Key points covered in this article:
- State and local governments are navigating reduced pandemic-era funding, new federal legislation, and heightened cybersecurity risks, while focusing on sustainability, risk management, and operational stability.
- Key challenges include maintaining services initiated with ARPA funds, adapting to changes in federal audit rules, and addressing rising costs in cybersecurity and workforce planning.
- Legislative updates, such as the One Big Beautiful Bill Act, impact infrastructure borrowing, rural health programs, and clean energy projects, while workforce hiring shows improvement but faces challenges in retaining talent and filling critical roles.
Mid-Year Update for State and Local Government
In the second half of 2025, state and local governments are balancing service delivery with limited resources. Pandemic-era funding is tapering off, and recent federal legislation is introducing changes that may affect healthcare, infrastructure, and administrative oversight. At the same time, cybersecurity risks continue to demand attention, particularly in areas involving critical infrastructure.
While many challenges remain, there are also areas of progress. Job growth has improved, and some governments are beginning to revisit long-term planning. The focus is now turning toward sustainability, risk management, and operational stability.
Key Issues Affecting Municipalities
Federal Funding
Most of the American Rescue Plan Act (ARPA) funds have already been committed, and federal pandemic support is winding down. Many local governments are now working to maintain services that were launched or expanded during the past few years. That includes broadband access, public health programs, and workforce initiatives.
Cybersecurity funding is also uncertain. The final round of State and Local Cybersecurity Grant Program funding is expected to be distributed soon. Congress has not announced whether the program will continue, but it seems unlikely. Communities that depended on this support may need to adjust their budgets and timelines.
Changes to federal audit rules will also affect local oversight. The threshold for a Single Audit recently increased from $750,000 to $1 million in annual federal expenditures. Smaller governments may benefit from reduced audit requirements, but those with larger grants may want to prepare for increased scrutiny.
Legislative Updates
The One Big Beautiful Bill Act (OBBBA), signed into law earlier this year, includes several provisions with long-term implications for local governments.
The law protects the tax-exempt status of municipal bonds, which helps cities and counties keep infrastructure borrowing costs low. It also adds a new rural health program and extends tax credits for affordable housing and community development. However, it speeds up the phase-out of several clean energy tax incentives, prompting some governments to re-evaluate upcoming projects.
The law also increases cost-sharing requirements in some areas. SNAP administrative expenses are expected to grow over the next few years, and new Medicaid work requirements will begin in 2027. These changes may lead to higher uncompensated care costs for community hospitals and could strain social service budgets.
Cybersecurity and Technology
From a risk-management perspective, cybersecurity remains the fastest-moving variable. Phishing attacks have become more sophisticated, especially those using artificial intelligence to simulate real voices and emails. Municipalities are incorporating more employee training and the use of multifactor authentication.
Cyber insurance is getting more expensive, and providers expect governments to meet certain benchmarks to qualify for coverage. This often includes strong access controls, regular testing, and vendor management. At the same time, recent cyberattacks on water systems have drawn attention to weaknesses in critical infrastructure. Some states have already started requiring local systems to take new security steps.
Workforce Planning
Hiring has improved. More than a million public-sector jobs have been filled since 2023, and over 80,000 were added in June 2025 alone. But staffing is still a concern. Retirements are picking up, and some departments are finding it hard to compete for new talent, especially in finance, IT, and public safety.
To widen the pool of applicants, many local governments are removing degree requirements for certain positions. Others are offering remote work options, supporting certification programs, or highlighting their benefit packages. Cross-training continues to be important for managing turnover and preserving institutional knowledge.
Sector-Specific Updates
In most areas, local governments are focusing on service delivery and long-term planning.
State and Local Government: Property tax revenue rose by more than 8% in 2024 and remains strong this year. Higher assessed values have given some municipalities more budget flexibility. However, pension obligations continue to limit financial planning in many areas, especially those still recovering from pandemic-era losses.
Utilities and Waste Management: Infrastructure upgrades are still a top priority for many municipalities. More utilities are starting to invest in new systems like smart meters, predictive maintenance tools, and remote monitoring. These types of updates can help reduce costs and meet environmental goals along with improving compliance.
Public Safety and Social Services: Staffing is a challenge, particularly for police and EMS roles. Some departments are looking at offering bonuses to attract new recruits. Technology is also being expanded in an effort to make the most of existing teams.
Strategic Takeaways
Municipal governments may want to consider these practical actions in the upcoming months:
- Review federal grants for sustainability, prioritizing those nearing expiration.
- Conduct mid-year evaluations of internal controls and introduce automation where feasible.
- Perform cybersecurity assessments, update response plans, and invest in infrastructure protections.
- Strengthen workforce planning by identifying vulnerable roles and encouraging certification and training opportunities.
Conclusion
While uncertainty is still there, many governments and municipalities are in the position to plan ahead. This is the time to evaluate funding, strengthen internal systems, and set priorities for the next fiscal year. For more information or guidance, contact Betsy Hedrick or Michael Garber, Partners on PBMares’ State and Local Government team.
