Our Top Risks Reflect Heightened Uncertainty

The April 2 tariff announcements by the U.S. administration--and the subsequent escalation in the trade conflict between the U.S. and China--went far beyond what financial markets expected. President Trump's 90-day pause of most tariffs didn't remove the uncertainty around what could ultimately occur. The tariffs and other policy shifts that slow economic growth or worsen inflation could have an outsize effect on government entities, in particular those that are struggling to maintain balanced operations. S&P Global Ratings believes that, with some exceptions, the largest risk to most public finance sectors is from the potential for slower economic growth or recession.

U.S. public finance sectors with the potential for more targeted effects on costs from tariffs include public utilities that source essential inputs like chlorine from Canada and Mexico, and U.S. ports and tolled border crossings where tariffs could weigh on volume and revenue. Some regions, in particular those with auto manufacturing, may be more susceptible to the economic effects of tariffs. For example, in Michigan, a weaker economy could test all issuers to maintain balanced operations if revenues fall and operating costs rise.

We believe most public finance issuers can adjust to short-term budget disruptions caused by tariffs. However, the duration of the shock and resulting uncertainty will meaningfully inform the level of credit pressure that issuers experience.

Below, we recap some key insights from various thought leadership articles focused on federal policy changes published in the last 100 days (see Related Research for the complete list).

Worsening Economic Trends Caused By Tariffs Could Require Government Reprioritization

The repercussions of tariffs could weaken consumer confidence, stifle business growth, and increase unemployment, leading U.S. states to reduce financial support to schools and local governments.  Governments that were struggling to maintain balanced operations will face greater challenges if economic growth slows or inflation levels rise. Public schools and local governments facing localized pressure from tariff-induced impacts could be particularly affected by job losses or lower sales tax collections. Beyond the risk of a weaker national economy, we expect much of the impact of tariffs will be more issuer- or in some cases, region-specific; in those situations, the effect on credit quality will depend heavily on an issuer's ability to withstand the duration of the potential revenue or economic pressures.

U.S. ports and tolled border crossings that handle cargo, particularly from China, are likely to face lower volumes.   Although many U.S. port volumes (containers and tonnage) have surged since fall 2024 as importers and companies stockpiled inventories ahead of potential tariffs, we anticipate declines in 2025 for imports and many categories of exports including agricultural products, in particular to and from China. Recent data from Container Atlas indicate daily ocean container bookings from China to the U.S. are down 20% from the same period last year as importers slow cargo given evolving tariff levels. In addition, a proposal by the Office of the U.S. Trade Representative to levy fees on Chinese-built vessels' port calls to subsidize the U.S. shipbuilding industry could also have the effect of disrupting port volumes and logistical trade channels. Revisions to an earlier plan would charge all Chinese-built and -owned ships docking in the U.S. a fee based on the volume of goods carried, on a per-voyage basis, and also charge any vehicle carriers not made in the U.S. calling at U.S. ports.

Finally, many cross-border toll roads and bridges are highly dependent on trade with Mexico and Canada, and to the extent tariff policies change the economics of manufacturing and production, tolls from commercial vehicles--typically a significant proportion of toll revenues--would be negatively affected.

The ability of management to raise rates and charges to maintain financial margins will be key to credit stability should activity levels materially decrease for an extended period. Conversely, if activity levels will be materially lower with high unlikelihood of recovery, stressing financial metrics, it could lead to downward rating pressure.

Renegotiation Of The Tax Cuts And Jobs Act Could Add To Budget And Debt Costs

Medicaid cuts, depending on the method and amount, could require some U.S. states to cut services to maintain budgetary balance.   Medicaid is the largest expenditure (inclusive of state and federal funding) in states' budgets. Possible federal actions as part of the federal budget reconciliation process could shift significant Medicaid and Children's Health Insurance Program costs to states over the next 10 years, costs that we believe would be difficult for any state to absorb without material changes in spending or program eligibility. Although the magnitude and implementation period of potential federal changes are critical to states' ability to make budget adjustments, we believe states generally possess good autonomy to implement changes to their Medicaid programs, which could help partially offset potential credit pressures. The ultimate determination of credit impact will come down to what changes are made, the significance of the cost shifts, and the time frame states are provided to adjust to the new policy directives.

