Bangkok--21 Aug--Standard & Poor's
Standard & Poor's Ratings Services revised the outlook to negative from stable on Arizona's issuer credit rating (ICR) and on the state's outstanding certificates of participation (COPs) and lease revenue debt rating and underlying rating (SPUR). At the same time, Standard & Poor's affirmed its 'AA' ICR on Arizona. Standard & Poor's also affirmed its 'AA-' rating and SPUR on the state's outstanding COPs and lease revenue debt.
"The revised outlook is based on our opinion of the state's diminished financial flexibility, which is a result of softening revenue streams and reduced reserves," said Standard & Poor's credit analyst Matthew Reining. "Additionally, the state lacks a final, full fiscal 2010 budget, which is a break from the state's history of regular and timely budget action and makes the projection and management of cash flows more challenging."
Arizona is at a challenging place financially, in our opinion. Fundamentally, the state enjoys a broad and diverse economy supported by a growing population. However, the slowing national economy and a painful housing downturn have financially pinched the state, which had previously enjoyed above-average growth in numerous categories including population, economy, and housing value. Sales and income taxes, which boosted reserves during the economic boom earlier this decade, have since declined, putting pressure on budgets. The state's general fund, which had included surpluses that built reserves through fiscal 2006, posted a very modest fiscal 2007 deficit after transfers, and closed fiscal 2008 with a larger deficit despite midyear adjustments. In fiscal 2009, recent data on 12 months of revenues show that general fund tax revenues have fallen by the largest percentage in decades. Even with midyear revisions, state officials project a negative ending fiscal 2009 general fund balance on a budgetary basis (although final results are not available). The state entered fiscal 2010 with a budget that allowed essential spending and debt service payments. However, executive and legislative branch disagreements resulted in significant line-item vetoes that leave major budget decisions unresolved. The state's late adoption of and continuing negotiations on its budget represent a departure from a long history of timely budget action.
Coming on the heels of a fiscal 2008 budget in which revenue forecasts were lower than original projections, fiscal 2009 was a very challenging year for state revenue, in our opinion -- the state continued to lower revenue projections as the year progressed. Based on 12 months of actual data, fiscal 2009 general fund revenues (base revenues excluding transfers and revenue-sharing) declined 18.4% from fiscal 2008. Sales and use tax revenue dropped 13.7% in fiscal 2009 due to softness in automobile sales, contracting, and construction-related spending. Individual income tax collections were down 24.6% for the same period, and continued job losses could impact this trend further. As a result, the state has lowered its revenue projections numerous times throughout the year. Based on the state's Joint Legislative Budget Committee (JLBC) projections, the final general fund revenues (base revenues excluding transfers and revenue-sharing) actual year-to-date results as of June 2009 are down 9.8% from the January 2009 JLBC projection. Despite the state's midyear budget actions, the JLBC estimates a $479 million shortfall in fiscal 2009 due to revenue declines.
"We believe continued significant financial deterioration, including potential prolonged budgetary inaction, could also impede a return to structural budgetary balance, which could pressure the rating," continued Mr. Reining. "If state officials were to address the budget and bring the state's final performance into a more structurally balanced position, the rating outlook could be revised to stable."
RELATED RESEARCH
USPF Criteria: "GO Debt," Oct. 12, 2006
USPF Criteria: "Appropriation-Backed Obligations," June 13, 2007
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Media Contact:
Ana Sandoval, New York (1) 212-438-5095, [email protected]
Analyst Contacts:
Matthew Reining, San Francisco (1) 415-371-5044
Sussan Corson, New York (1) 212-438-2014
Key Contacts:
Americas Media Relations: (1) 212-438-6667
media_ [email protected]
Americas Customer Service: (1) 212-438-7280
[email protected]