Community Fiscal Conditions and Cost Drivers

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Erin Mullenix
July 28, 2015

As a new city budget season approaches, many cities are beginning the process of budget planning and forecasting. Though each local community undoubtedly has their own factors that make up its fiscal conditions, aggregate economic research may be useful in understanding some of the basic trends and cost drivers that cities may prepare for.

Before delving into some recent examples and data, it is important to note the “local” element of budget planning. There is no cookie cutter budget or cookie cutter solution to the financial challenges cities face. The following, among others, are important budget planning considerations within any individual community:

• Strategic planning directives and related involvement of local officials.
• Strengths and weaknesses of the community.
• Visions and goals of the community.
• Financial condition related to the broader regional economy.
• Local finance as it relates to other local policies or restrictions.
  • Local tax and revenues structure and spending policies.
  • Local economic development policy and practice.
  • Regulatory environment.
  • Community demands and stakeholders.
  • Local planning and capital projects.

Having these in mind will help communities understand the priorities and long-term planning considerations within the budget process.

Other Budget Impacts   

Outside of rising costs, it is important to stress the changing environment and other factors that uniquely affect local governments. As stated above, local tax and revenue structure and legislative policy may influence the budget. This may occur simultaneously with other economic trends.

For example, Iowa’s legislature recently changed the local property tax structure, restricting revenue to local jurisdictions for certain classes of property. In this case, most Iowa communities faced both rising costs and the additional limitations on tax revenues. Still, when compared to many of the broader economic challenges nationwide, Iowa has fared relatively well.

Local Cost Drivers

Over the past few years, the Iowa League of Cities conducted informal research studies to examine the largest city operational costs, recent cost drivers and increasing costs, and costs most communities expected to increase in the near future. For the purposes of this discussion, the scope of analysis is limited to the general fund, or Iowa’s budget fund that supports the day-to-day operational costs. Certainly, other budget funds have significant impacts on overall budgets (proprietary/municipal utilities, capital projects, special revenue funds, etc.).

Some of the largest categories of local expenditure in Iowa are commonly public safety, culture and recreation, general government (which includes local employee wages) and public works. Associated subcategories are transportation infrastructure (roads, bridges and sidewalks), public safety (police and fire departments), parks and recreation, and health care premiums.

Among respondents in a “cost driver” survey, the most commonly cited categories of increases in spending were related to transportation (roads, bridges and sidewalks), demand for public safety services (police and fire departments), health care premiums and public pension systems. The same categories were also noted as the most anticipated increases in the near future. Notable increases in the demand for more local public safety and public works services were reported. Within this research, city population had some bearing on responses. However, small and large cities alike reported public safety and transportation as recent cost drivers within their top combined responses.

Last year, the National League of Cities published a fiscal conditions study that also polled city finance officers nationwide on the factors that would have the most positive and negative influence on local budgets. Coincidentally, the top categories almost exactly mirrored those in the earlier study in Iowa. The categories it named as cost drivers with the most impact on budget were infrastructure needs, cost of employee/retiree health benefits, cost of employee/retiree pensions, employee wages and salaries, and public safety needs. Those categories with the biggest positive budgetary impact were the health of the local economy, the value of the city tax base, population, amount of state aid to the city and the amount of federal aid to the city.

Though not surprising, it was interesting that nearly identical cost drivers were reported in the national study. Nationally, communities are dealing with the challenges associated with aging infrastructure, rising health care and public pension costs and demands for local services. This is logical. Who wouldn’t want their community safer, their roads maintained, security in their income and health care, clean water, etc.?  The challenge is in navigating the local budget to meet regulatory standards and local priorities.

Long-term planning, and an understanding of potential areas of volatility and challenge, as well as growth are an opportunity to help cities adapt to changing economic conditions.

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Author: Erin Mullenix is currently an experienced research and fiscal analyst at the Iowa League of Cities. In her role, she provides a wealth of local government finance research and support to local communities. Her areas of study were in public administration, industrial engineering and Spanish. Erin can be reached at [email protected]. 

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