Fiscal Challenges Facing Counties Require Planning for the Long Term

Counties nationwide face several common budgetary challenges, including higher health care and personnel costs, natural disasters, demographic changes, and how to best manage new federal funds, according to questionnaire responses from officials from more than 100 counties throughout the United States. The Pew Charitable Trusts, in partnership with the National Association of Counties (NACo), conducted this questionnaire in early 2022 to get a better understanding of counties’ most pressing budget issues.

Policymakers can respond to such common challenges by analyzing the long-term effects that these trends may have on local revenue and expenditures. By looking at the potential ramifications over time, local leaders can estimate their budgetary impact and, importantly, make informed decisions about how to manage and mitigate their effects.

Increasing costs

Many counties cited increasing costs as a challenge to sustaining strong fiscal health. Health care expenditures, including Medicaid and employee health benefits, are key drivers of long-term spending for state and local governments. For example, in its annual financial forecast from March 2022, Monterey County, California, spelled out how increasing health care expenses were contributing to “countywide fiscal pressures.” The county administrative office estimated that the cost of employee health insurance premiums would grow by 28% from fiscal 2021 to fiscal 2023.

County officials who completed the questionnaire also described the challenge of increasing personnel costs. Market competition, coupled with inflationary pressure, is requiring county governments to spend more on wages and salaries than previously to maintain their personnel; many counties now face staffing shortages. Personnel costs can constitute 70% or more of total expenses for many local governments.

Sedgwick County, Kansas, offers an example. The county’s 2022-27 forecast showed that expenditures are expected to exceed revenue in each year, attributing the deficits partially to the implementation of a new compensation plan. The county designed this plan to move its pay closer to the market rate to facilitate the recruitment and retention of employees.

The costs of natural disasters

Many respondents expressed concerns about the fiscal impact of natural disasters and extreme weather. Throughout the country, climate-driven risks such as droughts, extreme rainfall, hurricanes, and intense heat are leaving populations and infrastructure vulnerable.

Recognizing this risk, Florida’s Pinellas County highlighted the impact of a changing climate as a consideration in its six-year budget forecast, particularly how rising sea levels may result in expenses related to reconstruction or relocation of facilities in low-lying areas. Further, because of the costs associated with addressing sea level rise and natural disasters, Pinellas County signaled that reserve funds may need to be increased.

Changing demographics

In the long-term, changing demographics—such as aging populations or an influx of new residents—will affect counties’ revenue and expenditures. Some respondents spoke of challenges handling increased demand for services linked to migration into their counties after the onset of the COVID-19 pandemic in 2020. Still, concerns about aging populations or population declines were more widespread in the responses. That finding aligns with the reality that more than 73% of counties experienced population loss in 2021.

Pinellas County’s forecast includes an assumption that the locality would experience lower population growth relative to other counties in Florida because of a scarcity of undeveloped land. That means the county anticipated receiving a smaller percentage of the revenue and sales taxes that is shared among eligible counties throughout Florida because the state distribution formulas are based partially on population.

Increased federal funding

The American Rescue Plan Act (ARPA) passed by Congress in 2021 allocated more than $65 billion in COVID relief to counties. The money must be obligated by the end of fiscal 2024 and expended by the end of 2026. When asked about plans for the ARPA funds, counties answered that they were putting them toward a wide range of eligible uses, including revenue replacement, infrastructure, broadband, and public services. Although counties generally said the relief is helpful, some noted that underlying long-term fiscal challenges cannot be solved with ARPA funds alone because they will not be available after 2026.

For example, in Cook County, Illinois, the Independent Revenue Forecasting Commission (IRFC), which helps develop and analyze the chief financial officer’s five-year consensus revenue forecast, has raised concerns about creating long-term obligations. In a recent quarterly update to the board of commissioners, the IRFC recommended that the county government determine sustainable revenue options for ARPA programs that will remain after 2026.

The questionnaire responses clearly indicate that policymakers nationwide are concerned about how they will be able to address increasing costs and make the best of use of unprecedented federal funding. Projections of future revenues and expenditures that account for these challenges can help counties make better-informed decisions.

The National Association of Counties (NACo), collaborating with Pew, distributed a qualitative questionnaire in January 2022 to nearly every NACo member county across various positions, totaling approximately 6,000 recipients; 128 counties responded. Researchers identified common themes from open-ended questions regarding the impact of COVID-19 and the American Rescue Plan Act on county finances in addition to counties’ beliefs about future fiscal challenges.

Katy Campillo works on The Pew Charitable Trusts’ state fiscal health project.