New Delhi, Jan 8 (.) The US public finance sector is expected to enter 2026 on a relatively stable footing, though underlying vulnerabilities are gradually building across several segments, according to a new outlook by S&P Global Ratings released on Thursday.
While most state and local government entities continue to benefit from solid reserves, disciplined fiscal management, and a still-resilient economy, the report cautions that growing structural pressures could test credit strength over the medium term.
S&P Global Ratings notes that public finance credit quality remains broadly supported by healthy revenue collections and prudent budgeting adopted by many governments in recent years.
States and large local governments, in particular, have accumulated strong cash buffers and rainy-day funds, allowing them to absorb economic fluctuations without immediate strain. This financial flexibility is expected to help most issuers maintain stability through 2026, even as economic growth moderates.
However, the outlook also flags emerging risks that could weaken fiscal resilience if left unaddressed. Rising fixed costs, including debt service, pension obligations, and healthcare expenses, are placing increasing pressure on budgets.
As interest rates remain elevated compared with the pre-pandemic period, borrowing costs for new capital projects are expected to rise, reducing fiscal headroom for governments with limited revenue-raising capacity.
The report highlights that revenue growth is likely to normalize after several years of exceptional gains. Tax collections surged in the post-pandemic recovery, driven by strong employment, asset-related income, and federal stimulus support.
These tailwinds are now fading, and revenue growth is expected to align more closely with long-term economic trends. This shift could expose structural imbalances in jurisdictions that expanded spending during the period of unusually strong revenues.
Certain public finance sectors are expected to face greater pressure than others. Higher education institutions and some school districts continue to confront enrollment challenges, demographic shifts, and rising operating costs.
Institutions with weaker demand trends or heavy reliance on tuition revenues may experience declining financial flexibility, increasing the risk of credit deterioration.
Similarly, local governments with narrow tax bases or limited expenditure controls could face heightened stress during an economic slowdown.
S&P Global Ratings also points to long-term liabilities as a key vulnerability, particularly for governments with underfunded pensions and retiree benefit obligations. While market performance and past reforms have improved funding levels in some cases, the report warns that volatility in investment returns or sustained higher interest rates could reverse recent gains. Governments with less progress on pension reform may see growing budgetary strain over time.
At the federal level, persistent fiscal deficits and rising interest costs form an important backdrop to the public finance outlook.
Although federal finances do not directly dictate state and local credit quality, broader fiscal conditions can influence market confidence, interest rates, and funding availability.
Continued reliance on debt to finance spending could limit future fiscal flexibility and heighten sensitivity to economic shocks.
Despite these challenges, the report does not anticipate widespread credit deterioration in 2026. Instead, it describes a mixed environment in which strong governance, conservative budgeting, and diversified economies will remain key differentiators.
Governments that continue to align spending growth with sustainable revenue trends and actively manage long-term liabilities are expected to preserve credit stability.
. SAS ARN