Skip to content
    1. Overview
    2. Alternative Managers
    3. Consultants
    4. Corporations
    5. Family Offices
    6. Financial Advisors
    7. Financial Institutions
    8. Individuals & Families
    9. Insurance Companies
    10. Investment Managers
    11. Nonprofits
    12. Pension Funds
    13. Sovereign Entities
  1. Contact Us
  2. Search
  3. Client Login
Outlook · 07.07.22

Municipal Bonds 2023 U.S. States Outlook

Revenue above expectations, pandemic federal aid and reserves have strengthened states' financial outlook. But states will need to prepare as pandemic aid winds down and the economy slows.

  • Markets & Economy
  • Market Views
  • Market & Investment Trends
  • Commentary

Key Points

What this is

We examine the budget health and resiliency of U.S. states, which issue municipal bonds.

Why it matters

The budget health and resiliency of states affects their credit quality, including their ability to pay interest on their debts.

Where it's going

We believe all states are well-positioned to meet debt obligations in the near term, supporting strength in the overall municipal credit market.

The 2023 fiscal year will start July 1 with states well-positioned due to record fiscal year 2022 revenues and accumulated reserves, as well as federal aid. However, states should begin normalizing spending in the coming year, particularly in light of potential equity market losses, inflation-related rising costs, anticipated slower growth and the absence of new extraordinary federal stimulus. The vast majority of states have prepared to manage this transition with continued resiliency (see Exhibit 1), supporting a stable credit outlook for $375+ billion of state-issued municipal bonds.



The vast majority of states remain resilient. Only Illinois is categorized as “weak.” Louisiana, Massachusetts, Nevada, New Jersey and Pennsylvania are “challenged.”

The vast majority of states remain resilient. Only Illinois is categorized as “weak.” Louisiana, Massachusetts, Nevada, New Jersey and Pennsylvania are “challenged.”

Sources: Northern Trust Asset Management; National Association of State Budget Officers; state budget reports; Moody’s Investors Service; U.S. Census Bureau. Resiliency considers historic revenue volatility measured against budget practices, fixed obligations, reserves, economic trends and overall fiscal flexibility.

Healthy Budgets for 2023


Generally, states expect balanced budgets for the fiscal year 2023, despite likely moderating economic growth. Many states are budgeting for flat to modest revenue growth, with some calling for a pullback from fiscal year 2022’s record tax collections — particularly in corporate taxes.


The National Association of State Budget Officers Annual Survey reports projected 2023 revenue growth at a median 1.4% versus 2022. This is composed of 6% growth in personal income tax, less than 1% growth in sales tax and significant weakness in corporate tax collections, down 11% with expected lower profits. States will continue to use federal pandemic aid (see Exhibit 2).


Thirty states have proposed or enacted some kind of temporary or permanent tax cut in light of record revenue collections and demand for tax relief. The most popular cuts are to income taxes, followed by sales taxes and then corporate taxes. Only four states have proposed or enacted tax increases.


The budgets show a 4% spending increase. Key drivers are raises for teachers due to pandemic related staffing shortages and higher Medicaid costs as pandemic-related federal funding rolls off. Further, many states historically plagued by chronic pension underfunding, including New Jersey and Illinois, expect to make higher pension payments. Other states with more consistent annual funding, like Tennessee, are choosing to make supplemental payments to tackle long-term underfunding.



States have used or plan to use about 20% of the $350 billion in federal American Rescue Plan Act funds for general operations and administration through 2024. As extraordinary aid ceases, some states may have to find other sources of revenue or cut spending to keep their budgets balanced.


Source: National Conference of State Legislatures

A Potentially Difficult Transition on the Horizon


Record reserves and unspent federal aid have made states more resilient than in the past. However, federal pandemic aid will dry up eventually. To adjust, we believe some states will need to cut spending or find alternative funding sources. These states — including California, Pennsylvania and Illinois — already tend to have above-average tax rates, making tax increases a more challenging option to generate additional revenue.


Some states will need to adjust to moderating revenue growth from lower capital gains taxes and moderating corporate profits. This is particularly true in states such as California or New York, which depend more on that kind of economically sensitive tax revenue. Further, some states with higher tax rates are seeing net out-migration from residents, which may, over the long-term, challenge their ability to maintain current levels of taxation. Migration from higher tax states to lower tax states accelerated during the pandemic, although taxes haven’t been identified as a key reason for moving.


Over the past two years, only New York, New Mexico and Washington D.C. have implemented material tax increases. Many states, including Arkansas, Colorado, Idaho, Louisiana, Montana, North Carolina and Tennessee, have decreased income taxes. Five states (Arizona, Oklahoma, Iowa, Mississippi and Georgia) are transitioning from a graduated tax rate to a lower flat tax rate.



