Three years after the American Rescue Plan Act delivered billions in direct and flexible aid to every county in the nation, cities are preparing for life after federal funding.
When President Joe Biden signed the landmark $1.9 trillion economic stimulus legislation in March 2021, cities, towns, and villages were offered financial assistance from the $65.1 billion set aside under the State and Local Fiscal Recovery Funds (SLFRF) program.
Two-thirds of cities said they are crafting a plan or have fully developed efforts to navigate potential fiscal turbulence now that federal aid is running dry.
In the post-ARPA world, more than half (55 percent) of cities will seek alternative funding sources.
Forty-nine percent will consider a reduction in expenditures, 39 percent might tap into their reserves, and 17 percent may raise taxes.
Twenty-eight percent currently do not have any strategies in place.
But city officials might not need to employ these tactics.
Sixty-four percent say they are better prepared to meet their financial needs because of ARPA funding and various economic factors.
Additionally, 70 percent of municipalities were unconcerned about possible post-ARPA budget shortfalls, and 50 percent were optimistic about their fiscal health for next year.
Revenues from local income, property, and sales taxes have been robust, and spending levels have been stable, allowing governments to produce “healthy fund reserves,” says Farhad Omeyr, the research and data program director at the National League of Cities.
For instance, the study found that Chandler, Arizona, registered a 21.5 percent increase in revenues from the sales tax and other state-shared revenue contributors.
Melbourne, Florida, reported a 20 percent jump in revenues “due to elevated property taxes and a surge in intergovernmental revenues.”
“Based on the results, we see that the overall health of the economy is in tip-top shape,” Omeyr said.
“Taxes—specifically property and sales—do not show any sign of slowing down, which is helpful for healthy fund reserves. These factors and more help governments be more positive about this year’s budget, and the approach for 2025.”
While there is immense optimism surrounding local finances, officials say they must contend with other economic challenges, such as inflationary pressures, infrastructure needs, and elevated employee wages and salaries.
Debt and Pension Issues
Despite the rosy outlook for cities across the country, there are still hurdles to overcome, primarily debt and pension problems.“Our biggest challenge is not the replacement of the ARPA funds. It’s rather how are we going to pay for the future debt,” said Lisa J. Cipriano, the director of budget and evaluation in Newport News, Virginia, in an event discussing the National League of Cities report.
David Schmiediccke, the finance director of Madison, Wisconsin, stated that places with high legacy costs, such as pension system issues, may have to struggle with future roadblocks in the event of economic shocks.
It has been no secret that cities and states have been wrestling with pension issues for years as “public-sector pensions are underfunded,” says Allison Schrager, an economist at the Manhattan Institute.
“Despite many years of high asset returns, municipal and state finances face a slow-moving crisis as the bill comes due on their pension obligations.
“The burden will either fall on taxpayers or lead to cuts in benefits on retirees and essential services on the entire tax base.”
“Almost all cities saw an increase in pension spending per employee.”
Researchers projected that unfunded liabilities will be $1.29 trillion for fiscal year 2024, down from $1.63 trillion from the previous fiscal year.
The funded ratio for U.S. public pension plans will improve to 81.4 percent, up from 75.8 percent in 2023.
