US State economies show strength, future growth may wane: Fitch

May 29, 2024 (MLN): Economic growth remains solid for U.S. state governments overall, although initial data point to weaker medians in the coming months, according to Fitch Ratings’ latest media metrics report.

Sector medians suggest that through fiscal 2022 states had ample expenditure flexibility, low long-term liability burdens and steady operating performance.

The medians for 33 states with fiscal 2023 annual comprehensive financial reports (ACFR) reviewed by Fitch are either stabilizing or show some signs of modest weakening. State budgetary results from fiscal 2023 and mid-year fiscal 2024 indicate that revenue growth is slowing and, in some cases, even declining.

Fitch’s analysis for state governments includes budgetary results due to their relative timeliness and importance for state governments in their own fiscal planning. For fiscal 2022, it took 18 months for all 50 states to release ACFRs.

This lag has become more typical and reflects the complexity of compiling financial data across entities as large and complex as state governments.

State auditors have noted transition issues in moving away from legacy financial management systems and staffing challenges for accounting personnel.

“Slower macro-economic growth and tax policy changes will continue to be a primary catalyst for credit conditions,” according to U.S. State Government Ratings Head Eric Kim.

“Continued implementation of large tax policy actions will lead to further headwinds that states will have to address and ultimately protect against,” said Kim.

Mathematical factors such as lower denominators for calculations using total governmental fund revenues or expenditures, and personal income, as one-time federal aid rolls off financial statements is also likely to drive weaker 50-state medians for fiscal 2023 and 2024.

However, very high ratings reflect Fitch's view that states will continue to act prudently in managing a more challenging budget environment as they prepare for the next inevitable downturn.

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