Cities wrestling with life after ARPA

As funding from the American Rescue Plan Act peters out, cites are balancing reserves and issuing new debt while searching for funding streams. 

“Our biggest challenge is not the replacement of the ARPA funds, it’s rather how are we going to pay for the future debt, for the amount of infrastructure debt we have facing us and our upcoming next year,” said Lisa J. Cipriano, director of budget & evaluation in Newport News, Virginia. 

The comments came during a webinar produced by the National League of Cities on Thursday in conjunction with a new report on city fiscal conditions released by the NLC. 

The annual report indicates that average spending by cities in fiscal year 2023 was up 6.7%, even as revenue dipped. Public safety consumes the biggest chunk of city budgets, accounting for over 25% of the total general fund budgets while debt service clocks in at 3.5%. NLC’s numbers came from a survey of 375 municipal governments.   

Per the report, “Cities are preparing for life after ARPA with 65% reporting that they are either currently developing a plan or have a fully developed plan to navigate post-ARPA fiscal challenges.”  

A combination of federal stimulus money, strong tax collections, prudent spending, and roaring markets has fattened many cities reserve funds, allowing them to pay cash for projects once financed by bonds. 

Finding the sweet spot in how much to hold in reserves is an ongoing balancing act. 

“When I first started here, they had a very low fund balance policy of 8%,” said Rebecca Fleury, City Manager of Battle Creek, Michigan. “It was a surprise to me, but the ARPA dollars allowed us to put ourselves on a good, sound, fiscal, sustainable path. Happy to say we did change that policy to between 15%-17% and right now we have a 22% fund balance.” 

“Looking at the fiscal year 2024 closing we’ll probably be in the 16% range,” said Cipriano.  “Our aspirational goal is 20% to nudge closer to that triple-A bond rating. But again, for a city our size, holding on to that much cash and not using it is always the hardest conversation to have.” 

Cipriano notes that the credit ratings agencies like to see numbers in the 20’s but there’s a tradeoff to holding too much. “If you can’t ever use it, what are your opportunity costs that you’re experiencing in your individual locality?” she said.  

Having a robust reserve makes funding large public safety projects with new credit an easier sell. “We’re looking at a $28.5 million bond for fire station improvements,” said Fleury. “To go to the market with a fund balance at 22% is a much better than if I were at the 8%.” 

Madison, Wisconsin, used half of its ARPA funds to sustain its operations and is currently facing a $22 million gap, a problem it has been dealing with for the last 14 years. Despite the budget juggling, Madison’s current credit rating from Moody’s Ratings is Aaa. 

“We’re going to the voters in November to allow additional property tax increases,” said David Schmiedicke, finance director of Madison. “That’s really the only option that the state legislature allows us to pursue and maintain current service levels as we wind down from ARPA funding.”  

Retaining human resources remains a key pain point for municipalities as they compete with the private sector.  Battle Creek has resorted to consolidating and sharing services with neighboring municipalities using informal barter arrangements while also exploring other solutions. 

“Can we use public private partnerships to leverage the private sector with the talent that we already have?” asks Fleury.  “I would have told you pre-pandemic we would have never done that.”  

“The pandemic showed us we better be working better together to serve our residents, because our money is tight, the expectation of our residents is not lessening, it’s greatening.”