NEW YORK - The outlooks for the U.S. state and local government sectors in 2012 remain negative as both levels of government face a weak U.S. economy and significant budgetary pressures, says Moody's Investors Service in a pair of new reports.

"While revenues have improved since the worst of the downturn, tentative economic growth could still be knocked off course by contagion caused by the European recession and debt crisis," said Moody's Vice President -- Senior Analyst Nicholas Samuels, author of the report, "Outlook for U.S. State Governments Remains Negative in 2012."

Austerity measures by the U.S. federal government come on top of uneven job growth, high unemployment and weak consumer confidence, according to the two Moody's reports. A weaker U.S. sovereign credit outlook and expected substantial federal downsizing make it unlikely that additional federal stimulus aid to states and local governments will be forthcoming, especially if there is another recession, concludes the rating agency.

"Even with revenue growth, both states and local governments will still face budget pressure, especially from Medicaid, employee health care, and pensions," said Samuels.

He said global risks that could affect the stock markets would have outsize impact on state revenues, and further darken the outlook.

"While most state and local governments have demonstrated a willingness to adjust their budgets to the realities of the downturn, they still face significant cost pressures that revenue growth alone will not solve," said Moody's Vice President -- Senior Analyst Toby Cook, author of the report, "Outlook for U.S. Local Governments Remains Negative in 2012."

He said local governments still benefit from many ongoing strengths, including the ability in most cases to raise property tax rates and user fees, monopolistic control of essential services, and relatively low debt service expenses.

"Even as economically sensitive revenue streams for local governments have improved since the depths of the recession, real estate assessed values remain depressed and, in some cases, continue to decline, impacting property tax receipts, a primary revenue source for most municipal entities," said Cook. "Enterprise and debt structure risks in some places continue to cause financial strain."

Moody's expects continued downgrades in both sectors in 2012 and defaults could increase for local governments although they would still be rare.

The outlooks express Moody's expectations for the fundamental credit conditions in the two sectors over the next 12 to 18 months.


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