In this article, we examine the current state of key public finance sectors, highlight emerging risks and performance trends, and offer insights into what the path ahead may hold.

Ongoing economic and federal policy uncertainty is elevating the importance of strong fiscal management for local governments. While widespread credit downgrades are not anticipated, many agencies are projecting budget deficits that could begin to erode the financial reserves built up over the past several years. Additionally, potential shifts in federal policy may affect local, regional, and state economies — posing risks to key revenue sources such as property and sales taxes. As reserve levels decline, local governments may face increasing financial strain in a sector that has otherwise demonstrated resilience since the onset of the pandemic.

In the most recent publication by Standard & Poor, there are a total of five local government impact categories to watch for:

• Federal Policy Initiatives around immigration, trade & federal spending levels
• Federal Budget discussion with a divided Congress and negotiations
• Stimulus Winddown for many governments that received one-time federal funds, and ensuring the tracking the expenditure of those monies
• Slower Economic Trends in both consumer & business spending. Also, slower GDP growth, elevated inflation and economic pressures
• Climate Hazards including higher cost & higher frequency of large climate-related events

Not-for-profit public power, electric cooperative, and gas utilities continue to face fiscal challenges due to rising operating costs and the burden of both direct and indirect capital investments. These financial pressures are narrowing their rate-setting flexibility, making it more difficult to adjust rates in a timely manner to fully recover costs. As a result, utilities may experience increasing strain on their financial margins, heightening the risk of negative credit rating actions. These challenges underscore the need for careful long-term financial planning and balanced capital investment strategies to maintain fiscal stability.

Here are a few impact categories to watch for:

• Inflation: Persistent inflation continues to strain household budgets and limits utilities’ ability to raise rates without public or political pushback, weakening revenue flexibility.
• Rising Operating and Capital Costs: High costs for emission reduction, grid resilience, and infrastructure upgrades are eroding financial margins and increasing long-term debt burdens.
• Regulatory Uncertainty: Shifting federal and state mandates create planning and compliance challenges, adding cost pressure and reducing financial predictability.
• Cyber and Physical Security: Growing cyber threats and geopolitical risks require significant investments in personnel, systems, and insurance, adding to operating costs.
• Utility Size Constraints: Smaller utilities face greater financial stress due to limited scale, fewer resources, and challenges absorbing rising expenses.
• Resource Adequacy Risks: As utilities retire firm generation and adopt renewables, reliability gaps may emerge — raising costs and exposing utilities to regulatory and customer pressure.

For water, sewer, and stormwater utilities, capital and operating costs continue to rise faster than general inflation and, in many cases, have not been fully recovered through rate adjustments. While some cost pressures have eased compared to recent years, ongoing increases in payroll expenses, staffing challenges, construction costs, and elevated interest rates are expected to drive expenditures higher. Looking ahead to 2025, rising capital investment needs and growing affordability concerns will likely continue to strain the sector’s financial position. During President Biden’s administration, there was a strong emphasis on modernizing public utility infrastructure and increasing funding support for local and regional governments. However, it remains uncertain whether this policy direction will continue under the Trump administration, raising questions about the future of federal investment in infrastructure.

Here are a few factors that are impacting the U.S. municipal water and sewer utilities:

• Aging Infrastructure: Deferred maintenance is exposing utilities to heightened financial and operational risk. Asset management will remain a central focus for maintaining credit quality.
• Regulatory Environment: A slowdown in regulatory activity is anticipated due to shifting federal priorities and recent legal decisions, introducing uncertainty for future compliance expectations.
• Governance: Strong, stable management remains the most influential credit factor. Institutionalized practices, asset planning, and succession strategies are key to weathering leadership transitions and complex operating environments.
• Rate Affordability: Rising service costs are straining affordability, especially in areas with weaker demographics or limited scale. This underscores the need for effective customer programs and sound cost recovery mechanisms.

Many American transportation agencies are grappling with structural financial challenges, particularly their dependence on a limited number of revenue sources — often with a heavy reliance on local or regional sales taxes. This concentration poses significant risks during economic downturns. For example, if consumer or business spending declines, sales tax revenues can drop sharply, leaving agencies with budget deficits or forcing service cuts to maintain fiscal balance — a scenario faced by many transit systems nationwide.

Compounding this issue, operating and capital costs are rising at a pace that outstrips revenue growth, driven by inflation, aging infrastructure needs, and escalating construction expenses. These dynamics continue to pressure the long-term financial sustainability of transportation agencies.
Here are a few factors that will impact the American transportation sector’s performance:

• Federal Policy Uncertainty: Many transportation agencies across the U.S., particularly those serving major metropolitan regions, rely heavily on federal funding to advance large-scale capital projects — often valued in the billions of dollars. These investments, which include network expansions and system upgrades, are critical to meeting future demand and supporting regional growth. However, without sustained federal support, many of these projects would be financially unfeasible. Additionally, some agencies depend on federal funding not only for capital improvements but also for operational needs.
• Economic Outlook & Demand Risk: An overall shift in economic conditions can significantly impact the revenue base and its growth for transportation agencies. This is especially true for agencies that rely heavily on ridership or sales tax as a primary source of revenue. A sharp decline in ridership or economic conditions can therefore have a major impact on the agency’s overall revenue picture.
• Capital Spending During a Rising Construction Cost Environment: In the current environment, where construction costs are rising, transportation agencies still need to fund their capital expenditures. This will likely impact the funding secured for mega capital projects, possibly leading to a need for additional funds or cuts to the scope of these projects

Many local and state governments are going through similar uncertain times. Some are looking to make certain cuts to their financial obligations to stay on an economically sustainable path. These economic challenges are further complicated by federal and legislative changes, making the full impact uncertain or too early to predict. Investors should carefully assess their financial investments in municipal debt.