Cities Brace for Inflation, Recession as Infrastructure Needs Multiply

• City governments are being “super cautious and fiscally conservative”
• Growing cities in the southeast see “no huge downturn” in revenue 
• New York City faces “enormous budget stress” in the next two years
• Chicago is in a better position with Moody’s investment grade rating

Almost two years after the COVID 19 pandemic upended the world economy, inflation is driving up costs and a possible recession threatens to curtail tax revenue. Still, panelists at a November 17 Special Briefing hosted by the Volcker Alliance and Penn Institute of Urban Research said they were cautiously optimistic about cities’ fiscal outlook.

Farhad Omeyr, program director of research and data at the National League of Cities, said budgets show declines in expenditures and revenues of more than 2 percent in real terms for fiscal 2022. “That’s actually a good thing,” he said. “It shows that our governments are bracing for impact and they are being super cautious and fiscally conservative. Governments are in the mood of not expanding their programs, and basically focusing their limited resources at this point on vital services such as public health and public safety.”

Moderated by William Glasgall, Volcker Alliance senior director, public finance, and Penn IUR Fellow, and Susan Wachter, co-director of Penn IUR, the webinar is the thirty-sixth in a series of sixty-minute online conversations featuring experts from the national research networks of the Volcker Alliance and Penn IUR, along with other leading academics, economists, and federal, state, and local leaders. The latest episode and all previous ones are available on the Special Briefing podcast, which can be downloaded from all major podcast platforms.

In addition to Omeyr, panelists included former Atlanta Mayor Shirley Clarke Franklin; Greg David, director, business and economics reporting program, City University of New York Craig Newmark Graduate School of Journalism, and a contributor to The City; and Heather Gillers, a Wall Street Journal national municipal finance reporter in Chicago. 

Mayor Franklin said municipalities in the southeast and in the Atlanta region, and more broadly in the Southeast, benefiting from in-migration, are raising salaries to compete for workers, especially in police departments. “We are seeing growth in population and therefore a growth in demand not just for basic services but for investments by cities in quality of life."

She added, “I have not been able to uncover any evidence that local governments of size in the metropolitan area are experiencing a huge downturn in revenue that concerns them. They realize they could be facing a recession, but none have reached a point where they are expressing serious concerns about their ability to pay for basic services.” 

In New York City, meanwhile, the projected budget deficit for next year is a “pretty manageable” $3 billion, David said, as revenues continue to come in above expectations. The city has $8.3 billion in reserves and has “no big pension overhang,” after fully accounting for the increased pension contributions that are required by financial markets’ decline. 

In two years, however, the city is projecting budget deficits of $10 billion, he said. That may understate the size of the shortfall, he said, because it anticipates raises for municipal workers of only 1.5 percent a year, which unions are likely to reject. If a recession leads to a Wall Street downturn, the budget may come under “enormous stress,” David said. 

Gillers said Chicago will benefit from the raise in its rating to investment grade by Moody’s Investors Service. The rating service rewarded mayors Rahm Emmanuel and Lori Lightfoot for taking a more disciplined approach to reducing the city’s pension debt than longtime Mayor Richard M. Daley, she said.

Nationally, the full impact of the pandemic on city revenue hasn’t yet been felt, Gillers said, noting that the low point for revenue following the 2007-09 recession didn’t come until 2011 or 2012.  “We’ll be watching this all play out for a long time,” she said.