An Overview of US State Budgets and Municipal Bonds

As COVID-era funding boosts come to a close, US state and local governments are facing some challenges. However, they have many tools with which to tackle them, according to Jennifer Johnston, Franklin Templeton Fixed Income’s Director of Research, Municipal Bonds. She provides her latest outlook.

In January, we discussed the start of the US state budget season and what we were seeing from one large state, California. As May 2023 ends and state legislatures get to work on budgets, we want to provide an update on what we are seeing and what we believe it could mean for muni credit.

We wrote about California extensively in January. We highlighted the projected deficit and described how California’s revenue volatility comes largely from its dependence on high-income earners and how all states could see slower revenue growth and potential budget deficits if the US economy slows. California just released its mid-May budget update (called the “May Revision”), which tells a story of further revenue slowing and an increased budget deficit. This update doesn’t come as a surprise to us, nor are we worried at this point. In fact, many states and some large local governments have released similar news over the past few weeks, and we want to outline what we think this means for muni credit.

What are states saying?

California reported that its deficit has grown by US$9.1 billion since January, and New Jersey recently announced it decreased its forecast for income tax revenue by US$2.3 billion as April payments came in lower than expected. Illinois reported that tax revenue in April was US$1.84 billion lower than it was a year earlier. And at a more local level, there are reports that New York City has seen a US$1.6 billion increase in its budget gap just since April. How worried are we?