A silent revolution is taking place at the municipal level in Germany. Cameralistics, which way back in the 19th century became established as the standard method of accounting, will in the foreseeable future be fundamentally revised by the introduction of double-entry accounting: the presentation and recording of public finances, that is the revenue and expenditure of a municipal authority, will be transformed.

What are the differences between the two systems? Whereas cameralistics focuses primarily on the expenditure and revenues in a single year (as stipulated in the first instance in principle by the parliamentary budget legislation), double-entry accounting concentrates on the change in the asset stock over a period of time. This ensures better recognition of, on the one hand, value impairment – e.g. a neglected infrastructure – and, on the other, future revenue commitments – e.g. pension obligations. It will no longer suffice to simply look at the payment stream, i.e. the outflow of money, in order to achieve a surplus in one year. Rather, resource consumption and thus not directly liquidity-relevant components should also be taken into account.

Double-entry accounting enables greater attention to be paid to cost-effectiveness in the provision of public services – even though as long ago as the mid-1970s elements such as calculatory depreciation found their way into municipal budget accounting. Knowing the true cost of a service also makes it easier to compare local authorities. This helps in assessing the more efficient operators, i.e. those who manage limited resources efficiently and responsibly and at the same time provide the best possible range of services. The need for such information is demonstrated by the reports regularly published by the state auditing authorities. Moreover, targets and metrics for practical application certainly do already exist (e.g. in the local authority statutes of North Rhine-Westphalia).

A better outcome is achieved, however, when double-entry bookkeeping is combined with a functioning cost and activity accounting system, i.e. a controlling model. Only then is greater scope provided for also taking steps in advance to actively manage the costs and benefits of policies. This step is, however, more difficult than simply changing over from cameralistics to the double-entry method and requires even more substantial rethinking. Large municipalities have long since begun to implement modern ERP (Enterprise Resource Planning) software in order to be able to make active management a reality. Ultimately everyone can benefit – the administrative authorities, the general public and businesses. The internal assessment of the administrative authority’s own performance can be improved, and individuals and companies are provided with more ways of exercising external control of the authority’s financial practices.

The double-entry system certainly does also have its limits. Just like companies whose accounts are prepared according to the German Commercial Code, for example, there is an extensive range of options available for arriving at the value of an asset belonging to a local authority. In most cases there are no market prices to use as a valuation basis. With municipal land and buildings this is much less problematic than for example with the municipal road network, whose value in many local authorities has to be estimated using comparative procedures (e.g. based on the value of neighbouring plots of land). The limitations of the system are displayed most clearly when cultural assets are to be assessed – the outcome will be a large range of values (as far as these can be determined at all). For a work of art or a cultural asset this spectrum can range from the symbolic value of a single euro, a comparatively low acquisition price of, for example, EUR 1.7 m for two Gutenberg bibles or also a grand potential sale value of, for example, EUR 700 m for a collection of Albrecht Dürer works (although in both cases a sale should certainly be out of the question). This severely limits the overall comparability of different budgets. In addition, a transitional phase still provides opportunities for making changes to valuation approaches, allocation formulae and the like, because it certainly takes time and experience to refine and improve the new budgeting system. This is definitely positive in itself, but it further reduces comparability.

On top of this – in the medium term at least – comes the variety of rules, since each state can decide for itself how (which valuation approaches) and to what extent it introduces double-entry accounting (the options available for choosing between double-entry and cameralistic provisions). By the end of 2009 all local authorities in Hesse, North Rhine-Westphalia, Rhineland-Palatinate and Hamburg had completed the changeover. By 2016, local authorities in 12 out of 16 federal states will have changed their accounting system (in the remaining states the changeover is optional and there are no binding deadlines). Statistical time series on local authority metrics such as expenditure, revenue and deficits will therefore probably not be comparable for quite some time, because the changeover will bring with it structural breaks. Furthermore, should considerable differences in implementation remain over the longer term this will become a lasting problem.

In all, many municipalities face far-reaching changes. Greater cost-benefit transparency will not be a cause for rejoicing in every parliament, as this could become an obstacle to many a local prestige project. Nonetheless, the reform is sensible and necessary. However, the introduction of the double-entry method can only make a limited improvement to the structural revenue and cost structure – e.g. continually rising social security spending. Reforms in this area are a matter for politicians at the state and federal levels. Above all, the reform of the federal finance constitution, which – apart from minor changes – was woefully neglected in the last federalism reform, remains one of the key issues that have to be resolved.

Frank Zipfel (+49) 69 910-31890

 

...more information on Economic and european policy issues

Talking Point - Archive