WASHINGTON — Fitch Ratings sees no widespread threat to state ratings from efforts to cut the federal deficit or from a slowing economy. Both, however, “present much uncertainty and risk,” according to a report released on Thursday.

Fitch analysts have not taken a negative outlook on state finances in general. “I think most of our ratings have a stable outlook at the moment,” said Laura Porter, lead analyst on the report “U.S. Public Finance Credit View — States.”

Until Congress and President Obama make decisions on the levels and types of spending reductions and federal tax changes, the report said it is impossible to gauge the fiscal effect on states.

“The ability to eliminate, modify or self-fund programs that experience cuts, and how the state governments react or absorb fiscal impacts, will be crucial in determining whether they maintain their credit standings,” the report said.

The single biggest threat to states is the possibility of reductions in funding for Medicaid, Fitch analysts said. Federal and state governments share the cost of providing medical care for the poor and the program is a substantial part of state budgets. 

Medicaid is protected from the automatic spending cuts that would go into effect if the so-called super committee fails to agree on $1.5 trillion in deficit reduction. However, Medicaid is not protected from any cuts the committee might decide to recommend.

The super committee is a wild card, in Porter’s view. “It’s very difficult to prepare for. It’s just so uncertain what’s going to happen,” she said. But the states do have some time to plan. Neither automatic nor legislated Medicaid reductions would take effect before 2013.

“For the states, a lot depends on whether it is cuts that they are expected to make up the funding for or whether they are able to reconfigure and eliminate programs,” Porter said.

States are also worried about the national economy. The report said: “Although state revenues have shown signs of recovery in 2011,” employment is weak and economists have become more pessimistic in their outlooks since states made their last revenue forecasts.

States typically make revenue estimates before developing budgets for their fiscal years, most of which begin July 1, and therefore, Porter said, “their revenue estimates will be based on spring expectations. which certainly on the national level, the expectations are lower now then they were.”

Scott Pattison, executive director of the National Association of State Budget Officers said its members’ views are similar to Fitch’s.

“It’s really in line with what we are talking about for almost every state,” he said.

Economic uncertainty and volatility in the markets are making states watch their numbers carefully.

States are just beginning to release the results from their fiscal year first quarters, which ended in September. Those will be “a helpful indicator of whether widespread budget adjustments will be needed,” said the report.

Some states are already moving their revenue forecasts down, according to Pattison. “We’re not talking crisis,” he said, “just that revenue may not come in as we expected.”

State revenue systems based on personal income taxes and sales taxes are economically sensitive. “To the extent that economic performance weakens, revenues very quickly show that,” Porter said.

To illustrate the level of uncertainty, Pattison said he could make an argument that Greece defaults and other bad things happen that affect states. But he said he could just as well make an argument that economic growth continues to muddle through, or even improves, along with state finances.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.