States and cities are eyeing the future with a mix of hope and caution based on uncertain economic conditions.
"City leaders are on the frontlines of America's economy and have shown their resilience, particularly these last few years coming through the pandemic," said Clarence E. Anthony, CEO and executive director of the National League of Cities.
"As the fiscal landscape shifts for municipalities, they are pivoting to ensure they can continue to build strong communities and make the critical investments in housing, infrastructure and public safety."
The comments come in conjunction with the latest edition of the NLC's annual
The report surveyed over 2,600 finance officers and captured data from annual comprehensive financial reports to examine trends in revenue, spending, taxation, tariffs, and the ongoing concerns about threats to the tax-exempt status of municipal bonds.
According to the report, "the municipal bond tax exemption remains an area many city officials are watching, with a majority expressing concern about the potential implications should it change."
"Earlier survey data suggested that cities have been relying more on debt financing to address aging infrastructure needs, so any shift affecting the affordability of that debt was viewed by respondents as a factor worth monitoring."
Many of the cities surveyed, 43%, indicated that if the tax exemption were eliminated, they would be forced to reduce or delay infrastructure projects. The other options included looking at alternative funding methods and increasing taxes.
New types of taxes are already being explored by municipalities who are anticipating federal cuts to affordable housing programs.
"One option that's being considered is a transfer tax on homes over a million dollars," said Clare Kelly, Councilmember for Evanston, Illinois.
"That would be sort of like sweet poetry. Wealthy folks would pay a certain amount to help support our low-income residents."
The report shows an overall 7.5% rise in general fund spending in 2024 as compared to 2023 and pegs 2025 economic growth rate at .7%. Public safety accounts for the biggest chunk of federal spending, accounting for 60% of budgets.
Inflation continues to bedevil funding for infrastructure projects.
"Bond rates are much higher so we're having to hold off on issuing the kind of bonds that we might otherwise issue for projects," said Kelly.
"We, like many cities, are facing an affordability crisis. I feel it's incumbent right now on electeds to really double down on the budget to really understand where we can make cuts in discretionary spending."
Fitch Ratings is taking the pulse of what's happening at the state budget level and finding similar concerns.
"States now face the highest level of uncertainty since the early pandemic months, driven in part by economic unease and federal policy change," said senior director Karen Krop.
"Despite these pressures, Fitch expects states credit quality to remain robust, supported by prudent operating performance and substantial fiscal buffers."
According to Fitch, the states are also anticipating slow revenue growth, inflation and dwindling federal aid coupled with changes in tax policy.
"Fiscal 2026 is seeing more tax policy action, with several states lowering income tax rates or flattening brackets, while others are raising revenues to close gaps or meet program goals," said Fitch.
S&P Global Ratings analysis of U.S. Public Finance finds cracks forming in its resilience.
Issuers in the public power sector along with water and sewer utilities are becoming vulnerable "from ongoing affordability risks underpinning rate adjustments that did not fully account for cost recovery and debt issuance associated with large capital plans."
"We believe many of the themes underpinning credit conditions in 2025 will continue and could become more material and visible in our analysis in 2026," said S&P Global Ratings chief analytical officer Nora Wittstruck.
