Cities face mounting financial pressures with fiscal cliff nearing

By Daniel C. Vock

As big cities try to regain a steady financial footing after the pandemic, some familiar but stubborn problems threaten to knock them off balance, a panel of municipal finance experts warned this week.

“We’re in a moment of inflection right now,” David Schleicher, a Yale law professor, said during a virtual gathering on municipal distress held by the Volcker Alliance. “We’ve been living through this period of flush state and local budgets, and we’re about to see a real turn.”

While the economy has proved resilient in many places, it has had an uneven effect on cities. The pressures facing municipalities include the imminent end of federal pandemic aid, uncertainty around the economic condition of downtowns, inflation, and increased demand for social services and other city services.

Stephanie Miner, a former mayor of Syracuse, New York, said city officials “have the same crises facing them once again. And they’re the crisis of — whether you say legacy costs or unfunded liabilities — both pensions and … retiree health care.”

Funding those obligations is a hard sell politically, especially because government workers often get retiree benefits that few in the public enjoy, she said. 

Meanwhile, growing concern about crime nationwide is putting pressure on mayors and other city officials to hire more police officers and staff up other city agencies. Rising interest rates are also making it harder for city officials to borrow more money for construction projects or big-ticket purchases, like fire engines and snow plows, she said.

“You’re going to have leaders who are forced to make very difficult decisions at the same time when their revenues are unstable at best, or maybe even going down because the model of how we go to work and how we pay taxes and how we think about that is changing,” Miner said.

In Philadelphia, city leaders have been constantly readjusting their budget plans since the start of the pandemic, said Rob Dubow, Philadelphia’s finance director. In the first half of 2020, the city released three different versions of its budget because of dire revenue projections. But federal revenue from the American Rescue Plan Act cushioned the blow.

“Things could have been much, much worse without that ARPA funding. We would have had to make even more painful cuts, and those cuts would have been not only bad for the city, but bad for the entire region because we are the economic engine for the region,” Dubow said.

The city received $1.4 billion in federal pandemic aid to cushion the blow from lost revenue, he explained. But the city’s revenue ultimately dipped by $1.5 billion, meaning that all of Philadelphia’s share of the federal money went to patching the holes in its budget.

“One of the big challenges that we and other cities face is making sure we don’t fall off the fiscal cliff when those dollars go away,” Dubow said.

On top of the familiar problems, though, city officials are still trying to prepare for two potentially devastating scenarios: a recession or the possibility that congressional inaction on debt repayment causes the U.S. Treasury to default on its loans.  

A dip in city and state revenues is “coming sooner than anyone thought,” said Schleicher, the Yale professor and author of the new book “In a Bad State,” that examines how lawmakers respond to fiscal crises.

“Federal aid is not only going to dry up, but it may be pulled back,” he warned. President Joe Biden has shown that he’s willing to go along with House Republicans and take back some of the money promised to municipalities in ARPA, Schleicher noted.

“For lots of governments, we’re going to find out whether they used the boom responsibly, or whether they didn't. There was a huge surge in federal money,” Schleicher said. “Did they use this surge to fund one-time investments that match the fact that the revenue was volatile? Or alternately, did they spend the last few years cutting taxes and creating new spending program policies that will be hard to reverse in the future?”

Daniel C. Vock is a senior reporter for Route Fifty, where this story originally appeared.