Fed’s recent rate cuts could improve borrowing options for state and local government projects
Lower interest rates may bring changes for housing development, tax revenue, debt refinancing and bread-and-butter projects like roads, water and sewer, state and local government officials told States Newsroom.
"On average, the lower the interest rates are expected to help stock market returns if historical trends hold," said
This change means states and localities will have lower borrowing costs, which will make it easier to make big long-term changes in infrastructure, to see higher sales tax collections as a result of more spending, and it is likely to result in better pension performance in an environment where stocks tend to respond to lower rates, fiscal policy experts at Pew say.
In 2021 and 2022, states had record high revenue growth due in part to federal pandemic aid and the impact of the federal aid on workers and businesses, according to Pew. But that kind of growth was unsustainable.
Recently, nearly all states have entered into a slower revenue growth environment, said
"States overall are remaining in a strong fiscal position. It's just that we're starting to see slower growth compared to what we did see for those a couple of years after the start of the pandemic," he said. "That was really a unique set of circumstances where we had the additional federal aid provided by all the different COVID relief bills and at the same time where state revenue growth was growing so strongly, and that led to very strong growth in tax collections."
Sigritz said that states, which have to almost entirely use borrowing for infrastructure and capital projects, will benefit from lower borrowing costs as a result of the Fed rate cuts.
"We're seeing a lot of development, even with the higher rates.
"[Interest rates] have an impact on our ability as a city of 52,000 to provide the full services that we do. Every little bit impacts us, because we have to buy fire trucks," she said."If there's a decrease in one of our three largest revenue sources, we feel it."
But there are both pluses and minuses to the cut in the federal funds rate, Schmiedicke said, as it brings down the interest income states receive.
"It probably will reduce the amount of investment income the city receives on its cash balances. We saw that go up dramatically in 2022 and 2023, so that'll probably come down as the Fed cuts rates," Schmiedicke said.
Different tax policies also change how states and localities experience the Fed rate cuts.
"When the markets are doing well, those types of firms that are concentrated in
State reaction
But the state agency said it may take some time to see any of the effects of recent rate cuts.
"While recent changes in the federal funds rate may lead to increased state revenues, absent a significant change in the rate, the impact on revenues and expenditures would not likely be seen immediately. We will continue to monitor and assess all economic indicators to ensure steady, sustainable, conservative growth for the benefit of all Alabamians," the department said in a statement.
Schmiedicke said
"We could see more development in the city and that could definitely help with our overall property tax base, as well as if it results in more travel and room taxes," he said.
As states and localities wrestle with how to provide more affordable housing, with nearly half of renters having to spend more than 30% of their income on housing, lower interest rates could help spur more building. Fleury said the costs of loans and labor and materials has been "astronomical," making it hard for developers to build. Although she said
"I think that a lower interest rate could really help us get farther along in our housing plans," she said "If you can't get your project to pencil within what they're able to fund or finance, we just never make the list."
Despite lower interest rates creating a better environment for affordable rent and homes, states will likely continue to spend a lot of energy on housing programs, Sigritz said. Governors' budget proposals and state of the state speeches have prioritized affordable housing more and more in the past few years, he said, and he expects this to continue.
"Housing affordability is not an issue that's going to go away overnight, and there's still a need for more housing," Sigritz said. "It takes a while to build additional housing even in the lower-interest environment."
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