S&P Global — 9 January 2025
Daily Update: January 9, 2025
US States Are Fiscally Healthy, But Wary of 2026
By Nathan Hunt
Start every business day with our analyses of the most pressing developments affecting markets today, alongside a curated selection of our latest and most important insights on the global economy
The COVID-19 pandemic was a budget buster for many US states. However, just a few short years later, most have returned to good fiscal health. According to S&P Global Ratings, most US states’ credit fundamentals are strong. State budgets tend to balance, and states act when revenues or expenses are outside of expectations. Many states maintain “rainy day” reserves to conservatively bridge temporary shortfalls. As a result, of the 49 rated states, S&P Global Ratings rated 41 AA- or higher, with 16 given the highest possible rating of AAA. But anticipated policy changes under the incoming Trump administration could affect state budgets through inflationary pressure, past wage adjustments, waning federal support and changes in state-level tax policy.
New administrations almost always affect states’ capital. There are practical reasons to believe that the incoming administration will be even more disruptive. Tariffs, tax cuts, immigration reform and lower federal spending can all affect state budgets.
Not all the fiscal challenges facing US states can be attributed to the changes in Washington, DC. States will be forced to account for cost increases and wage adjustments in their budgets due to inflation. Pandemic-era federal stimulus dollars are drying up, and some states will be looking to close gaps of up to 10% in their budget for fiscal 2026. Expenses incurred for social services for new arrivals to the US could be reduced for many states if legal and illegal immigration are curtailed under the incoming administration.
A strong US economy and vigorous federal government support allowed many states to reduce personal income tax rates in the past few years. However, economic growth is projected to slow in 2025, and support from the Tax Cuts and Jobs Act is ending. Medicaid costs are mounting quickly, partly due to unfavorable demographics. On average, states estimate that budgeted Medicaid costs swelled by 17% in fiscal 2024. Limited federal support of Medicaid shortfalls under the incoming Trump administration could create budgetary gaps. Insurance costs are also rising for many states due to cyberrisk and catastrophic weather events.
States have some fiscal room to accommodate additional budgetary pressure. Seven US states have positive rating outlooks: Arizona, Arkansas, Kansas, Oklahoma, Pennsylvania, Washington and Wyoming. The only state with a negative rating outlook is Mississippi. The trend across most states has been greater fiscal discipline. Most states tap bond markets for capital projects, rather than liquidity.
Today is Thursday, January 9, 2025, and here is today’s essential intelligence.
Listen: 2025 Outlook: What to Expect from Energy Transition, Climate and CERAWeek
What’s ahead for 2025? In the first ESG Insider podcast episode of the new year, we’re talking to Pulitzer Prize-winning author Daniel Yergin about the outlook for the energy transition in a landscape of geopolitical unrest and climate change.
—Listen and subscribe to the podcast from S&P Global Sustainable1
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—Read the article from S&P Global Ratings
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—Read the article from S&P Dow Jones Indices
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—Read the article from S&P Global Commodity Insights
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—Read the article from S&P Global Commodity Insights
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—Read the article from S&P Global Commodity Insights
Webinar: What's in Store for The Global Oil and Gas Industry in 2025 (Jan. 14, 2025)
Please join S&P Global Ratings sector leads for the oil and gas industry for a live interactive webinar on the key drivers and what we expect for in 2025. Look for our published outlook in advance of this webinar.
—Register for the webinar from S&P Global Ratings