Moody's: Outlook for U.S. States Remains Negative for 2013

Moody's Investors Service continues to have a negative outlook on the US states sector because of uneven employment and tax revenue growth and spending pressures from Medicaid and pensions, despite signs of economic stabilization across the country. Repercussions from possible reductions in the federal deficit, which could damage economic growth, are also a risk for states.

"States are experiencing a slow recovery, but still face economic and fiscal challenges," says Moody's Assistant Vice President and Analyst Kimberly Lyons, main author of the report "US States Sector Outlook Remains Negative."

"Despite these risks, the US states sector is supported by broad and diverse economies, low debt burdens compared to other global sectors, and strong fiscal flexibility to mitigate economic risks," says Moody's Lyons.

Moody's says a weaker US economic outlook has diminished hopes of a robust economic recovery, which would buoy state finances. The economy-and in turn state finances-remain susceptible to additional pressure from implementation of federal deficit reduction measures.

State tax revenues continue to grow, but collections are slower than forecasted and some states have revised their estimates downward. At the end of the second quarter of fiscal 2013 revenue growth had fallen short of budgeted forecasts in nine states.

States are rebuilding reserves, but for the most part these resources are still below their pre-recession levels, with many states still behind their pre-recession peak levels.

To return to a stable outlook, Moody's says several factors would need to occur, including: sustained national economic growth; a return to structurally balanced state fiscal plans; and a more muted impact of federal spending cuts on state economies and finances than we currently expect.

Moody's sector outlook for the states has been negative since 2008. The outlook expresses Moody's expectations for the fundamental credit conditions in the sector over the next 12 to 18 months. It does not speak to expectations for individual rating changes and is not a prediction of the expected balance of rating changes during this time frame.
 

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