Policy Brief: Bridging the Gap: Federal Funding and Local Budget Shortfalls

The Hamilton Taxation and Public Finance Research Center is proud to release its latest policy brief, “Bridging the Gap: Federal Funding and Local Budget Shortfalls,” a timely and essential examination of the growing disconnect between federal appropriations and the fiscal challenges faced by state and local governments.

As municipalities across the country grapple with rising service demands, aging infrastructure, and workforce retention issues, many are finding themselves in a persistent budget squeeze. Despite record levels of federal investment in recent years, including COVID-19 recovery packages and infrastructure funding, a widening gap remains between available resources and community-level needs. This brief investigates why—and offers practical, actionable strategies to address the imbalance.

Crafted by researchers from the Public Finance and Budgeting Division, the policy brief explores:

• The structural limitations in current federal-to-local funding mechanisms

• The consequences of mismatched timelines, restrictions, and unfunded mandates

• The fiscal pressures on school systems, public health departments, housing authorities, and transit agencies

• Recommendations for improving flexibility, equity, and responsiveness in future funding legislation

“Too often, federal dollars come with strings that prevent local governments from using them where they’re needed most,” said Deputy Director Marcus D. Langston, who oversaw the development of the brief. “This policy brief advocates for reforms that not only close funding gaps, but restore local agency and accountability.”

Key Policy Recommendations Include:

• Streamlining federal grant applications and reducing administrative burdens on local agencies

• Increasing the share of discretionary block grants for cities and counties

• Creating emergency contingency funds for municipal governments

• Reforming maintenance-of-effort rules to allow targeted flexibility in times of fiscal stress

• Encouraging intergovernmental fiscal partnerships and performance-based funding models

The brief also highlights best practices from communities that have leveraged federal resources creatively and effectively, from cooperative budgeting models in Chicago to participatory grantmaking in New Mexico.

This release is part of Hamilton’s commitment to advancing fiscally sound, community-first public finance policy. We encourage civic leaders, budget officers, legislators, and researchers to engage with this brief and participate in upcoming policy forums.

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