Introducing the Strong Towns Finance Decoder
Cities across North America struggle with financial challenges, yet the tools we use to understand local budgets often fail to reveal the full picture. Year-to-year budget reports focus on short-term balance — ensuring that revenues match expenses — but they do not answer the deeper question: Can we sustain what we’ve built?
At Strong Towns, we advocate for financial resilience — cities that can maintain essential services, adapt to economic shifts, and avoid long-term financial crises. This requires looking beyond annual budgets to understand the structural forces shaping our financial future.
By applying a framework that examines financial sustainability, flexibility and vulnerability, we can better assess whether a city’s budget is on a trajectory toward stability or decline. These three indicators provide a structured way to analyze budgets beyond short-term balances, helping local leaders make informed decisions that will benefit communities not just this year, but for generations to come.
Where This Analysis Comes From & Why It Matters
The framework we are sharing is based on Indicators of Financial Condition, a methodology developed by the Public Sector Accounting Board (PSAB) in Canada and aligned with the Governmental Accounting Standards Board (GASB) in the U.S. While these indicators are not legally required, they are recognized as best practices for assessing long-term financial health.
In other words, none of the analysis we are sharing with you is really new. This information is already available to municipal financial officers and accountants, yet it's rarely utilized to its full potential. Our goal is to bring it to the forefront so that decision-makers and citizens alike can develop a clearer understanding of their local government’s financial health.
Most local decision-makers — mayors, council members, city staff — are not accountants. They step into public service to make their communities better, not to become fiscal experts. That’s why this analysis framework exists. It is designed to help them by translating complex financial realities into clear insights, revealing long-term trends, and showing where policy adjustments may be needed.
If a city is struggling financially, it is rarely because of a single bad decision. More often, financial decline happens gradually and structurally, accumulating over decades as past choices shape present realities. By using this analysis framework, we can get ahead of financial crises instead of reacting to them after they become unmanageable.
Kansas City’s Finances: Decoded
To illustrate how this framework applies in practice, we can look at Kansas City, Missouri. Like many cities, Kansas City faces financial pressures from aging infrastructure, service obligations and an unproductive development pattern, coupled with shifting economic conditions. In 2019, we worked with Urban3 to publish a series of articles providing insight into how Kansas City’s development pattern has financially impaired the city. It is a fascinating case study because Kansas City is a fairly typical North American city.
Now, by applying the three key indicators — sustainability, flexibility and vulnerability — we can dig into Kansas City’s financial statements and assess its long-term financial health. We can also add more data to our understanding of the structural challenges that have resulted in ongoing fiscal stress. Kansas City serves as one example of how these financial pressures develop over time, but the framework is applicable to every city.
The structural challenges Kansas City faces are not unique and can be found in municipalities across North America, as we will show throughout this series.
1. Sustainability: Can the city maintain its current level of service indefinitely?
A city's fiscal sustainability is determined by its ability to provide essential services — such as roads, water and public safety — without needing to continuously raise taxes or take on new debt. A city's Net Financial Position measures the difference between its financial assets (such as cash and receivables) and liabilities (such as debt and pension obligations). If a city's net financial position is negative, as it is with Kansas City, it means that past spending will need to be paid for with future revenue. A downward trend is financially unsustainable.
Kansas City’s net financial position highlights its tremendous challenges. For over two decades, the city’s current assets have not kept pace with its liabilities, reflecting a reliance on future revenue to meet ongoing obligations. Kansas City has already obligated itself to raise taxes or cut services in the future by a total of $3.7 billion — that is what it will take to meet its current liabilities. And the trend suggests that, without a policy shift, this will get worse.
Another metric of fiscal sustainability is Total Assets-to-Total-Liabilities. This differs from net financial position in that it includes the value of all the city’s assets (including infrastructure), instead of just its financial assets. As a ratio, it shows the extent to which the city’s operations are generating a surplus (positive slope) or being financed with debt (negative slope). A ratio above 1 indicates solvency (more total assets than liabilities) while a ratio below one indicates insolvency (more total liabilities than assets).
In Kansas City, annual operations are being financed with debt, not generating a surplus. While Kansas City retains a positive total assets-to-liabilities ratio, it is trending toward insolvency. This is particularly problematic for the city because so many of its assets are infrastructure systems that have been recently gifted as part of the development process. These can inflate a city’s true financial position in the short term while creating large financial obligations that accelerate in the future.
The third fiscal sustainability metric we are featuring is Net Debt-to-Total Revenues. We have seen, in the net financial position, that Kansas City has funded its operations with debt and that future revenue has already been spent. The net debt-to-total revenues ratio shows us the size of that future obligation relative to the city’s income. An upward slope means it will take a larger proportion of future revenue to close the present fiscal gap, while a downward slope means the city is closing the gap.
