The year 2024 presented a relatively stable and manageable landscape for state and local financiers. The Federal Reserve's success in taming inflation and stabilizing interest rates had a significant impact on state and local government budgets and finances. Despite some challenges such as softening office tax receipts and the backwash of the COVID-19 revenue wave, most localities were able to cope with modest revenue constraints.

Navigating the Calm Waters of Public Finance in 2024

Inflation and Its Impact

Inflation remained an issue at all levels of government, but it was the delicate balance between higher tax receipts and personnel costs that captured the attention of budget departments. Public-sector labor unions' restraint in pay demands helped stabilize public pension costs. State budgets faced a fiscal hit this year, but most were able to navigate the 2024 revenue shortfall. Short-term interest rates played a helpful role, allowing public treasurers to generate net fiscal positives.

The U.S. Treasury securities yield curve flattened, and overnight interest rates declined but not as much as expected. This had implications for public finance, with some treasurers benefiting from lower anticipated interest rates in 2025.

Debt Management and Its Challenges

Debt managers had a relatively stable year as municipal bond interest rates were repriced upward in 2023. This raised the long-term financing cost of new infrastructure projects, but for 2024, the cost to muni issuers ended relatively unchanged. The implementation of the federal Financial Data Transparency Act brought debates about financial reporting and the ownership of public information in the era of artificial intelligence.

There is a growing tension between traditional financial statement formats and the views of municipal finance officers on useful information. The shift toward digitalization is inevitable, but the details are yet to be settled.

Pensions and Their Performance

Public pension funds benefited from the stock market's gains, which should lead to slightly lower contribution rates. However, there were some misses within pension portfolios, such as the cash-flow headache from private equity portfolios. Environmental, social, and governance investing became a controversial issue, with red-state political backlash likely to impact pension advocates.

Overall, 2024 was a better-than-average year for most pension portfolios on paper, but there are still challenges ahead.

Local Government Finances and Elections

The election results had a mixed impact on local governments. While the overall partisan balance remained mostly unchanged, voters in eight states approved measures to limit property taxes. This highlighted the concerns of local taxpayers about rising property values and tax costs. Softening office tax receipts were a drag on municipal revenues, but most localities were able to manage with modest adjustments.

In conclusion, 2024 was a year of both stability and challenges for public finance. It remains to be seen how we will look back on this year in the future.