Wealth Insights

Public sector finance midyear outlook: Debt, liquidity & risk

Explore key trends shaping public sector finance in 2026, including municipal bonds, liquidity strategies, digital payments, and risk management insights.

Public sector finance in 2026 is being shaped by market volatility, infrastructure demand, and evolving policy changes. Governments, higher education institutions, and nonprofits must adapt their borrowing strategies, liquidity management, and risk planning to navigate uncertainty in the second half of the year.

In this midyear outlook, Regions Head of Government and Institutional Banking Jeff Sundheimer explores the key trends impacting public sector finance and what public sector leaders should prepare for next.

What should municipal debt issuers consider in 2026?

Key takeaways:

• Market volatility is a defining challenge, shaping borrowing decisions and complicating debt issuance timing.
• Infrastructure demand remains strong, even as federal funding declines, with utilities and data center growth driving new projects.
• Governments are prioritizing flexible financing, using alternative debt structures to avoid fee and tax adjustments in the current economic environment.

In the public finance space, there is consistent, steady demand for infrastructure borrowing to support maintenance and new construction. The federal dollars that were made available to fund infrastructure development during the Covid-19 pandemic have largely been spent, but the demand for infrastructure projects remains strong, especially in areas of the country that are experiencing significant population growth. The utility space is one area where demand is particularly strong, as many states have leaned into the construction of data centers, which come with the need for electricity grid buildout.

This is occurring at a time when many governments are cautious to change their revenue mix due to ongoing elevated inflation. The result is that many governments are finding creative ways to finance projects, whether through appropriation-based debt.

Municipal bond market volatility—driven by geopolitical risk and fluctuating oil prices—will likely be the most important factor influencing issuance strategy in the second half of 2026. The volatility makes it difficult for issuers to time going to the public market correctly. It’s going to be important for these issuers to work closely with financial advisors and institutions to determine if the public market is the right option or if the bank market might make sense.

How should governments adjust liquidity strategies during market volatility?

Key takeaways:

• Liquidity management is critical, with entities focusing on cash optimization, short-term investments, and faster revenue collection.
• Digital payments are becoming essential, improving efficiency, speed, and constituent experience.

What governments should be focusing on, is where and how they are maximizing their cash. Do they know what their operating cash needs are? Generally, most government entities hold two months of their budget in their checking account, and anything beyond that can go into some type of short-term investment with a higher yield, whether it’s an investment pool or sweep account. Knowing what your short-term cash needs are can help maximize earnings and liquidity.

Improving digital collection of revenue is becoming increasingly important to government entities. Traditionally, there have been several different collection points and several different processors who process collection of various payments, such as water bills, property taxes, parking tickets, etc.

Government entities are increasingly looking at how they can streamline and improve these processes to collect revenue digitally. They’re examining if their processes meet the expectations of their constituents, who are accustomed to being able to make payments digitally through platforms like Apple Pay and Google Pay, and looking into ways they can accept payments in a similar tokenized, encrypted way.

From a liquidity standpoint, speed of collection matters. How quickly governments are receiving and investing revenue is an important aspect of the liquidity conversation. Most governments, from a short-term cash perspective, are tightly restricted by state-level investment policy.

What policy changes are impacting public sector finance?

Key takeaway:

• Policy changes—like crypto, AI, and cannabis legalization—create opportunities but require careful operational execution.

There are several federal and state policies driving active conversations, including things like cannabis, the use of cryptocurrency, and the deployment of AI, that present both challenges and opportunities for finance leaders in governments and other public institutions.

The challenge lies in effectively operationalizing these policy changes. Finance leaders of these entities are generally subject to the guidance of their governing board. While a publicly elected governing board may be supportive of these policies, it’s up to the finance leader to determine how to effectively make it work.

Take cryptocurrency as an example. Perhaps the entity really believes in crypto and has the board’s full support. The finance leader should do everything within their statutory capabilities to support crypto adoption. However, cryptocurrency is not currently widely used for public sector payments and typically functions more like a foreign exchange transaction. When you choose to operationalize the acceptance of crypto, you need to have a process in place for converting it into dollars at a specific time. You need to have processes that are familiar and testable.

How can governments improve treasury and payment systems?

Key takeaway:

• Technology investment is key, especially in automation, ERP integration, and merchant services to reduce manual processes and risk.

Streamlining and automating processes through technology is perhaps especially important to government and public sector entities, who generally have to do more with fewer resources. The more they can invest now in minimizing manual processes, the better off they will be in the long term.

These entities should challenge their finance staff to look into where they can automate and integrate, and this may take the form of something like Embedded ERP Finance. This technology, which integrates the transmission of financial data between the entity and their financial institution, is key for driving efficiency. It also helps mitigate risk, as it reduces manual touch points.

Merchant services technology is another important investment governments and institutions can make, going back to the topic of collecting revenue, as it simplifies processes and offers a better user experience.

What are the biggest financial risks facing public sector organizations?

Key takeaway:

• Cybersecurity and resiliency planning remain top risks, requiring frequent testing and proactive safeguards.

Cyber risk remains an ongoing threat for businesses of all types, including those in the public and non-profit sectors, and it’s not going away. It’s incumbent upon these organizations to be proactive and vigilant about putting appropriate protections in place.

It’s very important to test business resiliency plans. A lot of organizations have business resiliency plans in place, but they don’t test them with any frequency. So, they may not be prepared when it comes time to put them into action.

From a financial point of view, as entities manage funds digitally, they need to make sure they have an active resiliency plan that they test several times a year. It’s important to know what it is actually like not to have access to your bank portal, for example, and have a solution ready to mitigate the financial risk.

Also, this testing should happen without widespread or advance notice. The CFO or IT head who is leading the testing doesn’t need to share with the organization that it’s coming, because a real-life resiliency issue isn’t going to make itself known ahead of time. It’s critical to test the key areas of the organization that play a role in the first line of defense.

It’s important to note that these entities don’t have to go about building or testing a resiliency plan on their own. Financial institutions can offer important guidance to help them prepare.

Ready to help

Regions is here to help navigate municipal finance challenges in 2026. Our treasury management, infrastructure financing, and public sector banking solutions are designed to help governments and institutions optimize liquidity, manage risk, and fund growth. Connect with us.