New York State holds about $15 billion in reserves. It also faces projected budget gaps totaling $31.8 billion over the coming years. Both numbers come from the same office, in the same report, on the same day.
That isn’t a contradiction. It’s the whole problem with reading a municipal bond issuer through a single headline figure.
This article is educational only and does not recommend buying, selling, or avoiding any security.
Municipal bonds get discussed as one asset class, but the borrowers behind them have almost nothing in common. A state, a city, a school district, a toll authority, a hospital system, and a water utility can all issue municipal debt. What backs the repayment varies enormously, and so does the financial condition of the entity making the promise.
For some investors, municipal bonds may also carry tax advantages. Interest on many municipal bonds is generally exempt from federal income tax, while state and local treatment depends on the issuer, where the investor lives, and the type of bond. Certain private-activity bonds, meaning bonds issued to finance projects that benefit a private entity, can also trigger alternative-minimum-tax consequences. Both the credit details and the tax details matter.
Key Takeaways
- State fiscal cushions remain well above pre-pandemic norms, even as pandemic-era balances get spent down.
- The national reserve picture depends heavily on which measure you use. Different definitions produce different numbers, and both can be accurate.
- Issuer differences matter more than national averages. Pension burdens, revenue mix, fixed costs, and budget structure vary widely.
- A large reserve balance is not a credit rating and shouldn’t be read as a stand-alone measure of financial strength.
The National Picture Depends on Which Number You Pick
Reserves are the clearest starting point for state fiscal health. They’re the money set aside to absorb a downturn without immediate cuts or tax increases. The complication is that “reserves” describes at least two different things.
The narrower measure is the rainy day fund, a formally designated account with rules governing when a state can draw on it and how it must be replenished. According to the National Association of State Budget Officers, enacted budgets for fiscal 2026 put the median rainy day fund balance at roughly 14.4% of spending.
The scale of the build-up is worth pausing on. NASBO reports that aggregate rainy day funds stood at $174.2 billion at the end of fiscal 2025, more than double the $79.1 billion held in fiscal 2019, and 13.3% of total general fund spending against 9.1% back then. States entered this period with materially thicker cushions than they carried before the pandemic.
The broader measure is total balances, which adds general fund ending balances, meaning leftover money sitting in the state’s main operating account, on top of the rainy day fund. That figure runs higher. NASBO’s Spring 2026 survey reports that total balances are projected to decline in fiscal 2026 and fiscal 2027 as states spend down prior-year surpluses, while remaining well above pre-pandemic historical highs.
Both statements describe the same 50 states. They aren’t interchangeable, and a reader who encounters one without knowing which measure it uses will draw the wrong conclusion about how much cushion exists.
Spending tells a similar story. NASBO reports that governors’ proposed fiscal 2027 budgets call for general fund spending to rise 0.6% on a median basis. Aggregate figures, which weight large states more heavily, can point in a different direction than a median, which describes the typical state. Neither is wrong. They answer different questions.
Why Reserve Numbers Resist Comparison
A reserve figure can look precise and still be close to useless for ranking issuers against one another.
States and cities don’t share definitions for rainy day funds, total balances, unrestricted reserves, fiscal cushions, or surplus accounts. Fiscal years end on different dates. Some reported figures come from cash-basis accounting, which records money when it moves, while others come from budget documents or audited financial statements built on different conventions.
A chart showing one government with tens of billions and another with under $1 billion is measuring scale, not quality. The larger government is larger. That’s most of what the comparison reveals.
The more useful question: how much recurring financial flexibility does an issuer have relative to its own spending commitments, debt service, pension obligations, and revenue volatility? Recurring means money that shows up every year, as opposed to one-time measures such as asset sales or accounting shifts that work once and can’t be repeated.
California: Large Reserves and a Large Projected Gap
California shows why a reserve balance and a budget outlook have to be read together rather than one instead of the other.
On the reserve side, the state’s 2026-27 budget summary reports a $3.6 billion deposit into the Budget Stabilization Account, California’s constitutional rainy day fund, bringing combined reserves to $28.8 billion.
On the outlook side, the Legislative Analyst’s Office, California’s nonpartisan fiscal adviser, projected an $18 billion budget problem for 2026-27. Its revenue tables show General Fund personal income tax easing from $130.4 billion in 2025-26 to a projected $125.2 billion in 2026-27.
Both descriptions are accurate, and they answer different questions. A reserve balance describes money already set aside. A budget problem describes a projected gap between future spending and future revenue. A state can hold tens of billions in reserves and still face a gap measured in tens of billions, and drawing on reserves to help close it is what those reserves exist for.
