Municipal Market Strength Endures, With a Few Caveats
As we close out 2025, the state of the municipal market remains strong and will continue to provide a defensive credit structure along with its tax-exempt income benefit. However, the current economic backdrop is showing signs of strain in several areas that have put some pressure on some municipalities. Looking forward into 2026, it is important to understand that the fiscal landscape of America’s cities is a study in contrasts, where some urban centers stand as models of financial resilience while others struggle under the weight of persistent challenges.
Fiscally Strong Cities: Common Threads
The fiscal strength of Columbus, Boston, Charlotte, Denver, and San Antonio is rooted in shared characteristics that set these cities apart from their peers. First and foremost, each city benefits from a large, diverse, and growing economic base. Their economies are anchored by sectors such as education, healthcare, technology, finance, and tourism, which provide stability and resilience against economic downturns. This diversity translates into a broad and reliable tax base, supporting consistent revenue growth even when individual industries face headwinds. Additionally, these cities have experienced steady population growth, which further bolsters their economic prospects and expands their tax base.
Equally important is their commitment to prudent fiscal management and conservative budgeting practices. All five cities maintain substantial financial reserves and liquidity well above the thresholds set by credit rating agencies for top-tier ratings. They consistently achieve balanced budgets or surpluses, avoid reliance on one-time revenues, and keep debt levels manageable relative to their resources. Their leadership teams prioritize long-term planning, invest in infrastructure, and make proactive adjustments to address emerging fiscal challenges. As a result, these cities enjoy high credit ratings — often triple-A from all major agencies — and are widely recognized for their financial flexibility, stability, and ability to weather economic or policy shocks.
Fiscally Challenged Cities: Common Threads
The five most fiscally challenged US cities — Chicago, Philadelphia, Milwaukee, New Orleans, and Jersey City — share a set of structural and financial vulnerabilities that have compounded over time. One primary similarity is their significant legacy costs, particularly in the form of unfunded pension and retiree healthcare liabilities. These obligations consume a large portion of annual budgets, crowding out spending on essential services and infrastructure. Additionally, all five cities have struggled with slow or stagnant revenue growth, often due to a limited or eroding tax base, population decline, or state-imposed restrictions on raising new revenues. This has left them heavily reliant on property taxes or state aid, both of which can be volatile or politically constrained.
Another commonality is the persistent use of one-time measures and non-recurring revenues to balance budgets, rather than implementing sustainable, long-term fiscal reforms. These cities frequently operate with thin reserves and limited liquidity, making them more vulnerable to economic downturns or unexpected expenses. High fixed costs, such as debt service and labor expenses, further limit their financial flexibility. Many have also faced credit rating downgrades in recent years, reflecting concerns about their ability to address structural imbalances. Ultimately, the combination of high legacy costs, constrained revenue options, and a reluctance or inability to enact deep fiscal reforms has left these cities in a precarious financial position as of the end of 2025.
