Budget delays don’t tarnish North Carolina’s triple-A ratings

North Carolina’s triple-A ratings are undaunted by the state’s late budget and projected out-year deficits.

The state plans to price $178.4 million of limited obligation bonds Oct. 30 and $328 million of GO bonds Nov. 5, and ahead of the deals the state’s issuer ratings were affirmed at Aaa by Moody’s Ratings and AAA by S&P Global Ratings and Fitch Ratings. Each agency rates the limited obligation a notch lower. The ratings have stable outlooks. 

North Carolina lawmakers have been unable to agree on a budget for the biennium from July 1, 2025, to June 30, 2027, due to disagreements between the state’s Senate and House of Representatives, both controlled by Republicans. Instead, the state has been operating on a continuing resolution based on the last fiscal year’s spending level. 

Republicans reconvened the legislature this week not to address the budget but to work on redistricting the state’s U.S. House districts. They aim to reduce the number of Democrats representing the state in the House by one. 

The GOP currently has a 10-4 advantage in the House delegation, in a state where the top performing Republican in a 2024 statewide race had less than 53% of the vote.

“Redistricting our already gerrymandered state is an especially cynical power grab, given there are several other critical issues that require your attention this month,” Gov. Josh Stein, a Democrat, wrote in a letter to the legislature.

The state Senate approved the proposed redistricting Tuesday on a 26-20 party line vote. The state House was expected to vote Wednesday.

“Our lack of a budget – and the lack of any traction toward getting one – should absolutely be a credit concern for our state,” House Democratic Leader Robert Reives II told The Bond Buyer. “That continuing resolution provision keeps the lights on, yes, but it also removes most of the incentive to get a deal done.” This has led to the General Assembly’s repeated failures to pass on time budgets over the last decade, Reives said. 

“Working on a continuing resolution due to a delayed resolution is an uncommon feature for a AAA credit,” said John Hallacy, president of John Hallacy Consulting LLC. “There should be some pressure now to resolve the budget impasse or there could be a reconsideration in the future.” 

The state government estimates Hurricane Helene, which hit the state in September 2024, led to $60 billion in damage. The state government has been awarded $6.5 billion in federal funds for recovery but has only received $1 billion so far. 

Reives said the meager aid was a short or long-term credit concern for the state. “It seems like the federal government is making North Carolina fend for ourselves… North Carolina cannot afford to pay for this recovery effort alone – especially as we double down on tax cuts that restrict our revenue. What happens when the next hurricane hits?”

Of the state’s challenges, “the thing I find most troubling is the potential for reduced federal disaster funding,” said Joseph Krist, publisher of Muni Credit News.

“It will produce more uneven recovery paths. It’s already showing up in places like Asheville where recovery has been very uneven, reinforcing class inequalities,” he said.

“Hurricane Helene will prove a costly disaster for the state, though the combination of the state’s considerable fiscal reserves, as well as federal funding, will help to mitigate the impact,” said Moody’s Vice President and Senior Credit Officer Dan Seymour. “If the Federal Emergency Management Agency changes its policies to reduce federal funding for recovery from major natural disasters, there are several states that will be faced with tough choices when their next storms hit.”

With passage of the One Big Beautiful Bill Act in July, North Carolina faces cuts to Medicaid and to other social welfare programs.

“I don’t think we have a clear picture of how bad Medicaid cuts will affect the state yet, but there are clearly hundreds of thousands of North Carolinians who rely on Medicaid expansion which is at risk,” Reives said.

“We really do not know the full scope of the prospective Medicaid cuts will be until the federal budget is done,” Hallacy said. “How it will be dealt with is unknown.” 

The recently passed cuts to Medicaid and other programs, “feature a deferred implementation period, making it too early to determine the full effects and credit implications, if any, that federal changes will have for North Carolina,” said S&P spokesman Jeff Sexton.

“We believe that the years-long lead time before these changes fully take effect, along with considerable state autonomy to implement changes in Medicaid programs, should limit immediate credit exposure,” he said.

In March the North Carolina Office of State Budget and Management projected an 8% revenue shortfall compared to needs in fiscal 2029 unless changes are made. It projected smaller shortfalls in fiscal 2027 and fiscal 2028 and larger ones after fiscal 2029. 

The office released a revised General Fund revenue forecast in late May that adjusted the revenue forecast for fiscal 2026 down by 0.6% and for fiscal 2027 down by 0.7%. 

“The large budget gap forecasted for 2029 is too far in the future to raise too much concern at present,” Hallacy said. “Smaller gaps for the next couple of years should be manageable.” 

“The long term budget projections could all change after the 2026 elections so my attitude is, we’ll see,” Krist said. Yet, “I’m not surprised that the ratings are still triple-A. The combination of low debt and, at the end of the day, a history of eventual budget balance under a continuingly strong economy give plenty of support.”

BofA Securities and Wells Fargo Securities are lead managers on the GO and limited obligation deals. JP Morgan and Truist Securities are co-managers.

MaguireWoods LLP is the bond and disclosure counsel. Davenport & Co. is the municipal advisor. 

The GO bonds are split between $147.9 million Series 2025C to be settled Nov. 19 and $180.1 million forward delivery Series 2026A to be settled March 4. 

The Series 2025C bonds are expected to have serial maturities from 2026 to 2039. The Series 2026A bonds are expected to have serial maturities from 2026 to 2034. 

Proceeds from the Series 2025C bonds will be used to refund Series 2015A bonds and to pay for tendered bonds responding to an invitation to tender sent out Monday. 

If the targeted “bonds offered to be tendered for purchase are less than the maximum amount the state determines to be economically beneficial, the state may use proceeds of the Series 2026A bonds to current refund on June 1, 2026 certain maturities, or portions of maturities, of the state’s general obligation refunding bonds, Series 2016A and general obligation public improvement (Connect NO) bonds, Series 2016B,” the state said in the GO’s preliminary official statement. 

In its AAA rating of North Carolina’s GO bonds, S&P cited historically strong economic growth, a history of prudent fiscal management and a low-to-moderate debt burden. It mentioned a well-funded pension system and an institutional framework that supports predictability of the state’s budgeting and operations. 

Even without budget approvals, there are provisions that allow the budget director to allocate funds for debt payment, S&P said. 

It is too early to determine the impact of planned changes to Medicaid on North Carolina, S&P said.

In the western part of the state, 97% of the state-maintained roads are open after Helene. Rebuilding efforts in the region “should somewhat offset the [economic] effects of lost tourism and business closures,” S&P said.

In the first two months of the current fiscal year, July and August, tax revenues were up 5.8% from a year earlier, S&P reported.

In explaining its Aaa rating, Moody’s spoke of very low leverage, with long-term liabilities at 47.5% of revenue, the 11th lowest of the 50 states, and superior economic growth. 

“Credit challenges include a history of late budgets, a long-running campaign of tax cuts that could reduce revenues in future years, and above-average exposure to climate risk,” Moody’s said. “In spite of these, North Carolina is one of the strongest states according to nearly every measure.”

Fitch made similar points. It said the state had “solid long-term prospects for continued economic expansion and diversification.”