Every constituent of every elected official wants a better quality of life in their community. Priorities shift among demographics, but great parks, pedestrian safety, quality housing, good schools, safe streets and protection against dangers top just about everyone’s list.
The challenge is how to fund a municipal budget with room for everything from social services to huge infrastructure projects aimed at both sustainability and mitigation against ever-increasing natural disasters.
The task becomes even more challenging when the cost of services and materials is soaring, while the federal government — and its myriad programs that traditionally disburse billions to municipalities — is shrinking.
Ask a municipal financing and policy guru and they will say there is no magic bullet. But plenty of thought leaders have notions on how local government can improve quality of life while reconciling belt tightening needed as a result of stimulus and infrastructure dollars from the previous administration drawing down while the present administration very intentionally wants to shrink federal spending.
The challenge is how to fund a municipal budget with room for everything.
Belt-Tightening Basics + Creative Funding Mechanisms
Lucy Dadayan, a principal research associate with the Urban-Brookings Tax Policy Center at the Urban Institute, offers these standard belt-tightening measures:
- Hiring freezes/not filling vacant positions, suspending or reducing pay increases, furloughs and layoffs.
- Delaying or canceling infrastructure upgrades.
- Across-the-board or targeted spending cuts in both non-essential and sometimes critical services.
- Selling surplus assets or utilizing government-owned real estate for revenue generation.
- Redirecting already-obligated funds to ensure that legally committed projects can proceed.
In addition to drawing from hopefully healthy rainy-day funds, Dadayan offered these best practices for raising municipal revenue without directly raising property tax millage:
Public-Private Partnerships (PPPs) are increasingly used to finance, build and operate major infrastructure projects. The private sector provides upfront capital and assumes cost overrun risks in return for future revenue.
Community Redevelopment Agencies (CRAs) fund local revitalization by capturing and reinvesting increased property tax revenues within designated zones, particularly in underserved areas.
Business Improvement Districts (BIDs) are self-taxing districts where property owners fund supplemental services and improvements (cleanliness, security, marketing) and all revenues are reinvested locally.
New Local Revenue Strategies: Cities can boost funds by raising service fees, levying special assessments, and monetizing their assets — such as through congestion charges, stormwater taxes, utility fees, asset leasing, naming rights, or selling land development rights.
Maria McHale, governmental affairs and policy director for East Tennessee REALTORS® (ETR), said REALTORS® have a responsibility to understand the complex financing choices that local governments face and to help ensure those choices are made with balance and long-term vision in mind.
“Local elected officials work hard to balance growth and resident services, and beneficial development is often hindered by a lack of infrastructure funding,” McHale said. “As REALTORS® advocate for smart growth, we can help educate communities on sustainable ways to fund and improve neighborhood infrastructure without putting an unfair financial burden on homeowners.” (See page 66 for more information on what ETR is doing to inform municipalities on options to solve immediate financial and land-use decisions, while also helping them grow in a way that is sustainable.)
It’s certainly time for local governments to think outside the box,” Dadayan said. “Local governments could ... enact tourism taxes. Government buildings and land could lease space to cell towers or solar farms.”
Dadayan said there is an upfront cost, but many cities have lowered costs while raising revenues via automation. She said a great example is a meter for coins at every parking space — which cost a lot to maintain and service — replaced with an app that makes it easy for people to pay by phone.
It’s certainly time for local governments to think outside the box.
Largest Cities Facing Budget Deficits
Josh Goodman, senior officer, State Fiscal Health, The Pew Charitable Trusts, authored a study that looked at the largest cities in the nation and found 20 of 25 have budget deficits in fiscal year 2026 and many have deficits that go beyond that.
“I was a little bit surprised in doing this analysis. It’s not just a remote work and office vacancy problem; it is that they got a lot of help from federal stimulus and infrastructure dollars. Plus, post Covid, they got income tax and local taxing boost,” he said.
Now that federal dollars are going away, a lot of state and local governments are experiencing more widespread deficits. “Billions in healthcare research and university support have been cut, which means in cities like Boston or Pittsburgh built around hospitals, healthcare, higher ed and research, if those are areas that are hurting, your budget is hurting,” Goodman said.
Also, as broad shifts in policy on immigration and documentation impact international travel, a city such as Las Vegas — somewhat dependent on international tourism — could see less revenue.
Goodman suggests that states loosen their grip on regulating what cities can do, so local government can be flexible to meet unique shifts in policy.
“If a state mandates small class sizes in schools, it can add billions of dollars in expenses for a huge city such as New York,” he said. “Boston is highly dependent on property taxes, but they might not keep pace with inflation. The state hasn’t given the cities the ability to levy income or sales taxes, so the cities are limited in how they fill [the budget] gap.”
Goodman noted the paradox that virtually all local governments are trying to create more affordable and attainable housing, but they are limited in funding it themselves through property taxes, because higher property taxes contribute to the high cost of housing.
Fatima Yousofi, senior officer, Infrastructure and Pensions, The Pew Charitable Trusts, said with drastic federal cuts, states will have to take a more active role in facilitating capital funding.
She said the continuity of major road, bridge, highway, water and other infrastructure projects hinges on states creating infrastructure banks, offering low-cost financing and bonding. She pointed to an example in Vermont where several rural communities created one large bond issuance. Teaming up created capacity and helped small communities share the administrative costs and bond reporting duties.
Yousofi said transit funding is suffering nationwide. Remote work has reduced ridership, but dozens of cities have workers who still depend on commuter rail.
