NEW YORK - Moody's Investors Service said it has affirmed the Aa3 issuer rating for the state of Arizona and changed the outlook to stable from negative.

The A1 ratings on the state's general fund appropriation-backed debt, which includes certificates of participation and lease revenue bonds issued by the state, the Arizona School Facilities Board, and the Industrial Development Authority of Phoenix, and the A3 rating on beneficial interest certificates issued for the Arizona Game and Fish Department have also been affirmed.

The change in outlook and affirmations of the ratings are primarily attributable to significant improvement in the state's overall liquidity and stabilization of the state's budget position. The fiscal 2012 budget was balanced with moderate use of one-time measures.

State officials are currently projecting budget-basis operating surpluses for fiscal 2012 and 2013. The state is currently projecting a budget gap for fiscal 2014 following the expiration of a temporary sales tax enacted in fiscal 2011, but the size of the gap is significantly smaller than the revenue generated by the sales tax and appears manageable.

A key contributor to the improved budget situation was the approval by the federal government of a Medicaid waiver requested by the state; the waiver has allowed the state to contain program costs.

At the same time the ratings reflect the persistence of GAAP-basis General Fund balance sheet deficits, which are unlikely to be eliminated in the foreseeable future, and uncertainty regarding the extent to which the state will choose to appropriate the projected budget surpluses for new programs or tax cuts.

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