The Impact of the Credit Crisis and Weaker Economy on U.S. States and Municipal Entities

In April 2008, Moody’s revised its outlook for U.S. state governments to negative. The economy has weakened substantially since then, compounded by a severe credit and liquidity crisis. While the credit market slump poses short-term risks for some states, particularly ones that rely on cash flow borrowing, long-term credit quality will be more challenged by the economic downturn. Already weak state revenues are expected to decline further, particularly personal income and sales taxes. Leaner finances will compel states to balance budgets through expenditure reductions, the use of reserves, and other non-recurring actions, and possibly revenue enhancements. Despite the negative outlook, most states should get through the credit and economic crises without significant deterioration in credit quality. Similarly, local government and enterprise issuers face a broad array of difficult choices, but many are expected to have the flexibility to adjust to circumstances and maintain their strong credit ratings.