Germany's federal and state governments agree to cover 80% of new municipal costs from September
After months of negotiations, Chancellor Merz and state premiers agreed on a 'who orders, pays' principle, with the federal government covering 80% of new costs imposed on municipalities from September 1.
The agreement
Bund and Länder have settled on a financial reform to relieve Germany's cash-strapped municipalities. The federal government will cover 80 percent of additional costs that new federal laws create for cities and districts, starting from 1 September 2026. The deal was announced late Thursday after a Ministerpräsidentenkonferenz in Berlin that ran longer than scheduled.
Wer bestellt, bezahlt. Den werden wir demnächst auch gemeinsam einhalten im Verhältnis zwischen Bund und Ländern.
Negotiation dynamics
The compromise followed months of wrangling. States initially pushed for full 100 percent compensation, while the federal side offered no more than 75 percent with a nationwide cost threshold of 250 million euros. On Thursday morning the 16 Länder agreed among themselves to demand 80 percent and a threshold of 125 million euros. The final deal landed at 80 percent and a 200-million-euro floor.
Wir wollten 100 Prozent als Länder haben, weil wir das wichtig finden, dass derjenige, der die Musik bestellt, auch bezahlt.
- States' initial demand
- 100 %
- Federal initial offer
- 75 %
- Final agreement
- 80 %
What is covered
The new rule applies to all federal laws enacted after 1 September that impose financial obligations on states or municipalities. Tax legislation is excluded, as are laws that transpose EU directives or rulings of the Federal Constitutional Court. A de minimis threshold of 200 million euros in nationwide additional costs must be met before the compensation kicks in. The mechanism is symmetrical: if a federal law reduces costs for lower levels of government, Berlin may reclaim corresponding amounts via the VAT distribution.
Immediate relief and open questions
Alongside the general principle, Bund and Länder agreed to work on savings in three specific social laws: integration assistance, child and youth welfare, and maintenance advance payments. Details on how municipalities will be relieved in these areas are to be settled by the end of the year. Rhineland-Palatinate premier Gordon Schnieder estimated that municipalities could see relief of around three billion euros next year, against a backdrop of municipal deficits totalling roughly 30 billion euros.
Dieser Staat funktioniert. Wir kommen nicht nur ins Handeln, sondern wir sind mittendrin.
Reactions
State premiers broadly welcomed the outcome. Schnieder called it a fair result, noting that previous compensation levels had been far lower. Lower Saxony's Olaf Lies praised the "fair cooperation", while Schleswig-Holstein's Daniel Günther described the 80 percent as an important intermediate goal on the way to full cost coverage. Mecklenburg-Vorpommern's Manuela Schwesig and North Rhine-Westphalia's Nathanael Liminski also voiced support. Chancellor Merz framed the agreement as a signal of a new, cooperative federal spirit.
- Last Ministerpräsidentenkonferenz ends without agreement on financial reform.
- Bund and Länder reach agreement on 80% cost coverage and 200 million euro threshold.
- New compensation rule takes effect for federal laws enacted after this date.
- Deadline for detailing savings in three specific social laws.
Next steps
The new compensation rule takes effect on 1 September 2026. By the end of the year, Bund and Länder aim to specify how the three targeted social laws will be reformed to curb cost growth. The agreement also envisages that future cost estimates will be drawn up jointly with the umbrella organisations of local authorities.
