LOS ANGELES -- The outlook for U.S. states is negative for the sixth year in a row, as they continue to face challenges from the economic and fiscal environment, Moody’s Investors Service said Thursday.
Analysts said that, despite signs of economic stabilization, employment and tax revenue growth are still uneven across the states. They also noted the continued threat of federal deficit reduction plans, pre-recession level reserves, and remaining spending pressures as factors in the sector’s outlook.
“A weaker U.S. economic outlook has diminished hope of a robust economic recovery for states,” analysts wrote. “Unemployment has declined, but remained unchanged during the final quarter of calendar 2012, perhaps signaling a leveling off. The economy — and state finances — remain susceptible to additional pressure as federal deficit reduction is implemented.”
Since Moody’s assigned its last negative outlook on the sector in September, the economy has expanded, but the pace of growth slowed in the last part of 2012. State tax revenues have increased for eleven consecutive quarters, according to the Rockefeller Institute of Government, put the pace of growth is slower than states’ enacted fiscal 2013 estimates, according to the National Association of State Budget Officers.
NASBO said that while state revenues are currently projected to increase by 3.9% in fiscal 2013 compared to enacted estimates of 4.1%, general fund revenues have returned to pre-recession peaks.
Personal income taxes, the largest revenue source for states, have recovered more strongly than any other state revenue source, and sales taxes, the second largest source, also increased slightly. However, at the end of the second quarter of fiscal 2013, revenue growth had fallen short of budgeted forecasts in nine states and some states have revised their estimates downwards.
States continue to rebuild reserves, but many “still have a way to go before they reach pre-recession peak levels,” analysts said.
As states try to reach these levels in a lower revenue environment, they will be challenged to balance that with meeting their various expenditure demands.
“After consecutive years of spending adjustments to offset declining revenues, states are now faced with pent-up demand to fund certain programs such as education and local aid, as well as rising costs associated with pension funding,” Moody’s said.
On a positive note, the states are supported by broad and diverse economies, low debt burdens compared to other global sectors, and strong fiscal flexibility to mitigate economic risks, Moody’s said, adding that states have shown a willingness to reduce expenditures to deal with economic weakness.
“Conditions that could lead us to revise the sector’s outlook to stable include sustained national economic growth, a return to structurally balanced state fiscal plans, and federal spending cuts that have a more muted impact on state economies and finances than what we currently expect,” analysts said, adding that they will actively monitor these conditions.