According to the National League of Cities’ Municipal Infrastructure Conditions 2025 report, 46% of municipalities depend on bonds to finance capital projects, while 84% already say their budgets cannot cover current needs. 

“Cities are demonstrating resilience in the face of uncertainty, but the financial and procedural hurdles they face threaten to blunt the impact of historic federal investments,” wrote League CEO Clarence E. Anthony.

Borrowing at Risk

The report identifies $4.2 trillion in outstanding municipal bonds and loans as “another prominent funding channel … enabling issuing cities, towns and villages to address needs that exceed their current budget capacity.” 

It warns that if federal tax-exempt status were revoked, “municipalities would face significantly higher borrowing costs, potentially delaying or reducing the scope of infrastructure projects.”

Market data show the scale of exposure. The Securities Industry and Financial Markets Association reports $4.3 trillion in outstanding U.S. municipal bonds as of the second quarter of 2025, with $434 billion issued through September—an increase of nearly 12% from a year earlier.

“These bonds are the backbone of local infrastructure finance,” said Kenneth E. Bentsen Jr., association president, in an October interview with The Bond Buyer. “We will certainly be advocating for maintaining the tax-exempt status for municipal securities.”

At Dallas-based Hilltop Securities, one of the nation’s leading municipal-bond underwriters and advisors, Managing Director Tom Kozlik said that “any situation where the tax exemption is not being prioritized as an important infrastructure tool is troubling.”

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One recent example underscores how sensitive major projects can be to borrowing conditions: In Nevada and California, the Brightline West high-speed rail line is restructuring portions of its $2.5 billion in private-activity bonds to keep the corridor on track amid rising debt-service costs—an illustration of how changing market terms can ripple through infrastructure delivery.

Cities increasingly rely on these instruments as inflation and labor shortages squeeze project budgets. The National League of Cities found that 71% of municipalities cite water and wastewater systems as their top investment priority, followed by roads and bridges at 63%. 

With construction costs still high—ENR’s September 2025 Construction Cost Index shows skilled-labor costs up 4.7% year over year and materials holding near record levels—even modest interest-rate hikes could erode gains from federal funding.

“The tax-exempt general-obligation bond plays a crucial role in municipal finance,” the League report notes, adding that any loss of exemption could “strain municipal budgets, reduce public investment and hinder long-term economic growth.”

Shrinking Margin for Error

The federal government shutdown that began Oct. 1 has paused economic-data releases from the Bureau of Labor Statistics and the Census Bureau, leaving municipalities and contractors to forecast inflation and demand with limited visibility. Reuters called it a “data blackout” that heightens risk for owners preparing 2026 budgets.

Rising project costs and insufficient capital budgets are the top financial obstacles cited by U.S. municipalities, with 90% and 84% of respondents, respectively, identifying them as the most significant barriers to infrastructure delivery, according to the National League of Cities’ Municipal Infrastructure Conditions 2025 report. Graphic courtesy of the National League of Cities.

Report authors Farhad Omeyr and Harshita Umesh Tanksali write that cities are “meeting these challenges head-on with various funding solutions, such as borrowing from the market and tapping into local budgets and strategic planning,” but warn that sustained inflation and policy volatility threaten to “shrink project scopes.”

For now, bond issuance remains strong, but any change in tax treatment could push yields up and erode the purchasing power of remaining Infrastructure Investment and Jobs Act funds. 

Analysts say even a 50-basis-point rise in borrowing costs could translate to hundreds of millions of dollars in deferred local projects.

Four years after passage of the Infrastructure Investment and Jobs Act, the U.S. infrastructure bottleneck may soon be financial rather than bureaucratic. 

If Congress preserves the municipal-bond tax exemption, cities can continue to convert federal and local dollars into contracts. If not, much of the promised construction wave could stall before bids ever hit the street.