The 2015 outlooks for both U.S. states and local governments will remain stable as a strengthening economy supports state revenue growth and property tax revenues slowly recover, says Moody's Investors Service in two new annual outlook reports.
Moody's expects state tax revenue growth in 2015 to rise faster than in 2014, but remain within a 5% to 6% range, which is moderate for the sector and consistent with the long-term average. There will be significant regional variations, however, as a surging technology sector and an oil and gas boom fuel job growth in the West and South.
Risks to state revenue growth include anti-tax sentiment prevailing and the volatility of the stock market. With personal income taxes making up about 40% of state revenues, and with taxes from high wealth individuals contributing a disproportionately large share of this revenue taxes, revenues tend to rise and fall with the stock market.
Pressures on the budget side include Medicaid, pensions, K-12 education, and deferred infrastructure improvements and maintenance.
"Expected increases in Medicaid costs and growing pension expenses have constrained the ability of states to increase other areas of spending," says Vice President Senior Analyst Lisa Heller.
Property taxes, the majority of local government revenues, have returned to a slow but steady growth trajectory as housing markets stabilize and governments are generally willing to use their property tax authority.
Moody's expects property taxes to grow at 2%-3% for the next several years. Property tax caps, anti-tax sentiment and the unevenness of the housing recovery are checks on this growth, which is significantly below the 6%-plus range that it was before the economic downturn.
In general, impending cost pressures will make it difficult for some local governments to balance their budgets.
"Fixed costs such as pensions and retiree health benefits are likely to consume an increasing share of budgets, presenting dilemmas about whether to cut costs, increase property tax revenue or tap into reserves," says Moody's Analyst Dan Seymour.
Some pockets of credit pressure remain across the US, but fewer than a year before. For 2014, Moody's designated 21 local government sectors — municipal, country or school districts across a given state — as "pressured." For 2015, only 13 are so designated.
Moody's outlooks reflect its expectations for the fundamental business, financial and economic conditions in a sector over the next 12 to 18 months.
