Overview

S&P Global Ratings' 'AAA' long-term rating reflects Utah's strong fundamentals including a diverse economy with strong population growth, historically proactive budget management, strong reserves, and a low-to-moderate debt and retirement liability burden. We believe these strengths helped Utah maintain a solid financial footing throughout economic downturns and we believe prudent fiscal management, including the state's practice of timely mid-year expenditure adjustments, position it well to manage potential softening of state revenues in the near term.

In our view, Utah's economic growth rate has been among the strongest in the nation over a one-, five-, and 10-year basis, as the state benefitted from higher natural population growth rates and a steady wave of net in-migration compared with other states. In 2021, the state's population increased by 1.7%, outstripping the 0.1% growth rate for the nation. We also believe its demographic and economic momentum helped the state rebound from the COVID-19 pandemic quickly, and we expect it will support the state's resilience through future recessionary periods. In 2022, Utah's annualized unemployment rate declined to 2.3%, substantially lower than the nation's annualized rate of 3.6%. In addition, the state's real gross state product (GSP) increased in calendar 2021 by a strong 6.8%, while the nation's real GDP increased 6.0%.

Utah's well-educated, young workforce and business-friendly climate continues to attract new business investments, but S&P Global Economics believes that the U.S economy will fall into a recession in 2023. Our U.S. GDP growth forecast is a 0.1% decline for 2023. Our lower GDP and inflation forecasts for 2023 and 2024 reflect the likely outcome of a more aggressive monetary policy stance to cool consumer spending and tamp down inflationary price pressures. (See "Economic Outlook U.S. Q1 2023: Tipping Toward Recession", published Nov. 28, 2022, on RatingsDirect.) S&P Global Market Intelligence's forecast for Utah supports this expectation, showing that the state's real GSP growth rate could slow to just 0.5% in 2023, albeit slightly better than the nation's GDP growth rate of 0.3%. It also forecasts Utah's unemployment rate will climb to 3.9% in 2024, before declining again to 3.6% in 2025, indicating a shallow recessionary impact and quick recovery relative to the nation.

The state exhibited strong financial performance historically, demonstrated through its consistent operating surpluses the past five years. These strong financial results allowed the state to build up reserves in recent years, which are at historic highs. At fiscal 2022 year-end, the state's combined general fund and education fund reserve balances totaled nearly $1.19 billion, or a strong 11.1% of combined fiscal 2022 general and education fund expenditures. Slightly over halfway through fiscal 2023, Utah reports robust growth in its general and income tax funds with $6.6 billion collected, or a 16.5% increase compared with the same period the previous year.

While Utah is not forecasting a recession in its base-case consensus revenue forecast, we expect the state will navigate its fiscal 2024 budget amid a flattening revenue growth picture compared with fiscal 2023. In March 2023, the state enacted a combined general fund, income tax fund, and uniform school fund budget fiscal 2024 budget, totaling $14.6 billion. It includes an income tax rate reduction to 4.65% from 4.85%, which is estimated to reduce state revenue by $380 million, along with a variety of other tax-relief measures. We view this action as credit neutral given the state's constitutional requirement to maintain a balanced budget throughout the year and its extraordinary ability to make expenditure reductions, when necessary. In addition, the state appropriated $233.1 million to increase its Weighted Pupil Unit for public education and $196.9 million for educator salary bonuses.

The state's financial performance is further supported by Utah's rainy day fund statute and funding mechanism, which require that at least 25% of any surplus revenue in either the general or income tax fund be deposited into the state's respective budget reserve account. These automatic surplus transfers continue until each budget reserve account reaches its cap; 9% of appropriations for the general fund and 11% of appropriations for the income tax fund. At fiscal year-end June 30, 2023, we expect the state's rainy day fund will be a very strong $1.2 billion, or approximately 12% of general and education fund expenditures, and the state has no expectations to use rainy day balances in future budgets. At fiscal year-end June 30, 2023, we expect the state's rainy day fund to be a very strong $1.2 billion, or approximately 12% of general and education fund expenditures, and the state has no expectations to use rainy day balances in future budgets.

