Moody’s: 2011 will continue to be a tough year for state and local governments

State and local governments could be facing their toughest year financially since 2008, when the global financial meltdown began, according to a recent report from Moody’s Investor Services.

“Rating activity during the first three months of 2011 marked the ninth consecutive quarter in which downgrades in the municipal sector exceeded upgrades,” said Moody’s Assistant Vice President Conor McEachern. “With negative outlooks assigned to all major municipal sectors, the trend is likely to prevail for all of 2011.”

The first quarter of 2011 saw a 3.9 to 1 ratio of public finance ratings downgrades to upgrades – 66 downgrades versus just 17 upgrades – the second highest ration since 2002.  Ratings were dropped on bonds totaling $23 billion in par value versus $2.8 billion that saw an upgrade.

In the sector that includes state and local government bond issues ratings activity included 39 downgrades versus only 10 upgrades – a 3.9 to 1 ratio –  which shows some improvement over the fourth quarter of 2010 when the ratio was 5 to 1.

Late last month, Moody’s downgraded its rating on New Jersey’s debt, citing the state’s slow recovery from the recession that walloped the country in 2008 as well as its rising costs for retirees.  The agency dropped the state’s rating to Aa3, still the agency’s fourth highest but among the lowest rating of any state in the nation.

In its report, Moody’s said it expects to see continued downgrades of state issued debt throughout the remainder of 2011.

“We expect downgrades to continue to exceed upgrades throughout 2011 as the effects of weak revenue growth and significant spending obligations combine with the loss of federal stimulus funding to intensify pressure on state financial positions,” the report said.

The story is much the same on the local front the ratings agency said, as local governments face declining state aid, a drop off in real estate valuations and “fewer budgetary options.”  Local governments throughout the U.S. have already depleted their budget reserves and have in many cases exhausted one-shot revenue boosts.

In New Jersey, local governments are hampered by a state levy cap that restricts tax increases to 2 percent.

Among infrastructure issuers, the picture was even worse as the agency dropped six ratings and raised none.  Among the downgrades was the South Jersey Transportation Authority, which saw its rating fall to Baa1/Stable from A3/Stable.  In dropping the rating, the agency cited “Multi-year traffic declines, low liquidity and negative pressures in the service area.”