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City Finances Are Stronger, but Uncertainty Lies Ahead

In its annual survey of the fiscal condition of U.S. cities, the National League of Cities finds cause for both hope and concern. Federal funds have improved municipal fiscal health, but inflation and recession fears are on the horizon.

New York City offers an extreme example of the role of federal funds in municipal finance. Relief dollars made a record-breaking budget possible in June, but the state comptroller has said a $10 billion budget gap is possible in 2026.
(Angela Weiss/AFP/TNS)
After suffering historic blows to their fiscal stability from the COVID-19 pandemic, municipal governments appear to be on the path to recovery for fiscal year 2022, according to a City Fiscal Conditions report just released by the National League of Cities (NLC).

Though it’s not the only factor, this is largely attributable to the funds available to them through the American Rescue Plan Act (ARPA) and the Bipartisan Infrastructure Law (BIL). While these will continue to be available for several years, other forces currently in play could bring financial turbulence in coming years.

The 2022 report from NLC is the latest in a series that began 37 years ago. “The overarching theme for this year's report was cautious optimism,” says lead author Farhad Omeyr, program director, research and data, at NLC’s Center for City Solutions.

City governments are doing relatively well compared to a couple of years ago, but uncertainties cloud the road ahead. “The majority of governments are still very cautious with regard to 2023 and 2024 because of high levels of inflation and the looming fear of another recession,” Omeyr says.

The latest report from the Bureau of Labor Statistics won’t allay these concerns. The Consumer Price Index (CPI) rose .4 percent in September and 8.2 percent over the last 12 months.

The “core” inflation rate, which excludes food and energy costs and is considered a more accurate marker, is at 6.6 percent — well above the long-term average of 3.65 percent. The future trajectory of this trend, how actions by the Federal Reserve might affect it and the impact on city finances all remain to be discovered.

Nine in 10 local finance officers believe that they can meet fiscal needs for FY 2022. Billions in ARPA and BIL funds may help sustain this optimism in the face of inflation and future revenue reductions.

The Changing Role of Federal Funds

The NLC report is based on a survey of finance officers in cities with populations greater than 10,000 and all but 200 of the largest cities in the country. Almost 90 percent of the finance officers who responded believed they would be able to meet their fiscal needs in FY 2022, a dramatic contrast to the 22 percent who expressed similar confidence in NLC’s survey regarding FY 2020.

To date, governments have mostly used ARPA funds for revenue replacement according to a tracker developed by NLC, Brookings Metro and the National Association of Counties. As revenues come back from the lows resulting from pandemic shutdowns, reliance on federal funds for this purpose is expected to decrease, says Omeyr, and the focus will shift to securing funds for infrastructure projects, economic development, public health and other uses allowed under ARPA and BIL.

More than 80 percent of the cities in the U.S. have populations less than 50,000, notes Omeyr. These jurisdictions may face hurdles in regard to accessing federal funds intended to spur recovery, such as meeting matching fund requirements.

Moreover, local government employment still remains far below pre-pandemic levels. Despite the continuing need for more workers, more than half of finance officers cite employee salaries as one of the factors most hindering their ability to balance their budget. Federal funds will be available through 2026, but few see a long-term commitment to an employee as a sensible use of this money.

Even with employment at normal levels, a lack of manpower to formulate plans, develop budgets and meet extensive and complex requirements of federal grant proposals can prevent communities at greatest need of assistance from securing funds.

It’s one of the main objectives of NLC to help governments with limited fiscal and administrative capacity maneuver the path to federal support, says Omeyr. In coming months, NLC will be offering a series of “boot camps” to help small and mid-sized towns prepare applications for $4 billion in BIL funding for community resilience, energy conservation, EV charging, flood mitigation and other purposes.
Philadelphia Police stand along South Street following a mass shooting. Nearly 40 perent of public finance officers cited public safety needs as a major hindrance to a balanced budget.
(Charles Fox/TNS)

Funding sources can vary greatly from city to city. Some states forbid the collection of sales taxes. Others allow municipalities to collect sales tax, property tax and income tax.

Local tax authority plays a significant role in community resilience, says Omeyr. “What we observed over the COVID recession was that governments that relied on property taxes were not hit as hard as governments that relied on income and sales tax.”

In periods of recession, municipal governments would be less prone to ups and downs by reducing their general fund reliance on tax sources that are likely to be volatile, he says.

The collapse of the housing market during the Great Recession, caused largely by predatory lending practices, is a cautionary note regarding overreliance on property tax. However, lending reform and constraints in housing supply lessen the chances of a similar event, at least in the near future. According to the Big Three credit agency Fitch Ratings, a crash such as that seen in 2008 is “highly unlikely.”

In his conversations with governments, Omeyr is finding that more are thinking beyond the paradigm of two-year terms for general fund budgets, with longer terms reserved for capital budgets. The fact that ARPA funds will be available for several more years is making it possible for them to take a longer view of their general fund strategies.

“Some are moving in that direction,” he says. “I find that fascinating.”
Carl Smith is a senior staff writer for Governing and covers a broad range of issues affecting states and localities. He can be reached at or on Twitter at @governingwriter.
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