WASHINGTON – State bonded debt was relatively flat in 2015, according to a report released this week by Moody's Investors Service.
In its "US States: Revenue Growth Supports State Fiscal Stability" report released Monday, Moody's said that state-issued debt increased by only 0.6% in calendar 2015, which followed a 1.2% drop the previous year.
The rating agency attributed the slight increase to the effect of low commodity prices on some states' economies, as well as uncertainty surrounding federal fiscal policy and healthcare funding. Moody's expected the slow-growth trend to continue next year due to those continuing factors as well as "politically debt-adverse" attitudes in many state governments and high,growing unfunded pension liabilities.
Absolute debt levels as well as debt per capita declined in 34 states, with the latter's mean 50-state median level stable at $1,025. The 50-state median for debt as a percent of personal income remained at 2.5% in 2015.
Debt service as a percentage of total governmental fund revenue was 4.3% in 2015, marking the third straight year that figure has remained flat. Moody's added it expected "only minimal growth" next year.
The rating agency said high and rising pension costs have caused budgetary inflexibility in states such as Illinois, New Jersey and Pennsylvania, leading to political gridlock. This is expected to continue due to weak stock market performances in fiscal 2015 and 2016.
The report also affirmed Moody's stable outlook for U.S. states despite a "modest slowing" of revenue growth since the agency's 2016 outlook published in December.
Moody's said collections of personal income and sales taxes, which account for states' two main revenue sources, are slightly below 4%. Though lower than the rating service's forecast of 4%-5%, Moody's said they are still within most states' forecasts and it expected subdued revenue growth to continue through fiscal 2017.
"Barring an unexpected US recession, we expect subdued revenue growth to continue during the next 12-18 months," Moody's said in its report. "Modest national economic expansion will lead to aggregate state tax revenue growth during this period of less than 4%, a subdued trend that reflects some economic headwinds but one that states are well-positioned to manage through."
Budget cuts, use of reserves, tax increases and other revenue adjustments will help states adapt to slow growth patterns, according to the report.
Though oil prices have recovered to the $40 per barrel range and are expected to increase slowly over the coming years, the ongoing oversupply of oil coupled with a stagnant demand will continue to hamper oil-producing states, Moody's said.
Moody's officials said energy states like Alaska, Louisiana and Oklahoma have faced pressure from lower oil and commodity prices. Other oil-producing states such as Texas and New Mexico are better prepared for an extended energy price downturn because of their diverse economies, Moody's added.
States with strong population and income growth, including California, Oregon and Utah, have among the strongest revenue outlooks, while states with sluggish economies or poor demographic trends, including Connecticut, Kansas and Rhode Island, are experiencing revenue slowdowns. This moderate economic expansion will drive slow state tax revenue growth, officials said.
Moody's said it could revise the state outlook to negative if revenue growth drops steadily or revise it to positive if states show sustained revenue growth.
