Inflation is ruining everything

The rising cost of pretty much everything has been coming up more often in my conversations with officials and government stakeholders as of late. And this week, it seems to touch on everything I’m reading about. We learned that Federal Reserve officials at their last meeting think inflation has “remained unacceptably high” and are worried about doing too little, rather than too much. (Which is a big change in tune from earlier this year.) I’ve also received a number of reports this week alone that highlight the impact of inflation on government budgets and spending. So, time to look at this topic once again.   

Just when we thought infrastructure spending was turning a corner…

Despite ample federal aid and investment, rising inflation and the prospects of a recession are making city leaders more cautious about their spending plans in the years ahead. According to the National League of Cities’ annual survey of city government financial health released this week, inflation is already taking a bite out of revenues.

The figures on sales tax revenue are particularly startling. Although cities on average report their nominal sales tax revenue increased in fiscal 2021 by about 11%, that gets adjusted downward to about 4% when accounting for inflation. “It's a huge deal,” Farhad Kaab Omeyr, program director for research and data at NLC’s Center for City Solutions said at a panel discussion this week. “I went through the data and double-checked, triple-checked.”

What’s more, with slowing consumer spending, NLC estimates that sales tax revenue in fiscal 2022, which ended on June 30 in many places, is expected to fall by 2.5%. Similarly, Arlene Bohner, Fitch Ratinngs’ head of U.S. public finance, recently predicted that “rapid Federal Reserve monetary policy tightening could lead to state revenue growth weakening and possibly swinging negative in time.”

• Read the NLC report (subscription required)

• Fitch Ratings 3Q report summary

• Complicating the picture: Two-thirds of states enacted tax cuts this year

What this means: There are two big ways rising inflation is taking an immediate toll on infrastructure investment.

Rising prices are cutting into project scopes. I hear this quite a bit from officials when talking about inflation and it also came up in a recent episode of the Public Money Pod. From school districts to transit to public works, rising costs means projects are being scaled back or spread out over a longer period of time. Plus, inflation and higher interest rates makes it more expensive to issue debt—so governments are taking the hit on both ends. 

• Delaware’s infrastructure coordinator: “There’s certainly concern about inflation.”

Fewer cities will be able to pony up a local match for federal grants. The Infrastructure Investment and Jobs Act requires a local match for many (but not all) grants available. In some cases, it’s small—10%—but for major projects, that still could be prohibitive. During the NLC panel this week, several local officials said the revenue uncertainty has clouded the picture.

Mary Ellen Leonard, finance director for College Station, Texas, said the city had been hoping to apply for federal funds to invest in improving transit connectivity between Texas A&M University and off-campus housing. “[But] we looked at the infrastructure bill and we can't make the match,” she said.

How can a housing shortage get worse? Add inflation.