Note also what the LAO figures are measuring. They report General Fund personal income tax, meaning the portion that reaches the state’s main operating account. California directs a large share of income tax revenue to schools and other dedicated funds before that point, so a figure describing total collections will be substantially larger than a figure describing General Fund revenue. Both can describe the same tax in the same year.
California’s revenue system leans on high-income taxpayers and capital gains, the components most sensitive to market conditions. That structure builds reserves quickly in strong years and withdraws support quickly when asset values fall. The strength and the volatility are both real.
New York State: Record Reserves and a Growing Budget
New York enacted a fiscal 2027 budget of roughly $277 billion, up 7% from fiscal 2026. State Comptroller Thomas DiNapoli’s July 2026 report describes the state’s reserve levels as a genuine fiscal achievement built over several years.
The report also notes that reserves stay flat at approximately $15 billion across the financial plan. When reserves hold steady while the budget grows 7%, the cushion shrinks in relative terms even though the dollar figure doesn’t move. The Comptroller’s office makes this point directly, warning that the effectiveness of those reserves “is being diluted as the budget grows.”
Projected budget gaps in the outyears, meaning the future years covered by the plan rather than the one being enacted, total $31.8 billion. The Comptroller’s office projects that spending will exceed receipts in each year of the plan.
New York holds real financial resources. It also faces a sustainability question about how fast recurring spending grows relative to recurring revenue. Both things are true, which is exactly why one number doesn’t settle the matter.
New York City: A Cushion That Shrank by a Third
New York City entered its fiscal 2027 budget cycle under significant pressure. The City Comptroller’s office reports that the city’s fiscal cushion declines from $12.43 billion at the start of fiscal 2026 to an estimated $8.36 billion at the start of fiscal 2027.
The Comptroller’s analysis attributes that decline to a $1.35 billion reduction in in-year reserves combined with a $2.72 billion reduction in the operating surplus used to pre-pay the following year’s costs. The budget also leans on one-time revenue measures totaling roughly $6.07 billion.
One-time measures close a gap once. They don’t lower the following year’s spending or raise the following year’s revenue. The credit question for New York City is whether expenditure growth can slow enough to narrow future gaps without drawing the cushion down further. The city’s economic base and tax capacity remain substantial, which is a genuine strength, and it doesn’t answer the recurring-balance question by itself.
New Jersey: Surplus Maintained, Structural Deficit Halved
New Jersey’s fiscal 2027 Appropriations Act totals $60.7 billion, with a surplus of $6.084 billion and a $7.3 billion pension payment, the sixth consecutive full contribution. The state reports its structural deficit at $1.35 billion, down from more than $3 billion projected earlier in the year.
Structural deficit means the ongoing gap between recurring revenue and recurring spending, setting aside one-time items. Cutting it roughly in half while maintaining a full pension payment is the kind of change that shows up in credit analysis, because it addresses the recurring imbalance rather than papering over a single year.
New Jersey still carries substantial long-term obligations. Direction of travel and size of liability are separate measurements, and a credit review needs both.
Massachusetts: A Rebuilt Reserve, and a Lesson About Reporting Dates
Massachusetts has rebuilt its Stabilization Fund substantially, and the state also illustrates a practical wrinkle: official figures carry dates, and the most recent published number is often not the most recent actual balance.
The Office of the Comptroller is required by state law to report the fund’s balance, and its published figure is $8.165 billion as of June 2, 2025. Separately, the Governor’s fiscal 2026 budget filing in January 2025 projected the fund growing to a record high of $8.333 billion after transfers from excess capital gains taxes. One is a reported balance on a specific date. The other was a forward projection in a budget proposal. Quoting either as “the current balance” overstates what it is.
The trajectory gives both numbers context. State documentation shows the Stabilization Fund sat below $3 billion for most years from fiscal 1987 through fiscal 2018, then climbed sharply from $3.42 billion in fiscal 2019. A fund that roughly doubled inside six years reflects deliberate policy, not a market accident.
The funding mechanism deserves attention too. Massachusetts routes capital gains tax revenue above an annual threshold into the fund automatically. That builds cushion in strong markets, and it means contributions shrink when markets weaken, which tends to be when a state needs the money. The strength is real. The funding source is cyclical.
