US Credit Downgrade: What it Could Mean for State and Local Governments

Last week, Moody’s Ratings downgraded the U.S. federal government’s long-term credit rating from Aaa to Aa1. Moody’s indicated that the downgrade was driven by concerns with growing deficits, the country’s overall debt and subsequent significantly higher interest payments. The move marks the third time a rating agency has downgraded the U.S.’s credit rating, following S&P in 2023 and Fitch in 2011.

Two specific and important actions that state and local governments should take in light of these events:

1. Governments invested in Treasuries should ensure that their state and local laws and policies do not prohibit these investments if rated less than triple-A.
2. A federal downgrade may trigger provisions in bond purchase agreements and other financial transactions which may allow the underwriter or financial institution to walk away from the proposed financing if the bonds have not yet closed or been finalized at the time of the downgrade. Governments and their financing team should review these contracts for such provisions.  Governments should also consult counsel if they are concerned about the implications the US downgrade could have on their entity’s own credits.

When previous US sovereign debt rating downgrades occurred in the past, there was concern that some state and local government credits closely linked to the federal government, including some pre-refunded bonds, housing bonds with federal guarantees and bonds backed by federal leases, could be impacted.  While no direct impacts have materialized, it is important to maintain awareness to any further developments that may happen with this downgrade.  GFOA will be monitoring regulatory and market events as well.