Despite the costs for goods and services being at historic highs, state and local governments are in a solid place to withstand the many economic headwinds blowing their way; still, it appears best to proceed with caution.

The Good

Most municipalities are in good shape with strong rainy day reserve funds thanks to Federal programs like the American Rescue Plan Act, the Infrastructure Investment and Jobs Act, and State and Local Fiscal Recovery Funds. Add to that benefits from increased sales revenues and a hot housing market (although signs are pointing to it cooling down), and state and local governments are in as good a place as any to weather economic and financial storms.

Earlier this year, the Volkner Alliance and Penn Institute for Urban Research hosted a briefing on inflation and recession risks. Moody’s Analytics chief economist Mark Zandi said, “State and local governments are in good shape to navigate whatever … path we go down.’’ New York Governor Hochul reiterated this mid-year, indicating the state is prepared for the worst and in a good position to weather downturns. According to the National League of Cities, Federal programs have bolstered cities’ ability to deal with inflation and “led to consistent spending for normal government operations and services, helping local governments keep their communities running with minimal interruption.”

The Bad

The cost of capital projects and services is up and while a certain amount of inflation is factored into estimates and budgets, the current environment is prompting questions about whether projects started can be finished; whether projects should be cut or delayed; and whether there are other funding that can help keep projects moving. At the same time, some municipalities are experiencing low-to-no responses for construction Request for Proposals (RFPs) and are finding it tough to compete with so many other options available to construction companies that are more flexible and don’t include fixed budgets.

Then there are salary, pension, and other benefit costs – they’re going up and not an option as municipalities compete with the private sector to attract and retain much-needed talent. How far they go and whether they’re sustainable remains to be seen.

Will It Get Ugly?

It depends on what happens next and how well-prepared each municipality is.

There are potential impacts on credit. As reported by S&P Global, how credit quality is pressured depends on “the duration of elevated inflation growth” and “state law and revenue mix.” Overall, municipalities could see higher social service spending, but should be able to withstand pressures on credit quality at least in the short term.

Increases in food insecurity are already occurring, and there are expectations that Medicaid and unemployment trust fund costs may go up. Increasing benefit costs for retirees and existing employees could seriously impact future pension liabilities. Whether there are local income taxes, capital gains tax revenue, caps on annual revenue increases, debt and other factors also come into play.

As reported by the  Federal Reserve Bank of Richmond, rural areas are feeling inflation more than urban areas, so municipalities may be experiencing differences depending on location. An Iowa State University report reiterated this finding, noting that those living in non-metro areas with populations under 2,500 or in the countryside are struggling more than their urban counterparts.

Disparities based on the demographics are also coming into play. NBC News reported, “A recent study from University of California San Diego found minority households are being hit especially hard because they spend a larger portion of their income on essentials like housing, electricity, transportation, and food.”

In some states, like New York, residents are taking things into their own hands, migrating to lower-tax states in bigger numbers, having the potential to negatively impact sales and tax revenues now and in the long term.

Still, as reported in the weekly Deloitte Insights issued August 15, July inflation showed signs of slowing; producer prices are decelerating, and labor costs may not be as bad as some think. Month to month and even week to week, the story changes. Whether things end up good, bad, or ugly remains to be seen. For now, the consensus is municipalities are in as good a place as any for what comes next.

Remember, RBT CPAs is an accounting, tax, and audit partner you can depend on through good times and challenging ones. If you need a trusted partner that provides the highest levels of professionalism, service, and value, give us a call.

We recently published an article about NY county gas caps, based on information available in May. Since then, several counties updated how they are handling the cap. In an abundance of caution, we felt it best to update our piece based upon these recent changes.  It should be noted that there is a lot of controversy surrounding the tax and its administration. This may result in additional changes, so it’s best to refer to the NYS Department of Taxation and Finance and NYS Tax Publication 718-F for up-to-date information or simply give us a call.

From June 1 through the end of this year, New York State is giving a tax break on fuel.

