Local, State Credit Downgrades May Follow S&P Downgrade of US Debt

(August 22, 2011) — Standard & Poor’s (S&P) has stated in a recent report that state and local governments will likely face credit downgrades following a finalization of the US budget.

This comes after S&P became the first agency to ever lower the nation’s sovereign debt rating to AA+ from a perfect triple-A.

The report, titled “State And Local Governments Face Fiscal Challenges Under Federal Debt Deal,” noted that the US Budget Control Act of 2011 — which already includes at least $2.1 trillion in deficit reductions over the next decade — could have an effect on S&P’s view of municipal credit quality.

“In our opinion, the longer-term deficit reduction framework adopted as part of the BCA could undermine the already fragile economic recovery and complicate aspects of state and local government fiscal management,” said credit analyst Gabriel Petek in a statement by S&P. “Either of these outcomes could potentially weaken our view of certain individual credit profiles of obligors across the sector.”

This year, S&P has revised its credit ratings for a range of state governments. While six states have received upgrades, including South Dakota, and Wyoming, New Jersey and Nevada have had their ratings dropped.

Earlier this month, for example, Fitch Ratings downgraded New Jersey’s bond rating a notch, citing the state’s failure to make full pension payments and its sluggish economic recovery despite proposed pension reforms. New Jersey’s rating is now among the lowest in the nation, and could make it more costly for the state to borrow. Only California and Illinois have ratings lower than the AA-minus Fitch gave New Jersey. The move by Fitch Ratings is the third time in less than six months that Wall Street has downgraded New Jersey’s bond rating. In addition to S&P and Fitch, Moody’s also gave New Jersey similar low ratings.