Mary Scott NabersSeveral noteworthy trends will lead to significant changes in how states and local governments address critical infrastructure needs in fiscal year 2026. Analysis of legislative actions, published budgets, and documented critical infrastructure needs throughout America make it obvious that federal funding and state funding will not be adequate to support some of the most pressing priorities. Because of the criticality of the projects that must be launched soon, government executives throughout America are seeking other funding sources. An overview of notable examples follows.
Texas – Water Infrastructure:
The water infrastructure in Texas is aging and water utilities can no longer meet the escalating demand caused by the state’s population growth. Billions of gallons of water are being lost annually because of frequent breaks and leaks in water distribution pipelines. Weather related events are causing flooding that results in more water purity issues, a public safety concern. The well-respected annual report from the American Society of Civil Engineers gave Texas a “D+” for drinking water and a “D-” for wastewater infrastructure. The recent grades are even worse than the report released in 2021, indicating Texas’ water systems will continue to worsen over time without major funding intervention. In the recent legislative session, Texas lawmakers committed $20 billion in funding but only $1 billion of that amount will be available annually to address water needs. While substantial, the allocation falls many billions short of what is needed immediately in Texas for both water resources and water infrastructure upgrades. Some experts have said that the public funding leaves Texas approximately $112 billion short in funding for immediate needs. As a result, some utility districts are relying on bond elections and/or customer fees to fund large-scale water infrastructure projects. Others, however, are seeking funding support that is obtained by other types of collaborative partnerships.
The Midland County Utility District hopes to launch a potable water initiative to shift non-city residents off unreliable, low-quality well water and onto a quality-controlled and centralized potable system. The county needs new water facilities including a reverse osmosis treatment plant, more wells, new storage, and over 100 miles of transmission lines. Voters rejected a $625 million bond in May 2025, but local leaders have indicated that another bond election will be held this November to secure funding. Additionally, the San Antonio Water System is planning a $100 million aquifer storage and recovery expansion project which will be funded largely by customer fees. The completed project will double water storage and treatment capacity. The expanded storage is critical for improving drought resilience in the region.
California – Water Issues:
California is also facing a critical water infrastructure funding shortfall and the state’s ability to deliver safe, reliable water is threatened. A 2025 report by the Public Policy Institute of California estimates the state will require $15 billion over the next five years to address long-deferred maintenance issues along with the construction of new infrastructure. Water needs span multiple sectors including up to $1 billion annually for flood control measures, $500-800 million annually for stormwater and polluted water management to meet environmental regulations, hundreds of millions per year to treat drinking water for purity, and up to $300 million annually for water management systems to meet requirements for supply, water quality, and flood control. In total, these infrastructure needs represent billions in underfunded recurring costs.
California also faces unique environmental and geographic challenges related to water management. The state must manage increasing water stress from drought, wildfires, aging infrastructure, and a balance between urban and agricultural water demands. While California spends roughly $35 billion annually on water and wastewater, an estimated 85% of that comes from local utility bills and fees. In response to limited support, local governments and water agencies are currently seeking different types of funding options to execute large-scale water projects.
The Monterey Regional Water Authority wants to expand water resources with a new desalination plant. That project will include sub-surface slant intake wells and related facilities including source water pipelines, product water pipelines, and brine disposal facilities. The project has been conditionally approved by the California Coastal Commission, with the remaining steps to include final city-level permits, a building permit for Cal‑Am, and resolving Coastal Commission conditions. A construction timeline is pending completion of these regulatory items.
The California’s legislative session ends in early September and there are positive indications that more funding for water will be allocated. There is large support for funding to be allocated for the California Water Resiliency Act. If passed, this statute will provide for a constitutional amendment that allows the state to transfer 1% of total General Fund revenues (valued at approximately $3 billion per year) into a new Water Conveyance & Capacity Infrastructure Fund that will provide financial support for multi-purpose water system upgrades. The fund will establish a multi-billion-dollar annual funding system to support water projects. If that happens, the Water Conveyance & Capacity Infrastructure Fund will be administered by the California Water Commission.
