Local Government and the Fiscal Cliff: It’s Time to Build a Net
When we first wrote about “the mother of all fiscal cliffs” in local government, President Donald Trump had just taken office for his second term. We didn’t know exactly how events would unfold, but we did know what direction things were heading: toward a new era of fend-for-yourself federalism and mounting fiscal and service-delivery pressures. Now, the specifics are taking shape: federal retrenchment, new mandates without money, and a devolution of responsibility onto cities and counties already stretched to their limits.
For local governments, the One Big Beautiful Bill Act (OBBBA) could translate into one very big ugly challenge. Pandemic aid has evaporated, new service cuts (like to SNAP) are landing, and the new tax and spending law represents what the National League of Cities calls a “major realignment of federal policies with direct fallout for local governments.”
It’s not entirely negative: OBBBA preserves the municipal bond tax exemption and expands certain housing incentives. But it also rescinds unspent federal funds for infrastructure and climate programs, shifts new SNAP and Medicaid costs to states (and in many cases, by extension, their local partners), and layers on additional administrative burdens for programs that cities and counties help deliver. The result is greater fiscal stress and fewer federal backstops, just as local service demands continue to climb.
The consequences are not abstract.
Homelessness, food insecurity, and household financial distress are on the rise. In an Urban Institute survey, more than one in four non-elderly adults said their household experienced food insecurity in 2024.
Meanwhile, in a recent WalletHub study Texas and Florida topped the national rankings of financial distress, with the largest proportions of their residents struggling with debt, overdue bills, and unpaid taxes. Urban Institute credit data show that in parts of the South as many as 37% of consumers have at least one debt in collections.
When residents are carrying this level of financial burden, it directly threatens local government coffers, reducing the likelihood that households can keep up with property taxes, utility bills, and other revenue streams that cities and counties depend on.
Money is tight. Responsibility is growing. And increasingly frequent disasters, from hurricanes to wildfires, are greatly adding to this burden.
Resilience Means Reserves—and Realism
Resilience isn’t just about reinforcing infrastructure and emergency preparedness; it has a vital fiscal dimension. Disaster response and recovery are huge costs that cannot be deferred.
The capacity to withstand and recover from these kinds of disruptions is inseparable from financial management. As I wrote back in 2017, “These are not costs that will respond well to the time-honored practice of kicking the can down the road.” Cities like Long Beach, California, that built resiliency into their fiscal policies—planning not just for economic cycles but also for earthquakes, floods, or public health crises—show how foresight can make the difference between financial chaos and continuity.
Resilience also requires rethinking what not to do and being prudent about financial choices. Too many local governments facing fiscal distress tend to dig the hole deeper—lavishing incentives on corporations, subsidizing new sports stadiums, or building “nice to have” amenities while critical infrastructure decays.
As mayor of Kansas City, I pushed to invest in repairing the city’s levee system rather than a new convention center hotel. The hotel got the vote. But when a natural disaster strikes, the city will wish it had better levees.
The lesson: stop digging. Instead, local governments should direct scarce dollars toward investments that keep wealth circulating in the community—repairing critical infrastructure, supporting local businesses, and financing projects that generate long-term prosperity on the ground rather than siphoning resources away. In other words, build a net for the fiscal cliff.
The Muni Bond Boom: Opportunity or Mirage?
One of the main tools to do just that is the municipal bond market. At the very moment that budgets are tightening, governments are issuing new debt at record levels. As Liz Farmer noted in her latest newsletter article, governments issued a record $508 billion in new bonds last year, and 2025 issuance is on pace to surpass that.
That creates a paradox: fiscal strain is rising, but so is borrowing.
Many cities are grappling with deficits, service cuts, and overextended reserves—signs of fiscal weakness. Yet in the bond market, investors still view municipal debt as a relatively safe haven, so demand remains high. This disconnect means governments can borrow cheaply even while their underlying finances may be deteriorating.
History gives us reason to be cautious. After the Great Recession, when fiscal strain was high, many governments pulled back on issuing bonds even though market conditions were favorable. In the mid-2010s, low interest rates should have made it a golden era for infrastructure financing, but issuance actually fell. As Farmer reminds us, fiscal pressures outweighed need, and opportunities to rebuild roads, bridges, and schools were missed.
That precedent suggests that today’s surge in borrowing may not signal a wave of transformative investment but rather governments trying to plug shortfalls or race to market before conditions worsen.
For example, Chicago, despite a downgraded credit rating and persistent deficits, issued nearly $1 billion in general obligation bonds earlier this year, largely to refinance old debt and cover budgetary holes. By contrast, Los Angeles recently went to market with bonds specifically for water system upgrades and wildfire resilience—projects that strengthen long-term capacity.
The lesson for local leaders is clear: debt can be a powerful tool for resilience if it funds essential community-building projects, but if it’s used to paper over budget gaps it risks leaving governments even more vulnerable when the next shock arrives.