Financial Merger Incentives for Municipalities: A Bottom-up Perspective

Lawrence Zünd and Flavien Felder, IFF Institute of Federalism, University of Fribourg

Relevance of the Practice

Municipal mergers are a relatively recent topic in Switzerland. Indeed, while the municipal structure has undergone only minor changes since the creation of the federal state, the last thirty years have seen a clear increase in the number of mergers targeting mainly rural municipalities.[1]

This trend can be explained by deep economic and social changes that affect the Swiss municipalities.[2] On the one hand, the multiplication and the complexity of the tasks assumed by municipalities of all sizes require greater professionalization and specialization of the municipal entity, and on the other hand, as they have to cope with an increasing demand by citizens regarding public services, the financial situation of some municipalities has been worsening since the beginning of the 1990s.[3] While larger urban municipalities have enough tax revenue to carry these tasks on their own, smaller and often rural municipalities are reaching their limits. Also, in small and rural municipalities, it is increasingly difficult to find citizens ready to dedicate themselves for the public affairs and to join their municipal council.

If we consider the advantages that fusion proponents present, a merger may then appear as a solution: increased efficiency in the accomplishment of tasks, lower costs by economy of scale, improvement of the supply and quality of municipal services.[4] This has resulted in a growing number of cantons encouraging mergers of municipalities on their territory.[5] This encouragement can take the form of negative or positive incentives. The Canton of Neuchâtel has a policy of positive incentives, which aims at giving an advantage or reward to municipalities engaging in a process of fusion.

By interviewing local authorities and taking a bottom-up perspective to focus on the municipalities’ perception, the study of this practice is relevant for the LoGov researchers as it will allow them to identify and discuss:

  • some factors of success / failure of mergers;
  • the negotiation processes between reluctant municipalities with different needs and objectives (rural/urban);
  • the perception by municipalities of the cantonal assistance they have benefited from;
  • the evaluation by municipalities of the provided assistance
  • the incentives considered as particularly important for the success of a merger;
  • the missing measures that could improve the merger assistance mechanisms and avoid failed mergers.

Description of the Practice

The Canton of Neuchâtel has a policy of positive incentives that apply equally to urban and rural municipalities. The canton, with its financial and consulting assistance aims at supporting municipalities engaging in a process of fusion. In practice, these incentives primary target the small rural municipalities or small municipalities closely linked to an urban municipality. For example, the three small and rural municipalities of Peseux, Valangin and Corcelles-Cormondrèche are merging with the City of Neuchâtel, formally creating a new Municipality of Neuchâtel as of 1 January 2021.

The system of financial incentives is the most common in Switzerland. Along with Neuchâtel, 15 other cantons have financial incentives: Zurich, Bern, Lucerne, Glarus, Fribourg, Solothurn, Schaffhausen, St. Gallen, Grisons, Argovie, Thurgau, Tessin, Vaud, Valais and Jura.[6]

In the Canton of Neuchâtel, the calculation method necessary for granting financial assistance is clearly defined by law. It is therefore possible for all parties involved to calculate the amount of the total assistance that would be granted by the canton according to the law.[7] This has two main implications for the Canton of Neuchâtel. While, on the one hand, the clear calculation method leaves the canton little room for maneuver when it has to determine the amount of the financial assistance and makes the merger financially more attractive to reluctant municipalities, on the other hand, this clarity offers relative transparency regarding the justification of the financial assistance being granted. The amount of the assistance is calculated by multiplying, for each of the merged municipalities, the amount of 200 francs per inhabitant, weighted by the average relative tax coefficient and the inverse of the average relative tax income of all the merged municipalities.[8] The population taken into account for the calculation is capped at 2,500 inhabitants per municipality.[9] This ceiling can exceptionally be raised to 5,000 inhabitants, for municipalities with more than 10,000 inhabitants.[10]

Financial assistance is allocated according to the need and importance of the project,[11] and can cover both the study costs to evaluate the merger, as well as the subsidization of the merger.[12] There is no right to obtain financial assistance.[13] The Council of State of Neuchâtel decides which municipalities are supported, it determines the amount of this support and sets the conditions for granting the assistance.[14]

The canton also makes available technical and legal assistance to municipalities wishing to merge. With these various measures, the Canton of Neuchâtel aims at supporting all municipal mergers of all size and avoid that the reduced size of some municipalities -and thus their inability to bear with all the costs engaging in a merge can induce- restrains them to engage in this process.

Assessment of the Practice

The Canton of Neuchâtel encourages the merger of municipalities by providing various types of support. The cantonal assistance, that can be considered either as a means of reducing the costs of the merger or as a form of reward, aims at increasing the number of mergers by making it more attractive to the municipalities. However, for this objective to be reached, the assistance offered by the canton must correspond as best as possible to the needs and expectations of the municipalities that might consider a merger. If the canton is unable to do so, it faces the risk of wasting resources without achieving results.

In general, one can say that the citizens’ emotional affection to the independence of their municipality is often a brake on mergers that cantonal incentives cannot overcome without a strong political commitment of the local elected representatives who are really decisive. The example mentioned above of the new City of Neuchâtel after the merging of four existing municipalities (1 urban and 3 rural) is telling as the original project was to merge four additional rural municipalities (Hauterive, St-Blaise, Enges and la Tène). These municipalities rejected the idea of merging with the urban City of Neuchâtel but are now considering a merging together to form a larger rural municipality within the agglomeration of Neuchâtel.

