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Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poors. Copyright © 2011 Standard.

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Presentation on theme: "Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poors. Copyright © 2011 Standard."— Presentation transcript:

1 Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poors. Copyright © 2011 Standard & Poors Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved. National Association of State Auditors, Comptrollers and Treasurers Annual Conference – August 16 th, 2011 Economic Report for the States Robin Prunty Standard & Poors

2 2. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poors. Distribution of State Ratings as of August 2011 State Rating Distribution 1

3 3. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poors. State Credit Trends We Have Observed Through August, 2011 –Five state ratings have been lowered. California's general obligation rating was lowered to 'A-' from 'A, Arizonas ICR was lowered to AA- from AA, Illinois' was lowered to 'A+' from 'AA-, New Jersey was lowered to AA- from AA and Nevada was lowered to AA from AA+ –Six state ratings have been upgraded (Idaho, Louisiana, Nebraska, Oregon, South Dakota, and Wyoming) –Three state ratings have a negative outlook (Arizona, Illinois, and Maine) –Three state ratings have a positive outlook (Massachusetts, North Dakota and Tennessee)

4 4. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poors. State Credit Update From a credit standpoint, the state sector has, in our view, a relatively high credit profile and a history of managing through volatile economic periods We believe the relative credit stability for the sector to-date reflects that: States tend to have well-developed budget and revenue monitoring processes and have been actively managing their budget gaps. Those that have not managed budget gaps have been downgraded Most states have broad authority to enhance revenues, adjust spending and manage disbursements Large fixed cost type of obligations, including those for retirement benefits, can reduce this fiscal flexibility

5 5. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poors. State Credit Update - Continued Most states entered the recession with high reserves which continue to provide flexibility in our view Access to internal liquidity is high for many states State governments typically have easy and cost-effective access to the capital markets which is helpful for both budget balance and liquidity On the whole, states have made many improvements to budget structure, reserve policies, and debt management during prior periods of budget stress that, in our view, have generally enhanced their ability to manage through downturns

6 6. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poors. S&Ps Overview of U.S. Public Finance In the aftermath of the recent economic recession, U.S. state and local governments face budget, policy and in some cases political crisis but we do not believe they face a debt crisis where there will be widespread defaults. Recap of Our View of the Current Environment Municipal market is very diverse Governments have experienced significant fiscal stress since 2008 Typical balanced budget requirements contain growth of debt; the level of leverage is low for states relative to their sovereign counterparts across the globe Most U.S. state and local governments issue amortizing debt for capital purposes and not to finance their budget Debt obligations are secured either by a specific pledge of the governments full taxing authority or dedicated taxes, user revenues or fees. Constitutional or statutory provisions strengthen bondholders claims.

7 7. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poors. Pensions And State Rating Criteria

8 8. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poors. Criteria Application: Debt And Liability Profile Key Metrics (Debt, Pension, and OPEB) scored individually and weighted equally

9 9. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poors. Our View of State Debt U.S. Public Finance Report Card: 2009 State Debt Review: Despite Surge of Issuance, No Debt Crisis for U.S. States – May 25th, 2011 Debt levels increased for the sector but remain moderate, in our view, due in part to the growing prevalence of debt affordability models and policies that help to limit leverage. The sector has weathered a broad range of bond market challenges and still retained its relatively strong credit profile. Aggregate tax supported debt for US states exceeds $470 billion Average per capita debt burden is $1,281; median is $932 Average debt/personal income is 3.1%; median is 2.5% Average debt to state GDP is 2.8%; median is 2.2% Average debt service burden 4.2%; median is 3.6%

10 10. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poors. Our View of State Debt Debt Landscape for 2011 and 2012 Less debt for some… Some states accelerated their debt issuance in 2010 to take advantage of BABs and have less need for capital in 2011 Volatility in the municipal bond market has caused some states to wait on the sidelines Debt affordability guidelines have and could continue to constrain issuance Overall fiscal climate is forcing policy makers to rethink their allocation of resources to funding capital infrastructure More debt for others… The current economic and budget climate will likely continue to translate to more borrowing for some states. We have seen debt issuance to fund operations, manage pension costs, replace pay-go financing, or restructure outstanding debt for budget relief. So far we estimate that more than $18 billion has been issued or is planned – this compares to $30 billion during the last recession- but could increase as stimulus funding phases out.

11 11. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poors. Our View of State Debt For debt managers, municipal market has been challenging due to: Disruption of auction rate market, bank supported debt and credit swap markets; Deteriorating credit quality of numerous financial institutions and monoline bond insurers; Implementation of Build America Bond (BABs) program and the influx of taxable market and foreign investors who were relatively unfamiliar with the tax-exempt market; Concern about the fiscal health of state and local governments, which has contributed to volatility in the market, in our view. Future challenges are numerous, including budgetary climate and the overall performance of the bond market and how it will affect the affordability of financing infrastructure and other obligations.

