Moody’s reports that the state government sector has carried a negative outlook since February 2008, reflecting weak economic conditions that have resulted in three years of reduced revenue for state governments.
States have responded to this serious challenge by taking decisive actions that include reducing expenditures, spending reserves, and increasing taxes.
However, certain states have continued to spend more than their current revenues, causing reserves for operations to be virtually depleted, which is reducing future financial flexibility.
In addition, the federal fiscal stimulus dollars made available by the American Recovery and Reinvestment Act are set to expire during the current fiscal year, adding more downward pressure on future revenue.
Despite the narrowing options that states have available to deal with declining revenues, Moody’s expects the sector to remain resilient, barring a return to severe recessionary conditions.
States possess many tools to maintain their credit position and will continue to need to deploy them as they face continued high unemployment and weak revenue growth.
Spending reductions and tax increases are likely to continue for the next year or more.