When it comes to finding new funding mechanisms, Yousofi praised California for being the first state to allow the creation of special Climate Resilience Districts. The districts can finance projects that help communities adapt to the impacts of wildfires, sea-level rise and flooding.
Don’t Restrict How Cities Can Create Revenue
Michael Pagano, dean emeritus, University of Illinois at Chicago College of Urban Planning and Public Affairs and former Brookings Metro non-resident fellow, has researched public finance for decades.
He said federal funding typically accounts for only about five percent of a municipal operating budget, so federal cuts won’t hurt deeply. The area that will see a drastic change is capital spending.
“With the surge of infrastructure and stimulus money, cities have been designing a city future that had federal support for electric charging stations, expansion of infrastructure and repairing old infrastructure,” Pagano said. “This is especially true in older northern states that are not experiencing the demographic gains that southern states are. The loss of federal dollars forces them to lower their expectations of what the future will be.”
States should loosen their grip on regulating what cities can do, so local government can be flexible to meet unique shifts in policy.
Pagano noted that Ohio is one of the very few states that allow cities to impose an income tax, which means cities continue to get income-tax revenue, whether an employee is remote most or part of the time. However, in a city reliant on property taxes, if a downtown building is half empty, its value goes down and thus the city’s essential revenue is reduced.
Pagano said the bigger impact is what Covid did with remote work and hybrid work. He said the lack of downtown workers, which also impacts downtown retail and restaurants, has impacted the commercial tax base. Some cities have rebounded and repurposed, while others are still struggling.
“There is not any such thing as an average city, so there is no such thing as a magic bullet that works in every city,” he said. “Another issue is that states ban city access to certain resources — a downtown may come roaring back, but if the city doesn’t have authority to levy taxes on that growth, it is not the boost it could be.
“When states preempt what cities can do, it denies the fact that cities are individual and not uniform. Cities need to be nimble and not be restricted from creating the kind of revenues they need to continue delivering services.”
There is no such thing as a magic bullet that works in every city.
Having worked in the core of Chicago for two decades, Pagano also noted that commercial occupancy hovers around 70 percent downtown. That has a huge negative impact on transit ridership and funding.
Karen Tamley, president and CEO of Access Living, a Chicago-based disability rights and service organization, points out that transit cuts have a disproportionately negative impact on people with disabilities.
“Public transportation for people with disabilities is the difference between a life of isolation and full independence. Right now, for those who live in the Chicago region, independence is on the line,” Tamley wrote in an August Chicago Tribune opinion piece.
She urged public officials to find a way of addressing a projected $771 million shortfall that would start in early 2026. Projected transit service cuts of up to 40 percent, mass layoffs and fare increases “would have a devastating impact on our communities, including people with disabilities who live here.”
“For disabled residents, especially those who can’t drive or afford their own wheelchair-accessible vehicle, public transit is the foundation of daily life — a way to get to work, attend school, access medical care, visit family and be part of the community,” Tamley’s op-ed stated.
Some cities will look to Tax Increment Financing (TIF) to build transit stops.
Municipalities Must Boost Economic Development Without Increasing Operational Costs
Shayne Kavanagh, senior manager of research for the 26,000-plus member Government Finance Officers Association, authored “New Taxes That Work: How Local Governments Can Raise New Revenue” and “Rethinking Revenue.”
He noted that even in an era of strong anti-tax sentiment, communities successfully gained voter approval when they associated the tax with a concrete purpose that citizens value.
“For Plant City, Fla., 50 percent of its 160 miles of streets were in poor condition. Staff estimated that it would take up to 60 years to resurface or reconstruct all roads in the city, based on available resources at the time. Street quality served as the foundation for a new tax,” Kavanagh reported.
In Broward County, Fla., voters approved a new property tax and a special district to provide services for disadvantaged children. The new district was the Broward County Children’s Services Council.
Kavanagh said local government must challenge itself to find ways of increasing economic activity without increasing operational costs. He said better coordination of land-use policy to economic development could help.
Development that results in urban sprawl often costs as much or more than the new taxes generated by the development itself.
The Land Value Return Concept
The Lincoln Institute of Land Policy was founded to promote the Land Value Return concept of public financing.
“In an era of tight budgets and exploding need, cities around the world are funding infrastructure and other public improvements through land value return, also known as land value capture. This policy approach offers an array of public finance tools that enable communities to recover and reinvest land value increases resulting from public investment and other government actions. Notably, as new subway lines, roads and other public works raise the value of nearby land and real estate; developers and property owners share that publicly generated windfall to help local governments pay for new bridges, transit, parks, affordable housing and other infrastructure upgrades,” Lourdes Germán and Allison Ehrich Bernstein wrote in a policy brief published before deep federal funding cuts became a reality.
“Land value return is based on a simple core premise: public action should generate public benefit. As challenges mount from rapid urbanization, deteriorating infrastructure, climate change, and more, this funding source has never been more important to the future of municipalities,” continued the Germán-Bernstein brief titled “Land Value Return Tools to Finance Our Urban Future.”
Kim Reuben, senior advisor, Fiscal Systems at the Lincoln Institute, said taxing the value of land independent of what is being built on top of it can provide a more stable flow of revenue. She explained that many commercial buildings have lost value because they have vacancies due to the shift to remote work.
Reuben said some cities will look to Tax Increment Financing (TIF) to build transit stops, capturing the increased value around the station and dedicating it to paying off bonds that funded the transit extension. She said some areas are looking at a series of Business Improvement Districts (BIDs) to fund some capital costs, but it may be difficult to convince property owners to the additional self-taxing that comes via a BID, as those may be downtown businesses already hurting from the shift to remote work and hybrid work from home.
