Moody’s Investors Service is maintaining its negative outlook on U.S. states.
“While the U.S. states remain strong with tax revenues having recovered modestly, states face persistent fiscal challenges due to the slow recovery of the U.S. economy, a weak global economic outlook and risks to states from federal downsizing,” said Moody’s senior analyst Ted Hampton. Hampton is one of five authors of a report, “U.S. States Sector Outlook Remains Negative,” released Wednesday.
On an inflation-adjusted basis, state tax revenues are down from pre-recession levels, the analysts noted. However, recent revenue growth has been sufficient to allow some states to start to replenish reserves.
However, “the U.S. economic recovery has been anemic and remains vulnerable to shocks,” the analysts wrote.
According to Moody’s Analytics, the combined budget cuts and expiration of tax breaks in January 2013 could lead to a recession, harming state government revenues, the analysts wrote.
“Eventual expenditure cuts at the federal level could have more direct consequences for Medicaid and other state programs,” the analysts wrote. “They also may hurt state revenues through reductions in federal employment or procurement contracts.”
Along with federal fiscal actions, shocks from the euro area debt crisis or other factors could adversely impact the economy, they wrote.
Medicaid costs continue to strain state budgets. “According to the Kaiser Family Foundation, Medicaid enrollment increased 4.4% in fiscal 2011 and was expected to increase 4.1% in fiscal 2012,” the analysts wrote.
Pensions are also pressuring the states.
“Some states continue to underfund the payments needed to fully amortize pension liabilities, deferring costs to the future and undermining structural budget balance and future fiscal flexibility,” the analysts wrote. “Pension budgetary costs will continue to be driven upwards by both the increasing number of state government retirees and by the price of past benefit enhancements.”
Moody’s has downgraded three states so far this year: Connecticut to Aa3 from Aa2, Illinois to A2 from A1, and Pennsylvania to Aa2 from Aa1. It has not upgraded any states. It has nine states with negative outlooks. It has no states with a positive outlook.
Moody’s has had a negative outlook on the state sector since 2007.