Local authority budget simulation and simultaneous mathematical optimisation – better investment decisions in real time.
Why German cities should mathematically optimise their investment portfolios and simulate their budgets before political decisions are made.
The challenge: Greater investment needs than financial resources
Germany’s towns and local authorities face a fundamental challenge: investment needs are growing, whilst available budgetary resources remain limited.
Schools need to be refurbished, roads modernised, infrastructure expanded and climate protection measures implemented. At the same time, numerous projects are competing for the same financial resources.
But which investments should actually be made? Which combination yields the greatest benefit? And how do different decisions affect the local authority budget?
A realistic example scenario illustrates the scale of this challenge.
The scenario: A German town with a population of between 50,000 and 80,000
| Key figure | Value |
|---|---|
| Available investment budget | €81 million |
| Planned investment projects | 50 |
| Total investment requirement | €220 million |
| funding gap | €139 million |
| Calculated debt coverage ratio | 36.8 % |
The planned investments relate to key local authority responsibilities:
- schools, nurseries and educational establishments
- Roads, bridges and transport infrastructure
- Housing and neighbourhood development
- Climate protection and energy supply
- Digitalisation and administrative modernisation
- Sports facilities and leisure centres
- Social and care infrastructure
- Public buildings and local authority property
Each of these projects may, in its own right, make economic, social or political sense.
However, the available budget covers only 36.8 per cent of the total investment volume.
This creates a fundamental decision-making problem.
The crucial question is no longer: Which project is the most important?
Traditionally, local authority investment projects are assessed individually, prioritised and then negotiated at a political level.
However, the isolated assessment of individual projects does not answer the crucial questions:
Which combination of 50 investment projects will generate the greatest possible overall economic, social and strategic impact within the available budget of 81 million euros?
And how will this combination affect the budget in the coming years?
After all, the project with the highest individual priority is not necessarily part of the best overall investment portfolio.
A combination of several smaller projects may, under certain circumstances, achieve a greater overall impact than a few large individual investments.
This is precisely where mathematical portfolio optimisation, combined with scenario-based household simulation, comes into play.
The invisible problem: 1,125,899,906,842,624 possible project combinations
With 50 projects, there are not simply 50 decision alternatives.
Each project can either be implemented or not implemented.
This results in an exponentially growing decision space:
250 = 1,125,899,906,842,624 possible project portfolios.
This corresponds to around 1.126 quadrillion theoretically possible project combinations.
A local authority finance committee can discuss a few dozen scenarios. Even extensive Excel spreadsheets and traditional prioritisation methods represent, in practice, only a small fraction of this decision space.
Even if budget constraints, legal obligations, project dependencies and other framework conditions rule out numerous combinations, the number of permissible alternatives remains potentially enormous.
The best permissible project combination does not, therefore, necessarily have to be among the options under political discussion.
The next dimension: simulating the local authority budget in real time
Selecting the right projects is only part of the challenge.
Local authority investments often have an impact over many financial years. Construction costs are spread over several periods, grants are paid out at a later date, follow-up costs place a burden on future budgets, and new investment decisions alter the available financial leeway.
What if mayors, treasurers and political decision-makers could simulate these effects in real time during a budget meeting?
Using mathematical portfolio optimisation and a budget simulation based on this, different investment and financing scenarios can be systematically examined.
For example:
- Budget changes: What happens if only 70 million euros are available instead of 81 million euros?
- Additional budgetary funds: Which other projects could be implemented with an investment budget of 95 million euros?
- Mandatory political projects: How does the optimal portfolio change if a particular school absolutely must be refurbished?
- Funding: What additional investments become possible when the federal or state government provides funding?
- Project postponements: What are the implications if individual investments are postponed by two or three years?
- Multi-year planning: How do funding requirements, the remaining budget and financial leeway change over several financial years?
- Strategic objectives: What combination of projects emerges if, for example, education, climate protection or infrastructure are given greater priority?
From static budget planning to dynamic decision simulation
Let us imagine a meeting of the local authority’s finance committee.
