Credit rating agency Moody's Investors Service revised the outlooks of 119 local governments and two states that are indirectly linked to the U.S. government to stable from negative, it said on Wednesday .
The agency has kept the outlooks for 36 local governments and three states at negative, which it assigned this summer when it gave the U.S. government a negative outlook.
"Today's actions are based on an expanded evaluation of the exposure each municipality has to the U.S. government, including economic sensitivity to federal spending reductions, dependence on federal transfers and exposure to capital markets disruptions," said Naomi Richman, Moody's managing director, in a statement.
The outlooks of South Carolina and Tennessee were raised to stable to "reflect their relatively lower levels of financial and economic exposure" to the federal government.
Those of Maryland, New Mexico and Virginia "remain negative due to high concentrations of federal government employment and federal procurement," Moody's said.
If Moody's did place under review or downgrade the current rating for the United States - Aaa with a negative outlook - those state and local governments that kept their negative outlook would follow suit, the agency said.
Concerns about state credit ratings have mounted since the summer when the U.S. sovereign rating was first put in jeopardy. Taxpayers, political leaders and buyers in the $3.7 trillion municipal bond market were uncertain if states, cities and counties could have ratings higher than the sovereign.
This week a managing director from Moody's, Robert Kurtter, told a National Association of State Treasurers meeting that "if the federal government were downgraded one notch ... we'd probably still be comfortable with many states or governments having higher ratings."
On Wednesday, Moody's noted that "even with a return to a stable outlook for the U.S. sovereign rating, the ratings of some of these states and local governments may remain pressured if the measures to reduce the federal deficit significantly cut government spending or transfers in areas in which the municipality has concentrations."
Cities, towns and counties in Alabama, California, Colorado Connecticut, Delaware, Florida, Georgia, Illinois, Kansas, Kentucky, Massachusetts, Michigan, Missouri, Minnesota, Nebraska, New Jersey, North Carolina, Ohio, Oregon, Pennsylvania, Tennessee, Texas, Utah, Washington, and Wisconsin had outlooks revised to stable.
The outlooks for four counties and one city in Virginia also improved, despite the state's negative outlook.
Many local governments in those same states - Alabama, Colorado, Missouri, Pennsylvania, Texas - continued to have negative outlooks, as did those in Indiana and Oklahoma. Some local governments in Maryland, New Mexico and Virginia also maintained negative outlooks.
Congressional fights over the federal debt, deficit and spending have dominated 2011, after Tea Party conservatives swept elections in November 2010.
This summer, a standoff over the deficit raised concerns with the three major rating agencies. Most recently, Fitch Ratings revised its AAA U.S. sovereign rating outlook to negative and then consigned certain categories of long-term ratings directly tied to the creditworthiness of the country to the same outlook.
A bipartisan, bicameral committee was supposed to find ways to cut spending last month, but it failed to reach an agreement, triggering automatic reductions.
States were relieved that Medicaid, a federal healthcare program that can bust many of their budgets, was left out of the cuts, but could be affected by reductions in other areas such as defense funding.
Alongside being close to the nation's capital and home to many federal workers and contractors, both Virginia and Maryland have large U.S. military presences.
Moody's said it also looked at states' Medicaid expenditures and local government's public hospital spending, and considered how much short-term or puttable debt they had sold, which could be shaken by capital markets disruptions.
The agency said six of the 161 local governments it examined continue to have negative outlooks "for reasons unrelated to the U.S. government." They included Fairfield, Connecticut, and three counties - Union County in New Jersey, Westchester County in New York and Harris County in Texas.
Another local government, Bedord, Massachusetts, has already been downgraded for other reasons.
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