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State and local governments will have… an okay 2015, ratings agencies say

The next year or so will be, well, just okay for state and local governments, according to forecasts from two ratings agencies.

Both Fitch and Moody’s Investors Services say they expect a “stable” — neither positive nor negative — year ahead, thanks to a consistent but slow economic recovery. That outlook would improve if growth in tax revenues for state and local governments picks up speed, according to a pair of Moody’s reports issued Wednesday.

Those conclusions are largely in line with an analysis of state governments from Fitch ratings agency earlier this week, which found that states enjoy mostly stable ratings for the year ahead. There are some risks to the outlook, though: namely pressures from anti-tax sentiment, building expenses for programs such as Medicaid and overall economic volatility.

For local governments, slow but steady growth in property tax revenues is a “key positive,” Moody’s finds. Those increases are slow — an estimated 2 percent to 3 percent annually over the next few years — but growth is growth:

Even at a slower growth rate, the reliability and predictability of property tax revenues remain a key strength for local governments. Although the recovery has been slower for property taxes than for the other more economically sensitive taxes, the decline in local government property taxes during the downturn was mild compared with the declines in the income and state taxes collected mainly by states.

But local governments are also facing growing budgetary pressures in the form of debt, capital expenditures, pensions and retiree health care benefits. And those costs will force decisions on tax hikes, service cuts and/or drawing on reserves. But while Moody’s identified 21 city, county or school district sectors — out of nearly 150 — under pressure last year, it identified just 13 this year, as shown in red in the charts below.

As with any forecast, the local government outlook is subject to change, Moody’s notes. The picture could brighten if property tax growth returns to a healthy rate of 5 percent to 6 percent, the economic recovery accelerates or there is widespread pension and employee health care reform. Of course, the opposite is true, too. If property tax growth slows or the recovery sputters, the outlook could go negative, Moody’s warns.

For states, Moody’s forecasts moderate tax revenue growth of 5 percent to 6 percent, driven mostly by improving consumer spending, job growth and sales taxes.

For a handful of mostly Western states, the agency’s analysts expect strong growth driven by the technology and energy sectors. That growth, they write, is reflected in the most recent annual wage and salary income growth.

While the year ahead looks stable for states, there are some risks. A volatile stock market could take a toll on revenues dependent on capital gains taxes. And anti-tax sentiment is leading states to cut taxes in the hope that fewer or capped taxes will attract business and economic development.

To compound the concerns, expenses for Medicaid, pensions and other programs are rising.