Moody's Ratings upgraded Nebraska's issuer rating to Aaa from Aa1 on Monday and its $24 million certificates of participation to Aa1 from Aa2. The outlook is now stable.
The upgrade stemmed from the state's improved financial position and low liabilities, which Moody's said give Nebraska significant financial flexibility.
"The state's stable economy, strong reserves, low fixed costs and prudent budget management position it well to weather uncertainties stemming from potential federal policy actions," such as trade uncertainties that could hit the agriculture sector, Moody's said. Reductions in the federal share of Medicaid funding also concern the rating agency.
Pisei Chea, vice president and senior analyst at Moody's, said Nebraska's improved financial position stems from higher-than-projected revenues.
"The state has added to its cash reserve fund since fiscal 2019 as a result of revenue overperformance," Chea said. "While some of the funds have been used for one-time purposes, it remains nearly twice the amount from five years ago."
Chea noted that while the corporate and individual income tax cuts passed in 2023 reduce ongoing revenue, the state had the leeway to implement them due to its strong revenue performance. And those cuts can be paused at any time, if necessary.
"I praise Moody's recognition of Nebraska's strong economic position. The trajectory of our state's economy and financial stability is better than ever," Gov. Jim Pillen said in a statement. "We must continue our work to deliver a strong fiscally conservative budget and rebalance our tax structure, so we are less dependent on soaring local property taxes."
The stable outlook reflects Nebraska's strong reserve levels, healthy financial performance and the expectation of continued robust reserves in line with its Aaa-rated peers.
But Moody's noted Nebraska's dependence on the agriculture sector exposes it to commodity price volatility and said it could downgrade the state if a weakening of the agriculture industry or demographic trends lead to structural imbalance and revenue shortfalls.
A downgrade could also result if the state is unable to weather federal policy actions that create budget deficits or if there is a material decline of the GAAP-basis available fund balance to below 25% of own-source revenue, Moody's said.
Chea said the state has shared no plans to authorize additional debt beyond the $450 million of road bonds it recently approved. And "Nebraska has always been a very low-debt state," Chea said.
Pillen and state legislators are trying to close a $289 million budget gap. The governor has advocated service cuts and cash fund sweeps, the
"Everyone keeps calling it a deficit, but I call it a manufactured deficit," state Sen. Machaela Cavanaugh, D-Omaha, told The Bond Buyer. "We have choices."
There is plenty of money sitting in the property tax relief fund, she said, and then there are the income tax cuts. "If we want to keep cutting corporate and individual income taxes … that rating probably won't last," she said.
Cavanaugh said a pause in the income tax cuts "would be much more sustainable," and "even this year, there are more transfers coming out of the cash reserves. ... I am concerned that we are on a very unsustainable path with the choices that we are making," she said, adding that she favors "funding government services and not putting aside $1.2 billion for a tax that we don't levy."
A spokesperson for Pillen declined to comment.
The state recently rose to 24th from 28th in the State Tax Competitiveness Index rankings determined by the Tax Foundation, a nonpartisan tax policy nonprofit based in Washington, D.C.
That rise was due mainly to its tax reforms, including the income tax cuts two years ago, said Abir Mandal, senior policy analyst at the Tax Foundation. Nebraska "lowered rates further than initially anticipated [and] there are plans to further cut income taxes and corporate income taxes to 3.99% by 2027," he said.
Mandal said Nebraska's corporate tax ranking rose seven places, to 20th, reflecting both a reduction in rates and a streamlining to a single-rate tax structure. Its individual income tax ranking jumped three places, to 26th, based on the rate reduction and a consolidation of tax brackets from four to three.
"There is a degree of uncertainty around the economy with regards to the volatile stock markets and fears of a tariff war-fueled recession that should give every state government a pause, especially an agricultural exports-based economy like Nebraska," Mandal said.
"We cannot be sure how much buffer the state has to deliver on the planned income tax cuts and proposed property tax relief, especially in the face of reduced transfers from the federal government under the new administration," he added.
He noted certain legislators have called for pausing the income tax cuts. That, if initiated, "should provide adequate excess revenues to cover the budget deficits over the next two years," and should not affect its score on the Tax Foundation's index, Mandal said.
Cavanaugh noted Nebraska also has to worry about the impact of federal policy.
"If there are massive cuts to Medicaid or if Medicaid goes to a block grant, that's going to harm us," she said. And as for tariffs, "I assume that there will be financial repercussions for Nebraska as an agricultural state that exports.
"I think that Nebraska is going to face hardship due to federal decisions," she said.
Nebraska is also rated AAA by S&P Global Ratings. The outlook is stable.
