Cities putting off projects as high gas prices pinch budgets

Aug. 26 (UPI) — Rising gas prices are not only putting pressure on consumers at the pump; they are forcing local governments to make tough choices with their budgets.

The average price for a gallon of regular gasoline in June, when municipal governments set their fiscal year budgets, was $4.05. The national average price is higher yet as of Wednesday, reaching $4.10 per gallon, and city councils and appointed officials were faced with preparing for the unknown with global uncertainty around fuel availability.

Gas prices are a variable unlike any other when it comes to the economy at each level, Fahrad Kaab Omeyr, program director of research and data at the National League of Cities, told UPI. When fuel prices rise, so too does everything else that must be budgeted for.

As a result, city leaders across the country have been choosing to put infrastructure projects that are “less than necessary” on hold, despite the certainty that the costs of those projects will ultimately be higher down the road.

The Congressional Budget Office estimated in 2023 that local governments funded nearly 70% of public capital investments, such as public infrastructure, and about 87% of operation and maintenance of water and transportation infrastructure.

The National League of Cities is currently gathering data and responses for its 41st annual City Fiscal Conditions report, a snapshot of the financial health of municipalities across the country. Omeyr said about 87% of respondents have said increased costs across the board are squeezing their budgets.

“From smaller communities, midsized cities, larger cities, everybody’s being hurt,” Omeyr said. “To what extent, we have to wait for the blockysis to finish and see who’s actually hurt most with regard to the size of communities.”

When a municipal government decides where to make cuts during the budgeting process, infrastructure projects deemed less than necessary are typically the first to be put on hold, Omeyr said. While no infrastructure project is really unnecessary, a less than necessary project is one that does not need to be immediately addressed.

Local economies have been facing pressure from inflation and high demand on the supply chain dating back to the COVID-19 pandemic. The disruption to the supply chain is still felt today with manufacturers, construction companies and project managers facing longer lead times and higher costs for materials.

The producer price index for inputs to nonresidential construction and goods, a marker of changing prices over time in the construction industry, is more than 177 for July, the U.S. Bureau of Labor Statistics reported.

The index in March 2020 was 113. It rose sharply until June 2022 before easing. That is until the beginning of this year when it again climbed sharply from 165 in December.

These figures mark a roughly 56% increase in the costs of nonresidential construction goods since the start of pandemic lockdowns in March 2020. The jolt of price increases never returned to pre-pandemic levels.

City leaders have expressed concerns that costs will not return to pre-Iran war levels either.

“I had this talk with one of our member city council members. What she told me, paraphrasing of course, was ‘Fahrad, when costs of material go up, they never come down,'” Omeyr said. “It’s a compounding factor. Right now, most municipalities are choosing to postpone their less necessary infrastructure planning and budgeting. What’s going to happen? The bill will come due.”

“A couple years from now, god forbid we have the same strained supply chain that we have today, it’s more demand on an already strained supply chain,” he continued. “It will drive the costs even higher.”

The state of infrastructure across the country is already in a place of need. Water and sewer infrastructure in particular are among the most commonly cited areas in need of maintenance or a larger overhaul.

The American Society of Civil Engineers, a professional organization that represents the civil engineering profession worldwide, gave the United States’ overall infrastructure a C grade in its latest report card published last year.

The report gave drinking water infrastructure a C-, estimating that it is underfunded by more than $300 billion. U.S. roads received a D+, underfunded by nearly $700 billion, and wastewater infrastructure also received a D+ with a funding gap of nearly $700 billion.

“Most water and sewer infrastructure in this nation, unfortunately, is crumbling,” Omeyr said.

The ASCE report did include some optimism. It credited recent federal investments, namely the pblockage of the Biden era Infrastructure Investment and Jobs Act, with bringing about “incremental improvements” across “some of the historically lowest-graded categories.”

“This is promising momentum, but sustained infrastructure investments are necessary to equip stakeholders with certainty for long-term planning and execution of policies and projects that fully realize the benefits of robust resources,” the report reads.

All funds from the IIJA must be allocated by Sept. 30.

American Rescue Plan dollars have also been crucial in helping cities balance the budget, infusing more than $100 billion into local government to cover funding gaps in response to the pandemic.

Governments were required to obligate all ARPA funds by Dec. 31, 2024, and all obligated funds must be spent by the end of this year.

“This gas price increase, this oil price increase, actually happened at the worst time possible. That money is gone” Omeyr said of IIJA and ARPA funds expiring. “A majority of governments came back to us and said, ‘Yes, [gas prices] are affecting us for the worse.’ Most were affected actually by the impact gas prices have on general price increases for the material they use for infrastructure.”

With infrastructure projects on the backburner, municipal budgets are focusing on the core functions of local government: public health and public safety services.

As results continue to come in for NCL’s annual report, public safety has been listed as the fourth most commonly cited item that city budgets are struggling with.

Core services are not optional for local governments. Eventually the infrastructure projects that have been on hold can hold no more. Government coffers must also pay out to pensions and wages for city employees. With gas and material prices eating up what revenue a government has, it has few options to meet its obligations.

“What do they do? They just have to borrow more from the market in this environment where interest rates are also going up,” Omeyr said. “At this point it’s a really vicious cycle.”

Last year, about $525 billion in municipal bonds were issued, the Municipal Securities Rulemaking Board said in its year-in-review report. With a market average yield of roughly 4% for the year, local governments, and their taxpayers, are faced with more than $20 billion annually in interest payments for 2025 bonds alone, before paying anything on the $525 billion principal.

The other option to generate the revenue needed to fund a local government is to raise taxes, a politically unpopular proposal that has limitations of its own.

Omeyr said a majority of governments are “not exploring” marginal tax increases or fees as a revenue option. In the instances that tax hikes are considered, it is unlikely to be enough to make up for shortfalls.

“Overall, this has been the lowest confidence year that we have seen since 2020 and the COVID recession,” Omeyr said. “This is not just a one year thing. Unless we change course it’s going to get worse. Unless cities, villages and towns, of all sizes, especially smaller communities, receive federal and state grants, they cannot deal with this on their own.