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Comprehensive survey shows that high levels of municipal debt lead to active portfolio management and increased use of platforms

10 June, 2020 |
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Comprehensive survey shows that high levels of municipal debt lead to active portfolio management and increased use of platforms

Frankfurt am Main, 10 June 2020 – The fiscal situation of many German municipalities has eased further in recent years against the backdrop of higher tax revenues and declining interest rates. However, the COVID-19 crisis could again exacerbate the budgetary situation of German towns and municipalities. When it comes to interest rate and debt management, municipalities see the main challenges as being in the social sector and a lack of tax revenues. An active interest rate and debt management policy is widely used in municipalities for strategic management purposes. Less than half of municipalities are portfolio-oriented, while slightly more than half focus on individual loans. A comparison of debt categories shows that not only highly indebted municipalities carry out active debt and interest rate management. These are the results of the empirical survey "Municipal interest rate and investment management in times of digital platforms", which was carried out by the KOWID Centre of Competence for Public Economy, Infrastructure and Public Services at the University of Leipzig in cooperation with ING, komuno and S-Kompass of Giro Solution (Sparkassen-Finanzgruppe: Savings Banks Finance Group). The study was sponsored by the Deutscher Städte- und Gemeindebund (German Association of Towns and Municipalities).

Municipal financing and interest rate management

Only one fifth of municipalities consider the financial margin for liquid funds to be sufficient for the medium term. More than half of municipalities surveyed consider their margin to be limited, while another fifth states that they will not have any financial margin at all in the future. Based on the planned uptake of investment loans by municipalities, the results of the study show that 74 percent of municipalities surveyed want to borrow on a larger scale than in the past five years and only 7 percent want to borrow less. The favourable interest rate environment therefore certainly attracts borrowing. Only 16 percent of municipalities surveyed said they did not want to apply for further investment loans.

The consequences of the low interest rate environment

The role of the low interest rate environment in the interest rate and debt management of municipalities is an ambivalent one: on the one hand, interest expenses can be saved, which is particularly good for highly indebted municipalities and, on the other hand, the interest income received is low when it comes to investing in financial assets. Two thirds of municipalities surveyed see the effects as positive, because they can achieve savings in interest rates by rescheduling their long-term liabilities. Long-term fixed interest rates are preferred by municipalities, but there is a dependency on overall debt in this case. As debt levels increase, longer-term fixed interest rates become more attractive. Capital market instruments, such as promissory note loans and bonds, play only a minor role.

Investment management for financial assets

Similar to the debt situation, municipal financial assets are extremely heterogeneously distributed. Municipalities see themselves as well informed from an investment point of view, but there are still limited investment guidelines in relatively few municipalities. There is less active management for investments than there is in interest rate and debt management. Sustainable investments and balanced certainty-earnings ratios are not yet sufficiently used by municipalities and towns. Sustainable investments in investment management are gaining in importance, but there is still a lack of experience in this area.

Importance of credit and intermediary platforms  

Online intermediary platforms are becoming increasingly important, especially for more indebted municipalities, which thus broaden their scope for action. However, the lack of demand is inhibiting the widespread use of intermediary platforms. Municipal investment loans dominate the use of digital platforms. The key approach for intermediary platforms is wider access to lenders, but time and transaction costs are also factors. Half of municipalities plan to use platforms with a more diversified focus in the future.

Media representatives can request the complete survey with detailed results from the media contacts of the survey partners.

About ING in Germany

With more than 9.5 million customers, ING is the third largest bank in Germany. Core products for private customers are current accounts, building loans, savings, consumer credit and securities. In lending to small and medium-sized companies, ING cooperates with the online platform Lendico, and in wholesale banking, the institute offers banking services for large, international corporate customers. In addition to traditional banking products such as corporate lending and transaction services, ING is a leading global provider of structured project financing in the corporate banking sector, which is complemented by innovative capital market solutions.

KOWID – Kompetenzzentrum Öffentliche Wirtschaft, Infrastruktur und Daseinsvorsorge e.V.

The Competence Centre at the University of Leipzig is an interdisciplinary network of currently 17 professorships and institutes that conducts research in a practical scientific manner on issues relating to infrastructure development, public services and public finances. The professorships and institutes of the Centre comprise the disciplines of economics, jurisprudence, infrastructure development, political science, health economics, pedagogy and administrative sciences.
The Centre is based in Leipzig and has been working throughout Germany and on European issues since 2009.

komuno GmbH

komuno GmbH is the provider of komuno, the digital platform for municipal loans. komuno brings together municipal budgets and lenders. Towns, municipalities and special-purpose associations place their loan tenders free of charge with financial institutions of their choice and financial institutions make legally binding offers. The platform has numerous functions and interfaces that facilitate analogue work steps – faster and more reliable processes, audit compliance, final documentation at the touch of a button and a wide reach due to its excellent market access. komuno, which has been active on the market since September 2018, is a joint venture of Helaba Digital GmbH & Co. KG and Lucht Probst Associates GmbH.

GiroSolution GmbH

GiroSolution is the competence centre for e-government of the Savings Banks Finance Group and provides municipalities, public authorities and municipality-related companies with digital solutions to implement digitalisation, citizen's requests and legal requirements. The multi-payment platform GiroCheckout enables customers to integrate, offer and process various online payment methods, such as giropay, paydirect, credit card or direct debit, in their citizen portals. With S-Kompass, GiroSolution offers municipal portfolio management software that supports municipal institutions in the management and planning of loans and derivatives. At the same time, municipalities have an overview of their interest payments and repayments at all times. Currently, S-Kompass is already being used by more than 380 customers nationwide. Since 2013, the software has been developed in cooperation with municipalities: today, municipal finance departments and accounts departments can optimise their debt management processes using S-Kompass and strengthen their decision-making bases.