As COVID-19 continues to slow the economy, the media has been rife with headlines foretelling revenue shortfalls and a cash crisis for battered state budgets. We look under the hood to better assess the status of the headline-grabbing states with the largest debt burdens.

Many States Had Prepared for the Unforeseen

Bond investors are right to be concerned. COVID-19 hasn’t been kind to anyone or anything, and municipal finances are no exception. When the pandemic struck, many investors expected state budget shortfalls to be as big as those of the 2008 global financial crisis and the recession that followed.

But municipal default rates have remained low through many crises, including the crisis of 2008. No state has defaulted since the Great Depression, and with today’s ample liquidity and market access, no state is even close to being in danger of a missed payment. While the strain of the pandemic may result in rating downgrades, we expect the overall credit quality of states to fare well through the coronavirus crisis.

Why has state credit quality remained so strong? To start, states came into 2020 on much stronger footing than in 2008. Municipal and state governments had used the long economic expansion since the global financial crisis to shore up their balance sheets and reserve funds. In fact, states faced the pandemic with more cash on hand than they have had in decades—on average, almost 8% of budget. And municipal debt to GDP is well below levels of 15 years ago.

Additionally, the federal government responded to the crisis by passing the initial CARES Act, which included direct disaster-related aid to municipalities of $150 billion—plus another $275 billion earmarked specifically for healthcare, education, transportation and airports.