FEIEF at Low Levels: States’ Financial Cushion Remains Far from Recovery
With the FEIEF at just 17% of its peak, the federal government and the states head into 2026 with less room to cushion declines in revenue-sharing transfers.
The Revenue Stabilization Fund for Federative Entities (FEIEF)—designed as an “insurance policy” to cushion declines in federal revenue-sharing transfers—ended 2025 with a balance of 12.833 billion pesos, according to figures from the Ministry of Finance and Public Credit (SHCP). While the amount represents a nominal increase of 1.185 billion compared with 2024, the level remains low: it equals about 17% of its historical peak, recorded in 2018, when it reached 76.348 billion pesos.
The comparison is significant. The FEIEF was created to smooth shocks to the Federal Participable Revenue (RFP)—the base used to distribute revenue-sharing transfers—and thereby reduce sudden liquidity pressures on state governments. But since 2019 the fund has lost strength after being heavily used during periods of weak revenue collection, especially during the 2020 economic contraction, when the drop in GDP affected tax and oil revenues and, through that channel, reduced the resources transferred to the states.
In recent years, the absence of sustained oil revenue windfalls—which in the past boosted stabilization funds—has also limited the replenishment of the FEIEF. While oil windfalls were recorded toward the end of 2025 and tax revenues performed better than expected, the rebuilding of the “cushion” has not been proportional to the accumulated drawdowns.
The underlying problem is structural: states rely heavily on federal transfers to fund operating spending and public services. When revenue-sharing transfers slow, the pressure falls on payroll, health services, public safety, local infrastructure, and payments to suppliers. With a small FEIEF, the adjustment tends to show up faster as cuts, rescheduling, or short-term financing measures.
From Stabilization Funds to “Agreements”: A Shift in Strategy
Public finance specialists have noted that, given the FEIEF’s reduced firepower, the federal government has increasingly turned to alternative mechanisms to address subnational cash-flow strains, such as budget expansions or reallocations, extraordinary support, and political agreements to unlock resources. In practice, this means part of the countercyclical role the fund was supposed to play is being replaced by discretionary decisions and case-by-case negotiations, which can create differences in response times and reduce certainty for state financial planning.
At the same time, state governments typically rely on their own tools to navigate liquidity gaps: taking on short-term debt (within legal limits and fiscal discipline rules), restructurings, using available cash balances, spending restraint, and strategies to improve own-source revenues. However, room to maneuver varies widely across states: economies with a larger tax base and stronger tax administration tend to hold up better, while states more dependent on transfers face more immediate adjustment.
Recent SHCP data show that between 2018 and 2025 there were years with shortfalls in total revenues (such as 2020 and 2023) and a decline in windfalls in 2024 and 2025. In the oil component, shortfalls were observed in 2019, 2020, 2023, and 2024, and only in 2025 were windfalls reported, totaling 79.916 billion pesos. On the tax side, revenue exceeded the budgeted level in 2025 by 55.293 billion pesos, although there were also shortfalls in several years during the period—reflecting public finances’ sensitivity to economic activity and external shocks.
Looking ahead to 2026, the trajectory of revenue-sharing transfers is back at the center of the debate. Ratings agency Moody’s expects faster growth in distributions from the General Revenue-Sharing Fund (FGP), the main source of operating income for the subnational sector, funded with 20% of the RFP. The agency acknowledges an official projection of 8.9% nominal growth in the FGP, but anticipates a somewhat smaller increase (7.1%) given expectations of more moderate economic growth than assumed in the General Economic Policy Guidelines.
At the same time, tax collection performance has shown resilience. Moody’s emphasizes that the federal government’s revenue effort—including adjustments and updates to the Special Tax on Production and Services (IEPS), as well as stronger enforcement—has allowed revenues to grow faster than the economy in certain periods. One illustrative data point: in January 2026, tax revenue posted a nominal year-over-year increase of 15.1%, a positive signal if it holds, though still dependent on the path of consumption, formal employment, and activity in key sectors.
On the horizon, key variables continue to shape fiscal space: GDP performance, the stability of the revenue base, volatility in energy prices, and the government’s ability to sustain tax collection without slowing activity. For states, the challenge is not only how much revenue-sharing transfers grow, but also how predictable the flow is—and whether there are buffers to prevent abrupt adjustments when there are deviations.
With a reduced FEIEF, the conversation returns to a basic point of fiscal discipline: smaller stabilizers force tighter planning, stronger own-source revenues, and improved spending efficiency—especially in states highly dependent on federal resources. The takeaway for 2026 is that the environment could be more favorable for nominal growth in revenue-sharing transfers than in prior years, but with less “insurance” available if the economic cycle turns.
In perspective, the FEIEF is still operating, but not with the strength it had when oil windfalls materially fed stabilization funds; as a result, the ability to respond to revenue shocks will depend more on tax collection, budget management, and federal-state coordination.