Illinois: Progress Alongside a $143.7 Billion Pension Gap
Illinois has drawn attention for improving its cash management and pension funding discipline over several years. The scale of the remaining obligation is still large. The Illinois Commission on Government Forecasting and Accountability’s most recent Special Pension Briefing reports total unfunded liabilities of $143.7 billion across the five state systems, with the funded ratios of four of those systems ranging from 46.0% to 48.6%.
Unfunded liability is the gap between what a pension system has promised and the assets it holds against those promises. The funded ratio expresses the same idea as a percentage. A ratio below 50% means the system holds less than half of what it owes on the measurement basis used.
This is the clearest illustration of a principle that runs through municipal credit work: fiscal improvement and a large structural liability can coexist. Better cash flow strengthens a credit profile without erasing obligations accumulated across decades.
Chicago: When Budgeted Revenue Doesn’t Arrive
Chicago offers the sharpest live example of why budget structure matters more than any single balance.
Chicago’s 2026 budget included revenue measures adopted by the City Council. By the middle of the year, according to the city’s own 2026 Mid-Year Budget Report, several of those measures had produced nothing. The Mayor’s office stated that key revenue proposals in the Council’s alternate 2026 budget “have generated zero revenue to date,” including a planned debt sale from which Council members had projected between $89 million and $90 million. The city reported that the resulting shortfall risk exceeded $130 million.
That account comes from an administration in an open disagreement with its Council over budget strategy, so the framing is the Mayor’s office’s own. The underlying mechanic is what matters for credit work, and it isn’t in dispute. A budget balances on paper when projected revenue equals projected spending. If a revenue line produces nothing, the gap reopens mid-year, and the options left are worse than the ones available during the original budget process.
Chicago is one of the largest economic centers in the United States, and its tax base is substantial. The credit question isn’t whether economic activity exists. It’s whether recurring revenue covers recurring costs, including pensions and debt service, without depending on measures that may not deliver. For an investor reading an issuer’s budget, the useful test is not whether it balances, but what it balances on.
Florida and Texas: Two Different Kinds of Cushion
Florida enacted a $117.6 billion budget for fiscal 2026-27.
Texas reports that its Economic Stabilization Fund, the state’s rainy day fund, reached its allowable cap after a partial transfer of $2.05 billion at the start of fiscal 2026. The Comptroller’s certification estimate puts total General Revenue-related funds available for the 2026-27 biennium at $203.63 billion against general-purpose spending of $198.97 billion, leaving a certification balance of $4.66 billion.
A fund at its constitutional cap is a meaningful buffer. It also means the fund stops growing, so future cushion has to come from elsewhere in the budget. And a large reserve doesn’t neutralize revenue concentration. Texas retains real exposure to energy-linked economic activity and the broader business cycle regardless of what its rainy day fund holds.
State-level strength also doesn’t transfer automatically to local issuers. Counties, cities, school districts, and special districts within a fiscally strong state can face entirely different revenue outlooks, particularly where property-tax policy is changing. Investors evaluating a local issuer need that issuer’s own financial statements, not the state’s.
What Municipal Bond Investors May Want to Evaluate
A municipal bond’s yield doesn’t carry the credit story. Depending on the security, the questions worth asking include:
- Repayment source. Is the bond backed by general taxing power, a dedicated revenue stream, or one specific project? General obligation bonds and revenue bonds can behave differently under stress.
- Recurring balance. Do recurring revenues cover recurring expenditures, or does the budget depend on one-time fixes?
- Reserve capacity. How large are usable reserves relative to annual spending and fixed obligations, using a definition you’ve confirmed?
- Pensions and fixed costs. Are required contributions growing faster than revenue?
- Debt burden. How much flexibility remains after debt service and other contractual commitments?
- Revenue concentration. Does the issuer depend heavily on one industry, one tax, one employer, or one economic sector?
- Intergovernmental dependence. How much does the issuer rely on federal or state transfers that could change?
- Governance and budget execution. Does the issuer repeatedly reach for one-time measures, or does it make recurring adjustments when conditions shift?
This is also where a portfolio-construction principle shows up on its own. When individual issuers within the same asset class can diverge this widely, concentration in any single name or single revenue source carries more risk than the shared label suggests.
Risk and Context
Municipal bonds are not risk free. Issuers can experience financial stress or default. Bond prices can fall when interest rates rise or credit conditions weaken. Some municipal securities trade less actively than Treasury or large corporate issues, which can affect what a holder receives when selling before maturity. Callable bonds can be redeemed before maturity, which can end an income stream earlier than expected.
