U.S. state and local governments will continue to face credit-rating cuts in 2012 as they cope with slow economic growth, Moody’s Investors Service said.
The outlook for states remains negative for a fifth straight year and local governments are negative for a fourth, the New York-based credit evaluator said today. Federal-aid cuts, high unemployment and low consumer confidence led to the continued negative outlooks, Moody’s said in two reports.
“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 Toby Cook, author of the local-government outlook.
States will see the biggest strains from Medicaid and pension costs, according to Moody’s. They will benefit from low borrowing costs as revenue growth moderates, the report said. Moody’s has a median rating on states of Aa1, its second-highest level.
“Tentative economic growth could still be knocked off course by contagion caused by the European recession and debt crisis,” said Nicholas Samuels, author of the state report.
Local-government defaults may increase, though would “still be rare,” Cook’s report said.
“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.
Local governments benefit from being able to raise property-tax rates and user fees, have monopolies on essential services and relatively low debt-service expenses, Cook’s report said.
Downgrades of U.S. municipal debt from October through December exceeded upgrades for the 12th straight quarter, Moody’s said last month. About five ratings were cut of every one upgraded in the fourth quarter, it said in a report Jan. 30.
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