UPDATE 1-Moody's says U.S. states' outlook negative for 6th year

Thu Feb 14, 2013 1:21pm EST

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NEW YORK Feb 14 (Reuters) - Moody's Investor Service said on Thursday its outlook for U.S. states remains negative for the sixth year in a row despite signs of stabilization in the economy.

"Expenditure pressure from budget drivers such as Medicaid and pensions has not abated, and the continued threat of federal deficit reduction actions presents a risk to economic growth," the rating agency said in a report.

Moody's, whose median state rating is Aa1, said that default risk for the sector remains "very low," however. Out of the 50 states, 30 are rated in the two highest categories.

The rating agency forecast 2013 U.S. economic growth of 2.1 percent, accelerating to 2.5 percent in 2014.

An increase in marginal tax rates for high-income earners at the federal level will have different effects on states, Moody's said.

Alabama, Iowa, Louisiana, Missouri, Montana and Oregon are likely to see reduced income tax collections because they allow some deductions of federal income tax. Another eight states, which link their adjusted gross income to federal tax rates, are instead likely to collect more in taxes. Those are Colorado, Idaho, Minnesota, North Carolina, North Dakota, Oregon, South Carolina and Vermont.

After California enacted a $6 billion personal income and sales tax increase, other states have proposed raising personal income taxes. Maryland plans to boost the tax rate to 6.25 percent, from 5.25 percent, while Minnesota plans a boost the tax rate on highest earners.

Other states, such as Kansas and Louisiana, have discussed lowering taxes, Moody's said.

State tax revenues have increased for eleven consecutive quarters and are projected to rise by 3.9 percent in fiscal 2013, according to the Rockefeller Institute of Government.

Meanwhile, spending has picked up again, Moody's said.

"Following two consecutive years of decline, state spending began to grow again in fiscal 2012, with the exception of higher education, public assistance, and corrections. The two largest growth areas for states are Medicaid and pension costs," the report said.

Aggregate public pension unfunded liabilities reported by states in fiscal 2011 were $400 billion or 27 percent of total state revenues for the year, according to Moody's estimates. Those liabilities range from less than 5 percent of revenues to almost 150 percent of revenues in Illinois and 190 percent in Puerto Rico.

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