Economic uncertainty, federal funding cutbacks and the end of State and Local Fiscal Recovery Fund (SLFRF) funding are creating a perfect fiscal storm for local governments. Economically challenged cities – those with high poverty rates and a history of population decline – will feel the brunt of the impact.

To prevent fiscal distress in the nation’s most economically challenged places, Congress should create a targeted program of revenue sharing for local governments and provide help with planning for long term fiscal stability and economic recovery.

The 2021 American Rescue Plan included $350 billion in SLFRF funding to state and local governments. Local governments were able to close pandemic related budget gaps and make once-in-a-generation investments in public safety, housing, economic development and basic service delivery.

SLFRF funds helped local governments in economically challenged places the most. For example, SLFRF dollars played a critical role in Chester, Pennsylvania’s efforts to emerge from bankruptcy. Left-behind communities were also benefiting from funding under the Bipartisan Infrastructure Law and the Inflation Reduction Act.

In the last year, however, the problem solving federalism of the Biden Administration has been replaced by a war on local government.

The Trump Administration’s trade and immigration policies are creating tremendous fiscal uncertainty. An August 2025 Urban Institute report found that the fiscal outlook for states was increasingly uncertain and – citing tariffs as a leading factor — state finance directors were projecting weak revenue growth in 2026. In October, a Moody’s analysis found that 22 states were either at risk of or in a recession.

Bipartisan Infrastructure Law and Inflation Reduction Act awards and funding have been subject to rescission and termination. Local governments were able to access federal funding for cost-saving clean energy projects under the Inflation Reduction Act until they were largely eliminated or time-limited under the One Big Beautiful Bill Act.

The tax and spending law also included significant cutbacks in funding for Medicaid and the Supplemental Nutrition Assistance Program that essentially pass those costs on to state governments. New demands on state funding will affect local government even where local governments are not on the hook to pick up the cost of federal cutbacks. Looking back to the Great Recession, the Government Finance Resource Center found that “[O]ne way states balanced their own budgets was cutting aid to local governments, which forced local leaders to grapple with a ‘new normal’ of less intergovernmental revenue.”

There is now a looming storm for local government budgets. As an August 2025 Pew analysis found: “Fiscal stress in the U.S.’ largest cities is widespread. In a five-month span from December 2024 to April 2025, Chicago, Los Angeles, San Francisco, and Washington all experienced credit rating downgrades… Since January, at least 20 of the nation’s 25 most populous cities have reported budget gaps for fiscal year 2026.”

The recent National League of Cities survey of fiscal conditions found that the percentage of finance officers who thought they would be better able to meet budget needs in the coming year than in the last was at 45% for 2026. With the exception of the pandemic year of 2020, that’s the lowest level of optimism about city budgeting since 2011.

For economically challenged places where local governments are fiscally distressed, reductions in revenue due to economic uncertainty and a cuts in federal funding will lead to immediate budget challenges.

Many already face structural deficits.

With limited local tax bases, high tax rates may already affect their competitiveness and there may be little opportunity to grow local revenue.

Many of these local governments will turn to across-the-board spending cuts, rather than strategic cuts. Some cuts, however, will be unattainable. Debt service and pension obligations aren’t optional. Other cuts, especially to public safety, will be politically unpopular. Many local governments will be forced to make deep cuts in the very programs – education, community development and workforce development — designed to drive economic recovery.

Local governments in economically challenged places simply don’t have sufficient resources to meet the looming fiscal crisis on their own. They need the help of the federal government.

American Rescue Plan aid to local governments, in response to the pandemic, was modeled after a more permanent form of federal state and local government assistance. Revenue sharing was created with bipartisan support during the Nixon administration. Between 1972 and 1986, Washington provided annual aid to state and local governments based on a formula that included population, per capita income and tax effort.

One of the justifications for general revenue sharing program still holds true: It helps local governments, especially those facing economic and fiscal challenges, deal with budget deficits and liquidity issues.

In response to the current crisis, the federal government should combine permanent, targeted revenue sharing for local governments in economically challenged places with technical assistance to support long term planning for economic recovery and fiscal stability.

There is already a program that can provide this support. The Distressed Cities Technical Assistance program was modeled on the successful National Resource Network, part of the Obama administration’s Strong Cities, Strong Communities initiative. The program was “designed to improve fiscal health and build capacity … in places experiencing persistent poverty and economic distress.” From its inception in FFY 2018 through FFY 2023, HUD has received appropriations totaling $23.5 million for the Distressed Cities Technical Assistance program. Through September 2024, the program has provided technical assistance to 56 communities.

Targeted revenue sharing and planning assistance should go to those cities and counties that need the aid the most.

Using the most recent data published on Distressed Cities Technical Assistance eligibility (based on the 2021 American Community Survey), there were 312 cities and counties where there were 10,000 or more residents, poverty was greater than 20% and population had declined by 5% or more between 2010 and 2021.

There are eligible local governments in 26 states, collectively represented by 26 Democrats and 26 Republicans in the U.S. Senate. President Trump won 20 out of these 26 states.

Most of these local governments are small. Of the 312 eligible local governments, 276 have a population under 50,000. But almost half the people who live in these places – roughly 4.8 million out of 11 million residents – live in places with a population of more than 50,000.

Based on the 2021 data, eligible local governments would include Rust Belt cities like Detroit, Cleveland, Flint, Youngstown, Gary and Erie. But the list would also include Southern cities like Birmingham, Alabama; Jackson, Mississippi; Albany, Georgia; and Shreveport, Louisiana, which is represented in the House by Speaker Mike Johnson. Another 71 of the local governments are Puerto Rico municipios.

Given the wide variety of places that would be aided by targeted revenue sharing, it becomes clear why the initial federal revenue sharing program and Distressed Cities Technical Assistance were able to gain bipartisan support.

Targeted federal revenue sharing and focused technical assistance can provide immediate relief in the face of fiscal stress as well as supporting long-term economic recovery and fiscal stability. Not only is there precedent, there is also real potential for a bipartisan coalition to make it happen.