References to Scientific and Non-Scientific Publications

Legal Documents:

Law on the Municipal Aid Fund (LFAC) of 3 December, 1721           <http://rsn.ne.ch/DATA/program/books/rsne/htm/17241.htm>

Application Regulations for the Law on the Assistance Fund for Municipalities (RALFAC NE) of 22 October 2003 <http://rsn.ne.ch/DATA/program/books/rsne/htm/172410.htm>

Council of State, ‘Rapport du Conseil d’Etat au Grand Conseil à l’appui d’un projet de loi portant modification de la loi sur les droits politiques (LDP)’ (Report to the Grand Council, 31 August 2015) <https://www.ne.ch/autorites/GC/objets/Documents/Rapports/2015/15041_CE.pdf>

Scientific and Non-Scientific Publications:

Economic  and  Development  Review  Committee  (EDRC)  of  the  OECD, ‘Switzerland’ (OECD Economic Surveys 2019) <http://www.oecd.org/economy/surveys/Switzerland-2019-OECD-economic-survey-overview.pdf>

Kettiger D, ‘Gemeindefusionen – ein Thema mit vielen Facetten’ (PuMAConsult GmbH 2004) <https://www.kettiger.ch/fileadmin/user_upload/Dokumente/Downloads/Kettiger_Aufsatz-Gemeindefusion.pdf>

Monay P, ‘Des fusions de communes à la chaîne’ (24heures.ch, 2 June 2015)        <https://www.24heures.ch/suisse/fusions-communes-chaine/story/28908718>

Rumley PA, La Suisse demain (Presses du Belvédère 2010)

Steiner R and Kaiser C, ‘Gemeindefusionen aus kantonaler Sicht’ (working paper, KPM Bern 2010) <https://www.researchgate.net/profile/Reto_Steiner/publication/303541769_Gemeindefusionen_aus_kantonaler_Sicht/links/57473a8608ae2301b0b8017a.pdf>


[1] Council of State, ‘Rapport du Conseil d’Etat au Grand Conseil à l’appui d’un projet de loi portant modification de la loi sur les droits politiques (LDP)’ (Report to the Grand Council, 31 August 2015) 2                 <https://www.ne.ch/autorites/GC/objets/Documents/Rapports/2015/15041_CE.pdf>.

[2] Economic  and  Development  Review  Committee  (EDRC)  of  the  OECD, ‘Switzerland’ (OECD Economic Surveys 2019) <http://www.oecd.org/economy/surveys/Switzerland-2019-OECD-economic-survey-overview.pdf>.

[3] Daniel Kettiger, ‘Gemeindefusionen – ein Thema mit vielen Facetten‘ (PuMAConsult GmbH 2004) 4 <https://www.kettiger.ch/fileadmin/user_upload/Dokumente/Downloads/Kettiger_Aufsatz-Gemeindefusion.pdf>, Council of State, ‘Rapport du Conseil d’Etat au Grand Conseil’ 3.

[4] Pierre-Alain RumleyLa Suisse demain (Presses du Belvédère 2010).

Interview with Daniel Kettiger, ‘Fusionen machen es nicht billiger, aber besser’ (Wiener Zeitung, 27 November 2009) <https://www.kettiger.ch/fileadmin/user_upload/Dokumente/Downloads/interview_gemeindefusion_wienerzeitung.pdf>.

[5] Patrick Monay, ‘Des fusions de communes à la chaîne’ (24heures.ch, 2 June 2015)           <https://www.24heures.ch/suisse/fusions-communes-chaine/story/28908718>.

[6] See report section 3.1. on Local Financial Arrangements in Switzerland: An Introduction. Reto Steiner and Claire Kaiser, ‘Gemeindefusionen aus kantonaler Sicht’ (working paper, KPM Bern 2010).

<https://www.researchgate.net/profile/Reto_Steiner/publication/303541769_Gemeindefusionen_aus_kantonaler_Sicht/links/57473a8608ae2301b0b8017a.pdf>.

[7] Law on the Municipal Aid Fund of January 30, 2002 (LFAC NE); Application Regulations for the Law on the Assistance Fund for Municipalities of October 22, 2003 (RALFAC NE); Decree Relating to the Use of the Balance of the Fund Intended for the Structural Reforms of Municipalities of March 29, 2006.

[8] RALFAC NE Art 17(1) The subsidy granted for municipal merger projects submitted to the population of the municipalities concerned until December 31, 2016 is: a) 800 francs per inhabitant, if the merger has been accepted; b) 600 francs per inhabitant, if the merger has been rejected and a new merger project bringing together at least two municipalities that are parties to the first project is accepted until December 31, 2020.

(2) The subsidy granted for municipal merger projects that do not meet the conditions of the first paragraph is 200 francs per inhabitant.

(3) These amounts are weighted by the average relative tax coefficient and the inverse of the average tax income of all the municipalities concerned. (Translated by author, Law available in French                <http://rsn.ne.ch/DATA/program/books/rsne/htm/172410.htm>).

[9] RALFAC NE Art 18(1)

[10] RALFAC NE Art 18(2).

[11] Law on the Municipal Aid Fund (LFAC) Art 5 (3). Incentive aid is in principle allocated according to the need and the importance of collaborations or mergers and takes into account, in particular, the tax coefficient and the financial situation of the municipalities concerned. (Translated by author, Law available in French,     <http://rsn.ne.ch/DATA/program/books/rsne/htm/17241.htm>).

[12] RALFAC NE Art 13(4).

[13] LAFAC Art 3(3).

[14] LAFAC Art 3(1), (2).

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