After two quarters of decline, public finance credit stabilized in the first quarter of 2012, Standard & Poor’s reported.

Despite this stabilization the sector had pockets of stress. Six S&P-rated public finance obligors defaulted in the quarter, equal to the number of the sector’s rated defaults for all of 2011.

As for the future, Standard & Poor’s Gabriel Petek wrote, “we cannot conclude that an inflection point was reached [in the first quarter] and that overall ratings are going to trend positive in the ensuing quarters.” Petek pointed to the possible impact of European sovereign debt problems and questionable domestic demand on the economic recovery.

The agency raised 121 ratings and lowered 83 ratings in the sector, excluding housing. The housing sector saw 78 downgrades versus eight upgrades. While a variety of factors contributed to the downgrades, the majority were due to S&P adopting a new methodology in March.

Excluding utilities, there were an almost even number of upgrades and downgrades in the state and local government sector.

S&P raised the general obligation rating of Alaska to AAA from AA-plus in January. It also revised its outlook on the A-minus-rated California GO debt from stable to positive. To explain its action on California, S&P pointed to the shrinking of the general fund spending base and the Legislature’s new ability to pass budgets with a majority vote, rather than the two-thirds majority previously required.

“In the past couple of years the governor and Legislature have worked hard to reduce our structural budget deficit, reduce reliance on one-time solutions, and borrowing our way out of the problem,” said Tom Dresslar, spokesman for California Treasurer Bill Lockyer. “This has put California on firmer fiscal ground.”

Three issuers had their ratings lowered to D or SD, for default or select default: Stockton, Calif., Moberly, Mo., and Poudre Tech Metro District in Colorado.

In March S&P dropped Surprise, Ariz., to A from AA. Audit adjustments in Surprise revealed that the unreserved fund balance was 0.3% of expenditures.

The utilities sector enjoyed a 4.2 to 1.0 ratio of upgrades to downgrades.

The most notable downgrades in this sector included downgrading Southern Montana Electric Generation & Transmission Cooperative to D from CC, after a November failure to make a $1.6 million interest payment. Standard & Poor’s also lowered subordinate-lien revenue bonds from Virgin Islands Water and Power Authority electric system to BB-plus from BBB-minus. The outlook is negative.

In the housing sector, S&P lowered the rating of Colorado Housing & Finance Authority to A from A-plus. The change “reflects our view of the authority’s declining equity ratios, high delinquency and foreclosure rates, and financial challenges resulting from its significant use of variable-rate debt and its reliance on swap and liquidity counterparties,” report authors Valerie White and Stephanie Morgan wrote.

In the higher education and nonprofit sector, Standard & Poor’s downgraded four institutions and upgraded two.

Health care saw a roughly equal number of upgrades and downgrades.

The S&P report, “U.S. Public Finance Credit Quality Began to Stabilize in First-Quarter 2012, But With Pockets of Stress,” was released Tuesday.

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