DALLAS — Downgrades outnumbered upgrades for the sixth consecutive quarter during the April to June period, according to a report released Thursday by Fitch Ratings.
The downgrade of 44 tax-supported credits in the second quarter matched the record set in the fourth quarter of 2009, the rating agency said. Only 18 tax-supported credits were upgraded in the Fitch scale. Among all sectors, the ratio was 57 downgrades to 36 upgrades. Negative outlooks outnumbered positive ones by 246 to 58, but the total number of negative outlooks was down from 305 in the first quarter.
Analyst Sarah Repucci said the report illustrates how changes in the municipal sector lag those in the overall economy. While the economy may be in recovery, tax bases and budgets are still heading for the bottom as issuers borrow to compensate for falling revenue.
One of the second quarter's most significant downgrades was that of Illinois, which fell to A from A-plus. The downgrade reflects the state's continuing unwillingness to address significant budgetary problems, according to Fitch.
Illinois' "recently enacted fiscal 2011 budget does not begin to address the current operating gap, relying almost entirely on various forms of deficit financing to close the gap," the report said.
Moody's Investors Service also downgraded Illinois to A1 from Aa3 on June 4, citing "a chronic lack of political will that indicates further erosion of an already weak financial position." Standard & Poor's has the state's A-plus rating on negative watch.
Connecticut's GO rating fell to AA from AA-plus on the Fitch scale, reflecting its reliance on borrowing to ease fiscal constraints amid high liabilities and large projected structural gaps, according to analysts.
The state issued $916 million of deficit notes to eliminate its fiscal 2009 budget gap after the close of the fiscal year. It now plans an additional $956 million deficit note borrowing, payable from a non-general fund utility assessment, to close the remaining fiscal 2011 gap. Connecticut has depleted its budgetary reserve.
"Although the state has taken other balancing actions to confront recession-related revenue weakness, including tax rate increases and spending cuts, it has relied primarily on one-time resources," the report said. They include "deficit borrowing, fund transfers, reserve fund transfers, and pension contribution cuts."
Standard & Poor's maintains its AA rating with a stable outlook on Connecticut, while Moody's rate's the state's GO debt Aa2 with a stable outlook.
Woonsocket, R.I., received one of the sharpest downgrades of any city in the report, falling four notches to BBB-minus from A. The downgrade "reflects the rapid and significant deterioration in the city's general fund and school fund to negative levels after repeated yearly operational deficits due to overestimated revenue projections, increased expenditures as a result of rising employee costs, and continued reductions in state aid," Fitch noted.
North Las Vegas also saw its Fitch rating fall to AA-minus from AA.
"The city and region's housing market is among the hardest hit by the collapse of the housing market," analysts said. "The regional economy is dominated by tourism and gaming, and both industries have experienced significant revenue and employment declines."
