Over-indebted Municipalities under German law Chicago June 30, 2016

The issue of over-indebted German municipalities Very diverse picture Depending on States and their legal environment

The issue of over-indebted German municipalities

The issue of over-indebted German municipalities Vast part of budget is fixed by mandatory administrative tasks delegated (and funded) from superior level

The issue of over-indebted German municipalities Vast part of budget is fixed by mandatory administrative tasks delegated (and funded) from superior level

The issue of over-indebted German municipalities Vast part of budget is fixed by mandatory administrative tasks delegated (and funded) from superior level

The issue of over-indebted German municipalities Trend to outsource and privatize local administrative tasks (fully publicly-owned private companies) Very different levels of outsourcing

The issue of over-indebted German municipalities Trend to outsource and privatize local administrative tasks (fully publicly-owned private companies) Very different levels of outsourcing

The issue of over-indebted German municipalities Trend to outsource and privatize local administrative tasks (fully publicly-owned private companies) Very different levels of outsourcing

The issue of over-indebted German municipalities Main sources of income: Taxes 3. Fees and fines Fund transfers 4. Profits

The issue of over-indebted German municipalities Main sources of income: Taxes 3. Fees and fines Fund transfers 4. Profits

The issue of over-indebted German municipalities Main expenditures: Payroll 3. Administrative expenses 5. Interest on debt Social spending 4. Investments in infrastructure

The issue of over-indebted German municipalities Very limited flexibility on income Very limited flexibility on expenditures Level of debt results from Years with little business tax income Failing private business activities

The issue of over-indebted German municipalities Structure of debt:

How to address the issue of over-indebted German municipalities Insolvency proceedings of failing publicly-owned private companies Possible and ongoing (e.g. Stadtwerke Gera) Restructuring necessary where services are needed Water supply Garbage collection Public transport Winding-down organisations that are not required Local bath Library Theatre or opera houses

How to address the issue of over-indebted German municipalities Insolvency proceedings of over-indebted municipalities? Possible under Sec. 12 InsO but excluded under every State law No orderly debt restructuring Winding-down public organisations is no option anyway Living with constantly rising debt levels (hoping for better days) With insolvency excluded: credit rating under risk weighing standard is 0% Only in cases of miss-managements: supervisory authority may appoint a commissioner or limit non-mandatory expenditures

How to address the issue of over-indebted German municipalities Insolvency proceedings of over-indebted municipalities? Should debt restructuring be available? Pro: Identifying structurally non-performing loans Relief from principal and interest payments on debt “Normalize” risk weighing of municipal loans Contra: Higher credit costs for all municipalities (not only over indebted ones) No operational restructuring possible (not even exchange of management) Costs of proceedings Public solution preferable

Let’s talk about it. Prof. Dr. Stephan Madaus Professor of Civil Law, Civil Procedure and Insolvency Law Martin-Luther-University Halle-Wittenberg 06099 Halle (Saale), Germany T +49 (0)345 552 3190 E stephan.madaus@jura.uni-halle.de www.stephanmadaus.de