Cities at a Crossroads: Understanding the Findings of City Fiscal Conditions 2025
A collaboration between Lewis McLain & AI
With Integrated Texas Analysis and Case Studies
Based on the National League of Cities Report (2025)
(Source: “City Fiscal Conditions 2025” PDF) 2025-City-Fiscal-Conditions-Rep…

Introduction
The City Fiscal Conditions 2025 report arrives at a moment when American cities are quietly but decisively transitioning into a new era of fiscal discipline. For several years after the pandemic, local governments benefited from an unusual combination of strong economic conditions and extraordinary federal aid. Revenue surged as consumers spent aggressively, home values climbed, and the job market reached historic strength. Cities responded by expanding public services, restoring depleted reserves, and tackling long-delayed projects.
But this report makes it clear that the “recovery period” is over. Growth has cooled, inflation remains persistent, and the federal support that once acted as a financial stabilizer is now winding down. The challenge for cities today is not collapse or crisis—it is how to regain balance in a world that feels more constrained, more expensive, and more uncertain than the one they just emerged from.
Texas cities illustrate these national trends with particular force. Their rapid population growth, heavy reliance on sales tax, and strict state revenue limitations make them a lens through which the pressures of this new era can be seen even more sharply.
I. From Rebound to Restraint: A New Phase of Municipal Budgeting
During FY2024, municipal general fund spending rose sharply—up 7.5 percent when adjusted for inflation. This increase was partly the result of postponed investments from the COVID years, when many cities limited expenditures and built reserves. It was also fueled by federal recovery programs such as the American Rescue Plan Act (ARPA) and the Infrastructure Investment and Jobs Act (IIJA), both of which infused substantial resources into local budgets.
By contrast, FY2025 reflects a deliberate slowing. Spending is still rising, but only by 0.7 percent, suggesting that cities are tightening operations and reassessing priorities. Revenue projections tell the same story: after a healthy 3.9 percent increase in FY2024, cities now expect a 1.9 percent decline for FY2025. This decline is driven largely by the tapering of federal relief funds and the normalization of consumer behavior after several years of unusually high spending.
Texas Context: Revenue Limits Under Rapid Growth
Texas cities feel this shift even more acutely. Most Texas municipalities rely heavily on sales tax revenues, which surged during the post-pandemic boom but have since flattened. When sales activity cools, city budgets weaken immediately because there is no corresponding income tax or other broad-based revenue source to cushion the decline. At the same time, the Texas 3.5 percent State Property Tax Revenue Cap prevents cities from increasing property tax collections to keep pace with population growth, even when new residents significantly increase service demand.
The combination of high growth and tight limits creates a unique challenge. Texas cities are being asked to do more—with policing, fire protection, streets, parks, utilities, and emergency services—while having less flexibility to raise the revenues needed to deliver these services. The national report identifies a slowdown; Texas turns that slowdown into a structural strain.
II. Public Safety: The Dominant and Growing Budget Pressure
Public safety remains the largest and most rapidly expanding area of municipal spending nationwide. In the average U.S. city, it now accounts for over 60 percent of the general fund, up from 54 percent just two years earlier. This includes police, fire, and emergency medical services, all of which have seen rising personnel costs, higher call volumes, increased equipment prices, and greater public expectations.
Other services—such as recreation, parks, culture, libraries, and general government—occupy a much smaller share of the municipal budget. Cities often want to invest in these quality-of-life functions, but the dominant weight of public safety makes this increasingly difficult.
Texas Context: A Perfect Storm of Public Safety Costs
Texas amplifies this national trend. Major Texas cities such as Dallas, Houston, Austin, Fort Worth, and San Antonio routinely spend 60 to 70 percent of their general funds on public safety. Several factors drive this. First, rapid population growth leads to higher 911 call volumes and more complex service demands. Second, Texas has faced serious police recruitment challenges since 2020, prompting cities to increase wages, offer signing bonuses, and add incentives to remain competitive with suburban agencies. Third, hospitals in many Texas metro areas struggle with capacity issues, causing local Fire/EMS departments to handle more medical emergency calls—including mental health-related incidents—which increases staffing and overtime costs.
