S&P Closely Watching States' FY-2015 Budgets

WASHINGTON — Standard & Poor's said in a report released Wednesday that it is closely watching states' fiscal 2015 budgets for signs of over-spending or large tax cuts.

"State sector credit quality through at least the next 12 to 18 months may, in our view, be linked to whether the states maintain a restrained fiscal posture," the rating agency said in its fiscal survey of all 50 states.

The report takes a detailed look at each state's reserves as well as whether it is making its actuarially recommended pension contributions.

States are approaching the start of FY-2015 with strong year-to-date revenue collections as the economy gains momentum, the report said, adding, "Thus a majority find that they are in a better budgetary position than at any other point since the start of the recession."

Governors have put forth generally restrained budget proposals for FY-2015 and even though some call for increased expenditures, the total spending growth being sought is still below the long-run average of 5.6% since 1979, the rating agency said.

But "reaching agreement on final budgets is ultimately a political exercise," the report said. "By initiating the budget process from a relatively stronger financial position, we see some potential for more deal making in 2014 than in the other years since the end of the recession."

The rating agency pointed out that with "a less crisis-like budgeting atmosphere," lawmakers confront a growing chorus of compelling public policy arguments in favor of enhancing service levels or reducing taxes. But S&P worries that enacting large tax reductions or spending increases now could level less "margin for error" as state revenues reach a plateau or begin to decline.

In June 2014, the current economic recovery will be five years old, S&P said, adding, "although underlying economic fundamentals have been improving, we note that the eight recessions since 1961 have occurred, once every 6.6 years on average."

"Our own outlook calls for a modest acceleration of economic growth throughout 2014 and into 2015," the report said.

The rating agency's forecast calls for real gross domestic product growth in 2014 of 2.8% and 3.2% in 2015, compared to 1.9% in 2013.

But state revenue growth could level off as a result of less bullish equity markets. And states may have to spend more, such as for Medicaid.

In some cases, restricting spending is not optimal in terms of fiscal sustainability over the long-term, the report said. For example, "While it may seem prudent for a state to limit its debt load, when it does, it risks allowing its infrastructure to deteriorate," S&P said.

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