution of federal investment assistance to the individual Länder, and in particular leads to an unjustified disadvantaging of the so-called city states [the three German Länder that are cities but have federal state status – Berlin, Hamburg and Bremen].

Key considerations of the Senate:

The application in abstract judicial review proceedings is manifestly unfounded. § 2 and § 11(1) of the Act are compatible with the Basic Law.

1. The distribution of funds under § 2 of the Act is in keeping with the limits of Art. 104b(1) first sentence no. 2 of the Basic Law and does not violate the principle of equal treatment within the federal order.

a) aa) According to Art. 104b(1) first sentence no. 2 of the Basic Law, the Federation may, within the scope of its legislative powers, grant the Länder financial assistance for particularly important investments by the Länder and municipalities (or associations of municipalities) which are necessary to equalise differing economic capacities within Germany. The types of investments to be promoted are thus aimed at ‘equalising differing economic capacities within the federal territory’ and concern certain significant areas of investment in which this aim is to be achieved with federal financial assistance.

Art. 104b(1) first sentence no. 2 of the Basic Law only sets the outer limits of this assistance; the details must be set out in a federal law requiring the consent of the Bundesrat (or in an executive agreement). This provision forms the basis for a framework that differentiates among the Länder according to their respective structural weakness and investment needs, without laying down the detailed differentiation criteria in the Constitution.

The question of whether the federal legislator has complied with the requirements for the granting of financial assistance under Art. 104b(1) first sentence no. 2 of the Basic Law is only subject to limited constitutional review on the basis of the standard of arbitrariness.

bb) Based on these standards, it cannot be found that the legislator, in providing for the distribution of investment assistance according to the percentages set out in § 2 of the Act, showed fundamental disregard for the concept of ‘equalising different economic capacities within the federal territory’ under Art. 104b(1) first sentence no. 2 of the Basic Law.

(1) Unemployment figures (based on the annual average of the respective Land), which count for one third of the formula for the distribution of investment assistance between the Länder, are clearly a suitable criterion for assessing structural weakness and therefore not inadequate.

(2) The same applies to the population criterion, which also counts for one third of the distribution formula. The legislator could assume that a larger population objectively requires additional infrastructure and therefore higher investment.

(3) It is also not inadequate to base one third of the distribution formula for financial assistance on the combined amount of liquidity loans taken out by the Länder and municipalities. The criterion of liquidity loans is not unsuitable for assessing structural weakness or investment needs and therefore does not go beyond the legislative latitude granted by Art. 104b(1) first sentence no. 2 of the Basic Law. Unlike budgetary borrowing, which may only be aimed at the financing of investments, measures to promote investments or debt restructuring, liquidity loans serve to maintain proper liquidity management and to offset cash deficits that arise temporarily as a result of receipts falling short of expenditures. Thus, a higher amount of liquidity loans indicates that current expenditures are partly financed through borrowing.

If the legislator opts to promote not only investment programmes of the Länder for their structurally weak municipalities, but also infrastructure projects in city states, the use of the criterion of combined liquidity loans of a Land and its municipalities is not inadequate. The legislator could assume that the infrastructure tasks in a city state and its resulting investment needs are roughly equal to the combined needs of a non-city state Land and its municipalities. As municipal tasks in city states are performed at Land level in addition to the actual tasks of the Länder, in this regard, the city states combine the roles of both a Land and its municipalities.

(4) The equal weighting of the criteria also does not overstep the limits set by Art. 104b(1) first sentence no. 2 of the Basic Law. The Federal Constitutional Court is not called upon to review whether the provision would allow a different weighting or whether the legislator has chosen the soundest of all possible distribution formulae.

b) The financial assistance provided pursuant to § 2 of the Act also does not violate the principle of equal treatment within the federal order. This principle, which is rooted in the principle of federalism (Art. 20(1) of the Basic Law) in conjunction with the principle of the rule of law (Art. 20(3) of the Basic Law), does not serve to level out differentiations directly laid down in the Constitution. It therefore does not preclude differentiations that pass constitutional review on the basis of Art. 104b(1) first sentence no. 2 of the Basic Law. Such differentiations do not amount to unequal treatment that must be measured against the principle of equal treatment within the federal order.

2. § 11(1) of the Act is in keeping with the limits of Art. 104c first sentence of the Basic law in both its old and its new version. It also does not violate the principle of equal treatment within the federal order.

a) aa) Art. 104c first sentence of the Basic Law (old version) allowed the Federation to grant the Länder financial assistance for investments in education infrastructure of financially weak municipalities (or associations of municipalities) if these investments were significant for Germany. This provision generally does not preclude a framework that grants financial assistance to all Länder.

Art. 104c first sentence of the Basic Law (old version) does not bar the Federation from also granting financial assistance to city states. While city states do not have financially weak municipalities because – with the exception of the Land Bremen – they are not divided into municipalities, the introduction of Art. 104c of the Basic Law (old version) was aimed at tackling deficits in education infrastructure investment throughout all of Germany. There are no indications that the need for investment in education infrastructure in city states is different from the need in other Länder.

Art. 104c first sentence of the Basic Law (old version) bars the Federation from granting the same amount of investment assistance to all Länder. The provision requires that federal financial assistance be distributed on the basis of financial weakness and the need for investment in education infrastructure.

Art. 104c first sentence of the Basic Law (old version) does not lay down any detailed criteria for such distribution. It merely sets the outer limits and leaves the detailed design to a federal law requiring the consent of the Bundesrat or an executive agreement. It is primarily for the legislator or the parties to the executive agreement to decide on the specific framework. Here, too, the Federal Constitutional Court only reviews compliance with the outer limits of the provision.

bb) Based on these standards, it cannot be found that the distribution of investment assistance according to the percentages set out in § 11(1) of the Act is inadequate, nor can it be concluded that it is based on fundamental disregard for the prerequisites of Art. 104c first sentence of the Basic Law (old version), in particular the concepts ‘financially weak’ and ‘investments of significance to the nation as a whole (…) in education infrastructure’.

The criteria of unemployment figures, population and the combined amount of liquidity loans of the Länder and municipalities are not inadequate.

The equal weighting of these criteria is also within the limits set by Art. 104c first sentence of the Basic Law (old version). It is irrelevant here whether the provision would allow a different weighting or whether the legislator has chosen the soundest of all possible distribution formulae because it is not for the Federal Constitutional Court to review these questions.

b) § 11(1) of the Act also does not violate Art. 104c first sentence of the Basic Law in its current version. Unlike the old version of Art. 104c of the Basic Law, the new version allows for distribution formulae that are not based on financial weakness. However, the provision does not rule out granting of financial assistance on the basis of the financial weakness of the relevant entities.

c) Finally, the financial assistance permitted under Art. 104c of the Basic Law, in both the old and the new version, does not violate the principle of equal treatment within the federal order. In this regard too, this principle does not preclude differentiations that can be based on Art. 104c of the Basic Law in either the old or the new version.