Taken together, public safety becomes both essential and unavoidable. But it also pushes cities into a corner, leaving less room for parks, street maintenance, libraries, community programs, and long-term capital upkeep. The national report identifies public safety as the dominant expense; in Texas, it is the defining budget reality.
III. Fiscal Confidence Declines
Municipal finance officers across the country report declining confidence. In the survey, 52 percent say they feel better able to meet FY2025 needs than in the prior year—a noticeable drop from previous surveys. Looking ahead to FY2026, only 45 percent express optimism, down sharply from the 64 percent optimism reported a year earlier.
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Cities cite inflation, workforce costs, capital needs, and public safety demands as the primary drivers of this sentiment. Inflation has raised the price of everything from asphalt to ambulances. Recruiting employees—particularly equipment operators, utility technicians, IT personnel, police officers, and firefighters—requires higher wages. And a backlog of infrastructure projects, many delayed during the pandemic, continues to grow in scope and cost.
Texas Context: Growth Without Elasticity
Texas cities experience each of these pressures but with added difficulty because their revenue systems are less flexible. A city such as Frisco, McKinney, or Leander may grow by 5–10 percent annually, bringing thousands of new residents who need water, police protection, parks, and roads. Yet the property tax cap prevents revenue from rising at the same pace unless voters approve a tax increase—a difficult political hurdle. Meanwhile, sales taxes can fluctuate unpredictably depending on regional retail activity.
The result is a mismatch: demand expands rapidly, but revenue cannot. The national report describes growing financial caution; Texas cities describe a tightening vise.
Texas Case Studies: How National Trends Become Texas Realities
These case studies are woven here to illustrate the national themes and show how Texas cities embody them with exceptional clarity and scale.
Case Study 1: Dallas
Dallas faces the full spectrum of pressures described in the report. Its infrastructure backlog—including streets, drainage systems, and public facilities—has grown as construction costs rise due to inflation and tariffs. Public safety spending consumes over 60 percent of the general fund, leaving limited room for parks, libraries, and cultural services. In addition, the city’s relationship with Dallas Area Rapid Transit (DART) has placed new focus on cost allocation practices, as suburban cities question their share of contributions relative to the services they receive.
Taken together, Dallas demonstrates how the national transition from recovery to restraint becomes a difficult balancing act: maintaining essential services, planning long-term capital investments, and managing regional partnerships with limited financial headroom.
Case Study 2: Houston
Houston’s fiscal challenges reveal how structural issues magnify national trends. The city continues to manage large pension obligations for police, fire, and municipal employees—obligations that constrain budget flexibility. At the same time, Houston’s commercial tax base is unusually sensitive to office valuation cycles. Post-pandemic work changes have depressed office demand nationwide, and Houston, with one of the largest office markets in the country, is particularly vulnerable. Sales tax revenues also depend heavily on energy-sector cycles; when oil prices soften, household spending often does as well.
Houston illustrates the report’s warning that cities tied to volatile economic sectors face heightened revenue uncertainty during national fiscal cooling.
Case Study 3: Austin
Austin is one of the fastest-growing cities in the nation. Population growth brings economic strength, but it also drives up demand for water, roads, transit, and public safety faster than revenue can legally expand under Texas law. The city’s ambitious capital plans—including the long-term Project Connect transit system—are deeply affected by construction cost inflation and tariff-driven price increases. Meanwhile, Austin’s hiring environment requires competitive wages to attract talent in a city with a high cost of living.
Austin underscores one of the report’s central themes: rapid growth does not guarantee fiscal ease. In fact, growth can intensify financial pressure when infrastructure needs escalate faster than revenue authority.
Case Study 4: San Antonio
San Antonio has historically maintained one of the most stable fiscal profiles in Texas, but even its disciplined budget faces rising strain. Public safety consumes nearly two-thirds of the general fund, mirroring the national trend. Tourism-driven sales tax revenues softened as consumer habits returned to pre-pandemic patterns. As one of the most military- and federal-contract-dependent cities in the state, San Antonio must continuously monitor federal procurement and tax policy—including potential changes to the municipal bond tax exemption.
San Antonio demonstrates the report’s finding that even stable cities are preparing for leaner years ahead.
