Twelve states, including Florida, North Carolina, Tennessee and Texas, have full credit scores.
US fiscal health is in the spotlight after Moody’s ratings lower the US credit score.
In a May 16 announcement, the agency downgraded the US long-term credit rating by one, citing the federal government’s worsening fiscal outlook.
Moody’s decision overshadowed financial markets, launching trading week and increasing US government debt yields.
But while market watchers are monitoring potential fallout on Wall Street, the state’s financial position has become a focus of attention.
For now, the state may be largely unharmed by Moody’s actions. Twelve states, including Florida, North Carolina, Tennessee and Texas, maintain full credit scores from a variety of rating agencies.
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“Florida’s ‘AAA’ IDRs and full faith and credit ratings recognize the state’s history of sound financial management practices, high gap closure and preparation capabilities, and low long-term burden of responsibility,” Fitch Analysts said in the report. “The state’s long-term economic and revenue growth outlook should stand above national economic performance.”
The S&P Global Assessment assigned a triple-A score to North Carolina, citing Tarheel’s economic growth, financial management, and “commitment to maintain a balanced biennial budget.”
Tennessee has a Triple A rating from the so-called “Holy Trinity” of the leading credit rating agency.
A “State Financial Survey” survey predicts that general fund spending will decrease by 0.3% this year, while general fund revenues will increase by nearly 2%.
“The median fund balances on rainy days have increased each year since the aftermath of the Great Recession in 2011, and the state expects this streak to continue, with a median balance forecast of 14.4% at the end of fiscal year 2025,” the report states.
Pew Charitable Trusts has sounded a warning bell about a growing trend in preparation, particularly as uncertainty surrounding federal funds intensifies.
“And when recession risk rises, countries may also need reserves for the traditional purpose of helping to fill shortfalls in recession.”
In comparison, Connecticut, Illinois and New Jersey have the lowest credit rating in the country among the challenges of fiscal deficits, high pension liabilities and struggling economy.
Florida Governor Ron DeSantis will speak at the Republican National Convention held in Milwaukee on July 16, 2024. Madalina Vasiliu/The Epoch Times
However, analysts have become more optimistic about the financial outlook for these states in recent years.
In a November 2023 report, Fitch praised Illinois’ ability to implement important planned reserve contributions and maintain improved budget management.
Looking at the local bond market
Yet despite solid fiscal performance by many US states, market analysts say it is likely that financial market volatility will be felt in the municipal bond market, a corner of the financial market where states and local governments issue debt. This was observed in April when tariff-driven turbulence caused a vast movement.
“The municipal bond market was facing intense volatility in April,” Lawrence Gillum, chief bond strategist at LPL Financial, told the Epoch Times.
According to Gillum, a key issue facing the municipal bond market is supply and supply, which exceeds demand. In the first quarter of 2025, total state and local government debt issuance was $182 billion, an increase of 18% year-on-year.
“The increase in supply by size seen in the last 16 months can be a significant headwind if demand does not increase comparatively, but unfortunately it is not,” he said.
During the trading session on May 19, municipal bond exchange trade funds (ETFs) weakened slightly. The iShares National Muni Bond ETF and ISHARES High Hight Muni Income Active ETF were soaked by about 0.1%.
The long-term impact of Moody downgrades on the US bond market is uncertain. The impact on financial markets may not be as severe as Fitch and S&P have already downgraded the US below Triple A.
“Moody’s downgrade was not dramatic news (S&P and Fitch downgraded US debt a few years ago), but it has increased its 10-year yield, which is weighing the (equity) future.”
Long-term interest rates have risen, and the yields for 30 years have been shorter than 5% for the first time since the start of the year. The benchmark 10-year yield reached 4.5%.
Treasury Secretary Scott Bescent has dismissed one notch downgrade for Moody as a “metric of delay” caused by the previous administration.
Bescent said the Trump administration will strengthen federal finances by cutting spending and deregulating the economy.
“Why I’m sitting here is to take away the credit risks of the US government. I think the fees will naturally drop,” Bescent said at a May 5th event at the Milken Institute.
