The horizon continues to appear gloomy for state and local governments heading into 2010, with two reports by Fitch Ratings and the Nelson A. Rockefeller Institute of Government this week predicting another year of crunched state and local finances.
The upcoming expiration date for most muni-bolstering programs that were created by the American Recovery and Reinvestment Act will contribute to the pressure on states and localities, one report said.
The reports come as governors are calling for more federal assistance to patch their ailing budgets and Congress is moving forward with a jobs bill that would provide a small amount of assistance to municipalities.
State tax revenues were 4.1% lower during the fourth quarter of 2009 than during the same quarter the previous year, according to a
Personal income taxes fell about $2.6 billion, and sales tax fell about $2.2 billion. About 85% of the states that reported tax collections said they fell between October and December.
Oklahoma’s revenues fared the worst, declining about 27% for the quarter. Seven states reported revenue growth for the quarter, however, with North Carolina leading the pack with an 11.4% gain.
It was the fifth consecutive quarter for declining personal income tax and sales tax collections, according to the report. The revenue slumps will endure at least another quarter, the analysts said.
“We expect more states to begin seeing year-over-year growth in some revenue sources over the next few months, particularly the sales tax as a result of stabilizing retail sales and consumption,” the report said.
“However, even with growth, tax revenue is likely to remain below its pre-recession peak for quite some time.”
Meanwhile, Fitch analysts predicted in a report issued Monday that “positive rating activity is expected to be infrequent” for municipal credits in 2010.
Downgrades quadrupled in number between 2007 and 2009, the report noted. However, Fitch did not assign an overall rating outlook for local governments.
Fitch predicted another year of financial difficulties, adding more drag to two fiscal years of pummeled state and local economies.
While the dismal reports for sales taxes and income taxes may start to turn brighter in the next year, declining property values will lead to declining property tax revenues for “at least the next two years,” the report said.
“Also, Fitch expects local governments to feel the impact of continued state budget gaps due in part to the scheduled phasing out of federal stimulus relief,” it said.
The jobs “agenda” proposed by congressional Democrats would give states and localities a boost, but the current jobs bill in the Senate would not provide direct funding to states in areas such as Medicaid.
Fitch added that the effect of state revenue declines on local governments will depend on how stressed the state budgets are, and on how much the localities rely on state funds.
“Fitch believes local government debt levels will be stable to slightly higher in 2010,” it noted.
But local governments with “further revenue deterioration and legal or political impediments to raising tax or fee rates,” less-than-favorable reserve levels, or obstacles to spending cuts will be more likely to be downgraded this year, Fitch said.