In Kansas City, not only is the size of the gap large, but it is growing. Back in 2005, the city had a ratio of 0.44, meaning a 44% tax increase or service cut would have put the city in a fiscally sustainable position. This would have been painful, but it could have happened over a number of years. Today, that ratio has grown to 1.5, meaning a 150% tax increase is needed, something that is essentially unthinkable. Like the other trends in this section, this is not sustainable.
2. Flexibility: How much room does the city have to adjust to financial changes?
A city’s financial flexibility refers to its ability to adapt to economic shifts without extreme measures like significant tax increases or drastic service cuts. One of the key indicators of flexibility is Interest-to-Total Revenues, which tracks the percentage of a city's revenue that goes toward paying interest. The higher this percentage is, the less flexibility the city has to allocate funds toward critical services and new investments.
In Kansas City, the rising debt burden limits the city’s ability to respond to economic challenges. Debt servicing costs in Kansas City rose steadily until 2009, placing pressure on the city's ability to invest in new initiatives or maintain existing infrastructure. However, since 2009, these costs have declined. This is not due to a reduction in debt; rather, it's a result of favorable interest rates. This trend has temporarily alleviated financial strain but, with interest rates rising in recent years, Kansas City is likely to face renewed fiscal pressure in the future.
Finally, Net Book Value of Capital Assets-to-Original Cost assesses whether a city is maintaining its physical assets. If infrastructure is depreciating faster than it is being repaired or replaced, future financial obligations will accumulate, leading to larger repair costs down the road and reducing financial flexibility.
In Kansas City, this measure has shown a concerning trend. Over the past two decades, the city's infrastructure assets have expanded significantly, yet maintenance and replacement efforts have struggled to keep pace with wear and tear. As a result, Kansas City faces a growing backlog of deferred maintenance. Without adequate reinvestment, aging infrastructure — such as roads, water systems and public buildings — will reach a critical state where repairs become prohibitively expensive, further straining the city's finances.
3. Vulnerability: How dependent is the city on external funding?
Vulnerability measures a city's reliance on revenue sources outside of its control, particularly transfers from higher levels of government. Government Transfers-to-Total Revenue evaluates the percentage of a city's budget that comes from state (provincial in Canada) or federal funding sources. A city with a high reliance on these transfers is more vulnerable to policy changes or funding cuts that could create sudden budget shortfalls.
Kansas City's reliance on outside funding sources has consistently been around 10% of its annual revenues, with variation year to year but no significant trend until a large shift in 2021. That is when aid associated with pandemic relief accounted for an increased portion of the city’s revenue, peaking at 21% in 2022. As that relief subsides, it is important to note that this infusion of resources did not improve the city’s net financial position or alleviate negative trends in the other metrics of fiscal sustainability.
Cities that rely too much on external funding put themselves at risk of financial instability. If grant programs change or federal funding is reduced, cities without strong local revenue streams may be forced to make sudden, difficult choices — such as reducing essential services or imposing emergency tax increases.
Using the Finance Decoder to Make Better Decisions
By looking at trends over time, not just this year’s budget, cities can take proactive steps to address financial challenges before they become emergencies. This analysis framework does not assign blame — it simply helps decision-makers understand financial risks, make fiscally sustainable choices, and ensure their city’s financial strength for the long haul.
A Strong Towns approach emphasizes that the financial health of a city is not determined by any single decision but by a pattern of development that either strengthens or weakens long-term resilience. Too often, cities focus on balancing annual budgets while ignoring structural problems that accumulate over time. By using this framework, we can see how past financial choices shape present realities and identify strategies to course-correct for a stronger and more prosperous future.
We used data from Kansas City’s annual financial reports to prepare this analysis. You can see how we did that in this Google Sheet. In the coming weeks, we will release a version of this spreadsheet, along with instructions, for you to do your own assessments. Sign up here to be alerted when that package is ready.
Michel Durand-Wood, the creator of Dear Winnipeg and frequent guest at Strong Towns, has been instrumental in putting the Finance Decoder framework together. The two of us will be going into depth on it at this year’s National Gathering in Providence (get your tickets ASAP).
Next week, I will reprise our most popular article of all time — "The Growth Ponzi Scheme" — using an analysis of Houston.
Charles Marohn (known as “Chuck” to friends and colleagues) is the founder and president of Strong Towns and the bestselling author of “Escaping the Housing Trap: The Strong Towns Response to the Housing Crisis.” With decades of experience as a land use planner and civil engineer, Marohn is on a mission to help cities and towns become stronger and more prosperous. He spreads the Strong Towns message through in-person presentations, the Strong Towns Podcast, and his books and articles. In recognition of his efforts and impact, Planetizen named him one of the 15 Most Influential Urbanists of all time in 2017 and 2023.