Moody's Ratings revised Washington state's bond outlook to negative citing funding uncertainties and the legal challenge to the state's recently passed millionaire's tax ahead of a May 5 competitive bondsale.

The rating agency also affirmed the state's Aaa rating and assigned the same rating to an upcoming competitive deal.

Washington Treasurer Mike Pellicciotti said the negative outlook gives his office "the opportunity to take this message to the Legislature and governor and push for structural balance in the next biennial budget."

The negative outlook reflects the increased likelihood the state will rely on sizable onetime budget-balancing measures over the next 12 to 18 months, continuing a trend of general fund expenditures outpacing recurring revenues, Xing Chen Zhu, Moody's lead analyst, said in the report, published Wednesday.

The persistent operating imbalances and projected narrowing of budgetary reserves amid still solid economic and revenue conditions underscore the depth of the state's structural budget challenges and reduce its financial flexibility to absorb unexpected revenue or expenditure shocks, the agency said.

The revised outlook to negative from stable, which also affects the state's school bond guarantee program, comes as it preps the competitive sale of $545.9 million Series R-2026C various purpose general obligation refunding bonds and $240.3 million Series R-2026D motor vehicle fuel tax and vehicle-related fees GO refunding bonds.

"In terms of our upcoming bond sales, we expect that investors will continue to be attracted to Washington's strong economy, the liquidity of the state's name and the state's long-term growth prospects," Pellicciotti said.

Moody's also affirmed its Aaa rating on the state's outstanding GOs, an Aa1 rating on outstanding certificates of participation, its Aa1 rating on outstanding Tumwater Office Properties lease revenue refunding bonds issued in 2014 for the Washington State Office Building and its Aaa rating on the Washington State School Bond Guarantee Program.

"The outlook revision reflects rising downside risks to the state's financial flexibility given continued reliance on one-time budget solutions to support general fund spending, a projected narrowing of budgetary reserves and ongoing legal challenges to new revenues intended to help restore budget balance," Zhu said in the report.

The affirmation of the state's Aaa issuer rating "is supported by the state's strong underlying economic fundamentals and ample revenue-raising and expenditure," Zhu said.

The Aaa GO rating is the same as the state's issuer rating because the state has pledged its full faith, credit and taxing power to pay the bonds Moody's said.

The economic fundamentals noted by Moody's include real GDP growth that has consistently outperformed the U.S., healthy per capita income representing 109% of the U.S. average and favorable demographic trends. It also "incorporates the state's total GAAP-basis governmental liquidity of nearly $13 billion as of June 30, 2025 (30% of governmental own-source revenue), which is relatively weaker compared to Aaa-rated peers, and is expected to moderate to around $10 billion (20% of revenue) by June 30, 2027," according to the report.

The state's overall liquidity is considered particularly important by Moody's as a "backstop to declining general fund liquidity."

The state's budgetary reserves — General Fund and Budget Stabilization Account — are projected to narrow to around $1.3 billion, 3.4% of general fund revenues, by June 30, 2027, given continued operating deficits, Zhu said in the report.

Moody's also noted the expected deficit in 2027 as a concern.

"We expect Washington's general fund deficit to materialize through fiscal 2027, driven by the state's escalating tort claims, rising health and human service costs and more limited policy level cost containment to date; further, the recently enacted income tax on high-earners, part of the strategy to help restore general fund structural balance, will not be available until fiscal 2029, even if upheld by the courts," Zhu said.

The issuer rating also incorporates the state's moderate total leverage, which includes debt, pension, other post-employment benefits, and other long-term liabilities and associated fixed costs representing 6.2% of revenue as of fiscal 2025.

The Aa1 rating on the certificates of participation (state and local agency real and personal property), one notch below the state's Aaa issuer rating, reflects the essential nature of the properties being financed, the contingent/ subject-to-appropriation nature of the state's payment obligations, active administration of the financing program by the State Treasurer's office, and the state's established track record of making appropriation-backed payments under a variety of financing programs.

The Aa1 rating on the TOP lease revenue refunding bonds, 2014 (Washington State Office Building) incorporates the essential nature of the leased asset, a state office building in Tumwater, and the contingent/subject-to-appropriation nature of the state's obligation to make lease payments, the agency said. The rating also reflects the state's established track record of making appropriation-backed payments under a variety of financing programs.

The Aaa rating on the Washington State School Bond Guarantee Program is the same as the state's issuer rating, as the program is backed by the state's full faith, credit and taxing power.

The state has AA ratings from Fitch Ratings and S&P Global Ratings. Both assign stable outlooks.