Moody's Ratings revised Missouri's outlook to negative from stable on Thursday and affirmed the state's Aaa issuer rating.
Moody's said the outlook revision was spurred by the state's large structural deficit, which will cause its high fund balances to drop below those of Aaa-rated peers.
It also affirmed the Aa1 ratings on the state's special obligation, annual appropriation and leasehold revenue bonds and the Aa1 rating on the Missouri School District Direct Deposit Program.
At the same time, Moody's assigned a Aa2 rating to $52.5 million of Series 2026 annual appropriation bonds for the Missouri State Fair Project, to be issued through the Missouri Development Finance Board.
The outlook revision affects about $1.8 billion in outstanding debt.
"The state's Aaa issuer rating incorporates its currently high fund balances and liquidity as of fiscal 2026," Moody's said in its rating report. "Overall leverage is slightly above sector medians because of underfunded pension liabilities, though the state has taken steps to provide stronger contributions to these systems."
But the rating agency said the state is facing a fiscal imbalance driven by tax cuts that curtailed general revenue growth and federal funding cutbacks around Medicaid and the Supplemental Nutrition Assistance Program, which will hit Missouri harder than most states.
Officials hope to restore structural balance by fiscal year 2028 through spending cuts which will need to be enacted in next year's legislative session. But Moody's noted that significant cuts, "especially for core safety net programs that an above-average percentage of state residents rely on," will be tough.
And while the state does have available fund balances it can draw on in fiscal 2028 if it fails to enact spending cuts, Moody's projects Missouri's available fund balance ratio will drop from 60% of revenue in fiscal 2025 to under 40% of revenue by fiscal year's end 2027.
"This ratio is still high but below other Aaa-rated peers and is somewhat inflated by balances not typically included in other state governmental reporting," Moody's said.
Missouri would have to show progress toward structural balance and balance sheet indicators consistent with Aaa-rated peers in order to see its outlook restored to stable, Moody's said.
The state could see a downgrade if there is a decline in its GAAP-basis available fund balance and cash balance to below 20% of own source revenue or below Aaa-rated peers, according to Moody's.
A downgrade could also result from extended structural imbalance that prompts further reserve draws or one-time rather than recurring budgetary solutions; from a weakening state economy or deteriorating demographic trends; and from a material increase in leverage and fixed costs.
Spokespersons for Gov. Mike Kehoe did not respond to multiple requests for comment.