Both the sales tax and excise tax on fuel is taking a holiday, June 1 through December 31. Distributors and wholesalers must exclude these taxes from the price charged for motor fuel and highway diesel motor fuel. In addition, county governments have the option to cap the price their applicable sales tax rate is imposed on based on cents per gallon.

As noted in NYS Tax Publication 718-F, “The Tax Law authorizes counties and cities to change their percentage rate sales tax to a cents-per-gallon method, or stay with a percentage rate method. Effective June 1, 2022, several localities have elected to change their method of computing local sales tax on motor fuel, highway diesel motor fuel, and B20 biodiesel sold as qualified fuel. In many of these localities, the local sales tax will no longer be computed using a percentage rate method and will instead be computed on a cents-per-gallon basis.”

Some counties have signed on to offer the tax break – see table below.

Counties Adopting the Cents-per-Gallon Method (Source: NYS Tax Publication 718-F)

¹ Rate will expire on August 31, 2022. ² Rate will expire on November 30, 2022. ³ Rate will expire on December 31, 2022. ⁴ Rate will expire on February 28, 2023.  * Sales and uses made in these cities are subject to cents-per-gallon local tax in addition to the percentage rate local tax.

For help with related taxes or accounting, contact RBT CPAs – a leading firm in the Hudson Valley and one of the top 250 nationwide.

Creating a strong fund balance and reserve policy that has the support of the local community takes work. Following are some do’s and don’ts municipal leaders should keep in mind as they make plans to create, maintain, and use a fund balance. This article will focus on the fund balance in the General Fund, but many points can be applicable to fund balance in other funds.

At its simplest, a fund balance is the difference between assets and liabilities. It can help ensure a municipality has enough money so essential public services don’t need to be cut or taxes raised due to unexpected expenses or events.

When managed strategically and effectively, using fund balance to balance municipal budget can help a community mitigate risk and weather economic downturns; ensure consistent delivery of essential services; respond to and rebound from the effects of a natural disaster; fund capital improvements; build a strong credit rating and benefit from lower debt costs; and more.

To maximize the potential advantages of a fund balance:

• Establish a written policy to specify the scope and purpose of the fund; set an appropriate minimum and maximum balance level; define how funds can be used and replenished; reveal what happens when the balance drops below defined levels; and related time frames.
• Communication in local government with the community about the general fund balance guidelines, especially when there are large changes, so you can manage expectations and minimize the type of speculation that can hurt trust in local government.
• Identify minimum fund levels through fund balance accounting to ensure uninterrupted service delivery and financial stability for the first two to three months while property taxes are collected. (A municipality primarily dependent on property taxes should have a larger fund balance than one with other revenue sources.) Focus on the general fund, although “financial resources available in other funds should also be considered in assessing the adequacy of unrestricted fund balance in the general fund.” (Source: GFOA Fund Balance Guidelines for the General Fund)
• Think ahead. Consider public entity risks to which the municipality may be exposed that are outside your insurance coverage. Not only will a strong fund balance help minimize risks, but it can also help fund future capital outlays. While reducing associated borrowing and interest for new infrastructure and equipment, it can also improve the municipality’s credit rating (for example, a fund balance between 15% and 30% earns an “Aa” rating from Moody’s).

To avoid negative public scrutiny and potential loss of community support and trust, do not just use your fund balance as a place to store extra money. Also, don’t use fund balance for recurring expenditures. Funding recurring expenditures means revenues are not covering every day expenditures; your fund balance will quickly be depleted and the municipality may be forced to raise taxes significantly. Finally, don’t minimize risks that should be addressed by the fund. “Research cited by GFOA has found that human judgment alone typically underestimates risks by about 50%.”

For additional information on managing fund balance, refer to these resources:

• New York’s Local Government Management Guide for Reserve Funds
• Best practices from the GFOA
• Financial Condition Analysis
• Understanding the Budget Process
• Government Finance Review: Stress Testing Your Reserves with Advanced Analytical Techniques

For tax, auditing, and consulting services related to your General Fund, contact RBT CPAs.