Cities Stare Down Huge Budget Gaps

Many city governments are suddenly confronting bad budget news, as years of federal coronavirus aid starts to run out, expenses climb and local economies continue to adjust to post-pandemic conditions.

For now, talk of big budget gaps and subsequent service cuts is limited to a few headline-grabbing localities. But experts warn that other cities face comparable pressure and likely will face similar situations soon.

In New York City, Mayor Eric Adams called for broad cuts to services, such as schools and libraries, in order to address an anticipated shortfall of $2.9 billion next year. Sheng Thao, Oakland, California’s new mayor, faces what city officials say is the largest general fund deficit in the city’s history, with a projected shortfall of up to $345 million. And Milwaukee could face cuts to police, firefighters and libraries when federal aid dries up next year, officials say, because of rising pension costs and dwindling state aid.

“The majority of cities are dealing with budget problems, because of the situation we are all in right now,” said Farhad Omeyr, the program director for research and data at the National League of Cities. Inflation continues to add to city expenses, he said, at the same time that cities are nearing the end of the federal aid they received from the American Rescue Plan Act (ARPA).

Larger cities and consolidated city-counties have spent 44% of their ARPA funds as of this January, according to the National League of Cities. But the balances vary widely among those cities. At least 71 cities and counties (or 21% percent of those the NLC tracks) allocated 100% of their funds as of January.

Those numbers are likely higher now, especially after city leaders ramped up their spending of the federal aid while congressional Republicans threatened to take some of that money back.

“Governments are struggling to find their way out of this once ARPA money is gone. That seems to be the major issue for smaller communities, and to some extent, larger cities. as well,” Omeyr said.

Richard Auxier, a senior policy associate in the Urban-Brookings Tax Policy Center who focuses on state and local finances, said cities face a much different path to recovery after Covid-19 than they did during the Great Recession a decade ago.

With the pandemic aid, Congress tried to avoid the long, painful recovery local governments went through after the financial markets collapsed in 2007, Auxier explained. Many economists and advocates say the hobbled condition of cities, counties and school districts during that time slowed the overall economic recovery. So, in 2020 and 2021, Congress provided direct aid to states and localities. But lawmakers assumed life would return more or less back to normal after the pandemic, as it did after the Great Recession.

This time was different, though, Auxier explained. Downtowns are empty, sapping a big source of local government revenue. And unlike after the Great Recession, unemployment rates are historically low now, which drives up labor costs for cities.

“The federal money was great. The economy is doing better” than expected, Auxier said. “But for a lot of places, their main sources of revenue and their main sources of spending have been fundamentally altered by the pandemic.”

Larger cities—such as New York, San Francisco, Seattle and Washington, D.C.—are disproportionately feeling the impact of languishing recoveries of their downtowns. The continued popularity of work-from-home policies and, in some cities, major tech sector layoffs have sapped the revenues those downtowns help create with sales tax and commercial property taxes.

But Chris Goodman, a professor of public administration and an expert in municipal finance at Northern Illinois University, pointed out that problems for many of the cities facing grim budget news were primarily with new spending pressures, not lack of revenue.

“The big issue is cost,” he said. “Everything has become more expensive. Labor is more expensive. Materials are more expensive. And revenues are just not growing at the same rate as costs.”

In San Francisco, he noted, increased labor costs are driving projected deficits for years to come. That’s true for both traditional employees covered by collective bargaining agreements and for outside vendors, Goodman said.

Because San Francisco is both a city and a county, it provides public health services that are often the responsibility of counties. That is also adding to budgetary pressures, as demand for homeless services and for drug treatment are on the rise. The new costs from public health are projected to increase by $20 million next year and continue to climb for each of the next five years.

Other factors have contributed to a projected deficit of $291 million for the city, as well. Lower investment returns on pensions are driving up the city’s required contributions. Real estate transfer taxes are down, because of a slow market for commercial properties. And the city council spent an extra $50 million on police overtime and street cleaning.

“This year will require tough choices of a magnitude that we haven’t had to face in many years,” Mayor London Breed’s office told the San Francisco Chronicle. “Even with that being said, the mayor has made it clear that we will continue to prioritize our city’s top priorities around ensuring clean and safe streets, supporting our economic recovery, and addressing homelessness, mental illness and addiction.”

In New York, tax revenues are expected to increase by more than $2 billion both this year and next, but Adams said the city faces $10 billion in new costs in the coming year. That includes $4.3 billion for an influx of asylum seekers and $4 billion for new labor deals with city employees.

The mayor, however, got a helping hand from Gov. Kathy Hochul and state lawmakers, who agreed to provide $1 billion in aid for migrants and added money for the subway and school system in their recent budget deal.

Adams relented on planned cuts to libraries that would have forced many of their locations to close on weekends. Other austerity measures he is pushing face serious opposition in the more progressive city council.

Goodman, the NIU professor, said it will be challenging for local officials to cope with the new budget challenges.

“We have not experienced a level of inflation like this in 40-45 years. It’s a completely different environment,” he said. “There’s basically no one doing state and local finances in the trenches that understands how any of this works. And now local governments are far more restricted in how they can raise money than they could in the 1970s. As they’re experiencing these rising costs, that’s obviously going to put them into a box.”