While most municipalities rely primarily on property taxes to pay for infrastructure, smaller cities have increasingly turned to local, cash-based funding rather than debt financing over the last four years, according to the National League of Cities’ 2026 infrastructure report.
That financial strategy has left them well-positioned for the future, one expert says.
From 2022 through 2026, 71% of the cities surveyed used both debt financing and cash-based funding to pay for capital infrastructure. Twenty percent relied exclusively on cash funding, and 9% relied solely on debt financing.
But for smaller cities, “there’s a hidden story here,” the report’s lead author, Farhad Omeyr, NLC program director, research and data, told Smart Cities Dive.
Omeyr said cities with populations below 50,000 often aren’t well-positioned to issue debt to pay for infrastructure, so they rely on their general fund — “meaning their piggy bank, basically.” Those piggy banks have been full over the last four years due to strong property tax revenues and American Rescue Plan Act State and Local Fiscal Recovery Funds, he said.
Because they’ve had more cash on hand over the last four years, smaller cities have tended to rely on cash-based infrastructure payments rather than dealing with the bond market, Omeyr said.
But that cash is drying up. Omeyr estimates cities’ ARPA and SLFRF money will be spent in “three years, tops. And if property taxes start to taper off, that’s another piece of the puzzle that smaller communities need to consider” when it comes to infrastructure funding.
The good news is that the report found smaller communities rarely used their SLFRF funds for infrastructure maintenance, Omeyr said. Instead, they’ve earmarked that money for major projects like building bridges and roads and used their “piggy banks” for maintenance. Consequently, he believes many smaller cities will be well-positioned to weather the end of ARPA funding on Dec. 31.
“What I expected out of the COVID recession was for cities to just use ARPA money as they pleased. But a majority of smaller cities used that one-time SLFRF revenue replacement for one-time programs rather than funding their ongoing programs,” he said.
“What I saw and experienced with what smaller communities did over the last six years gave me hope. I saw a level of budgeting and fiscal management [with ARPA funds] from these communities that was just outstanding,” he said.
