Moody's, S&P Lower Arizona's Credit as Crisis Keeps on Going

DALLAS — After months of failure to balance its budget amid one of the worst fiscal crises in its 97-year history, Arizona Wednesday suffered double ratings downgrades as Moody's Investors Service lowered the credit to A1 from Aa3 leaving the outlook negative, while Standard & Poor's late in the day dropped the state to AA-minus from AA.

The downgrades come ahead of a planned January sale of $733 million of certificates of participation designed to provide operating revenues as the state continues to run a $1.6 billion deficit.

The COPs will be issued to finance the sale of state buildings in a lease-purchase arrangement.

With a rating of A2, the COPs are rated lower than the state's issuer credit rating of A1. Arizona does not issue general obligation bonds, so it does not carry a GO rating.

"The downgrade of the state's issuer rating reflects Arizona's ongoing economic and financial weakening, leading to significant revenue underperformance, sizable budget deficits, significant structural budget imbalance, and increased tightening of liquidity," Moody's analyst Maria Coritidis wrote in a report also researched by backup analyst Kimberly Lyons and senior credit officer Edith Behr.

"In addition, it reflects a depletion of reserve balances, and a strong and ongoing reliance on one-time resources to balance the state's budget, including issuance of deficit bonds."

Moody's also downgraded to A2 from A1 the rating assigned to state debt backed by general fund appropriations, which includes bonds for the Arizona School Facilities Board. Debt issued for the Arizona Game and Fish Department and Commission was downgraded to A3.

In an update on the most fiscally troubled states earlier in the month, the agency noted Arizona's low debt level of $4.5 billion and lack of exposure to variable interest rates. However, as of yesterday, Standard & Poor's had not rated the upcoming COPs, expected to be issued the week Jan. 13.

Noting the negative outlook, state Treasurer Dean Martin Wednesday said: "I would be surprised if we don't get another downgrade if they don't do something to get this budget in balance. This is exactly what we warned the governor and Legislature was going to happen."

The Moody's ratings action came two days after Gov. Jan Brewer painted a dire picture of Arizona's finances at an emergency cabinet meeting. "We are faced with some of the worst days in our 97-year history," she said.

"We're in a state that's living off credit, off its borrowings and off money we owe parties we didn't bother to seek loans from but just simply haven't paid," Brewer told cabinet members. "Arizona's cash-flow difficulties are so profound, we're living on borrowed time. And the clock never, ever stops ticking."

In its fourth special session of 2009, the Arizona Legislature earlier last week trimmed another $200 million with across-the-board spending cuts of 7.5%. That left the deficit at about $1.5 billion for the budget through June 30.

When lawmakers convene in their regular session in January, they will face not only the current budget crisis but an estimated $3.6 billion shortfall in the next fiscal year beginning July 1.

Moody's last Arizona rating action was Sept. 14 when a negative outlook was assigned to the state's issuer rating of Aa3 and appropriation-backed ratings of A1 and A3.

Analysts said the outlook remains negative because of the economic slowdown and state revenue that has fallen by almost 40% in three years.

"While Arizona is acting to stabilize its fiscal situation, the size of the structural budget imbalance faced by the state, diminished state resources, economic uncertainty, and inflexibility related to spending mandates and revenue raising requirements pose considerable challenges to a return to fiscal stability," Moody's analysts noted.

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