As the support from the American Rescue Plan Act (ARPA) begins to diminish, municipalities across the United States are confronting a significant fiscal reckoning. City officials are not only tasked with managing the aftermath of federal funding but also with strategizing their financial futures in the face of mounting obligations. This scenario underscores the broader implications of unexpected fiscal influxes and the pressing need for sustainable financial strategies at the city level.
Cities are presently at a crossroads, and the transition from reliance on ARPA funds is fraught with challenges. As articulated by Lisa J. Cipriano, director of budget and evaluation in Newport News, Virginia, the central concern is not merely replacing lost ARPA funding; it revolves around how to manage and repay impending infrastructure debts. This critical commentary, made during a National League of Cities webinar, highlights a growing sentiment across urban administrations that fiscal planning must adapt to a post-ARPA world.
According to the recently released report by the National League of Cities (NLC), the average municipal spending rose by 6.7% in fiscal year 2023, even amid declining revenues. This situation paints a complex picture of fiscal management where cities are compelled to juggle increasing expenditures, largely driven by public safety, which constitutes over a quarter of general fund budgets. The situation is exacerbated as cities look forward to a fiscal landscape where they must either find innovative revenue streams or reallocate existing funds to cover essential services.
The NLC report reveals that approximately 65% of cities are actively crafting plans to navigate the post-ARPA fiscal landscape. This proactive approach is critical for municipalities to identify potential funding streams and develop sustainable budgets. The pandemic-induced economic fluctuations prompted many local governments to undertake meticulous financial assessments, and as such, the adaptation of fund balance policies has become a priority.
Rebecca Fleury, the City Manager of Battle Creek, Michigan, provides insight into effective adjustments made to her city’s financial strategy. By leveraging ARPA funding to bolster their fiscal health, Battle Creek shifted its fund balance policy from a modest 8% to a much more robust range of 15%-17%, currently achieving an impressive 22% in fund balance. This prudent management not only enhances fiscal resilience but also improves the city’s attractiveness to creditors, enabling them to pursue significant funding opportunities for public safety projects.
While maintaining a strong reserve is critical for future financial dealings, it is equally essential for city leaders to strike a balance. Cipriano advocates for an aspirational fund balance goal of 20%, recognizing that high reserves can send a message of fiscal responsibility to credit rating agencies. However, this approach must be carefully weighed against opportunity costs. Holding a large cash reserve without strategically investing it can inhibit a city’s growth potential, creating significant discussions around resource allocation.
The relationship between fund reserves and debt management is particularly pertinent when considering large-scale projects. Cities with substantial reserves are in a favorable position when negotiating bonds for critical initiatives, such as fire station upgrades, which require significant financial investment. Fleury’s experience underscores this dynamic—moving forward with a $28.5 million bond becomes a much more palatable choice backed by a strong fund balance.
Despite the financial strategies cities have adopted, challenges remain ubiquitous. Madison, Wisconsin, for instance, illustrates the complexity of budgeting amidst long-standing financial issues. With a $22 million budget gap, the city has had to make difficult decisions about resource allocation while maintaining a commendable Aaa credit rating from Moody’s. Madison’s finance director, David Schmiedicke, reveals plans to seek voter approval for additional property tax increases, indicating that municipalities may need to look to their constituents for relief.
As we advance beyond the immediate aftermath of the ARPA funds, cities must embrace a multifaceted approach to financial management. The balance between maintaining robust reserves and responsibly incurring debt will be pivotal in shaping sustainable municipal growth. Through proactive planning, strategic resource allocation, and community engagement, cities can mitigate financial pressures and build resilient local economies for the future. This evolving narrative of municipal finance serves as a reminder of the resilience of local governments in the face of fiscal uncertainty and the importance of adaptive strategies in navigating the complexities of budget management.