Not-for-profit acute health care providers, which have begun to exhibit more financial stability in the past year, could also experience margin compression from Medicaid cuts.   The federal government's focus on potential cuts and policy changes to the Medicaid program, which includes various supplemental programs and Medicaid expansion through the Affordable Care Act, could affect some rated acute care hospitals. The credit impact would depend on the details of the policy changes, including the timing and size of potential Medicaid cuts, a particular issuer's exposure to specific Medicaid payments (which varies), and management initiatives to reduce spending that help offset reduced funding.

Our rated children's hospitals, safety net hospitals--many of which are academic medical centers, and district hospitals typically have the most Medicaid payment exposure; however, there are other systems and stand-alone hospitals that may have meaningful Medicaid exposure. Potential cuts to the Medicaid program come at a time when many providers have stabilized performance following higher expenses related to inflation and labor, but not yet achieved target financial results. In addition, a growing number of providers rely on different Medicaid supplemental payments for cash flow support, and that funding could now be at risk.

The municipal bond tax exemption may remain largely in place, but some sectors could see increased borrowing costs if certain private activity bonds become taxable.   The threat to tax-exempt private activity bonds could cause widespread disruption in the housing sector, for example, that could require housing finance agencies and other issuers to adjust their financing strategies. Increased borrowing costs could subsequently trigger budget gaps and potentially shrink new development.

Stricter Immigration Policies Could Have A Mixed Effect On Ratings

Schools that rely on enrollment-based funding could be more vulnerable to revenue loss from a reduction in the international student population.   In addition to potential economic and workforce impacts, changes to federal immigration policy could put financial pressure on some school districts and higher education institutions, although significant uncertainty remains around the timing, magnitude, and implementation that complicates making cost or economic projections. If K-12 enrollment fell significantly due to immigration policy, it could exacerbate budgetary pressure in districts with a significant immigrant population where headcount determines per pupil revenues, particularly if budget gaps from expiring pandemic aid already pose a dilemma.

Many colleges and universities have faced credit pressures from lower enrollment amid rising competition for students, with a looming "demographic cliff." In some cases, international students have helped fill the domestic enrollment gap. Although many students enrolled in U.S. institutions are of international origin, less than 2% are undocumented (according to the American Immigration Council and Higher Ed Immigration Portal). However, if implementation of stricter immigration policies results in lower international student enrollment overall, schools with a significant international population could face additional budget pressures.

A tighter labor market, particularly in construction and leisure and hospitality services, could lead to higher operating costs across all U.S. public finance sectors.   Public finance issuers have incorporated recent years' inflationary increases and wage adjustments into budgets just as federal stimulus dollars are exhausted and changes in state-level tax policy kick in, which, for many, have reduced available resources. Some issuers are developing fiscal 2026 budgets with tighter year-end operating results or trying to close structural gaps. The federal government's changing immigration policy could exacerbate an already tight labor market, particularly in industries with high reliance on migrant workers.

The higher cost of labor and building materials could create budget gaps in the housing sector, slowing the development of affordable housing and limiting the financial viability of existing or new projects. In addition, increased costs could strain the ongoing maintenance and operations for existing affordable properties.

Certain safety net program costs could drop should border security efforts reduce in-migration, alleviating some budget pressures.  Tighter border policies could also relieve some costs for governments that experienced higher social service expenditures to support new arrivals entering the U.S. during the past few years, serving as a potential offset to rising costs for labor and construction. Furthermore, as the federal government contemplates Medicaid funding reductions to U.S. states, changes to border security could help trim program rolls.

Federal Workforce Reductions, Program Cuts, And Grant Clawbacks Could Create Cash Flow Gaps

Funding reductions for FEMA programs could require governments to borrow more to fund disaster resilience.   Cuts to federal resilience and hazard mitigation grants, including the Building Resilient Infrastructure and Communities program, could reduce the future ability of state and local governments to prepare for, respond to, and recover from disasters such as hurricanes, floods, and wildfires. Alternative resources at the state and local level to build resilient and disaster-ready communities could be constrained given the wide-ranging economic and revenue impact of announced federal policy changes. As a result, local governments may reduce funding for infrastructure programs, which could increase long-term vulnerability to the economic and credit impacts of disasters.

