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Unformatted text preview: es in 2000). 5.2. On the Way to Reorganization
What was to be done? In 1997 Bavaria together with Baden-Württemberg and Hesse started talks about a new type of
financial equalization: the compensation payments should be reduced sensibly, but above all greater incentive to
perform well should be created. Although the motivation to perform well was clearly missing the receiving states refused
to discuss possible changes. And because the eleven receiving states had the majority of votes at the Bundesrat there
was no choice than to appeal to the Federal Constitutional Court in the end. The judgment pronounced by the Federal
Constitutional Court on 11 November 1999, agreed with our point of view. According to this judgment the law governing
the current financial equalization will only be an interim solution until the end of 2004 at the latest. An obligation to pass
two new acts was placed on the legislature: 1. (Firstly) An act of standards which is to define in an abstract and general
way the objectives of adjustments as well as the factors underlying an adjustment in vertical and horizontal equalization
on the basis of the regulations laid down in the constitution. 2. (Secondly) The Legislator is to draft a new version of the
law based on the above-mentioned act of standards, governing financial equalization for each fiscal year. The act of
standards is to become effective no later than 1 January 2003, the new law of financial equalization no later than 1
January 2005. Failing this the current law governing financial equalization would become null and void according to the
judgment of the German Constitutional Court.
Long, difficult, and extremely unyielding negotiations among the states followed. For one and a half years the donor and
receiving states’ positions were nearly irreconcilable. In the end, after non-stop negotiations for three days the states’
premiers and the finance minister arrived at a solution on 23 June 2001, which all states and the confederation agreed
to. 58 Commission on Fiscal Imbalance 5.3. Reorganization as of 1 January 2005
This reorganization of the federal financial equalization as of 2005 is basically in tune with Bavaria’s objectives: reduced
deficiency payments and greater incentive for better performance. A comprehensive solution became possible because
the confederation agreed to assume financial responsibility for the ‘German Unity Fund’ (formerly financed by both the
confederation and the states) as of 2005, and in addition the confederation will pay a “settlement contribution”. The
entire package including the regulations for the eastern states is limited to 2019.
I am afraid there will not be enough time to discuss the reorganization in detail, but there are three issues which I find
particularly important: firstly, with the confederation’s settlement contribution in the amount of 2.5 billion German Marks
in addition to the protraction of the annual payments for the German Unity Fund, which the states had to come up with
so far, it has become possible to provide each of the 16 states with a financial profit compared to the status quo. As of
2005 Bavaria will be relieved...
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