Look closer, though, and the picture is more complicated. Only 45 percent of city finance officers feel confident about meeting fiscal needs in fiscal year 2026 — down from 64 percent in 2024. At the time of the NLC survey, revenue was projected to decline by 1.9 percent in FY2025 as federal aid was phasing out. These are important signals. But they are the wrong instruments for the most important financial question facing local governments right now: not whether budgets balance this year but whether they are structurally sound.
The NLC survey does what it was designed to do: track revenue and spending trends, finance-officer sentiment and emerging policy concerns. What it does not capture is structural fiscal condition — the alignment between a government’s current commitments and its long-term capacity to meet them. A government can report a positive general fund balance while carrying significant unfunded pension liabilities, deferred infrastructure maintenance obligations and spending patterns built on one-time revenue sources that no longer exist. The budget balances. The underlying fiscal position does not.
This distinction is not academic. More than a decade of research consistently finds weak or no association between what local officials perceive about their fiscal condition and what audited financial statements actually reveal. In one study examining 185 municipalities across 31 states, objective fiscal condition measures — fund balances, debt ratios, intergovernmental revenue dependence — were largely unrelated to how finance officers rated their government’s fiscal health. The one consistent exception was the general fund balance ratio: Officials tend to anchor their sense of fiscal condition to what they see in the general fund, largely ignoring the broader balance sheet. The same pattern has been replicated across multiple states and time periods.
The stakes are not merely diagnostic. Research on cutback management during periods of fiscal stress finds that subjective assessments drive management decisions more than objective financial data does.
The deeper structural risk hiding beneath the NLC data is what might be called the baseline problem. Between 2020 and 2023, local governments received an unprecedented infusion of federal aid, most notably from the Coronavirus Aid, Relief and Economic Security (CARES) Act, the Infrastructure Investment and Jobs Act (IIJA) and the American Rescue Plan Act (ARPA). For many cities, that aid funded ongoing operations, deferred hard budget decisions and, in some cases, supported service expansions that outlasted the funding itself.
Now that aid is gone. But spending structures adjusted upward during the CARES/IIJA/ARPA years do not automatically adjust back. The result is a structural overhang: Cities whose budgets appear balanced in FY2025 may have locked in expenditure commitments that require revenue growth to sustain. But three consecutive years of slow revenue growth following the pandemic-era surge have left governments operating with thinner margins than the recent past would suggest.
What Structural Condition Actually Looks Like
A complete picture of fiscal condition requires looking beyond the general fund to several additional dimensions, each accessible from audited financial reports and governmentwide statements. The most revealing is “unrestricted net position” — a measure that captures resources available for future services beyond what is restricted or invested in capital assets. A city that shows a positive general fund balance but negative unrestricted net position is, in effect, consuming reserves to sustain current operations, a warning sign the general fund alone will not reveal.
Closely related are long-term obligations: pension and other post-employment benefit liabilities that represent one of the most significant sources of structural imbalance. Fiscal constraints lead many governments to underfund pension obligations, deferring costs in ways that never appear in annual budget-balance measures. What is reported as balanced may be balanced only by pushing obligations forward.
Two additional dimensions complete the picture. Reserve adequacy — what researchers call “fiscal slack” — determines whether a government can absorb short-term shocks without structural disruption. Governments that drew down reserves during or since the pandemic may now be carrying structurally thinner margins than their fund balances suggest. The rapid spending growth in FY2024 followed by near-zero growth in FY2025 raises the question: How much of that adjustment reflects deliberate recalibration and how much reflects governments simply running out of cushion?
Beyond reserves, intergovernmental revenue dependence matters: Governments that rely heavily on federal or state aid for operating revenues are structurally more exposed when those sources contract. The CARES/IIJA/ARPA period temporarily masked that exposure; its unwinding is now revealing it.
Underused Tools
Finance officers have access to the tools needed for this analysis — governmentwide financial statements, pension funding ratios, long-term liability measures, reserve adequacy assessments. Professional organizations including the Government Finance Officers Association and the International City/County Management Association have developed accessible frameworks for applying them. The gap in practice is not one of tool availability. It is one of application.
Research consistently finds that even when objective fiscal condition tools exist, they are underused, and that the officials most likely to apply them effectively are those with more experience, more structured budget processes and access to formal fiscal monitoring systems. The diagnostic gap is not uniform. It is likely most pronounced in smaller governments, those with high leadership turnover and those without formal fiscal monitoring — precisely where structural imbalance is hardest to absorb.
The NLC survey documents how cities feel about their fiscal condition. Objective financial condition analysis documents what their fiscal condition actually is. In a post-CARES/IIJA/ARPA environment, where the gap between perceived and actual fiscal health may be at its widest in a generation, that distinction matters most.
Fiscal restraint as a budget posture is necessary. It is not sufficient if the structure it is restraining has quietly weakened. The hard work isn’t slowing the spending rate. It is looking honestly at what the full balance sheet says.
Governing's opinion columns reflect the views of their authors and not necessarily those of Governing's editors or management.
Related Articles
