As cities across the United States emerge from a period of relative ease, characterized by the influx of funds through the American Rescue Plan Act (ARPA), they now face a sobering reality—the fiscal landscape is shifting. The once-reliable federal support is fading, and municipalities find themselves in a precarious position, balancing existing reserves while contemplating new lines of debt. The urgency of this situation was brought to light during a National League of Cities (NLC) webinar, where fiscal leaders voiced their concerns about the sustainability of city finances in the future. Lisa J. Cipriano, director of budget & evaluation in Newport News, Virginia, succinctly captured the crux of the issue: the challenge is not merely about replacing ARPA funds but about managing the impending debt that looms large on the horizon.
Rising Expenditures Amidst Declining Revenues
According to the NLC’s latest report, the average expenditure by cities surged by 6.7% in fiscal year 2023 despite a downturn in revenue. This paradox reflects a growing concern among city officials who are grappling with the realities of spending priorities and fiscal health. Public safety expenditures have consistently consumed more than 25% of general fund budgets, while even the relatively modest cost of debt service—averaging around 3.5%—adds an additional layer of complexity to local finance. These figures stem from a survey encompassing 375 municipal governments, revealing a systematic strain on city budgets as they seek to address both immediate and long-term needs.
In what may be a pivotal transition phase for many municipalities, a significant 65% of city leaders reported either developing or fully establishing plans to handle the post-ARPA financial challenges. Such proactive measures are essential to prevent fiscal mismanagement and ensure that cities can maintain the services that their constituents rely upon. The silver lining in this situation is that a combination of strong tax revenue, prudent spending habits, and favorable market conditions has allowed many cities to fortify their reserve funds. The result? A shift toward funding projects through cash reserves instead of incurring additional debt.
Reserve Funds: The Balancing Act
The importance of reserves cannot be overstated, yet they present a challenging balancing act for city officials. Rebecca Fleury, City Manager of Battle Creek, Michigan, highlighted a stark contrast in fund balance policies over time. Initially, the city operated with a meager 8% fund balance policy; however, thanks to ARPA funding, they have since revised this to maintain a fund balance between 15% and 17%, currently boasting a commendable 22%. While aiming for a 20% fund balance is aspirational, it raises questions about the opportunity costs associated with holding larger surpluses without immediate deployment into critical projects.
The Dilemma of Opportunity Cost
The need for a healthy reserve often collides with the imperative to invest in essential public safety projects. As Cipriano points out, creditors favor robust reserve levels that signify fiscal responsibility, but the dilemma arises when municipalities struggle to leverage these funds effectively. Holding excess cash can lead to opportunity costs that risk stifling growth and development in local areas. For instance, cities may find it challenging to justify significant borrowings for public safety initiatives if they have substantial reserves that could otherwise be utilized for immediate upgrades.
The story shifts somewhat when we consider cities like Madison, Wisconsin, which utilized half of its ARPA funds to sustain operations amidst ongoing fiscal challenges. Yet, Madison is preparing to confront a $22 million budget gap, a lingering issue that has persisted for over a decade. The finance director, David Schmiedicke, points to a potential property tax increase presented to voters as a necessary step toward rectifying this financial shortfall. The forward-looking approach showcased here implies that cities must adapt to an evolving fiscal landscape where merely relying on federal support is no longer tenable.
As municipalities continue to navigate the complexities of post-ARPA fiscal realities, they must be both strategic and deliberate in their planning. The path forward will be dictated by how well cities can balance their reserves against the imperative to address pressing infrastructure needs and maintain public safety.