12 12. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poors. Pension Liability Metric Key indicators: –Pension funded ratio; –Pension funding (contributions) levels; –Unfunded pension liabilities per capita; –Unfunded pension liabilities relative to personal income

13 13. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poors. State Pensions: Overview S&P Report: U.S. States' Pension Funded Ratios Drift Downward, March 31 st, 2011 Not presently jeopardizing states capacity to meet their debt service obligations; Upward pressure on recommended contributions persists; Lower discount rates would increase recommended contributions further; Pension reforms efforts are underway in numerous states. Fiscal relief from these reforms remains to be seen; Deteriorating funded ratios and a lack of full actuarial contributions introduce potential for negative pressure on credit.

14 14. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poors. Our View of US State Pensions In 2009 (the latest year with substantially complete data available), according to our analysis, the mean funded ratio for the principal state pensions was 75%, down from 80% in Unfunded pension liabilities increased to $661 billion in fiscal Cumulative pension liabilities exceed tax supported debt for The average UAAL per capita increased to $2,527 in In relation to the resources available to service these requirements, debt per capita and the per capita unfunded pension liability relative to personal income had a 50-state average of 9.7% in 2009.

15 15. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poors. S&Ps Pension Survey Findings: As Of 2009

16 16. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poors. Current Credit Implications Of Pension Funding Long-term liability that must be managed now; Governments that are not addressing their liabilities now could face credit pressure; Instances of negative rating movement and rating outlook actions linked to management of pension liabilities exist; –Rating action linked to pension pressures to date is gradual in nature reflecting an erosion of credit quality due to poorly managed pension liabilities

17 17. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poors. Our View of Pension Performance and Budgets Public pension plans are designed to moderate annual changes in funding levels and required costs based on investment market volatility. Actuarial smoothing methods allow investment losses and gains to be phased in over a multi-year period About 88% of public plans have a smoothing period of 4 years or longer, with 5 years being the most common. This allows governments time to adjust budgets over a multi year time frame rather than one year. In our opinion, this is important because weak investment results have historically correlated with weak tax revenue performance. Key for credit will be assessing the budget impact for plan sponsor and plan participants.

18 18. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poors. Recent Articles: U.S. Public Finance State And Local Government Ratings Are Not Directly Constrained By That Of The U.S. Sovereign, August 8 th, 2011 Where U.S. Public Finance Ratings Could Head In The Wake Of The Federal Fiscal Crisis, July 21 st, 2011 Ratings Roundup: U.S. Public Finance Downgrades Remain Elevated, But Broader Sector Trends Are Intact, July 18 th, 2011 California And Greece: The Credit Divide Widens, June 1, State Debt Review: Despite Surge of Issuance, No Debt Crisis for U.S. States, May 25 th, 2011 State And Local 'AAA' Ratings Unchanged Following Outlook Revision On USA's Rating, April 20 th, 2011 Ratings Roundup: Public Finance Rating Change Volume Jumps In The First Quarter Of 2011, April 20 th, 2011 U.S. States' Pension Funded Ratios Drift Downward, March 31 st, 2011 U.S. Public Finance Defaults And Rating Transition Data: 2010 Update, March 2 nd, 2011 U.S. States Brace For Health Care Reform And Higher Medicaid Spending, January 27 th, 2011 S&P Comments On Recent Discussion Of Bankruptcy For States, January 26 th, 2011 Outlook: U.S. State And Local Governments Must Navigate Turbulent Conditions To Maintain Credit Stability, January 24th, 2011 U.S. State Ratings Methodology, January 3 rd, 2011

19 19. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poors. Copyright © 2011 by Standard & Poors Financial Services LLC (S&P), a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved. No content (including ratings, credit-related analyses and data, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of S&P. The Content shall not be used for any unlawful or unauthorized purposes. S&P, its affiliates, and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions, regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an as is basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENTS FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of the Content even if advised of the possibility of such damages. Credit-related analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities or to make any investment decisions. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&Ps opinions and analyses do not address the suitability of any security. S&P does not act as a fiduciary or an investment advisor. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non–public information received in connection with each analytical process. S&P may receive compensation for its ratings and certain credit-related analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, (free of charge), and and (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at STANDARD & POORS, S&P, GLOBAL CREDIT PORTAL and RATINGSDIRECT are registered trademarks of Standard & Poors Financial Services LLC.


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