Municipal Bonds: Fiscal 2025 State Outlook

Key Points

State reserves stable; revenues begin to weaken, sparking spending cuts

Higher interest rates have contributed to the cooling of the economy, with the Federal Reserve signaling likely rate cuts in the coming months. Slower economic growth has contributed to softening tax revenues in some states. In our view, states are generally well-prepared for potential economic weakness due to their strong reserves and moderate fixed costs.

Threats of the U.S. economy entering a recession have fallen over the past year with the economy continuing to grow, albeit at a slower pace, which has caused many states to see slower tax collection growth and a shifting mix of tax sources.

After strong fiscal revenue growth in 2021 and 2022, state revenues in 2023 were estimated to have declined around 1.1% according to the National Association of State Budget Officers (NASBO). Final tallies for fiscal 2024 are not yet available, but we expect tax revenues to be slightly above flat. NASBO projects fiscal year 2025 will return to more normal growth of 1.6%.