New York – Transit Infrastructure
New York’s Metropolitan Transportation Authority has a projected $35 billion budget shortfall that casts uncertainty over its $68.4 billion capital plan for 2025–2029. The capital plan outlines projects to revitalize and modernize the transit system, allocating nearly 90% of its funds to restoring basic infrastructure following decades of deferred maintenance. Key components include replacing more than 1,100 aging subway cars, upgrading commuter rail fleets, and enhancing bus service. The costs to cover these efforts is somewhere between $8.4 billion and $16.5 billion. Another priority is to modernize the existing power grid, starting with the replacement of 16 aging electrical substations, which are vital for uninterrupted service. The project also includes a range of station improvements, such as upgrades to 150 stops, the installation of new fare gates, accessibility upgrades, and platform safety enhancements.
New York City boosted its capital contribution from $1.2 billion in 2023 to $1.4 billion in 2024 and the amount for 2025 is still not finalized. Modest increases in keeping with historical trend will not be adequate to meet the MTA’s needs though. To fill the budget gaps they face, state and local governments are evaluating public-private partnerships, long-term lease agreements, and other collaborative types of funding options. City and state leaders are also considering increased mobility taxes, rideshare surcharges, and congestion pricing which is very controversial.
Arizona – Transportation Infrastructure:
The state of Arizona has a substantial shortage in its long-term transportation funding plan. The Department of Transportation estimates that the state will need approximately $231 billion to address transportation infrastructure needs through 2050. However, with only $69 billion in projected revenues, the state could face a daunting $162 billion deficit—over $31 billion of which is linked to highway-specific improvements. Several factors have contributed to this growing financial gap. Construction costs are rising, prices for materials have escalated and the state’s primary revenue streams have failed to keep pace or found ways to mitigate the price increases. Another hindrance is that Arizona receives between $700 million and $800 million annually from the Federal programs. That is not enough, and federal funding has remained static for years.
State and local government executives are exploring alternative financing strategies. The City of Phoenix and Maricopa County have implemented sales taxes and voter-approved bond initiatives to support transit and street upgrades. Meanwhile, rural regions are working with the Greater Arizona Development Authority which promotes public-private partnerships through grants and low-interest financing. Additionally, regional planning organizations are coordinating $400 million in one-time allocations to fund urgent projects.
North Carolina – Disaster Recovery Infrastructure:
Officials in North Carolina are confronting massive funding gaps as the state tries to rebuild infrastructure and restore communities impacted by recent hurricanes. With an estimated $10 billion still needed to fully recover, state leaders are urgently seeking new sources of financial support. Interestingly, although in March of this year $2.7 billion was allocated by FEMA to help North Carolina recover, the state is still waiting for at least $2 billion of that allocation. State lawmakers have allocated over $1.4 billion for storm recovery in recent years, with a new $524 million package approved under House Bill 47 to fund infrastructure, housing, and economic revitalization. Local municipalities are also taking creative approaches to bridge the gap, partnering with nonprofit groups in clean-up endeavors.
The North Carolina Department of Commerce has introduced the Small Business Infrastructure Grant Program to distribute a $1.4 billion HUD grants received through the Community Development Block Grant–Disaster Recovery program. The federal government, however, is currently clawing back some of this type of funding. The initiative focuses on restoring damaged infrastructure in low-income and rural areas while improving sustainability so that it can withstand future severe weather events. Contractors for projects involving road reconstruction, water systems, and climate-resilient infrastructure are in high demand. .
In light of these funding challenges, private sector investors, non-profits, and public sector trust funds are expected to be strong contenders for the opportunities that will be available to collaborate and enter into partnerships with public entities. The issues facing government leaders in the states mentioned are very similar to almost every other state in America. This is the perfect time for these interested parties to reach out to state and local leaders to discuss funding support.
