By Steve Brawner, © 2025 by Steve Brawner Communications, Inc.

Governments want good credit ratings just like individuals and businesses do. In that respect, the U.S. government is moving in the wrong direction, and Arkansas is moving in the right one – for now.

S&P Global Ratings recently raised its long-term rating on the state of Arkansas’ general obligation bonds to AA+. It’s the state’s highest rating since 1966 and the second highest on S&P’s scale after AAA.

Meanwhile, Moody’s Ratings kept the state at Aa1, also its second highest rating, and said its outlook was “stable,” meaning it doesn’t think things will change. On May 16, it wrote, “The Aa1 issuer rating reflects the state’s strong governance practices, high reserves and low leverage. The state’s proactive and conservative budget management has driven a material increase in reserve levels while lowering tax rates.”

Sounds good to me.

Gov. Sarah Huckabee Sanders touted the state’s ratings in a press release, saying they could attract potential investors. Department of Finance and Administration Secretary Jim Hudson pointed to the $1 billion Arkansas Reserve Fund. 

The news was not so good at the national level. That’s where Moody’s downgraded the federal government’s credit rating from Aaa, the highest possible, to Aa1.

While that’s the same rating as Arkansas’, it is a setback. Moody’s is the third of the three major credit ratings to downgrade Uncle Sam. S&P did it back in 2011, while Fitch did so in 2023. Moody’s said the government’s debt and interest payment ratios have reached significantly higher levels than other similarly rated “sovereigns,” or countries. The total U.S. government debt burden counting state and local governments equaled 12% of revenues in 2024. For Aaa-rated sovereigns, it was 1.6%

Moody’s further explained that a series of presidents and Congresses have failed to reverse the trend of large budget deficits and rising interest costs – the latter now about $1 trillion annually. It expects budget deficits to grow even bigger in the coming years. By 2035, interest payments will consume 30% of government revenues. In 2024, they consumed 18%, and in 2021 it was 9%. The government already spends more on interest than it does on either defense or Medicare. 

One of the results of the nation’s fiscal situation is that investors will demand higher rates to finance the debt. In fact, that’s exactly what happened Wednesday in a government bond auction. That means even more tax dollars will go to those investors, including those from overseas, including China. Those higher rates will trickle down to other sectors of the economy, such as mortgages and credit cards.

Meanwhile, Moody’s changed its outlook from “negative” to “stable,” meaning it doesn’t expect the rating to worsen. It said the U.S. has strong credit thanks to its resilient economy and the dollar being the world’s reserve currency. Moody’s does not expect higher tariffs to significantly hinder the economy, and it has faith in the Federal Reserve’s monetary policy. It also believes the United States will continue to have strong institutions, including a constitutional separation of powers among the three branches of government.

The overall downgrade occurs as Congress moves toward passing President Trump’s One Big Beautiful Bill Act extending and expanding the Tax Cuts and Jobs Act of 2017 while cutting spending by much less. The House of Representatives passed the bill Thursday, 215-214, with all four members of Arkansas’ delegation voting with the Republican majority. The bill now moves to the Senate. It will change significantly there, but based on the past 25 years, we can predict the ultimate result: Big tax cuts and much smaller spending cuts, with bigger deficits the result.

Let’s bring this back to Arkansas, whose own good credit and $1 billion reserve fund stem from responsible budgeting decisions but also from Uncle Sam’s borrowed money. 

Arkansas, like most states, is a “recipient state.” It receives more from the federal government than it pays in federal taxes. That reality props up Arkansas’ state budget. For example, Medicaid provides health coverage and services for 813,000 children and adults here. Its total annual spend in Arkansas is $8.6 billion. Federal funding is 81% of that, according to KFF. Take away those federal dollars, and Arkansas’ health care system collapses and its big budget surpluses go away. Moreover, the state budget is still benefiting from the billions of borrowed federal dollars flowing into the state during the pandemic. 

In other words, the state’s stable Aa1 rating from Moody’s depends in large part on the federal government’s credit, now downgraded to Aa1.

Let’s hope Arkansas moves up, and Uncle Sam reverses course. 

Steve Brawner’s column is syndicated to 19 outlets in Arkansas. Email him at brawnersteve@mac.com.