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Outlook Remains Negative for State, Local Credits: Moody’s

State and local governments may have their credit ratings cut by Moody’s Investors Service, which cited revenue risks as federal economic-stimulus funding ends amid a “fragile” recovery from the recession.

State economies have been slow to recover jobs lost to the recession and face costly U.S. health-care mandates, so even with “strong budgetary management” their finances remain strained, Moody’s said today in a report. Municipal governments are still grappling with the effects of the real estate slump and may face state aid cuts, the firm said in a separate report.

“Despite modest economic growth and a boost in sales tax, a robust recovery has failed to materialize, and revenues for local governments have declined,” Geordie Thompson, a New York- based analyst, said in the report reaffirming a negative outlook for municipal credit ratings first adopted in 2009.

States won’t receive $66 billion in fiscal 2012 as federal stimulus spending ends, Moody’s analysts including Nicholas Samuels said, citing data from the National Association of State Budget Officers. A negative outlook for a credit rating means the company may cut it in the next 12 to 18 months.

Tax revenue hasn’t increased enough for states to replace stimulus dollars that began flowing in the first half of 2009, Moody’s said. With the possibility of the economy slowing again, some states may have to cut spending midway through their budget cycles, Moody’s said.

Modest growth in sales tax receipts hasn’t offset the effects of sagging property values on municipal revenue, Moody’s said. State and local-government job losses have curbed economic growth while costs continue to rise, the company said.

To contact the reporter on this story: Darrell Preston in Dallas at dpreston@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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