Op-Ed - DiNapoli Warns Changing Fiscal Landscape Could Increase Budget Challenges for Local Governments

The expiration of one-time federal pandemic aid, combined with state aid that has not kept pace with inflation and slower growth in local revenue may push some local governments closer to the edge of a fiscal cliff, according to a report released today by State Comptroller Thomas P. DiNapoli. The report provides an overview of these revenue sources and how they have affected local budgets in recent years.

“With pandemic aid coming to an end and uncertainty coming out of Washington, local governments need to shore up their fiscal foundations,” DiNapoli said. “By focusing on ensuring structural budget balance, using realistic revenue projections and multiyear planning, local governments will be better positioned to weather whatever financial challenges lay ahead. My office continues to support local governments by offering resources to help with financial planning and management.”

Federal Stimulus Aid

Local governments received federal pandemic aid through a variety of programs in 2020, 2021 and 2022. The federal Coronavirus Aid, Relief and Economic Security (CARES) Act of 2020 provided nearly $1 billion in targeted aid to five counties and one town in New York state, and another $1.5 billion to New York City at the start of the pandemic. Local governments outside of New York City received a total of $4.8 billion in financial relief from the federal American Rescue Plan Act of 2021 (ARPA) in 2021 and 2022, which they were required to obligate by the end of 2024 and spend by the end of 2026.

Although federal aid traditionally represents the smallest portion of overall revenue for local governments, it was the fastest growing source of revenue during the pandemic – increasing more than 50% between 2019 and 2023, from $2.8 billion to $4.4 billion. Outside of New York City, counties received the most federal stimulus funds in terms of overall dollars, while ARPA funds represented 14.4% of total 2019 (pre-pandemic) revenues for cities, 5.3% for towns, 4.5% for counties and 3.2% for villages.

Excluding New York City, twenty cities (32.7%) received their first installment of ARPA funding in an amount that exceeded 10% of their 2019 total revenues, compared to 5.4% and 5.8% of villages and towns, respectively. ARPA payments in 2021 represented more than 30% of 2019 total revenues in the cities of Utica and Buffalo.

With these federal funds ending, some cities are taking measures to close structural budget deficits, including overriding the property tax cap to increase their tax levies. Local governments are at a greater risk of having a structural budget imbalance if the one-time aid was used for recurring costs, such as paying for personnel expenses or ongoing programs.

Other Revenue Trends Impacting Local Governments

DiNapoli’s report identified where local governments are facing other revenue pressures in addition to the end of federal pandemic aid which may require adjustments to avoid budget shortfalls.

Sales Tax - For most of 2021 and in part of 2022, local governments outside of New York City saw double-digit year-over-year percentage increases in local sales tax collections after experiencing a 19% decline during the height of the pandemic. Local government sales tax collections outside New York City totaled $2.85 billion in the fourth quarter of 2024, a decrease of over $21 million (0.7%) compared to the same quarter in 2023. This decrease marks a stark contrast to the post-pandemic surge in local sales tax collections. As seen throughout 2023 and 2024, sales tax revenue growth has returned to levels of growth typical of the pre-pandemic period, with moderate year-over-year increases. Local sales tax revenue outside New York City grew 7.5% from 2021 to 2022 but just 2.3% from 2022 to 2023.

State Aid - The Aid and Incentives for Municipalities (AIM) program represents the largest amount of unrestricted state aid to local governments. The State Fiscal Year (SFY) 2024-2025 Enacted Budget provides $715 million in AIM funding for all cities, towns and villages outside of New York City, or approximately the same amount that was appropriated in SFY 2011-12. When adjusting for inflation, AIM funding has declined nearly 30% over that same period, and is now worth less to local governments than what they received in unrestricted aid in 2004-05, the year before the AIM program started. In addition, $50 million in Temporary Municipal Assistance allocated in the SFY 2024-25 Enacted Budget for all AIM recipients is proposed in the SFY 2025-26 Executive Budget to continue for just one more year.

Property Taxes – For localities, property taxes continue to be one of the largest and most reliable sources of revenue, totaling $13.6 billion in local fiscal year 2023. However, there are statutory limits to how much a local government can raise in property tax revenue. Under the property tax cap, local governments are generally required to limit the growth of property tax levies to the lesser of 2% or the rate of inflation. Although the rate of inflation has been decreasing, it remains over 2%, setting the property tax cap at 2% for municipality fiscal years beginning in 2025. In addition, counties, cities and villages are limited in the overall revenue that can be raised through the property tax in any one year by the constitutional tax limit.

After receiving federal ARPA aid, some local governments reduced the amount of property taxes they levied. Overall, counties reduced their property tax levy by 1.2% or $75.7 million from 2022 to 2023, while cities outside of New York City raised their levy by 0.3% or $4.1 million during this same period. Towns and villages maintained a steady increase in their property tax revenue before and throughout the pandemic.

A Failure to File Annual Financial Reports Leaves Taxpayers in the Dark

The number of local governments that have failed to file timely annual financial reports [AFRs] has been increasing in recent years. For the local fiscal year ending in 2019, 142 (9%) of over 1,575 counties, cities, towns and villages failed to file AFRs on time. For fiscal year 2023, 233 (14.8%) had not filed AFRs by Aug. 31, 2024.

If a local government does not prepare and submit complete and accurate AFRs in a timely manner, it may call into question the effectiveness of the financial management and standing of a municipality, reduces transparency, and diminishes accountability for how funds were spent.

Without a timely-filed AFR, the Comptroller’s office is unable to issue a Fiscal Stress Monitoring System (FSMS) score to assess a local government’s financial condition. Recently, both the Village of Washingtonville (Orange County) and the City of Dunkirk (Chautauqua County), which have had problems filing recent AFRs, both needed state legislation to allow them to issue millions of dollars in deficit financing debt, a sign of extreme fiscal stress.

Recommendations

DiNapoli’s report recommends local governments:

Ensure any ARPA funds are spent before the 2026 deadline.

Identify any one-time revenues that were used for recurring purposes and find alternative revenue sources where needed.

Communicate with taxpayers regarding the use of additional aid over the past few years.

Engage in multi-year planning to better understand the implications of current revenue and expenditure actions for out-year budgets.

Act quickly to ensure fiscal stability by continuously monitoring the current budget and adjusting as needed.

Access the Comptroller’s Division of Local Government and School Accountability webinars, management guides and other publications to assist in developing a budget and maintaining proper accounting records.