| WASHINGTON, April 29
WASHINGTON, April 29 A major cutback in U.S.
federal spending could put at risk the credit ratings of states
across the nation, Standard & Poor's Rating Service said on
S&P linked the above-average credit level of U.S. states, of
which only six, or 12 percent of the total, have debt ratings
below AA, to federal government spending and said cuts in
programs such as Medicaid, while unlikely, were a potentially
"We believe the sector could be in for a bit more rating
turbulence if states are left to bear more of the brunt of
national recessions than they have in recent cycles," S&P said
in a report.
Federal support provided a stabilizing effect on economic
conditions and a supportive role in state credit quality, it
said, noting that 41 percent of the sovereign credit ratings of
euro zone countries were 'BBB+' or lower, and that no U.S. state
fell to below 'A-' during or after the 2007-09 recession.
"We attribute much of the state sector's above-average
creditworthiness to countercyclical federal fiscal policies that
involve reduced federal tax liabilities and large scale outlays
during economic downturns," it explained.
"We believe state budget problems would have been
significantly worse following the recession were it not for the
economic stimulus and fiscal aid to states," said Standard &
"By our estimates, the direct aid to states would come to
equal about 24 percent of their cumulative budget deficits
during the five fiscal years 2009 through 2013," S&P found.
Almost since the day it was signed into law in early 2009
the stimulus plan, known as the American Recovery and
Reinvestment Act, has been a political piñata, with
policy-makers and commentators alternately beating it as a
package of wasteful spending and financial mismanagement.
It sent $140 billion to states in the largest such transfer
in U.S. history, mostly through money for the Medicaid health
insurance program for the poor and for education, the two
largest spending categories for states.
The recession hit state budgets late, with revenue beginning
to dive in 2008 as unemployment rose. Because all states except
Vermont must end their fiscal years with balanced budgets, they
raced to make emergency spending cuts, institute temporary tax
and fee increases, and borrow.
They also turned to the federal government for help. The
U.S. government now sends state and local governments more than
11 times the money it granted them in 1960, according to
President Barack Obama's annual report on the economy to
Congress released in March.
For S&P, the ability of states to lean on the federal
government in times of stress is a plus, as is the way the aid
is distributed. The U.S. government often uses unemployment
rates to determine where to provide assistance, so that places
experiencing "economic trauma" receive the most support.
"From a global perspective, fiscal federalism in the U.S.
has evolved to support relatively high resource allocation
efficiency, which, in our experience, is beneficial to credit
quality," it said.
In 2011, when the Recovery Act ended, states warned they
would fall off a "stimulus cliff," and some slashed
spending. That summer, Congress and Obama began a fight over the
federal budget that continued through the "fiscal cliff" scare
at the end of 2012 and the beginning of automatic spending cuts
known as sequestration last month.
Still, 82 percent of the funding state and local governments
receive from the federal government is off-limits in
sequestration, according to S&P, while the new national
healthcare law provides extra money to those states that offer
Medicaid coverage to a wider population.
The rating agency does not anticipate a large "paradigm
shift" in how the federal government and states interact.
"While we acknowledge that such wholesale changes are
possible, our current institutional framework and state ratings
distribution do not assume they will occur," it said.