U.S. cities enter era of austerity without pandemic aid, report says

Cities across the U.S. seem to have financially weathered the pandemic, thanks mostly to massive federal stimulus funding.

Despite elevated inflation, tax revenues surged last year as economic activity picked up and unemployment rates fell to historic lows, according to a report published Thursday by the National League of Cities.

Yet, city leaders are concerned about the years ahead because the billions of dollars in pandemic aid they received is scheduled to expire in 2026. Many localities have already exhausted those funds.

“Although they are doing a little better this year with regard to budgets, they’re still cautious as it relates to federal money,” said Farhad Omeyr, program director of research and data at the National League of Cities and lead author of the report.

The study surveyed public finance officials from 820 cities and collected data from 287 cities’ budget documents.

“The fact that they know they have to do without major money coming their way could inspire some restraint,” he added.

Cities received about $65 billion in the form of Coronavirus State and Local Fiscal Recovery Funds, which provided a total of $350 billion directly to state, tribal and local governments as part of the $1.9 trillion American Rescue Plan Act.

Sales tax receipts grew 8.7% in fiscal 2022 as businesses reopened, the largest increase since at least 1996, and income taxes grew 5.3% compared to the prior year, the report said.

Property tax receipts shrank despite a strong housing market as inflation eroded the value of the collections.

Cities have tempered their revenue projections given a potential economic slowdown.

Officials expect sales and income tax receipts to decrease by 3.1% and 5.9%, respectively, in fiscal 2023.

Meanwhile, property tax revenue is expected to increase marginally by 0.9% since it lags the overall economy and reflects the value of properties one to three years in the past.

Roughly half of officials surveyed were optimistic about their ability to balance their budgets in fiscal 2024, a decline from the prior year.

Those officials cited inflation, infrastructure needs and rising labor costs among the factors weighing on their budgets, creating a fiscal gap that could force cities to cut spending on programs.

Conservative budget forecasts may benefit cities in the long run.

Many municipalities built up their rainy day funds to record levels, which combined with spending restraints could make them more financially resilient when faced with another crisis.

“This could be a net positive for governments,” Omeyr said.