Shrinkage of population will not lead to financial problems for municipalities

In decades to come the population of more than half of the municipalities will shrink. Many people fear that the municipalities will endure financial problems because of the shrinkage. Presumably this is not the case. This conclusion is the outcome of a research project conducted by COELO, which was presented 26 June. The research project was commissioned by the Fryske Nasjonale Partij (‘Frysian National Party’), facilitated by the Scientific Bureau of the Independent Senate Faction in The Netherlands Senate. The Centre for Research on Local Government Economics (COELO) is an independent research institute, affiliated to the Faculty of Economics and Business.

A shrinking population affects both the revenues and the expenses of municipalities. Revenues from building lot development, for example, will decrease, while some expenses continue, also with fewer users. The number and size of schools may decrease, but this is not realised overnight. A school with fewer pupils, however, is not cheaper in terms of maintenance or use of energy. Do shrinking municipalities need measures to prevent financial problems? This was the main question of the COELO research project.

Municipality revenues

First, COELO examined whether the revenue system of municipalities is organised in such a way that a shrinking population may have negative effects. This turned out not to be the case. Further research into the factual revenues of municipalities that have been shrinking for a while confirms this. Shrinking municipalities receive a higher government contribution per capita from the municipality fund and that contribution increases more than that of growing municipalities. The revenues from OZB per capita are rather insensitive to the development of the population, even when the housing prices fall. The sharp rise in housing prices in recent years did not lead to a big increase in revenues either. Municipalities adjust their rates to receive the desired revenues. Other revenues are not expected to be problematic either, despite the decrease in revenues from building lot development.

Municipality expenses

Large expenses as a result of a shrinking population are often expected when the housing stock is restructured or in case of facilities for which the expenses are reduced slowly despite a decrease in users. COELO therefore examined municipality expenses in the fields of education, environmental planning and housing, and recreational facilities (libraries, sports facilities, etc). However, there is no indication that a shrinking population leads to higher expenses per capita.

To confirm this, more detailed research was conducted into five separate shrinking municipalities in North-East Groningen. These were compared to five similar municipalities in Friesland that do not shrink. This comparison did not indicate a connection between a shrinking population and higher expenses either.

Reserves

Finally, research focused on the possibility of municipalities postponing financial problems by using up their reserves. This analysis did not reveal a difference with non-shrinking municipalities either.

No financial problems

COELO did not find indications that a shrinking population leads to financial problems for municipalities. It is possible that problems only arise after a very long period of shrinkage. This cannot yet be determined. What research clearly shows, however, is that shrinking municipalities are very different from each other. Differences between shrinking municipalities are often just as big as differences between shrinking and growing municipalities. It is therefore expected that possible problems in the future will not be met with generic measures but will require tailor-made solutions. At the moment, however, these measures are not yet under discussion.

This research modifies the sometimes frightening picture that was drawn in several earlier publications. The fact that financial problems are not expected in the near future does not mean shrinking municipalities do not face a challenge. However, this challenge is not primarily financial, but mainly concerns adaptation processes.

Note for the press

-  More information: Maarten Allers, tel. 050 363 3745 (Thursday 25 June after 18h00 available at 06 551 552 87) or Annette Zeilstra, tel. 050 363 8344, e-mail coelo@rug.nl  .
-  The entire report can be found on www.coelo.nl.