States with higher tax rates are losing population to states with lower tax rates.

States with higher tax rates are losing population to states with lower tax rates.

Sources: U.S. Census Bureau, WalletHub. The net domestic migration for a given geographic area is the difference between in-migration (the number of people moving in) and outmigration (the number of people moving out) during a migration period.

What This Means for Municipal Bond Investors


The vast majority of states enter fiscal year 2023 stronger than before the pandemic. They are well-positioned to meet their debt obligations, building a positive foundation . However, the normalization of fiscal operations may eventually create problems for some states.

Main Point

Near-term health appears strong

With strong reserves and pandemic federal aid, states generally are entering the fiscal year beginning July 1 in healthy financial condition. However, slowing economic growth and less federal support on the horizon may challenge some states to find alternative funding to maintain healthy budgets.

Point of View

3 Investment Trends Driving Portfolios in the Coming Years

  • Read Now
Curved Metal Building

Contact Us

Interested in learning more about our expertise and how we can help? 


For Asia-Pacific (APAC) and Europe, Middle East and Africa (EMEA) markets, this information is directed to institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors. The information contained herein is intended for use with current or prospective clients of Northern Trust Investments, Inc (NTI) or its affiliates. The information is not intended for distribution or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. NTI or its affiliates may have positions in and may effect transactions in the markets, contracts and related investments different than described in this information. This information is obtained from sources believed to be reliable, its accuracy and completeness are not guaranteed, and is subject to change. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor.


This report is provided for informational purposes only and is not intended to be, and should not be construed as, an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Recipients should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. Indices and trademarks are the property of their respective owners. Information is subject to change based on market or other conditions.


All securities investing and trading activities risk the loss of capital. Each portfolio is subject to substantial risks including market risks, strategy risks, advisor risk, and risks with respect to its investment in other structures. There can be no assurance that any portfolio investment objectives will be achieved, or that any investment will achieve profits or avoid incurring substantial losses. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Risk controls and models do not promise any level of performance or guarantee against loss of principal. Any discussion of risk management is intended to describe NTI or its affiliates’ efforts to monitor and manage risk but does not imply low risk.


Past performance is not a guarantee of future results. Performance returns and the principal value of an investment will fluctuate. Performance returns contained herein are subject to revision by NTI or its affiliates. Comparative indices shown are provided as an indication of the performance of a particular segment of the capital markets and/or alternative strategies in general. Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest directly in any index. Net performance returns are reduced by investment management fees and other expenses relating to the management of the account. Gross performance returns contained herein include reinvestment of dividends and other earnings, transaction costs, and all fees and expenses other than investment management fees, unless indicated otherwise. For additional information on fees, please refer to Part 2a of the Form ADV or consult an NTI representative.


Forward-looking statements and assumptions are NTI or its affiliates’ current estimates or expectations of future events or future results based upon proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve.  Actual results could differ materially from the results indicated by this information.


Hypothetical portfolio information provided does not represent results of an actual investment portfolio but reflects representative historical performance of the strategies, funds or accounts listed herein, which were selected with the benefit of hindsight. Hypothetical performance results do not reflect actual trading. No representation is being made that any portfolio will achieve a performance record similar to that shown. A hypothetical investment does not necessarily take into account the fees, risks, economic or market factors/conditions an investor might experience in actual trading. Hypothetical results may have under- or over-compensation for the impact, if any, of certain market factors such as lack of liquidity, economic or market factors/conditions. The investment returns of other clients may differ materially from the portfolio portrayed. There are numerous other factors related to the markets in general or to the implementation of any specific program that cannot be fully accounted for in the preparation of hypothetical performance results. The information is confidential and may not be duplicated in any form or disseminated without the prior consent of NTI or its affiliates.


This information is intended for purposes of NTI and/or its affiliates marketing as providers of the products and services described herein and not to provide any fiduciary investment advice within the meaning of Section 3(21) of the Employee Retirement Income Security Act of 1974, as amended (ERISA). NTI and/or its affiliates are not undertaking to provide impartial investment advice or give advice in a fiduciary capacity to the recipient of these materials, which are for marketing purposes and are not intended to serve as a primary basis for investment decisions. NTI and its affiliates receive fees and other compensation in connection with the products and services described herein as well as for custody, fund administration, transfer agent, investment operations outsourcing, and other services rendered to various proprietary and third-party investment products and firms that may be the subject of or become associated with the services described herein.


Northern Trust Asset Management is composed of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Northern Trust Asset Management Australia Pty Ltd, and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.


Not FDIC insured | May lose value | No bank guarantee