WASHINGTON — States are likely to increase debt issuance to plug operating budget shortfalls as federal aid declines and their tax revenues lag the economic recovery, Standard & Poor’s said yesterday in a report.
The 27-page report outlines the fiscal situation for all 50 states, many of which are currently planning their fiscal 2011 budgets. The pace of debt issuance to fill budget gaps could accelerate if the federal stimulus funds to states are not replenished in the period before states’ tax revenues fully return, the report said.
Debt issuance for state operating budgets “has been the pattern in prior recessions,” said Robin Prunty, lead author on the report.
Following the 2001 recession, states issued about $30 billion of debt to meet budget obligations, according to the rating agency. States issued the debt to compensate for revenue weakness, which remained through fiscal 2004
Since 2007, states have issued or are authorized to issue $15 billion of deficit bonds. This includes debt restructuring, securitization of assets or future revenue flows, and debt to fund costs related to pension funds.
The American Recovery and Reinvestment Act of 2009 provided “an unprecedented” $135 billion in direct aid to state budgets that has “softened” the revenue impact of the recession so far, the report said. But most ARRA programs are only in effect through the end of this year.
Additional federal help could be approved, and many states are planning for more stimulus funds in fiscal 2011, the report said. President Obama’s budget request includes $23 billion in additional aid for Medicaid programs but it has not been approved by Congress.
Not all states are legally permitted to issue debt for their operating budgets, according to Standard & Poor’s. In some of the states that have weathered their fiscal problems the best, the governor or a group of officials in the executive branch can cut budget spending without the legislature’s approval.
All states are working to balance their budgets, but states with the strong executive authority over the budget have a “substantial” track record. This authority has “been a factor in their [credit] rating,” Prunty said.
North Carolina has handled its budget crisis particularly well considering its high unemployment, she said. In March, the triple-A state had an 11.1% unemployment rate, which was the ninth-highest among states and above the 9.7% national average. Last fall, Gov. Beverly Perdue initialed a 5% average agency allotment reduction last fall to save $569.6 million.
On the other end of the spectrum is California. The state’s budget requires a two-thirds majority to be adopted, which Standard & Poor’s said “may prove difficult in the current political environment.” California and Illinois are both rated A-minus and A-plus, respectively, by the agency.
Separately, a Moody’s Investors Service report published yesterday said state and local governments had a 1.2-to-1 ratio of upgrades to downgrades in the first quarter of 2010. However, the tax-backed bond sector had more downgrades than upgrades in the fourth quarter of 2009, its first negative ratio in at least seven years. Moody’s maintains a negative outlook on all major municipal sectors, including state and local governments.
