The 2026 Infrastructure Fiscal Cliff: How Local Governments Are Preparing for the End of IIJA Funding

September 30, 2026, is circled in red on the calendars of city planners, state transportation departments, and heavy construction firms across the United States. On that date, the Infrastructure Investment and Jobs Act (IIJA)—widely known as the Bipartisan Infrastructure Law—is scheduled to expire. Signed in late 2021, the landmark legislation injected $1.2 trillion into the American built environment, including $550 billion in new, advance appropriations designed to modernize aging systems.[2][7]

Over the past five years, that funding has acted as the financial engine for more than 68,000 projects nationwide. It has paved highways, repaired structurally deficient bridges, modernized ports, and laid thousands of miles of rural broadband cable. But because the IIJA was explicitly written as a five-year authorization covering fiscal years 2022 through 2026, its impending sunset creates a massive "fiscal cliff" for local governments that have come to rely on the expanded federal partnership.[4][6][7]

The mechanics of this fiscal cliff are rooted in how municipal infrastructure is financed. Major capital projects—like overhauling a municipal water treatment plant or extending a light rail line—require years of environmental review, engineering, and procurement before a single shovel hits the dirt. Cities depend on predictable, multi-year federal funding formulas to confidently sign long-term contracts. Without a reauthorization bill in place, federal funding reverts to pre-2021 baseline levels, which have not kept pace with recent construction inflation.[2][4][7]

Water infrastructure is facing one of the steepest potential drop-offs. The IIJA allocated $50 billion over five years specifically for water systems, distributed primarily through the Clean Water and Drinking Water State Revolving Funds (SRFs). This money was heavily targeted toward urgent public health mandates, including the nationwide replacement of toxic lead service lines and the filtration of PFAS "forever chemicals" from municipal water supplies.[1][3]

The National League of Cities has warned that the expiration of this supplemental funding could severely limit the ability of local water authorities to deliver safe drinking water and manage wastewater. The IIJA effectively quadrupled annual SRF funding from its 2021 baseline of $2.7 billion to approximately $11.4 billion annually. If Congress does not maintain these authorization levels, cities will be forced to shoulder the burden alone, likely passing the costs onto residents through steep utility rate hikes.[1][3][7]

Surface transportation and mass transit face a similarly precarious timeline. The federal public transportation program, currently funded at $21.4 billion annually under the IIJA, is also tied to the September 2026 expiration. Transit agencies are already navigating a difficult post-pandemic recovery, and the Department of Transportation estimates a staggering $124 billion reinvestment backlog just to bring existing transit infrastructure into a state of good repair.[2]

Complicating the transportation picture is the structural insolvency of the federal Highway Trust Fund. The mass transit account of the trust fund has run deficits for more than two decades, spending more than it takes in from federal fuel taxes. The Congressional Budget Office projects that the gap between revenues and outlays will average $11.1 billion annually over the next five years, making any future reauthorization bill significantly more expensive to finance than the last one.[2][7]

In response to this looming uncertainty, municipal finance strategies are already beginning to shift. A 2026 survey of municipal infrastructure conditions revealed that cities are increasingly relying on local, cash-based funding rather than taking on new debt. High borrowing costs, combined with the unpredictability of future federal matching funds, have forced local leaders to exercise extreme fiscal caution, prioritizing the maintenance of existing assets over ambitious new expansions.[3]

The Volcker Alliance has noted that states and cities that used pandemic-era relief funds and infrastructure grants to cover recurring administrative or maintenance costs are at the highest risk of hitting a fiscal wall. If alternative local revenue sources are not secured by the end of 2026, some municipalities may be forced to scale back essential public works programs or delay critical safety upgrades.[5][7]

The heavy construction industry is also watching the September deadline with growing anxiety. The influx of federal capital drove a massive expansion in the sector, with highway spending rising by double digits annually since 2022. For bonded contractors, the expiration of the IIJA threatens to freeze the pipeline of new state Department of Transportation lettings, potentially leading to workforce layoffs and stalled economic momentum in the construction trades.[6]

In Washington, the legislative machinery has begun to turn, though a swift resolution appears unlikely. House Republicans recently introduced the BUILD America 250 Act, a proposed successor to the surface transportation provisions of the IIJA. However, the bill faces significant hurdles over proposed funding levels and controversial provisions that would exempt certain projects from standard environmental reviews.[2]

Budget hawks argue that the IIJA was always intended to be a one-time generational investment, not a permanent expansion of the federal baseline. They point to the soaring national debt and argue that continuing infrastructure spending at 2022–2026 levels is fiscally unsustainable without corresponding tax increases or spending cuts elsewhere.[6][7]

History suggests that local governments should prepare for a bumpy transition. A recent Congressional Research Service report documented that almost every major surface transportation authorization since 1991 has required multiple short-term extensions before a successor bill was finally passed. The 2009 expiration of the SAFETEA-LU act, for example, required ten separate extensions spanning 33 months.[2]

While projects that have already had their funds legally obligated will continue construction through 2027 and beyond, the pipeline for new infrastructure development is effectively on hold. For the next six months, city councils, state legislatures, and transit boards will be forced to plan their 2027 budgets in the dark, hoping that Congress can bridge the gap before the fiscal cliff becomes a reality.[3][4][7]