Proximity to the madness

July 19, 2011

More alarms are ringing in muniland today. Moody’s issued a statement announcing that it was putting on review five states which have Aaa ratings. Aaa is Moody’s highest rating, and the agency is concerned that knock-on effects from the federal government could weaken the ratings of these states.

I made this chart detailing the specific rationale Moody’s used for each state from the statement they released today. Note that states which have a large dependence on federal jobs and contracts dominate the list.

————– Sensitivity to natl trends Fed workers as % of employment Fed contracts as % of state GDP Medicaid as high % of budget Low rainy day fund
Maryland *** ***
New Mexico *** *** ***
South Carolina *** *** ***
Tennessee *** *** *** ***
Virginia *** *** *** ***


At the same time, state finances have generally been improving around the country. The Rockefeller Institute issued their quarterly tax collections report today and reported that state tax revenues are up 9.3% on average:

Total state tax collections as well as collections from two major sources — taxes on sales and personal income — showed growth for the fifth consecutive quarter, following five straight quarters of decline. Overall state tax revenues in the first quarter of 2011 increased by 9.3 percent from the same quarter of the previous year

All the states Moody’s identified for review, except South Carolina, had robust increases in tax collection year over year. Here are the specific gains for the states under review (Table 9, page 17):

What is the link between a state’s economic health and its reliance on the federal government? If we dug a little deeper, we might find the ebb and flow of the these states rests squarely on domestic expenditures in the federal budget. With the deficit/debt talks in flux in Washington, Moody’s is right to conduct reviews.


Bloomberg: 5 States’ Debt Ratings on Review by Moody’s

FT Alphaville: Moody’s puts NM, SC, VA, TN and MD on downgrade review

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