A small town in Ohio, having used federal pandemic funds to hire five new paramedics, now faces a 30% cut to its emergency services budget as those funds expire this year, according to the Ohio Municipal League. The 30% cut to its emergency services budget directly impacts the community's ability to provide critical, life-saving care.
Federal pandemic aid, specifically American Rescue Plan Act (ARPA) funds, allowed many cities to maintain and even expand critical services, from public safety to social programs. Yet, the temporary nature of these funds has left numerous municipalities without permanent solutions, creating a looming fiscal challenge for city services in 2026.
Given the widespread reliance on one-time federal aid and slow development of alternative revenue streams, many cities will likely face difficult choices regarding service reductions and tax increases in the coming years.
The Unprecedented Scale of Federal Aid
Federal aid comprised an unprecedented 22% of state and local government revenue in 2020-2021, a figure now rapidly declining, according to Pew Charitable Trusts Pew Charitable Trusts. This substantial, but temporary, infusion allowed many municipalities to avoid immediate financial reckoning.
- $350 billion — ARPA provided this amount to state and local governments, an unprecedented sum, according to the U.S. Treasury Department.
- Over 60% — Cities used ARPA funds for one-time infrastructure projects or to cover budget shortfalls, rather than establishing recurring revenue streams, according to the National League of Cities.
- Over 40% — ARPA funds were allocated to revenue replacement, allowing cities to maintain existing service levels temporarily, according to the National Conference of State Legislatures.
These figures reveal a pattern: cities largely deployed ARPA funds for immediate, one-time needs or to temporarily replace lost revenue. This approach, while addressing urgent gaps, created a false sense of fiscal security, masking underlying structural budget issues and deferring difficult decisions on sustainable revenue generation and expenditure reform.
Services on the Brink: What ARPA Funded
The average city allocated 25% of its ARPA funds to public safety initiatives, a category now facing significant funding cliffs, according to the U.S. Conference of Mayors U.S. Conference of Mayors. The allocation of 25% of ARPA funds to public safety initiatives addressed immediate community needs but often lacked a long-term funding strategy.
| Service Area | ARPA Impact (2024) | Post-ARPA Outlook (2026) | Potential Impact/Gap |
|---|---|---|---|
| Public Safety (e.g. Paramedics) | 25% of ARPA funds allocated | Significant funding cliffs | Reduced emergency response capacity |
| Mental Health Crisis Response | Phoenix launched team, 500 calls monthly | Future uncertain | Loss of vital community support |
| Public Transit | Substantial ARPA aid received | Projected $10 billion national gap | Service reductions, fare increases |
| Urban Renewal (e.g. Blight Demolition) | Detroit program active | Will halt without new funding | Stalled revitalization efforts |
Sources: U.S. Conference of Mayors; Phoenix City Manager's Office; American Public Transportation Association; Detroit Department of Housing.
These examples show critical services, from emergency response to urban renewal, now risk significant disruption without new, sustainable funding. ARPA's focus on "one-time needs" often masked systemic underfunding of these essential services.
Why Cities Can't Just 'Find' New Money
Replacing ARPA funds with local revenue sources represents the biggest financial challenge for 85% of local governments for 2025, according to the Government Finance Officers Association Government Finance Officers Association. The biggest financial challenge for 85% of local governments for 2025 stems from limited growth in traditional revenue streams and capacity constraints.
Property tax revenues, a primary local funding source, are projected to grow by only 2-3% annually in many regions, insufficient to cover rising service costs, according to the Lincoln Institute of Land Policy Lincoln Institute of Land Policy. Smaller municipalities also lack the grant-writing capacity or economic development resources to secure alternative federal or private funding, as highlighted by the Rural Policy Institute. The lack of grant-writing capacity or economic development resources leaves smaller municipalities particularly vulnerable.
Limited local revenue growth, capacity constraints, and diminishing state support make it exceptionally difficult for cities to bridge the ARPA funding gap independently. The focus on sustaining essential services with temporary funds prevented many local governments from investing in crucial long-term strategic planning for revenue diversification or cost-efficiency measures.
The Human Cost of the Fiscal Cliff
The expiration of ARPA funds is expected to disproportionately affect low-income communities, which relied heavily on federal aid for essential services and often have less robust local tax bases, according to the Brookings Institute.
A survey found 40% of city managers anticipate service reductions in areas like parks, libraries, and other public services and public health post-ARPA, according to ICMA. Compounding this, the cost of maintaining essential services like public health and affordable housing has increased by an average of 15% since 2020, according to the Center on Budget and Policy Priorities.
The expiration of ARPA funds threatens to roll back progress in vulnerable communities and degrade quality of life for citizens dependent on publicly funded services. Many local governments, having used ARPA to maintain a status quo of underfunded services, are now poised for a fiscal cliff that will disproportionately impact vulnerable populations.
Pathways to Sustainable Municipal Finance
Cities are exploring innovative financing models to replace temporary ARPA funds.
- Denver is exploring 'social impact bonds' to fund homelessness services, shifting risk to private investors, according to the Denver City Council Report.
- Austin implemented a 'resilience fund,' using a portion of its ARPA allocation to seed an endowment for future emergencies, according to the Austin City Treasurer.
- Some cities are exploring regional cooperation agreements to share costs for services like emergency dispatch or waste management, according to the Regional Planning Association.
While diverse solutions exist, their implementation requires political will, public buy-in, and sophisticated financial planning. The short-sighted reliance on one-time federal aid has masked deeper structural issues in municipal finance.
Beyond the Cliff: Building Resilient Cities
- 70% — Of residents are unaware of the impending expiration of federal pandemic aid for local services, according to a Gallup/Local Government Poll. The lack of public awareness that 70% of residents are unaware of the impending expiration of federal pandemic aid for local services hinders support for new local revenue initiatives.
- Cities with diverse tax bases and strong economic development offices are better positioned to absorb the loss of ARPA funds, according to the Fiscal Policy Institute.
The long-term fiscal health of cities hinges on public awareness, proactive leadership, and a fundamental shift towards sustainable, diversified revenue strategies. The impending expiration of ARPA funds reveals a critical failure in federal policy to incentivize sustainable local fiscal planning, rather than merely providing temporary relief.
By the end of this year, many communities, much like the Ohio town that hired paramedics with federal aid, will likely face stark choices, underscoring the urgent need for local governments to secure ongoing funding for critical services beyond temporary federal infusions.