Our ratings reflect our expectation that the availability of federal disaster relief funding will continue for disaster preparedness, response, and rebuilding; however, in our opinion, the establishment of an advisory council to evaluate the Federal Emergency Management Agency's effectiveness and role (Executive Order 14180 of Jan. 24, 2025) and the clear emphasis on state and local preparedness in national resilience strategy (Executive Order 14239 of March 18, 2025) could signal a shift in the balance of risk sharing between levels of government. Even if immediate federal recovery aid continues to flow after a disaster, we think a pullback in federal support for disaster mitigation and resilience at the state and local levels could lead to higher costs and liabilities for entities most exposed to physical climate risks and could, in some cases, lead to weaker credit quality.

Delays in grants and approvals for certain programs could create funding and operational uncertainty.  Federal funding cuts or weaker program administration through federal staffing reductions could affect many U.S. public finance sectors, some more than others. More specifically, it could lead to credit quality deterioration for affordable housing lenders, owners, operators, and developers that rely on federal funding, including public housing authorities (PHAs) and stand-alone Section 8 properties.

Funding delays could cause budget gaps from either the inability to scale back or offset expenses should federal revenues fall. Although rated PHAs reported median cash on hand of 209 days as of their latest audits, we expect that blanket cuts to the Department of Housing and Urban Development's budget and staffing could pressure liquidity.

Similarly, workforce and program reductions at the Department of Education could result in delayed disbursement of federal grant funds allocated to local education agencies, including many school districts and charter schools. Public schools' dependence on federal revenue varies, and most are primarily funded from local revenue. That said, significant federal aid cuts or delays, particularly to Title I funds for economically disadvantaged students, could elevate the importance of liquidity and financial management for schools or districts more dependent on federal dollars.

Colleges and universities facing federal research funding cuts could experience financial pressure.  S&P Global Ratings believes already-heightened credit risks for U.S. colleges and universities with significant federally funded research are rising, given evolving policies that might reduce or delay the funding, or potentially limit indirect cost recovery rates. The new administration has made some federal research funding contingent on particular universities executing certain policy changes. Although schools receive some funding from state and local sources, philanthropy, internal cash flow, endowment income, and other organizations, federal money is the primary source. Material cuts to federal research funds could create operating pressures.

2025 Could Test Management's Ability To Pivot

In our view, how management teams activate contingency planning, make expenditure cuts, or use scenario planning to determine where financial and operating vulnerabilities may materialize are similar to strategies employed during the pandemic. These management techniques will remain an important determinant of credit quality and as this uncertain policy period plays out, could be effective in maintaining credit stability.

Related Research

• U.S. Brief: Colleges And Universities Face Federal Research Funding Cuts That Could Create Financial Pressure, April 21, 2025
• Credit Conditions North America Special Update: Tariff Turmoil, April 17, 2025
• Global Credit Conditions Special Update: Ongoing Reshuffling, April 11, 2025
• "Liberation Day" Tariff Announcements: First Take On What It Means For U.S. And Global Outlook, April 3, 2025
• The U.S. Public Finance Housing Sector Could Face Credit Pressure From Federal Policy Shifts, April 3, 2025
• Academic Medical Centers And The Intersection Of U.S. Not-For-Profit Higher Education And Acute Health Care, March 25, 2025
• U.S. Public K-12 Schools Credit Quality Is Not Currently At Risk From Proposed Changes To Department Of Education, March 24, 2025
• U.S. States Brace For Potential Medicaid Funding Gaps, March 20, 2025
• U.S. Public Finance Credit Ratings Are Typically Resilient To A Federal Government Shutdown, March 17, 2025
• U.S. Local Government Credit Quality Could Wobble As Federal Policy Shifts, Feb. 27, 2025
• U.S. Public Finance 2025 Outlook: Cautiously Stable For Most Sectors While Others Are Pressured, Jan. 29, 2025
• How Proposed Immigration Policy Could Affect U.S. Public Finance Issuers' Creditworthiness, Nov. 20, 2024