Utah's limited debt profile also underscores our view of its credit fundamentals. The state's tax-backed debt has been declining given its very rapid amortization schedule and the enacted fiscal 2024 budget continues the state's trend of minimizing bonding by cash financing its capital projects. We calculate the state's net tax-supported debt at approximately $2.2 billion as of fiscal year-end June 30, 2022, including general obligation and lease revenue bonds, which we consider to be moderate at $728 per capita, 1.1% of GSP, and low at 1.3% of 2022 personal income.

We view the state's well-funded pension liabilities as a credit strength, given the state's record of exceeding its actuarially determined contribution levels. The state's three-year average pension funded ratio is 98%, partially reflecting being overfunded at fiscal year-end 2022, although with recent stock market returns this will likely decrease in the near term. On a combined basis, the state reported a net OPEB asset for its two single-employer, defined benefit retiree health care plans of $28.4 million for fiscal 2022.

Environmental, social, and governance

Utah, situated in the upper Colorado River basin, shares water usage with several other states along the river. In our view, the state faces elevated natural capital risk given pervasive drought conditions that are expected to continue in the western U.S. We think the long-term water supply challenges could dampen the state's robust demographic and economic growth. However, we believe Utah's mitigation efforts including funding in previous and future budgets and its commitment to planning for long-term water challenges could alleviate additional pressure within our credit rating analysis. Furthermore, the state is consolidating various action plans and directing both state and federal funds to water infrastructure and conservation projects. We view social and governance factors as having no material influence on our credit rating analysis for Utah.

Fiscal 2024 Budget Highlights

• $400 million state income tax revenue reduction to 4.65% from 4.85%, which we view as credit neutral given the state's ability to institute tax policy measures and manage prudently expenditures to sustain structural budget balance.
• Utah conservatively projects general fund and education fund revenues will be relatively flat at $11.7 billion for fiscal year 2023 and $11.8 billion for fiscal 2024.
• Of the state's $14.6 billion combined general fund, income tax fund, and uniform school fund budget, public education, with education spending comprising the largest portion at 37%. The year-over-year increase includes non-recurring transportation ($1.2 billion) and one-time debt reduction ($915 million) expenditures.

Fiscal 2022 (latest audited fiscal year)

On a generally accepted accounting principles basis, Utah ended fiscal 2022 with general fund and education fund revenue surpluses of $130.2 million and $1.1 billion, respectively. The governmental funds reported a combined $1.4 billion ending fund balance, or approximately 17.6% of expenditures. Individual income and corporate taxes accounted for 33.2% of total revenues while sales tax revenues accounted for 17.5%. Public education made up the largest share of total expenses at 27.9% while health and environmental quality accounted for 25%.

What We're Watching

• Utah maintained a strong financial position, with record reserves through fiscal 2022. However, weaker revenue trends could materialize alongside intensifying downside economic risks, including the prolonged high-inflationary environment and tightening monetary policy. S&P Global Market Intelligence expects Utah's economic strengths help mitigate recessionary effects, but we believe sectors with high-interest-rate sensitivity, including construction and real estate, could experience more negative effects. Simultaneously, constricted labor market conditions could contribute to higher state spending and public sector wage growth, which could pose a challenge to the state's budget performance.
• In addition to income tax rate reductions being enacted in the 2023 legislative session, the state forecasts flat revenues for fiscal 2024. We expect the state will adhere to its long history of budgetary balance and containing expenditures in the face of this change and it should economic conditions lead to pressure on other revenue sources. The legislature referred a constitutional amendment to voters that would remove limitations on the uses of income tax, which is currently restricted to public education, higher education, and to support children and individuals with disabilities. Conditional upon the measure's approval by voters in November 2024, the state would repeal its state sales tax on food beginning in calendar year 2025. It is estimated that this would reduce state sales tax revenue by $83.8 million in fiscal 2025 and $211.1 million annually beginning in fiscal 2026. We will continue to monitor the effects of future tax policy changes and their impact on the state's budgetary performance.

Credit Fundamentals

• Very strong governmental framework, with a constitutional requirement to maintain a balanced budget and a fiscal policy that allows for changes to the revenue structure and program spending by a simple majority of the legislature.
• Diverse economy, strong population and employment growth in recent years, and below-average unemployment, that offers employers a young, well-educated workforce.
• Continued good financial management, including proactive budget adjustments to maintain strong rainy day reserves, which are currently at strong levels.
• Low-to-moderate debt burden and limited OPEB liabilities.