WASHINGTON — States that pull back on their cost-cutting measures in response to improving economic conditions could harm their credit, but local governments are in good shape thanks to a housing market recovery, according to a new report from Standard & Poor's.
"Many state and local governments have taken advantage of the recovering economy in recent years to shore up their finances," said the report, which was authored primarily by analyst Gabriel Petek in San Francisco. "The slow motion economic recovery that began in 2009 has produced only gradual tax revenue growth for most state and local governments. Governmental credit quality has improved in this environment, but only because of sustained vigilance when it comes to budget management. After five or six years of restraint, however, we perceive that 'austerity fatigue' has begun to set in for some states."
Even though the agency's macroeconomic projection is largely positive, Standard & Poor's is warning that there could be a revenue plateau in the near future. Combined with the decision to either increase spending or cut taxes, that could prove "ill-timed," the rating agency said in the report.
"Most state and local government budget forecasts anticipate a continuation of the gradual economic expansion," Petek said. "This is similar to our view, but we recognize that in June, the current expansion will have reached its five-year mark. And the reality is, since the late 1950s, the U.S. economy has retrenched into recession once every 6.6 years, on average."
Local governments have a solid outlook because they are benefiting from an improved housing market and the increased property tax revenue that comes with it, the report explained.
"Local governments can look to continue their trend of strengthening credit quality, in our view," S&P said. "Property tax receipts were up 3% in the fourth quarter of 2013 compared with the same period in 2012. When these are coupled with governments' ongoing spending restraint, as demonstrated by local government employment figures, we anticipate improving balance sheets at the local level."
The report also detailed projected economic growth for different regions of the U.S. The Mid-Atlantic region faces the worst outlook under the agency's baseline credit driver forecast, with a 2014 projected gross domestic product growth of 1.91% - well below the U.S. projection of 2.8% growth. The Mid-Atlantic region includes New York, New Jersey, and Pennsylvania, which are suffering from lagging employment numbers, but are in the midst of major infrastructure investments and showing signs of improvement in new home construction, the report notes.
The West South Central states of Arkansas, Louisiana, Oklahoma, Texas are projected to experience the strongest growth in 2014 with an estimated 2.88% increase in GDP, according to the Standard & Poor's model. This part of the country did not suffer the same effects from the especially cold winter that the Northeast and Midwest did, but the region's economic growth is susceptible to the impacts of hurricanes, flooding, and tornadoes, the report noted.
