DALLAS — Moody’s Investors Service Wednesday lowered the outlook on Arizona to negative from stable, indicating a possible future downgrade of the economically troubled state’s Aa3 rating.
The outlook “reflects Arizona’s economic and financial weakness, stemming from significant revenue underperformance, sizable budget deficits, depletion of reserves and significant structural budget imbalance,” wrote analyst Lisa Heller.
Standard & Poor’s also maintains a negative outlook on Arizona’s AA-minus issuer credit rating. Fitch Ratings does not rate the state’s underlying credit.
The negative outlook affects $5.2 billion of outstanding debt.
According to the Joint Legislative Budget Committee, the state is facing a current budget shortfall of $530 million, an improvement from last year’s estimate of $825 million.
Due to rising revenues, the budget shortfall for the 2011-12 fiscal year beginning July 1 could be $975 million instead of the previously projected $1.4 billion, according to the committee. While that shows improvement, it indicates that deep spending cuts and a three-year sales tax increase of 1 cent approved by voters last year has failed to erase the deficit.
“Looking ahead, the expiration of the state’s recently enacted temporary sales tax increase will also be a budgetary challenge in fiscal 2014,” Heller noted.
After ranking among the fastest-growing states for several years, Arizona’s population slowed sharply in the 2010 census as the state was ranked as the nation’s second poorest behind Mississippi.
To cover operating costs, the state sold its state buildings for $730 million a year ago and is leasing them back as part of certificates of participation transaction.
The current fiscal 2011 budget relied on about $430 million of federal stimulus funding. The initial 2011 budget also assumed passage of two ballot measures last November that would have provided about $500 million in revenues redirected to the state’s general fund. However, the measures failed, necessitating a revised fiscal 2011 budget to cut the $530 million deficit.
