Fiscal Challenges Facing U.S. State and Local Governments Examined in New Reports

NEW YORK  (Profitable.com)  Standard & Poor’s Rating Services today published a pair of reports–U.S. States And Municipalities Face Crises More Of Policy Than Debt and “U.S. States’ Financial Health And Debt Compare Favorably With Other Regions“–illustrating its views on the differences between the overall fiscal challenges currently facing many U.S. state and local governments and the risk of nonpayment to municipal bondholders.

“We believe the crises that many state and local administrators find themselves in are policy crises, rather than questions of governments’ continued ability to exist and function. They are more about tough decisions than potential defaults,” said credit analyst Gabriel Petek.

Standard & Poor’s believes certain governments may need to reduce services or raise taxes and fees, which could motivate businesses to relocate, or perhaps cut back employment. From the perspective of residents dependent on such services, business owners facing additional costs, or employees terminated because of cutbacks, a government’s need to take such actions may be considered a crisis, or even a failure. From a credit perspective, however, actions to restore fiscal balance will avert default. Moreover, Standard & Poor’s believes, actions to restore fiscal balance may under some circumstances be able to prevent failure, and without them, government services would likely be in greater danger.

Even if governments lack the willingness to address their structural deficits in total, governments’ relatively low direct debt levels and the priority payment status that their GO debt obligations enjoy provide substantial protections for bondholders, the report says. Assuming current financial positions, the report shows that in many cases revenues would need to decline by substantially more than the average decline witnessed during the Great Depression before this priority protection would be breached.

Along with Standard & Poor’s views on the credit strength retained by the government sector, the first report also explores, through a number of small case studies, the fiscal challenges faced by governments. Challenges include cyclical revenue streams and economic bases, growing retiree benefit obligations, and political difficulties in making budget decisions. State and local governments profiled in the article include: Texas (AA+); New York (AA); Illinois (A+); California (A-); Cook County Township High School District 225, Northfield Township, Ill. (AAA); Las Vegas, Nev. (AA); Detroit (BB); and Littlefield, Tex. (B).

The second article includes a comparison of various financial measures for California, Illinois, New York, and Texas; Canada’s province of Ontario; Germany’s state of Bavaria; and Switzerland’s Basel-City canton.

From a global perspective, most U.S. states are lightly indebted compared with regional governments elsewhere in the world, the report notes. “Various constitutional or legal requirements for balanced budgets—less usual outside the U.S.–have kept U.S. states’ debt burden at moderate levels,” the authors say.

The report is available to RatingsDirect subscribers on the Global Credit Portal at www.globalcreditportal.com and RatingsDirect subscribers at www.ratingsdirect.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-7280 or sending an e-mail to research_request@standardandpoors.com. Ratings information can also be found on Standard & Poor’s public Web site by using the Ratings search box located in the left column at www.standardandpoors.com. Members of the media may request a copy of this report by contacting the media representative provided.

About Standard & Poor’s

Standard & Poor’s Financial Services, LLC, a subsidiary of The McGraw-Hill Companies (NYSE: MHP), is the world’s foremost provider of independent credit ratings, indices, risk evaluation, investment research and data.  With offices in 23 countries and markets, Standard & Poor’s is an essential part of the world’s financial infrastructure and has played a leading role for 150 years in providing investors with the independent benchmarks they need to feel more confident about their investment and financial decisions.  For more information, visit www.standardandpoors.com.