Federal funding cuts could drastically harm healthcare sector

The Bond Buyer's 2026 Policy Pulse Survey

Shifts in funding responsibilities will impact fees, borrowing needs

Key takeaway: User fees and municipal borrowing needs will noticeably increase if funding responsibilities are shifted to state and local governments.

Muni pros are forecasting higher user fees, borrowing needs and state and local tax levels if more funding responsibilities are pushed onto state and local governments.

User fees/service charges (94%), municipal borrowing needs (93%), state and local tax levels (90%), use of public-private partnerships (P3s) (84%) and consolidation of public services (79%) would all see increases to some degree if funding responsibilities are shifted to state and local governments.

Conversely, the overall level of healthcare delivery and other services (87%), quality of local infrastructure (86%) and state and local employment levels (77%) are all expected to see marked decreases should funding responsibilities pivot.

In this current environment, Jeff Lipton, market intelligence analyst for The Bond Buyer, said deals are being "priced to sell and dealers are working hard to limit their balance sheet exposure," but some issuers are seeing delays due to "elevated ratios with associated higher relative borrowing costs."

"In these instances, greater concession is often required to clear the market," Lipton said. "Those issuers with greater flexibility, and certain spread-sensitive credits, are in a better position to wait for improved ratio conditions."

Case in point, the North Carolina Local Government Commission approved about $2.2 billion in local government borrowing with some commission members voicing apprehension about overborrowing.

The market sectors most susceptible to reduced federal funding

Key takeaway: Hospitals are most vulnerable to federal funding shakeups, while airports and toll roads are better situated to weather changes.

Impacts to federal funding, while detrimental to much of the public finance market, will hit some sectors harder than others.

Hospitals/health systems (85%) is the market sector most vulnerable to reductions in federal funding, followed by local government (78%), mass transit (78%) and state government (78%) in a three-way tie for second. Housing authorities (77%) and higher education (76%) were also among those most at risk.

Airports/ports (11%) and toll roads (10%) were the two sectors considered the least vulnerable to fluctuations in federal funding levels.

Following recent cuts to Medicaid funding, findings from a Rand Corp. study estimate that the One Big Beautiful Bill Act "will reduce state Medicaid budgets by $664 billion over 2025-2034, with state general funds declining by $87 billion."

Hennepin County Medical Center in downtown Minneapolis, part of the public Hennepin Healthcare System and considered the largest safety net hospital in the state, is in danger of closing due to diminishing financial conditions and is seeking emergency funding from the state.

"What's happening in Minnesota to HCMC and to all of our health systems is not unique," said Jan Malcolm, senior advisor on hospitals and health systems to the governor's office, speaking at a committee hearing in late April. "They literally are all moving in the same direction."

What could happen to the muni markets if the MSRB was weakened?

Key takeaway: Weakened investor protections, transparency and confidence in the asset class are all highly likely should the MSRB's authority be reduced.

Efforts to reduce the authority of the Municipal Securities Rulemaking Board (MSRB) could in turn weaken the industry as a whole, according to muni pros.

Weakened investor protections (88%), weakened transparency and disclosures (87%) and weakened confidence in the asset class (84%) are probable if the MSRB's regulatory authority is weakened. Increased market volatility (82%), reduced market efficiency (81%) and decreased compliance costs (78%) were also identified as likely.

When broken out into age ranges including millennials (1981-1996), Gen X (1965-1980) and Baby Boomers (1946-1964), the possible outcomes received differing levels of expectation.

Among millennials, decreased compliance costs (90%), increased market volatility with widening spreads (90%) and weakened confidence in the asset class (90%) were all the top expected results.

For Gen X, weakened investor protections (100%), weakened transparency and disclosure (94%) and decreased compliance costs (91%) were the most probable trends.

Among Baby Boomers, weakened transparency and disclosure (73%), reduced market efficiency (67%) and weakened investor protections (67%) were the top expected outcomes.

The MSRB reform bill introduced by Sen. John Kennedy, R-La., takes particular issue with the composition of the board itself, which currently consists of eight public representatives and seven representatives of regulated bodies. His proposal seeks to make the representatives of regulated entities the majority rather than those from the public.

"Instead, it's an insider's club. It's more incestuous than King Tut's family," Kennedy said. "Public seats on the board shouldn't be filled by executives who just quit their Wall Street jobs. These reforms are long overdue."