Cities Good for Budgets Now, Worried About Next Year

A National League of Cities report on city fiscal conditions shows that many are at a crossroads.

Things are doing well fiscally now, but next year could be quite the challenge.

“Three years after the pandemic outbreak, cities have recovered and have maintained a largely positive outlook about their near-term fiscal future,” wrote the NLC, based on an analysis of data from 820 cities and responses from 533 city finance officers. They found four major points: • Cities learned that being cautious in their budgeting left them with increased reserves and limited spending in 2023. • With planning, inflation turned out to be easier to manage and the average city saw a 6% increase in general fund revenues. • Direct federal aid through the American Rescue Plan Act (ARPA) and the bipartisan infrastructure law turned out to be important to some cities’ ability to balance 2023 budgets, as 16% of respondents said that the aid had a positive impact. • Cities continue being cautious because of concern over the end of federal aid going forward. The picture is complicated. “The past several years have been challenging for America’s cities, towns, and villages but also full of opportunities and achievements,” they wrote. “Despite facing abnormally high levels of inflation during 2022, cities have seen their tax values surge as post-pandemic economic activities picked up, property values rose, and unemployment rates dropped to historic lows.”

The drop in unemployment rates would help improve conditions, but then so would all of the pandemic rescue money sent not only to people out of work, but to virtually everyone, and to so many small businesses as well.

“Constant-dollar general fund revenues declined by 0.46 percent in fiscal year 2022 compared to fiscal year 2021, with cities anticipating a further year-over-year decline of 2.41 percent for fiscal year 2023,” they wrote. “This is mainly because both sales and income tax revenues are expected to stabilize after a period of strong growth that occurred when the economy rebounded following the fiscal shock of the COVID-19 pandemic. Interestingly, when examining nominal—not adjusted for inflation—figures, the average city experienced more than a six percent increase in its current (i.e., unadjusted for inflation) general fund revenues.”

The reason was the “booming housing market,” which meant higher tax revenues with increased property valuations. It would be reasonable to assume the same for other types of properties that saw high valuations.

But next year is different. “Despite a positive outlook for the fiscal year 2023, only about 50 percent of the same group of respondents reported optimism in balancing budgets for fiscal year 2024,” they wrote.

Pandemic aid to cities is either gone or close to its end. So is most of the money that went to individuals and families. Consumer revolving credit usage is at all-time highs. And if cities feel an impact to their revenues, that will affect their ability to provide services, attract business, and so on.