The duration of tariffs will be key in determining their impact on municipal finances, several S&P Global Ratings' public finance and economic analysts said Thursday in a webinar.
S&P issued revised economic projections for the United States Thursday. U.S. real gross domestic product growth in 2025 is forecast at 1.5% growth, 60 basis points lower than its earlier forecasts, said Nora Wittstruck, S&P chief analytical officer, with a downside possibility of 1.1% GDP growth this year.
S&P analysts said the economic slowdown and federal policy changes will have a mixed effect on municipal credit quality.
U.S. States Sector Lead Geoff Buswick said he expects the federal government will cut Medicaid funding. States had different reactions to the 2010 Affordable Care Act's goal to expand coverage to everyone earning up to 138% of the poverty line. The ACA required states to kick in some of their own money from 2020 onward. Many states agreed to it. Many others did it with "trigger laws," which indicated state policies would change if federal aid changed. Ten states haven't signed on.
Buswick said his team was trying to get clarity on any federal cuts to Medicaid.
Many local governments get federal money by way of state governments, said Jane Ridley, local government sector lead. So, any possible federal cuts would be
Most local governments currently have solid credit, Ridley said.
Ridley said she was keeping an eye on federal cuts to public education, like the Title 1 program.
S&P Higher Education and Charter School Sector Lead Jessica Wood affirmed S&P's "bifurcated" outlook for the higher education sector — stable for stronger credits and negative for the weaker ones.
Federal
While there have so far been no changes to Pell Grant and federally subsidized student loans, there have been proposals to do so. Cuts to these would impact schools that have a greater portion of students using the programs, some of these are lower-rated schools, Wood said.
Foreign citizen students could be another area hurt by government decision.
The federal government recently introduced a 1.4% tax on endowments for institutions with endowments over $500,000 per student. If that were to be expanded to more moderately sized endowments, it could affect some A-rated schools, Wood said.
There has been talk of pulling tax exemption from at least some higher learning institutions. This wouldn't impact the highest rated institutions particularly since they already sell much of their debt on a taxable basis, Wood said. It would probably hit smaller institutions, making selling smaller bonds harder.
K-12 school districts and charter schools have yet to be impacted by federal policies as the funds they depend on continue to flow, Wood said, with the Department of Education cutbacks not yet having significant impacts.
S&P Transportation Sector Lead Kurt Forsgren said
S&P also expects exports to decline and this would adversely affect ports.
Forsgren said he expected port activity declines to start on the West Coast this month and come to the East Coast a few weeks later.
Most ports are in good financial position and many have agreements with users that protect them financially from downturns in use.
The impact of the tariffs will depend largely on how long tariffs continue, Forsgren said.
S&P Housing Sector Lead Hannah Blitzer said she still has a stable outlook on the housing bond sector. "With federal cuts and staffing reductions, our view is that public housing authorities and stand-alone Section 8 properties could be most exposed to operating pressures as they are most reliant on federal funding," she said.
S&P believes the federal government will continue to fund Fannie Mae and Freddie Mac lenders, Blitzer said.
