Amid a budget standoff between the Republican governor and the Legislature, the outlook on Arizona’s AA rating was placed on Standard & Poor’s CreditWatch for a possible downgrade last week.
The shift to negative from stable was attributed to lower-than-anticipated tax collections and the failure of Gov. Jan Brewer and legislative leaders to cover a shortfall in the current budget. After seven weeks in special session, the Legislature last week again sent Brewer a budget bill without the temporary sales tax increase she demanded to raise additional revenue.
Arizona does not issue general obligation debt but has issuer ratings of AA from Standard & Poor’s and Aa3 from Moody’s Investors Service. Fitch Ratings does not rate the state’s underlying credit.
The shifting outlook “is a warning to the creditor community there are problems in the future based on this borrower,” said Treasurer Dean Martin.
Martin, who is seeking a line of credit with banks to manage cash flow once Arizona runs out of money, said banks won’t lend the state anything until it adopts a budget. Last April, a month when the state is typically flush with cash, Martin had to issue IOUs to cover operating costs.
Martin expects Arizona to burn through its $500 million internal funding options in the middle of October. But setting up a line of credit takes weeks, so the state must adopt a budget soon, he said.
Since June, the state has been operating on a spending measure passed in the regular session with the expectation that looming shortfalls could be covered with a combination of cuts and revenue measures.
However, Republican lawmakers have refused to consider any measure that would increase taxes, even after legislative leaders and the governor’s office had agreed on such a combination.