Case Study 5: Fort Worth
Fort Worth is the fastest-growing large city in America, and its infrastructure needs are enormous. New neighborhoods require water lines, fire stations, streets, schools, and parks. Inflation and tariffs have raised the cost of steel, heavy equipment, and construction services, making public works significantly more expensive. At the same time, the revenue cap restricts how quickly Fort Worth can scale up funding to match new demand. With sales taxes now flattening, a key engine of local revenue has slowed at exactly the moment the city needs it most.
Fort Worth illustrates the report’s broad conclusion: even cities with extraordinary growth cannot outpace the pressures of rising costs and declining federal support.
IV. Tariffs and Municipal Bond Policy: Watching for External Shocks
Nationally, cities report that tariffs are complicating procurement. Nearly half say tariffs have affected their ability to secure materials or equipment, and some describe major project delays. Tariffs raise the cost of steel, vehicles, water infrastructure components, public safety equipment, and construction materials. When these costs rise, cities often must delay projects, revise budgets, or seek alternative suppliers.
Cities are also closely watching federal discussions about the municipal bond tax exemption. Should the exemption be weakened, the cost of borrowing would rise sharply. Because cities rely heavily on debt to build long-lived infrastructure—roads, water systems, drainage, bridges—the financial impact would be significant.
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Texas Context: Higher Exposure
Texas cities—especially large, fast-growing metro areas—would be among the hardest hit by these changes. Their capital programs are enormous, covering everything from freeway interchanges and transit expansions to water treatment plants and flood control systems. If borrowing costs rise, Texas cities would be forced to trim projects, delay improvements, or seek new revenue sources in a system already marked by tight constraints.
V. Tax Sources and a Shifting Economic Base
The report highlights that property taxes are projected to grow modestly while sales taxes level off. Income taxes—where they exist—are expected to decline. Since property taxes lag real-time economic changes by one to three years, cities often experience fiscal conditions later than the private sector.
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Texas Context: High Volatility in a Sales-Heavy System
Texas cities, with no income tax option, are uniquely exposed to consumer spending shifts. When retail slows, so do city revenues. This exposure becomes even more pronounced when combined with declining commercial property valuations, which are emerging in major Texas metros as the office market softens. The state’s combination of cyclical industries, rapid development patterns, and legally restricted revenue capacity creates both opportunities and vulnerabilities that align closely with the national findings.
VI. The Broader Narrative: Resilience Through Adaptation
Across the nation, the report shows cities taking proactive steps to manage uncertainty. They are adjusting their budgets, building reserves, planning capital projects more cautiously, and monitoring federal policy developments. Many are exploring domestic supply alternatives, streamlining operations, and prioritizing essential services. The tone is neither pessimistic nor alarmist—it is grounded, realistic, and strategic.
Texas Context: Innovation as Necessity
Texas cities have long relied on creative financial tools to navigate their constrained revenue environment. These include Public Improvement Districts (PID), Tax Increment Reinvestment Zones (TIRZ), Municipal Management Districts (MMD), and Economic Development Corporations (EDC). These tools allow cities to capture value from growth and reinvest it into infrastructure, parks, roads, drainage, and redevelopment projects. Texas cities also maintain some of the strongest financial ratings in the nation due to disciplined reserve policies and long-term planning.
In other words, the very constraints that challenge Texas cities also push them to become some of the most innovative financial stewards in America.
VII. Conclusion: A New Era of Municipal Pragmatism
The City Fiscal Conditions 2025 report captures a decisive moment. Cities across the nation are transitioning from recovery to resilience—from a period defined by federal lifelines to one marked by local decision-making, capital discipline, and an unflinching look at long-term responsibilities. The post-pandemic boom has given way to a quieter, more demanding phase of municipal governance.
Texas cities exemplify this shift even more vividly. They face explosive growth, aging infrastructure, strict revenue constraints, and heavy public safety demands. Yet they continue to innovate and adapt, often serving as national models for fiscal management in high-growth environments.
As the report concludes, cities are not facing an imminent crisis—they are facing a long horizon of disciplined planning. The margin for error may be narrower than before, but the commitment to resilience, adaptability, and pragmatic leadership remains strong. Texas cities, with all their complexity and dynamism, reflect that spirit—and in many ways, illuminate the path forward for the rest of the country.

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