States Are Caught in a Debt Squeeze

The financial state of the nation's states is shakier, Moody's warns, and downgrades are in the offing.
Roy HarrisFebruary 13, 2008

The slowing economy is about to hit the ability of states to borrow for key spending projects, Moody’s Investors Service warned.

Moody’s may cut its debt ratings on some state governments, just as those jurisdictions are also expected to have a tougher time raising money through taxes, according to an Associated Press account of the Moody’s statement.

Moody’s said the downgrades would reflect the twin shocks that it sees facing states: greater debt and lighter tax revenue. The factors undercutting the health of many states, of course, include the erosion of home prices and stunted corporate earnings, which impact state revenues. Sales taxes contribute about a third of states’ income, according to the AP.

States continue under pressure to spend on schools, roads, and health care, Moody’s noted. That will force some states to borrow more to compensate for the shrinking tax base.

However, Moody’s said, states for the most part are better prepared for a 2008 downturn than they were in 2002, since many governments have cut their spending and built reserves in expectation of an economic slide that they saw coming.