In the first quarter of 2012, Moody’s Investors Service downgraded the second highest quarterly total of municipal debt in the last 10 years.

On a less negative note, the downgrade-to-upgrade ratio was not as bad in the first quarter as it had been in the previous quarter or year.

The ratio of downgrades to upgrades in the quarterly report was 2.5 to 1, which is lower than the previous quarter’s 5.3-to-1 ratio and lower than the previous year’s ratio of 4.1 to 1.

Moody’s noted these facts in a report it released Monday, “U.S. Public Finance Rating Revisions for Q1 2012.”

The agency downgraded $80.9 billion of U.S. public finance debt in the first quarter, 14 times the amount it upgraded.

About 58% of the downgraded debt was due to lowered ratings on Illinois and Connecticut in the past quarter.

Illinois’ general obligation rating was dropped to A2 from A1 and the outlook revised from stable to negative, affecting $32 billion. Moody’s analysts pointed to “outsized pension deficits compared with other states based on decades of underfunding” and “chronic bill-payment delays that have resulted in large and increasing negative fund balances.”

In response to the report, Illinois Finance Authority executive director Chris Meister said: “On April 20 Gov. [Pat] Quinn made a bold proposal for reforming pension funding.” On Monday Moody’s said the proposed reforms were a credit positive for Illinois.

Moody’s downgraded $14.6 billion of Connecticut GO bonds to Aa3 from Aa2. The outlook was revised to stable. The agency pointed to “high combined fixed costs for debt service and post-employment benefits relative to the state’s budget” and “pension funded ratios that are among the lowest in the country and likely to remain well below average.”

Moody’s also downgraded $736 million of U.S. Virgin Islands’ gross receipts tax bonds from Baa1 to Baa2 with a negative outlook.

The agency upgraded $894 million of Louisiana Citizens Property Insurance Corp. assessment revenue bonds to A3 with a stable outlook from Baa1.

The credit quality of the state and state-related sector is slowly improving, Moody’s said.

In the report there was a 2.7-to-1 ratio of downgrades to upgrades in the quarter for local governments. It projected that downgrades will continue to outnumber upgrades for the rest of the year.

Moody’s had an equal number of upgrades and downgrades in the nonprofit hospitals sector in the quarter. Analysts projected more downgrades than upgrades in the sector in the next three quarters.

In the higher education and nonprofit sector there were fewer rating changes in the first quarter than there had been in any of 2011’s quarters, with five issuers downgraded and just one upgraded. Moody’s projected more downgrades than upgrades for the remainder of the year.

The infrastructure sector saw four downgrades and three upgrades by Moody’s, an improvement over 2011. The sector should be mixed in the rest of the year, analysts said. The sector is distinguished by its debt usually being issued as revenue bonds, as opposed to state and local sectors’ infrastructure bonds usually being GOs, a Moody’s source said.

Downgrades exceeded upgrades in the housing sector by a margin of 3.5 to 1. Moody’s projected that downgrades will continue to exceed upgrades in the sector for the balance of the year.

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