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2023 Credit Outlook For U.S. Public Finance: Credit Headwinds Accelerate


U.S. Local Governments Credit Brief: New York School Districts


U.S. Not-For-Profit Health Care Rating Actions, February 2023


Bulletin: Houston Independent School District, TX Takeover By Texas Education Agency Does Not Affect Rating


U.S. Local Governments Credit Brief: New York State Counties And Municipalities Means And Medians

2023 Credit Outlook For U.S. Public Finance: Credit Headwinds Accelerate


At the start of the year, credit conditions have weakened due to higher inflation, rising interest rates, and slowing economic growth (see "Economic Outlook U.S. Q1 2023: Tipping Toward Recession," published Nov. 28, 2022, on RatingsDirect). Despite this, all sector views are stable except not-for-profit health care and mass transit. Higher education has a mixed sector view, with lower-rated institutions and those with limited enrollment or financial flexibility facing more credit pressures. The rating distribution to start the year remains strong; 95% of outlooks are stable, 3% are positive, and 2% are negative (see "U.S. Public Finance Rating Activity, December 2022," published Jan. 6, 2023).

We have published our credit outlooks for all key sectors. In each report, we provide insight on the key issues we are watching in the year ahead. Federal fiscal and policy support has been significant since the onset of the pandemic and passage of the Infrastructure Investment and Jobs Act and the Inflation Reduction Act represent an important shift in funding U.S. infrastructure, promising much-needed federal support and relieving some pressure on state and local governments. Despite these generally positive developments, the announcement by the U.S. Treasury that on Jan. 19, the U.S. sovereign debt level would hit the statutory limit established by law contributes to uncertainty for U.S. public finance.

We expect that Congress will engage in brinksmanship with the debt ceiling but will address it on time, either raising it or suspending it, understanding the severe consequences on financial markets and the global economy of not doing so (see "Credit FAQ: U.S. Sovereign Debt Hits The Ceiling Again," published Jan. 20, 2023).

Inaction on the U.S. debt ceiling and a default would have a broad range of economic, budget, liquidity, and capital market implications across U.S. public finance that could lead to widespread credit deterioration.

There are many debt issues in U.S. public finance that are directly linked to the sovereign rating by our criteria, such as municipal housing issues backed by the federal government or reliant on investment in U.S. government securities, government-related entities in the housing and public power sectors, federal leases, and defeased bonds that rely on investment in U.S. Treasury or agency securities for debt repayment.

For the remainder of public finance issuers, we do not directly link our ratings to the U.S. sovereign debt rating. However, the ability to be rated above the sovereign and the framework for determining the notching are outlined in our methodology "Ratings Above the Sovereign--Corporate and Government Ratings."

Following is a more detailed look at key sectors including links to each report.

U.S. States

The shallow recession forecast for the first half does not equate to a hurricane for states' finances.  Although certain revenue and expenditure assumptions may get dampened, states' generally strong reserves will function as a credit-stabilizing umbrella. ("Outlook For U.S. States: Rainy Day Funds Will Support Credit In A Shallow Recession," Jan. 5, 2023.)


U.S. Local Governments

Our view reflects the local government sector's financial reserves and long history of effective responses to unexpected circumstances.  Having federal stimulus money on hand prior to a recession—rather than after a long period of economic weakness—should also help operating stability for cities, counties, and school districts. We expect they will have time to respond to economic challenges before credit quality is threatened, underscoring our view of the stable nature of the sector. However, any LGs that aren't proactively managing high inflation and preparing for a weaker economy could be challenged to maintain balanced operations. ("Outlook For U.S. Local Governments: Reserves And Agile Management Will Provide Stability In A Recession," Jan. 10, 2023.)


