Joseph Gotelli, Vice President and Senior Portfolio Manager at American Century Investments, examines the impact of shifting federal funding on municipal investors. He also outlines what municipal bond managers are watching in States at 250: What Federal Funding Changes Mean for Muni Investors.
Gotelli leads American Century Investments’ Municipal Markets team within the firm’s Global Fixed Income discipline. He is also a member of the Global Fixed Income Investment Committee and serves as a Portfolio Manager on the firm’s municipal fixed income strategies.
Given his expertise, Gotelli takes a close look at the financial and credit conditions of select U.S. states. He finds that credit quality generally remains healthy and expects states to maintain their investment-grade ratings. However, federal funding changes for Medicaid, SNAP, and FEMA have active municipal bond managers on high alert, as increased funding responsibilities shift to the states.
Gotelli outlines the state-level impact of four federal programs facing funding challenges:
Sources: Centers for Medicare and Medicaid Services, U.S. Department of Agriculture, Federal Emergency Management Agency, U.S. Department of Transportation, U.S. Congress.
Gotelli does not anticipate significant credit rating changes for states. However, he emphasizes that federal budget cuts combined with persistent inflation, slower state revenue growth and rising expenses may present challenges. Overcoming such challenges may require spending cuts, new revenue sources, and increased efficiencies—issues that states are generally better positioned to manage than local governments.
Gotelli emphasizes that this backdrop highlights the need for active municipal bond management and rigorous credit research to identify potential opportunities and risks.
As states work to balance their budgets, Gotelli notes that some may need to draw on reserve funds. He adds that states are attempting to avoid higher SNAP costs by reducing payment errors while also delaying final policy decisions regarding Medicaid funding. He does not expect states to fully backfill lost Medicaid funding due to the program’s size, which could place additional pressure on county-owned hospitals.
Gotelli regards efforts by states to anticipate and proactively address funding shortfalls as credit-positive actions. He notes that policymakers in California, Washington, and Illinois are exploring wealth taxes to help offset funding gaps. Meanwhile, Rhode Island, Michigan, and Pennsylvania have decoupled certain taxpayer provisions from the OBBA to prevent significant revenue shortfalls.
WEBCAST – The Muni Halftime Show: States at the Semiquincentennial
To learn more, join Gotelli alongside American Century’s Kim Nakahara, Senior Municipal Credit Analyst, and Greg Torretti, Client Portfolio Manager, Senior Director of Product Development, for a discussion on the state impact of shifting federal funding.
As the U.S. approaches its 250th anniversary, Gotelli, Nakahara, and Torretti will review the financial health of select states. While strong credit ratings generally prevail, emerging issues from federal funding shifts and rising costs demand careful management by states.
Join us for the Muni Halftime Show, because nothing says “semiquincentennial celebration” like a deep dive into state budgets and bond spreads. We’ll discuss:
- Municipal bond market performance in the first half of 2026.
- Structural forces influencing muni credit and issuance trends.
- State budgetary challenges and how officials are responding.
Accepted for 1 CFP / IWI / CFA CE Credit
Resources:
States at 250: What Federal Funding Changes Mean for Muni Investors.
This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.
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The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments’ portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
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Generally, as interest rates rise, the value of the bonds held in the fund will decline. The opposite is true when interest rates decline.
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