The starting point is 50 investment projects with a total requirement of 220 million euros. The available investment budget is 81 million euros.
The first mathematical optimisation determines a combination of projects based on the defined objectives and constraints.
Alternative scenarios are then simulated.
Scenario A – Baseline budget
An investment budget of 81 million euros. Which projects constitute the optimal portfolio based on the specified criteria?
Scenario B – Budget cut
The budget has been reduced to 70 million euros. Which combination of projects delivers the greatest overall impact under the new conditions?
Scenario C – Additional investment funds
The budget rises to 95 million euros. Which further projects can be included, and what additional benefits will they generate?
Scenario D – Political commitments
Three projects must be implemented regardless of their economic assessment. What is the optimal combination for the remaining funds?
Scenario E – Multi-annual Budget Planning
Investments are spread over several financial years. Which combination of projects, in terms of timing, takes annual budget constraints into account and enables the best possible achievement of objectives?
The key difference: any change in the framework conditions leads to a new mathematical optimisation – rather than simply adjusting an existing list of priorities.
Provided that data on time, funding and follow-up costs are entered accordingly, the simulation can also highlight the implications for future budget periods.
This transforms a static list of investments into a dynamic basis for decision-making.
Live simulation in budget planning: What if?
The particular added value stems from the ability to directly compare different decisions.
A mayor asks:
“What will happen if we postpone the new sports hall for three years and renovate two schools instead?”
The treasurer would like to know:
“What combination of projects is possible if we limit new borrowing whilst at the same time taking into account all measures required by law?”
A city councillor asks the question:
“How will the investment portfolio change if we give greater weight to climate protection?”
Instead of dealing with these questions solely through further meetings, Excel analyses and manual coordination rounds, suitable scenarios can be modelled, recalculated and compared directly.
Political assumptions become calculated alternatives. Budget debates become transparent scenario comparisons.
The simulation reveals the consequences of a decision within the defined model – and which other investment opportunities are thereby ruled out.
The problem is not a lack of political competence. It is mathematical complexity.
Local politics must define objectives, set priorities and make democratically legitimate decisions.
However, political discussions alone cannot systematically evaluate an exponentially large range of decision-making options.
This is where the crucial difference between the three approaches lies:
Prioritisation asks: Which projects do we consider to be particularly important?
Portfolio optimisation asks: Which combination of projects best meets our objectives and overall constraints?
Budget simulation asks: How do different budgets, project decisions, timeframes and policy requirements affect the investment portfolio and the financial scope for action?
With StratePlan, local authority investment portfolios can be mathematically optimised, taking into account defined budgets, project dependencies, economic targets and strategic weightings.
By repeatedly calculating changed framework conditions, alternative budget and investment scenarios can be compared.
A comprehensive multi-year budget simulation also requires the relevant cash flows, financing conditions, follow-on costs and time constraints to be incorporated into the model.
Mathematics is no substitute for democratic decision-making. It provides a more sound, transparent and comprehensible basis for decision-making.
From the list of political priorities to the calculated investment budget
The real innovation does not lie in automatically making more money available.
It lies in determining the best possible combination of projects using the available financial resources and making the consequences of alternative decisions visible even before a political decision is taken.
This principle is not limited to small towns.
It can be applied to large cities, metropolitan regions, regional budgets and ministries.
The greater the number of investment projects, the longer the planning horizons and the more complex the framework conditions, the more relevant mathematical support becomes.
Conclusion: Optimise first. Then simulate. Finally, make a political decision.
50 projects. A budget of 81 million euros. 220 million euros in investment required. Over one quadrillion theoretically possible project combinations.
The crucial question is not simply which projects a city can finance.
But rather which combination, given the current circumstances, achieves the greatest overall impact – and how different decisions will affect the budget in the coming years.
Limited budgetary resources require more than just political priorities. They require mathematically sound portfolio decisions and transparent budget simulations.
StratePlan – Same projects. Optimal combination. Greater impact.
How much additional potential for impact is there in your local authority’s investment budget?