Not-For-Profit Higher Education

Our view of the sector in the U.S. is mixed.  While institutions with strong demand, sound resources, and excellent reputations will likely maintain or strengthen their positions, we expect that less selective, regional institutions will struggle amid growing competition, higher expenses, and operating margin pressure that could weaken credit quality. Institutions at the lower end of the rating scale and those with limited enrollment or financial flexibility will face credit stress in 2023. ("Outlook For Global Not-For-Profit Higher Education: Credit Quality Continues To Diverge," Jan. 18, 2023.)


U.S. Not-For-Profit Health Care

We have revised our not-for-profit health care sector view to negative given persistent operating pressures coupled with investment market volatility that has eroded much of the balance sheet cushion built during the pandemic.  Margins and cash flow recently have at best demonstrated limited sustainability of a post-pandemic recovery and at worst have accelerated to uncharacteristically high losses. We do not expect full margin recovery in 2023 and will likely see continued operating losses, albeit at lower levels than 2022, for many institutions. Meaningful improvement will likely take multiple years. ("Outlook For U.S. Not-For-Profit Acute Health Care: A Long Road Ahead," Dec. 1, 2022.)


Transportation Infrastructure

Our view of business conditions and credit quality across the U.S. not-for-profit transportation infrastructure sector in 2023 is stable for airports (and related special facilities), toll roads, ports, parking and all federal grant-secured credits.   We have revised our sector view for mass transit to negative from stable to reflect financial pressures facing operators with a historical reliance on fare revenues, and other headwinds. ("Outlook For U.S. Not-For-Profit Transportation Infrastructure: COVID In The Rearview Mirror, Yet Transit Stuck In Second Gear," Jan. 11, 2023.)


U.S. Public Power And Electric Cooperative Utilities

We expect a continuation of rating stability among public power and electric cooperative utilities.  Our opinion reflects expectations of sound financial performance given the essentiality of electric service, coupled with the sector's record of credit-supportive ratemaking decisions and access to capital and liquidity. We will continue to assess management strategies for facing numerous risks and challenges, including inflation, recession, supply chain hurdles, increasingly stringent emissions regulations, climate change, and grid security. ("Outlook For U.S. Public Power And Electric Cooperatives: Essentiality And Strategic Planning Temper Challenges," Jan. 17, 2023.)


U.S. Charter Schools

Charter school demand continues to grow, per-pupil funding levels are healthy overall, significant federal funds remain available, and we expect credit stability for states.   These positives partially offset increased expense pressures, enabling the sector to enter 2023 with greater financial flexibility. ("Outlook For U.S. Charter Schools: Credit Profiles Hold Steady," Jan. 24, 2023.)


U.S. Public Finance Housing

Housing entities enter the year with healthy balance sheets and liquidity sufficient to sustain activities through the shallow recession we forecast.  Nonetheless, market headwinds may dampen both single-family and multifamily loan production, delay development, and pressure properties with thin operating margins. ("Outlook For U.S. Public Finance Housing: Economic Winds Won't Blow The House Down," Jan. 19, 2023.)


U.S. Municipal Water And Sewer Utilities

Although cost pressures are mounting, cash reserves have grown, and rate-setting flexibility is strong.   But there are some pockets of credit pressure, especially for utilities with substantial deferred maintenance or limited economic underpinnings. ("Outlook For U.S. Municipal Utilities: Stable, Though Risks Are Rising," Jan. 12, 2023.)


This report does not constitute a rating action.

Primary Credit Analysts:Robin L Prunty, New York + 1 (212) 438 2081;
Eden P Perry, New York + 1 (212) 438 0613;
Sector Lead:David N Bodek, New York + 1 (212) 438 7969;
Geoffrey E Buswick, Boston + 1 (617) 530 8311;
Suzie R Desai, Chicago + 1 (312) 233 7046;
Kurt E Forsgren, Boston + 1 (617) 530 8308;
Jenny Poree, San Francisco + 1 (415) 371 5044;
Jane H Ridley, Englewood + 1 (303) 721 4487;
Jessica L Wood, Chicago + 1 (312) 233 7004;
Marian Zucker, New York + 1 (212) 438 2150;

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