Moody’s cites economy, budget shortfall with negative outlook on state debt

By Steve Green

Wednesday, Dec. 1, 2010 | 8:56 a.m.

Moody's Investors Service is out with a new analysis projecting slow growth for the Nevada casino industry -- and has revised downward its outlook on state government finances to negative.

Moody's on Tuesday revised from stable to negative its outlook on the state government's debt, citing the struggling Nevada economy and the state government's huge projected $3 billion, or 50 percent, budget shortfall forecast for the next budget cycle.

The state's former stable outlook was last reiterated by Moody's in October 2009, but in Moody's view the state budget picture has deteriorated since then.

Analysts at Moody's suggested it's going to take awhile for Nevada's economy to recover from the multiple hits it has sustained since 2008, including the U.S. recession reducing visitation to Nevada casino resorts, the collapse of the housing market and the related devastation of the construction industry.

"Geared disproportionately towards consumer discretionary spending, Nevada's economy took a hit when global wealth evaporated during the recession," Moody's said. "Nevada's economy contracted 2.5 percent in 2008 and 6.4 percent in 2009, the latter being the worst among U.S. states. Nevada's unemployment rate, 14.2 percent as of October 2010, has been the highest in the country since May 2010."

Moody's recalled the "gaming-driven boom led Nevada's economy to grow faster than that of any other state in the years 2004 and 2005; it also grew faster than the average state in each of the 10 years ending 2007."

"At the time thought to be 'recession-resistant,' the gaming industry weathered the consumer-driven 1991 recession relatively well. In the current recession, the sector fell into a steep decline and has only recently stabilized. Any recovery is uncertain at this point although one likely scenario projects slow but positive growth in the near term," Moody's said.

Despite its concerns about the state budget gap, Moody's is confident the state will keep paying its bills on time. Moody's maintained its relatively high ratings on the state's debt, on Tuesday issuing Aa1 ratings to $226 million in general obligation bonds the state plans to sell this month. Aa debt is rated just a notch below the top-rated Aaa debt.

"The negative outlook reflects the outsized current pressures on the state's economy and finances relative to others in the rating category, including the following credit concerns: a very large expected budget gap for the next biennium; uncertainty around how the state will solve the gap, given the fact that the state has drawn down almost all of its reserves already; a very weak economy; and uncertainty around the recovery of gaming in the state," Moody's said in the report.

On the plus side for state government finances, Moody's said Nevada has just moderate debt and pension liabilities and policymakers have "a history of swift management action in response to reduced revenues."

On the $3 billion budget gap for the next biennium, Moody's said the actual amount may be closer to $2 billion since "approximately $1 billion of existing temporary revenue enhancements could be renewed."

"Other available tools include further spending cuts and pushing down certain expenditures to local governments. Revenue enhancements that sunset in the current biennium, but which may be renewed, include an increase in the modified business tax rate worth an estimated $345.7 million in the current fiscal 2010 and 2011 biennium and increase in the room tax worth an estimated $219.9 million," Moody's said.