Tax treatment can change, and it varies by security and by investor. Not all municipal bond interest is tax exempt in every situation.
Credit conditions that look healthy today can shift with recessions, market declines, natural disasters, policy changes, demographic trends, pension costs, or reductions in federal support. Reserve levels and revenue growth are inputs to a credit analysis, not guarantees of repayment or future performance.
Figures in this article come from official state and municipal sources published between March and July 2026 and reflect budgets, estimates, and projections as of those dates. Estimates and projections change.
Bottom Line
The 2026 municipal picture looks constructive at the state level in aggregate. The more useful observation is how much the issuers differ underneath that average.
Many states hold cushions well above pre-pandemic norms. At the same time, pension burdens, spending growth, local revenue policy, one-time budget fixes, and different revenue structures produce sharply different credit profiles.
Consider what the same year looks like across issuers. California holds $28.8 billion in combined reserves while its Legislative Analyst projected an $18 billion budget problem. New York holds roughly $15 billion in reserves and projects $31.8 billion in outyear gaps. New Jersey halved its structural deficit while making a sixth consecutive full pension payment. Illinois carries a $143.7 billion pension shortfall. Massachusetts rebuilt its Stabilization Fund past $8 billion on cyclical capital gains revenue. Chicago adopted revenue measures that produced nothing, opening a shortfall risk above $130 million by mid-year. None of those pictures is captured by a reserve figure alone, and several of them look contradictory until you ask what each number is measuring.
For investors, the practical lesson is that the issuer and the repayment source matter as much as the words “municipal bond.” A review of budget structure, reserve definitions, fixed costs, debt, and revenue durability tells you more than yield alone.
Anyone weighing tax-aware income may want to discuss how municipal bonds fit their objectives, risk tolerance, time horizon, and tax situation.
Sources and References
- NASBO, Fiscal Survey of States (Spring 2026): median proposed fiscal 2027 general fund spending increase of 0.6%; total balances projected to decline while remaining above pre-pandemic highs
- NASBO, Ten Facts to Know About Rainy Day Funds (March 2026): median rainy day fund balance of 14.4% of spending in fiscal 2026 enacted budgets; aggregate rainy day funds of $174.2 billion at the end of fiscal 2025 against $79.1 billion in fiscal 2019
- California Department of Finance, 2026-27 California State Budget Summary: $3.6 billion Budget Stabilization Account deposit; combined reserves of $28.8 billion in 2026-27
- California Legislative Analyst’s Office, The 2026-27 Budget: California’s Fiscal Outlook: projected $18 billion budget problem for 2026-27; personal income tax projections of $130.4 billion in 2025-26 and $125.2 billion in 2026-27
- Office of the New York State Comptroller, Report on the SFY 2027 Enacted Budget and Financial Plan (July 15, 2026): $277 billion enacted budget, reserves flat at approximately $15 billion, $31.8 billion in projected outyear gaps
- Office of the New York City Comptroller, Comments on the FY 2027 Executive Budget: fiscal cushion declining from $12.43 billion to $8.36 billion; $6.07 billion in one-time measures
- State of New Jersey, Governor Signs FY 2027 Appropriations Act (June 30, 2026): $60.7 billion budget, $6.084 billion surplus, $7.3 billion pension payment, $1.35 billion structural deficit
- Illinois Commission on Government Forecasting and Accountability, Special Pension Briefing: $143.7 billion in total unfunded liabilities; funded ratios of 46.0% to 48.6% across four systems
- Massachusetts Office of the Comptroller, Commonwealth Stabilization Fund: reported balance of $8.165 billion as of June 2, 2025
- Commonwealth of Massachusetts, FY 2026 Budget Filing (January 22, 2025): projected Stabilization Fund growth to $8.333 billion
- Commonwealth of Massachusetts, Task Force Considerations: Stabilization Fund history, below $3 billion from fiscal 1987 through fiscal 2018, rising from $3.42 billion in fiscal 2019
- City of Chicago, Office of the Mayor, 2026 Mid-Year Budget Report (July 7, 2026): key Council revenue proposals generating zero revenue to date; projected debt sale of $89 million to $90 million producing no revenue; shortfall risk exceeding $130 million
- Executive Office of the Governor of Florida, FY 2026-2027 Budget Signing: $117.6 billion enacted budget
- Texas Comptroller of Public Accounts, 2026-27 Certification Revenue Estimate: Economic Stabilization Fund at its allowable cap; $203.63 billion in General Revenue-related funds available
By Vann Equity Management