Attempts to balance budget pose state risk: raters

Reuters News
Posted: Dec 05, 2011 3:38 PM
Attempts to balance budget pose state risk: raters

By Lisa Lambert

NEW YORK (Reuters) - Threats to the credit rating of the United States may have spooked political leaders in U.S. states, but congressional attempts to balance the federal budget pose more long-term dangers, the three top rating agencies said on Monday.

"It's hard to know what's going to happen at the federal level. It seems unlikely to be good," Laura Porter, managing director of Fitch Ratings, said at a National Association of State Treasurers meeting.

"We feel like there is not a direct impact on state budgets right now. There will be time for states to respond and adjust. It's very difficult to know what is going to happen at this point, and that can cut different ways for different states."

Concerns about state credit ratings have mounted since the summer when the U.S. sovereign rating was first put in jeopardy.

Last week Fitch revised its AAA U.S. sovereign rating outlook to negative and then consigned certain categories of long-term ratings directly tied to the creditworthiness of the country -- such as pre-refunded bonds whose repayments are dependent on Treasuries -- to the same outlook.

Gripped with a desire to bring down the federal debt and deficit, the U.S. Congress agreed this summer to create a bipartisan, bicameral committee to cut spending. The committee failed to come up with an agreement, which sparked a series of automatic cuts.

States were relieved that Medicaid, a federal healthcare program that can bust many of their budgets, was spared from the automatic reductions, known as "sequestration," but began to worry about other areas, such as defense funding.

Despite the failure of the so-called "Super Committee," the U.S. government is still seeking a leaner budget.

"There's certainly nothing positive that we see for state and local governments," Robin Prunty, managing director at Standard & Poor's, told the same meeting. "It's a very broad area that once we have better information on what the federal government actually will be doing on the budget we will look case by case at each state."

When the worst economic downturn since the Great Depression caused states' revenue to plummet and threatened basic services such as education, the federal government stepped in with a stimulus plan that included the largest transfer of money to states in U.S. history. That funding is mostly spent.

Congress has typically sent aid to states to help during recessions, but now there is uncertainty it would take the same steps again in the future, Prunty said.

Bond buyers were concerned that if the U.S. credit rating were downgraded, all the smaller governments in the country would have to be knocked lower as well. The rating agencies have resisting a cascade of downgrades.

"We do think there are still a whole lot - two-thirds of these entities, perhaps even more when we finish this analysis -

that can have ratings that are higher than the federal government's," said Robert Kurtter, managing director at Moody's Investors Service.

The question for the agency is "how many notches above a federal government rating could we maintain for state and local governments?"

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"I think it's clear that if the federal government were downgraded one notch ... we'd probably still be comfortable with many states or governments having higher ratings," he said, adding that it would be less comfortable if the U.S. rating were cut further.

Meanwhile, Moody's in coming months will fold how much money states need to pay benefits for future retirees into its system of measuring credit quality.

Current estimates for the total public pension shortfall range from around $600 billion to $3 trillion, depending on the forecasted returns of the pension funds' investments.

"We are going to be including debt and pensions in our metrics," Kurtter said. "We understand an unfunded liability is different than the debt liability. There are different consequences for failure to make timely payment. But in many states these are protected benefits. They are benefits that must be paid."

Kurtter told Reuters that the new metrics will be unveiled in the beginning of 2012, but that the rating agency was still too early in the process to set a final date.

Last January, Moody's combined pension and debt data to rank the liabilities of each state.

(Editing by Padraic Cassidy)