US State and Local Governments: Impact of Great Recession Lingers NYU

1. US State and Local Governments:Impact of “Great Recession” LingersNYU

2. 2 How Recession Has Affected State Ratings

3. 3 Distribution of Current State G.O. Ratings

4. 4 Rating Downgrades Reflect Recessionary Pressure

5. 5 State Sector Outlook is Negative

6. 6 Outlook for States is Negative Employment is declining Unemployment rate is climbing Tax receipts have plunged PIT – high-end income has weakened Sales tax receipts are declining Corporate taxes are way off Consumer spending is weak Credit crunch and reduced home equity extraction have restrained the consumer Consumer confidence remains weak

7. 7 Six Critical Factors Revenue Declines Liquidity Position Available Cash Variable Rate Exposure Recession-Induced Spending Pressures Short-Term Expenses Longer-Term Expenses Deficit Financing Mitigants Federal Fiscal Stimulus Management

8. 8 State Finances

9. 9 States Rely on Big 3 TaxesIncome, Sales and Corporate

10. 10 Tax Revenue - http://www.rockinst.org/ Employment - http://www.bls.gov/ Tax Revenue - http://www.rockinst.org/ Employment - http://www.bls.gov/

11. 11 Tax Revenue - http://www.rockinst.org/Tax Revenue - http://www.rockinst.org/

12. 12 High-End Filers Determine PIT Revenues

13. 13 Corporate Taxes Slightly Positive

14. 14 Changes in General Fund Expendituresand Fund Balances

15. 15 Local Government Finances

16. 16 Local Governments Rely on Property and Sales Taxes

17. 17 Outlook for Local Government Sector isNegative First time designation of negative outlook for the sector Reflects the all-encompassing nature of this recession Changes in market price lag taxable assessed valuation State budget cuts now affecting localities

18. 18 Local Property Tax Collections Stable RPT based on assessed valuation is the major revenue for local governments Property taxes tend to be stable through business cycle AV significantly lags changes in market value Local governments RPT collections are beginning to slow Housing related transactional revenues are at risk: real estate transfer taxes, mortgage recording taxes We are closely monitoring credits secured by these revenues and TIF districts that may be more sensitive to housing market price fluctuations Fiscal strains at the state level are resulting in cuts to funding for local government programs and schools

19. 19 The Great Recession Has Ended

20. 20 Federal Fiscal Stimulus

21. 21 Federal Government Comes To The Rescue

22. 22 Build America Bonds Attract Taxable Investors BABs are authorized through the end of 2010 About $60 billion issued by state and local governments in 2009 Estimates are that BABs could be 30% of municipal market in 2010 Moody’s is confident in the reliability of the federal subsidy Liquidity buffers will be needed to assure timely payment of interest subsidy to bondholders

23. 23 Outlook for the Future

24. 24 What Will Lead to Recovery for the Nation? Consumer spending fueled economic growth and decline caused the bust Consumers were spending wages, bonuses, proceeds from stock options, home equity and capital gains Now, they can only spend income No income without jobs Therefore, jobs will lead us out of the recession Job growth may lag the improvement in GDP State revenues will be slow to recover

25. 25 Outlook for States and Local Governments is Negative Employment still weak Tax receipts have not recovered Challenges: Large budget gaps Reserves have been drawn down Many states and LGs facing reduced liquidity Some states assuming increased federal aid in budget proposals Turning to payment delays, cash management tools, other one-time actions

26. 26 Conclusion Broad and deep recession Major revenues hit hard Federal fiscal stimulus cushioned the blow Hard to see what will lead us out of the recession Long and slow recovery More negative pressure on state and LG ratings

27. 27 Global Scale Ratings Migration

28. 28 Current Status of Moody’s Municipal Rating Recalibration Moody's remains committed to ensuring that our US public finance ratings are comparable to ratings in other sectors Temporary pause in planned migration prompted by current conditions in the credit market Moody’s ongoing efforts: Surveillance of public finance ratings Taking ratings actions when appropriate – on the municipal scale Publishing research on the municipal credit environment Recalibration of approximately 20,000+ outstanding public finance credits ~20,000 distinct issuer security pledges, over 70,000 individual sales and approximately one million CUSIPS All public finance sectors to be considered in the recalibration Governments, higher ed, infrastructure, health care, housing Result will be comparability of Moody’s municipal ratings with ratings in other sectors such as sovereign, sub-sovereign, corporate and financial institutions

29. 29 U.S. Municipal Bond Defaults 1970 - 2009

30. 30