Report: As cities bounce back amid inflation concerns, cautious optimism remains among finance officers

Between balancing budgetary shortfalls, fiscally supporting local businesses and addressing the needs of citizens, the past two years have been exceptionally challenging for finance officers and local governments. A new brief from the National League of Cities (NLC), its long-standing annual “2022 City Fiscal Conditions Report,” sheds light on one of the most “dramatic fiscal downturns” many American communities have ever faced.

“This report underscores how crucial federal funds from the American Rescue Plan Act (ARPA) have been to local governments across the nation, ensuring that critical services continued and preventing what would have been years of fiscal struggle,” said NLC CEO and Executive Director Clarence E. Anthony. Authors of the report include Farhad Kaab Omeyr, Ph. D., program director at NLC’s Center for City Solutions, Erica Grabowski, a senior specialist at the center, and Jacob Gottlieb, a program specialist at the center.

Despite pandemic-related hardships, the report quantifies how municipal governments are bouncing back—largely due to federal recovery efforts. Practically, this looks like “a strong rebound of city revenue sources such as income and sales taxes, two years after the start of the COVID-19 outbreak in 2020, coupled with a once-in-a-generation and timely injection of federal monies in the form of American Rescue Plan Act (ARPA),” according to a statement from NLC. 

This action has strengthened local communities, with nine out of 10 finance officers reporting they were better able to meet their financial needs this year. Last year, 65 percent said the same.

Meanwhile, a strong housing market over the last several years has further positioned local governments to weather future challenge, as economic uncertainty due to inflation roils the market. This shift is reflected in the report. Finance officers aren’t as optimistic about the future—only 70 percent reported confidence in their ability to meet the financial needs of their communities in 2023. 

They’re adjusting accordingly. 

Fear of a looming recession has led many local governments “to implement conservative approaches to their 2022 budgets, adjusting their revenue and expenditure estimates based on the current micro as well as macro-economic factors,” the statement says. But while communities might be tempering their optimism, there’s still a lot of hope that the federal government will continue to buoy communities by upholding “its crucial role in helping municipalities meet their communities’ needs. The State and Local Fiscal Recovery Funds (SLFRF) remain a crucial part of cities’ plans to regain pre-Covid fiscal health.”

The recovery funds are available to local communities through 2026, which afford local administrators to look beyond the present hurdles to address future needs. 

“Overall, and in its 37th year of release, the report paints a cautiously optimistic picture for the fiscal conditions of our cities, villages and towns across the nation,” the report reads.

Another factor contributing to this outlook is the Federal Reserve’s action in hiking interest rates to combat inflation—it’s so far been effective, the report says, with inflation rates slowly falling back to normal levels. 

A disclaimer about the report notes surveys were sent to finance officers from across the United States representing cities with populations larger than 10,000 people. Officers were asked for assessments on their city’s fiscal outlook, and hand nine weeks to respond. To read the full report, visit the National League of Cities’ website.