S&P revises Arizona's outlook back to stable from positive

Arizona's outlook from S&P Global Ratings is back to stable after 14 months at positive.

The rating agency, which raised its outlook for the state's ratings in July 2024, pointed to potential financial pressure sparked by tax and policy changes on the federal level for the reversal.

"The outlook revision reflects our view of the state's evolving budget environment and the need to maintain strong budget management practices as it navigates potential economic uncertainty and effects from federal policy changes to maintain its strong finances," S&P said in a report on Thursday.

Arizona's AA issuer rating and AA-minus rating for appropriation-secured certificates of participation were affirmed by S&P, which cited the state's economic and population growth, budgetary discipline and low debt profile, along with a trend of relatively late annual audits.

It also noted the state's "demonstrated financial management and recent increases in reserves, although tempered by our view of potential financial and economic uncertainty influenced by federal changes that we believe could pose negative pressure on its budgetary performance."

H.R. 1, the massive federal tax and spending "One Big Beautiful Bill" signed by President Donald Trump on July 4, could reduce Arizona's general fund revenue by $459.6 million in fiscal 2026 and $398.5 million in fiscal 2027, according to a Sept. 18 report by the state's Joint Legislative Budget Committee.

The report said Arizona applied for $760 million from a federal program to reimburse states for border security costs incurred since 2021, adding the criteria or timeline for awarding grants is uncertain.

S&P said the state could take steps to mitigate impacts from H.R. 1, including addressing tax conformity.

At a ceremonial signing of Arizona's $17.6 billion fiscal 2026 general fund budget in July, Democratic Gov. Katie Hobbs warned H.R. 1 would be devastating for the state's spending plan.

Her office did not immediately respond to a request for comment on S&P's outlook revision to stable.

Arizona has an Aa1 issuer rating and stable outlook from Moody's Ratings.