Credit Quality

Federal Stimulus Uncertainty Does Not Affect Most State Ratings

2020 Revenue was stronger than expected

Fitch Ratings – New York- 30 November 2020 –Ratings for only a handful of states could be positively affected by the provision of new federal stimulus that includes money for states to help make up for pandemic-related revenue losses, Fitch Ratings says. Timely and substantial federal action that offsets state budgetary challenges could support ratings stabilization for states that have smaller buffers, outsized revenue declines and greater economic exposure, namely Illinois, New York, New Jersey, Nevada and Kentucky, whose ratings are on Negative Outlook.

Federal action could take the form of direct aid to help states mitigate spending cuts or tax increases that would otherwise be required and would slow the pace of recovery. Aid could also come in the form of broad stimulus measures to drive growth in economically sensitive tax revenues.

Our ratings do not assume any new direct aid for state governments. Failure to pass a new federal stimulus bill would not affect credit quality for most states but could slow the pace of economic growth, compounded by the expiration at the end of December of unemployment benefits for approximately 12 million people, according to the Century Foundation, provided under the Coronavirus Aid, Relief and Economic Security (CARES) Act. Fitch anticipates the vast majority of states are well positioned, even absent material new stimulus, to absorb volatility as reflected in Fitch’s downside macroeconomic scenario, which anticipates a return to economic contraction driven by renewed lockdowns.

2020 Revenue Stronger Than Expected

Federal action could take the form of direct aid to help states mitigate spending cuts or tax increases that would otherwise be required and would slow the pace of recovery...

Most states had stronger than expected revenue in fiscal 2020 (ended June 30 for 46 states) due to a combination of factors. Leading into the pandemic, states had already been reporting solid revenue growth through most of fiscal 2020; higher income earners that contribute the most to tax bases were not as hard hit by the recession; and substantial federal support to individuals and businesses through multiple stimulus bills drove a rapid initial economic recovery and indirectly subsidized state revenues by supporting incomes and spending.

California and New Jersey were ahead of fiscal 2020 revenue estimates made at the pandemic’s outset by $1.1 billion (1%, general fund) and $1.3 billion (3.5%, total revenues), respectively. Revenues were still down from fiscal 2019 by 14% for California and 1% for New Jersey, although California’s decline was driven partly by the deferral of income tax deadlines into fiscal 2021.

Fiscal 2021 (July 1 start) revenue is also generally trending ahead of fairly bleak forecasts for many states. Illinois recently revised its fiscal 2021 forecast for state source revenues upward by just over $2 billion, or 6.5%, from July and August forecasts. Revenues still trail the prior year for most states, however. The Urban Institute reports 34 states have seen yoy declines in tax collections between March and September of 2020 versus 2019. Most states took budgetary measures to address anticipated losses in fiscal 2021.

A key unknown factor is how individuals and businesses will respond to both surging coronavirus cases and new restrictions. Those restrictions are generally narrower than the ones imposed last spring at the onset of the pandemic but are nevertheless expected to have a dampening effect on economic activity.