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[ARTICLE] “Everything, Everywhere, All At Once”: The Evolving Municipal Credit Landscape
Featured in the Bond Dealers of America’s Spring 2025 Fixed Income Insights, Triet Nguyen’s article explores the growing uncertainty facing municipal credit markets and what market participants need to do to stay ready.
Over the past five years, municipal credit has benefited from strong tailwinds: federal pandemic aid, robust tax revenue, and a surge in property values. But that “Golden Age” may be giving way to a more unpredictable period, driven by a sharp shift in federal priorities and global trade policy.
The tax-exempt status of municipal bonds is under new scrutiny. While a retroactive repeal seems unlikely, any move to reduce or remove the exemption would raise borrowing costs for state and local issuers—just as infrastructure funding needs are growing. Trade groups are already mobilizing to defend the exemption.
Macroeconomic conditions also look more precarious. Tariff policies and global trade disruptions could trigger higher inflation or even a recession. Traditionally stable sectors like K-12 education and utilities may not be as resilient this time around, especially with growing efforts in many states to cap property taxes or phase out income taxes. These changes would shift revenue reliance toward more volatile sources.
A New Federalism
A defining theme under the current Administration is a push toward decentralization—what Nguyen calls a “new Federalism.” Key federal agencies like FEMA and the Department of Education are being downsized or dismantled, with responsibilities pushed to the state level. For municipal analysts, this means state governance and fiscal management will weigh even more heavily in credit assessments.
Several public finance sectors may be especially exposed in the near term:
- Ports and mass transit could see reduced revenues due to trade slowdowns and reduced federal support.
- Healthcare systems face risks from Medicaid cuts and supply chain disruptions.
- Higher education is under pressure from new federal contract conditions and political scrutiny.
- Federal job cuts could also have ripple effects in regional economies with a heavy federal employment base.
At the same time, policy shifts are creating new distressed opportunities. Lease-backed bonds tied to federal properties are seeing wide pricing variation, depending on lease strength and local real estate demand.
A Growing Concern
Climate risk is another growing concern. With the likely dismantling of FEMA, localities may no longer count on federal support after natural disasters. That could lead to longer recovery times and more persistent economic damage. Municipal analysts will need to factor in climate resilience and the strength of state-level insurance programs.
Nguyen’s central message is clear: complacency is no longer an option. Read the article to and find out his recommendations and what else you need to know about this important topic.
Go to the BDA article.
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