SPECIAL COMMENT
US PUBLIC FINANCE
JULY 3, 2012
Table of Contents:
ECONOMIC AND REVENUE GROWTHHELP STATES TO OVERCOME THEPOLITICAL STALEMATE THAT MARKEDMUCH OF THE DOWNTURN 4
Analyst Contacts:
NEW YORK +1.212.553.1653
Kimberly Lyons +1.212.553.4673
Assistant Vice President – Analyst
kimberly.lyons@moodys.com
Nicholas Samuels +1.212.553.7121
Vice President – Senior Analyst
nicholas.samuels@moodys.com
Emily Raimes +1.212.553.7203
Vice President – Senior Analyst
emily.raimes@moodys.com
Timothy Blake +1.212.553.0849
Managing Director – Public Finance
timothy.blake@moodys.com
Robert A. Kurtter +1.212.553.4453
Managing Director – Public Finance
robert.kurtter@moodys.com
Trend of On Time State Budgets Continuesas Revenues Improve
Every state adopted a budget on time for fiscal 2013. The adoption of timely budgets in thelast two cycles (most state fiscal years begin July 1) reflects moderate improvement in statefiscal conditions, and the fact that states have largely avoided the political showdowns thatmarked the peak of the recession.The trend of on-time budget passage underscores the willingness of state officials to makedifficult fiscal decisions. While the economic recovery remains tepid and fiscal challengesremain, revenues are growing and budget gaps are markedly lower. According to the Centerfor Budget and Policy Priorities (CBPP), state budget gaps totaled $191 billion in fiscal 2010and $130 billion in fiscal 2011. A separate study by the National Association of StateBudget Officers estimated total budget gaps of $110 billion for fiscal 2012.This special comment discusses the current budgetary environment for all states, the trend inmeasures used to balance state budgets and the institutional mechanisms in place for states toaddress late budgets, particularly with respect to debt service payments. Our findings reflect:
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Every state enacted a budget on time for fiscal 2013.
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By comparison, four statesenacted their budgets late in fiscal 2009, five in fiscal 2010, three in fiscal 2011 and onelast year—Minnesota;
Improving revenues have helped states overcome much of the political intractability that led to late budgets during the downturn.
Through the spring, more than half thestates report that fiscal 2012 revenues exceeded budgeted forecasts and most others wereon target.
U.S. PUBLIC FINANCE
2 JULY 3, 2012 SPECIAL COMMENT: TREND OF ON TIME STATE BUDGETS CONTINUES AS REVENUES IMPROVE
Late Budgets Reflect Political Discord and/or Supermajority Voting Requirements
The strength of financial governance and the efficiency of state budget procedures is an importantcredit consideration. Late budgets primarily reflect political disagreements, and in extreme cases lead togovernment shutdowns. In some states the requirement that a legislative supermajority approve thebudget can exacerbate existing political disagreement. However, even when budget enactment isdelayed, most states resolve their issues in a relatively short period, with no long-term impact on theirfiscal health or credit.Eight states have experienced at least one late budget in the last five years, and four of those eight stateshave experienced more than one late budget in the same time period (Exhibit 1). The states that tendto be late typically have established practices in place to ensure that disbursements for debt service andother expenses continue, even in the absence of full year spending plans. These practices are establishedby state constitution, statute, or by policy.Most states begin their fiscal year on July 1 (four states have different fiscal years: Alabama andMichigan begin October 1; New York on April 1; and Texas on September 1). For fiscal 2013, thelegislatures in Massachusetts and South Carolina passed budgets late in the legislative session, butbefore the beginning of the new fiscal year. In both states, budget laws grant the governor a period toreview the measures, 10 days for Massachusetts and five for South Carolina. Because the spendingmeasures were passed so late, neither governor signed the budget by July 1. We do not consider thesebudgets late, however, since the full-year spending measures were passed and in both cases, the statesenacted interim spending measures that cover operations and debt service.
EXHIBIT 1
Improving Trend for Budget Adoption
States that missed the start of the fiscal year
State G.O. Debt Rating FY2012 FY2011 FY2010 FY2009
California A1/Stable X XConnecticut Aa3/Stable XIllinois A2/Stable X XMinnesota Aa1/Negative XNew York Aa2/Stable X XNorth Carolina Aaa/Stable XOhio Aa1/Stable XPennsylvania Aa1/Negative X X X
Source: Moody’s Investor Service
U.S. PUBLIC FINANCE
3 JULY 3, 2012 SPECIAL COMMENT: TREND OF ON TIME STATE BUDGETS CONTINUES AS REVENUES IMPROVE
No Government Shutdowns for Fiscal 2013
Underscoring how the resolution of significant budget shortfalls can heighten ideological differencesand lead to political stalemate, the Minnesota government shutdown for 20 days at the start of fiscal2012, the longest state shutdown in recent history (Exhibit 2). During the 2011 legislative session,Governor Mark Dayton's original executive budget recommendation included new taxes forecasted togenerate approximately $3 billion of recurring revenues. Disagreement over the proposed new taxes forthe fiscal 2012-2013 biennium resulted in a budget impasse, with the state legislature staunchly againstany additional taxes. The state failed to enact a new biennium budget in time for fiscal 2012,prompting an immediate shutdown of government operations pursuant to statute, which prohibitedthe state from spending without a legislatively approved budget.
Debt service was not affected:mechanisms were put in place to ensure that all of the state’s bonds continued to be paid on time.
EXHIBIT 2
Only a handful of State Shutdowns – Last Ten Years
State G.O. Debt Rating Length of Shutdown Year of Shutdown
Michigan Aa2/Stable 2 hours 2007Michigan Aa2/Stable 4 hours 2009Pennsylvania Aa1/Negative 1 day 2007New Jersey Aa3/Stable 7 days 2006Minnesota Aa1/Negative 8 days 2005Minnesota Aa1/Negative 20 days 2011
Source: Moody’s Investor Service
Established Procedures Ensure Timely Debt Service Payments in Late BudgetSituations
While many states have mechanisms to ensure timely debt service and maintenance of operations inthe event of late budget adoption, some states have no established contingency plans for late budgets.In states that have no formal statutory or constitutional contingency plans but have a history of latebudget adoption, procedures have historically been put in place to address government payments andmanage cash flow during periods of budget delays. Some states have contingency plans that allow themto operate under an executive order, a continuing resolution, or an emergency spending bill. Thesemeasures ensure that the state can continue government operations, including the payment of debtservice obligations. For bonds that require legislative appropriation, such as lease-backed debt, moststates set debt service payment dates well beyond the start of the a state’s fiscal year to avoid possibledelays in the event of a late budget adoption.Even with contingency plans or established mechanisms, late budget adoption at the state level candisrupt the flow of state payments to vendors and employees, as well as school districts, cities, publicuniversities and other political subdivisions such as transit systems that rely in part of state funds. A delayed state budget could also result in late debt service payments but states have historically madespecial accommodations to allow debt service payments to be made on time.
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